COVID-19 & The Doctrine of Frustration

The COVID-19 pandemic has led to uncertainty as to the enforceability of certain commercial contracts. Where parties to a contract have not specifically included a force majeure/material adverse change clause, the common law doctrine of frustration may be brought to bear to bring the contract to an end. The courts have, however, been consistently extremely reluctant to hold that a contract has been frustrated in circumstances where it has simply become difficult or expensive to perform. Ultimately, a decision as to whether the COVID-19 pandemic has frustrated a given contract will depend on the actual impact of the outbreak and the associated government restrictions on the subject matter of the contract itself.

Irish approach

The leading Irish authority on the doctrine is the Supreme Court decision in Neville & Sons. Ltd. v. Guardian Builders Ltd.¹  The Court held that the frustration of a contract takes place when a supervening event occurs without the default of either party and for which the contract makes no sufficient provision. That event must so significantly change the nature of the outstanding contractual rights and obligations from what the parties could reasonably have contemplated at the time when the contract was entered into, that a Court must be satisfied that it would be unjust to hold the parties to the contract terms in the light of the new circumstances.

The Supreme Court also noted that the doctrine of frustration was flexible and capable of being applied in new ways in suitable circumstances.

The effects of a finding that a contract is frustrated are:

• all future obligations are discharged (at common law)
• accrued rights stand
• restitution on the basis of a total failure of consideration

Application

The practical difficulty in sustaining an argument of frustration is illustrated in Tsakiroglou v Nobleee and Throl², where a contract for the shipping of goods was found not to be frustrated, despite the closure of the Suez Canal (the standard route for such shipments) due to the outbreak of war. The Court found that, given that an alternate route was available (although it would more than double the freight cost of the load), the contract was not frustrated.

The Irish High Court has also held that a contract is either frustrated in its entirety, or remains enforceable – expressly rejecting the possibility that a contract can be partially frustrated in Ringsend Property Ltd v Donatex Ltd and McNamara.³

Notwithstanding the high hurdle that must be cleared in order to sustain an argument of frustration, common law courts have found contracts to be frustrated in the following circumstances:

(i) Impossibility – e.g. a contract of employment is impossible to perform if the employee then dies.⁴ It must be physically impossible to perform as opposed to commercially difficult (e.g. the goods to be supplied are destroyed or cannot physically be delivered. If delivery is physically possible but more onerous or delayed (as above, in Tsakiroglou⁵) the contract will not be frustrated);

(ii) Illegality – e.g. in Fibrosa Spolka Akcyina v Fairbairn Lawson Combe Barbour Ltd⁶, it became illegal to trade with Poland during WW2. If confinement or travel ban measures are put in place due to COVID-19, arguably this may strengthen an illegality argument;

(iii) Frustration of purpose – this is extremely narrow, the underlying purpose of the contract must have evaporated. If the contract is more onerous or the purpose still partly possible, the contract is not frustrated.

Conclusion

The success or failure of a plea of frustration based on the COVID-19 pandemic in defence of a breach of contract claim will mainly depend on the factual matrix surrounding the subject matter of the contract. The length of any delays imposed by pandemic-related restrictions, in particular, will be of significant importance.

The Court must consider whether or not the party seeking to invoke frustration has established that the outbreak of the pandemic, and the associated government restrictions renders it physically or commercially impossible to fulfil the contract or alternatively transforms the obligation to perform into a radically different obligation from that undertaken at the time that the contract was made. 

For further information please contact a member of the A&L Goodbody Litigation & Dispute Resolution team.

Date published: 31 March 2020