Much has already been written about force majeure clauses, but what if your contract doesn’t have a clause of this type? The legal doctrine of frustration could assist with ending contracts due to Covid-19.
The normal position in law is that the courts uphold contracts and if one party fails to honour their side of a contract, then the other party is entitled to damages for the loss caused by the breach.
However, in some circumstances the doctrine of frustration allows contracts to be ended when an unforeseeable event occurs after the contract has been agreed, making it commercially or practically impossible to carry out the contract as envisaged. In such circumstances a party does not need to take any action to terminate the contract, termination happens by law.
The law in this area is difficult and it has to be borne in mind that there is a high threshold to proving frustration, as English law tends to hold people to the bargains that they have agreed, but in present circumstances there are two subsets of frustration which could result in termination of a contract.
The principle underlying frustration for impossibility is that a contract should be ended if it becomes impossible to perform. As an example, in the present circumstances, if a contractor has a contract with a supplier to purchase specific goods from a particular region and, after the contract is signed, that region is placed under lockdown so that no goods can be loaded or delivered, then the contract would be impossible to perform, at least temporarily.
This may not automatically result in the contract being frustrated, as the doctrine of impossibility will only end the contract for temporary impossibility where either the contract specifically states that it has to be completed in the period when performance was impossible or continuing to perform the contract would mean it was useless for the contractor – or would lead to it being much more difficult for the supplier.
It is worth noting an exception to this rule, namely that if the supplier expressly said in the contract that it was legal and possible for it to supply the goods concerned, it will not be frustrated for impossibility as the supplier has, in effect, given a guarantee of supply. The contractor is entitled to rely on the guarantee separately to the contractual obligation to supply, so each contract needs to be looked at on its facts.
A further issue that may arise is that it may become impossible to fulfil a contract where a contract earlier in the supply chain has become impossible to perform. This will often be the case where specific goods are being supplied, as is typical in many supply chains in the technology industry. In these circumstances, impossibility will pass down the chain (but do check the terms of each contract in the chain as they may be different).
However, if it is possible to get the same goods from another supplier, even if that supplier is more expensive or there will be delays, then it will not be “impossible” to perform a contract and the supplier will be unable to rely on this subset of frustration to discharge it from its obligations.
Frustration of purpose
In contrast to impossibility, frustration of purpose tends to cover the situation in which goods can no longer be used by the contractor for the purpose which both the supplier and contractor expected when the contract was entered into. The leading cases on this doctrine date back to the last century and in practice arguments based on a failed purpose are only rarely successful.
This was recently illustrated in a case brought by the European Medicines Agency, in which it was argued that a lease that they had entered into should be ended for frustration of purpose because of Brexit – as the Agency was required to be located in an EU country. The court was unsympathetic to the argument because it said it was foreseeable when the lease was entered into in 2011 that the European Medicines Agency might have to move out of London.
However these are unprecedented times and if the purpose of the supply has been made obsolete by Covid-19 or by resulting changes in law, for example the government ban on mass participation events, then this doctrine may provide relief to a contractor no longer wishing to take delivery of goods which have no other use.
☛ James Campbell is partner and April Lord an associate at Pillsbury Law.