Frustration of Contract and COVID-19

This post was contributed by James Devenney, Module Convenor for International commercial law.

One issue to emerge from the current pandemic is how it might affect contractual obligations which become impossible to perform. In many commercial contracts, major intervening events, such as wars or natural disaster, will be dealt with by force majeure clauses and the issue then becomes largely one of interpretation. Where such major intervening events are not dealt with under a force majeure clause an issue which may arise, where the contract is governed by the Law of England and Wales, is whether the contract has been frustrated. If so both parties will be discharged from further obligations under the contract.

Personal picture of James Devenney's (Module Convenor) time in Hong Kong.
Hong Kong

Key points:

Frustration may occur where a contract becomes impossible or illegal to perform. It might also apply where any common purpose of the parties has been frustrated;
• The mere fact that a contract has become more difficult or expensive to perform is not enough to frustrate that contract;

Temporary impossibility may frustrate a contract if the delay is sufficiently serious (compare the Hong Kong case of Li Ching Wing v. Xuan Yi Xiong [2003] HKDC 54 where the unavailability of a flat for 10 days as a result of the SARS virus was insufficient to frustrate a two year lease);
Frustration must occur without the fault of either party; and
• It is sometimes stated that foreseeable events cannot frustrate a contract.

The doctrine of frustration was recently considered, albeit in another context, in Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch). That case involved a lease to the EMA in London. In 2017, following a referendum, the UK gave notice of its intention to withdraw from the EU. In 2018, EU Regulation 2018/1718 made provision for the relocation of the EMA to Amsterdam. The EMA claimed that Brexit would frustrate the lease. The Judge accepted that Brexit might frustrate a contract ([241]) but concluded that this contract had not been frustrated. For present purposes, he made important points on:

The basis of the doctrine of frustration:

Only if the supervening event renders the performance of the bargain “radically different”, when compared to the considerations in play at the conclusion of the contract, will the contract be frustrated.” ([27] emphasis added.)

  • The relevance of foreseeability:

“The foreseeability of the frustrating event is relevant only insofar as it informs the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk…Foreseeability is, thus, no more than a factor to be taken into account.” ([211] emphasis added.)

Applying all of the above it seems that under the Law of England and Wales, in the absence of a relevant force majeure clause, a contract might be frustrated by the current pandemic. For example, a significant delay to delivery of goods as a result of the pandemic might frustrate a contract of sale of goods. However, the date on which the contract was concluded – and hence the degree to which the current pandemic was foreseeable – would be relevant to this decision.

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