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30 March 2020 | Comment | Article by Aled Walters

COVID-19 and the law of frustration: what is it and how can it affect your commercial contracts?

The impact COVID-19 is having on businesses is already profound and is likely to worsen, with businesses both small and large struggling to fulfil their contractual obligations under their contracts due to the impact of the pandemic on supply chains and personnel. As more and more businesses look to find ways to avoid their contractual obligations, the legal concept at the forefront of everyone’s mind is the so-called “force majeure” clause. We look below at how this clause operates and how the law of frustration may assist parties where a force majeure clause is not engaged.

Force majeure

A force majeure clause is common in most commercial contracts. It aims to expressly excuse a party from performance of their contractual obligations following the occurrence of certain events, with the burden of proving that performance is excused resting upon the party seeking to rely on it. Whether a force majeure clause is engaged will depend upon the language used and it is therefore common for such clauses to be drafted widely, often including some “sweep-up” wording designed to catch any events beyond the parties reasonable control.

But what if this “sweep up” wording is missing from the clause? As the courts will focus on the language used, in the absence of such wording it is highly unlikely that the clause will be engaged, unless the drafting manages to specifically anticipate a pandemic of the kind we are sadly experiencing. It is also important to note that such “sweep up” wording is not guaranteed to be successful when a party comes to rely on it. In such circumstances, the parties may look to the law of frustration for assistance.


Frustration

After periods of self-isolation, “frustration” will be a term that most are familiar with – but what does it mean in a legal context? The law of frustration applies where a significant change of circumstances renders a contract physically or commercially impossible to fulfil, or otherwise transforms the obligation to perform into a radically different obligation from that originally undertaken. Such a change in circumstances must be due to an outside event or change of situation that occurs without the fault of the party seeking to rely on it.

If a frustrating event is deemed to have occurred, the parties will be excused from further performance and will not be liable for damages for non-performance. It is important to note, however, that the contract will be permanently frustrated. Except as otherwise agreed between the parties, recovery of monies paid under the contract before it was discharged is permitted, subject to expenses incurred by the other party (at the court’s discretion).

The impact of COVID-19 for many businesses is likely to satisfy the legal test and provided the contract was entered into before word of the pandemic had spread, there is little doubt that the crippling effects of the outbreak would for most businesses be deemed outside the reasonable contemplation of the parties. However, due to the inherent uncertainty that comes with the law of frustration, courts have historically been reluctant to find that a contract has been frustrated. It remains to be seen what approach the courts will take in present circumstances.


Key points for businesses

All businesses, whether as a supplier or a customer, should be examining their key contracts. The implications of rightfully or wrongly invoking the law of frustration or a force majeure clause are often substantial and parties should seek urgent legal advice before doing so.

 

For further advice on Coronavirus COVID-19 related corporate/commercial queries please contact our dedicated Corporate and Commercial team 

Key Contact 

Aled Walters, Partner, Head of Commercial

E: [email protected]

T: 029 2267 5530

For any other Coronavirus COVID-19 related business advice please visit our dedicated page Coronavirus COVID-19 legal advice & support for businesses.

Disclaimer: The information on the Hugh James website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. If you would like to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.

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