For many businesses contending with the ongoing COVID-19 pandemic, a key consideration will be seeking to suspend or be excused from contractual obligations.
In the second of a series of three articles, Barbara Creed, Litigation Partner in our Belfast Office, summarises the key legal principles surrounding Frustration – a common law doctrine which can, in specific circumstances, lead to the discharge of a contract.
What is frustration?
A common law doctrine, frustration occurs when it has become impossible or illegal for one or both parties to perform the contract. If the obligation to perform is altered and has changed in such a way to make it into something which was otherwise agreed, then this also amounts to frustration.
The characteristics required are summarised by Lord Radcliffe in Davis Contractors v Fareham UDCas being:
Without default of either party
Contract obligations now incapable of being performed
Circumstances in which performance is called for would render it radically different from that which was undertaken by the contract
Non haec in foedera veni (it was not this that I promised to do)
When does frustration occur?
The hurdle is high. Frustration is not often accepted by the courts. However, in some circumstances the courts have upheld the doctrine, to include:
When the contract is deprived of its whole commercial purpose
Where the contract becomes illegal to perform
Where the contract becomes incapable of performance
Destruction of subject matter
When does frustration not occur?
When the contract becomes more expensive or difficult to perform
Will Covid-19 amount to frustration?
The key question is the impact of Covid-19 on the contract. If it has made the performance of obligations under the contract impossible or illegal, or has destroyed the subject matter, then frustration will likely apply. If, however, it has only made it more difficult or more expensive to perform, then it is unlikely to apply.
If there is a force-majeure clause which includes the issue of a health pandemic, then frustration will not apply. However if this clause is not clear, then frustration could still potentially be relied on and both should be claimed.
The courts apply the doctrine narrowly. In 2019 The European Medicines Agency, which had signed a 25 year lease for a building in London as its HQ, argued that the doctrine of frustration had been satisfied as it would not be able to operate from the UK post Brexit. However, the court held that the lease was not frustrated.