The ongoing global pandemic has led to severe economic consequences which are likely to extend far beyond the lifespan of the virus itself. The long-term commercial impact of COVID-19 is unknown. However, businesses should take time to review their contracts and consider their position in respect of performance.

A general rule of contract law is that, where a contract becomes difficult or impossible to perform, the party that fails to perform will be in breach and liable to their counterparty for damages. The doctrine of frustration is an exception to this rule and automatically discharges future performance of the contract when a frustrating event occurs.

Frustration can apply where:-

  • a supervening event occurs following the formation of the contract;
  • the event is out with the control of the party seeking to rely upon it; and
  • the contract makes no provision for such an event.

The result must be that (i) performance of the contract is impossible or (ii) performance of the contract would be radically different from that which was in the contemplation of the parties at the time the contract was formed. The effect of frustration is that the contract is brought automatically to an end, with the contracting parties immediately discharged from further performance of the contract. It is for this reason that reliance upon the doctrine of frustration may not always lead to a commercially desirable outcome.

In order to rely upon frustration, a high bar must be met and the doctrine is often considered to have limited operation. Examples of when the doctrine of frustration has been successfully relied upon include changes in the law, the outbreak of war and the requisition of property by the government. It is insufficient for parties to argue, for example, that their financial circumstances have changed as a result of COVID-19 and therefore the contract is more onerous or expensive to perform. The doctrine of frustration will only be successfully relied upon in instances where contractual performance is impossible or the nature of it has radically changed due to the COVID-19 outbreak (and the three part test is satisfied).

It is important to note that the doctrine of frustration will not apply to in circumstances which were provided for by (and therefore in the contemplation of) the parties at the time of contracting. Before seeking to rely upon the doctrine of frustration, parties must first consult the contract in order to determine whether it contains a force majeure clause. If such a clause exists it will displace the application of the doctrine of frustration to parties' circumstances. For more information on the operation of force majeure clauses, please see our recent blog.