Is your contract frustrated?
The law of frustration is a common law doctrine which operates outside of binding contracts. A contract may be frustrated if, owing to an unforeseen event, it becomes impossible to perform. It may also be frustrated if performance of the contractual obligations becomes radically different as a result of the unforeseen event. As such in the right circumstances the coronavirus pandemic may result in the frustration of a contract.
If your contract contains a force majeure clause, a clause which deals with unforeseen events, the doctrine of frustration is unlikely to apply. This will however be a matter of interpretation and legal advice should be sought.
The effect of frustration is to discharge the parties from all future obligations. In circumstances such as the current pandemic, this will be pleasing to hear for many suppliers and businesses whom find themselves unable to deliver and exposed to claims for compensation, however caution must be taken as raising frustration in the wrong circumstances could result in you being in breach of contract.
It also provides a statutory right to recover payments made before the frustrating event, but only to the extent that such payments have not been used by the receiving party in the performance of its obligations prior to the frustrating event. For example, a deposit on account of future performance may be recoverable in the event that the contract is frustrated prior to the date of performance. However, credit may have to be given if part of that deposit has been used to pay for goods required for the future performance.
In the coming months and years the courts will be tasked with considering whether contracts have been frustrated as a result of the coronavirus pandemic. The reality is that each case will rest on an individual analysis of the particular contractual obligations and the actual effect of the pandemic on those obligations. Courts do not interfere with binding contracts unnecessarily and therefore caution should be adopted before wielding the sword of frustration.
We highly recommend that you seek legal advice in respect of each specific contract that has been affected by the coronavirus pandemic before acting.