Contractual issues and COVID-19

20 Apr 2020

Under common law, where it is physically or commercially impossible to fulfil a contract due to an event which has occurred after the contract was formed, which is not due to the fault of either party, the contract may be discharged due to the doctrine of frustration. The doctrine also applies where the event makes (further) performance  of the contract fundamentally different from that originally contemplated by the parties.
On the face of it, therefore, the current COVID-19 outbreak could amount to a  frustrating event. However, whether an event is capable of frustrating a contract, will depend on the facts and circumstances of each case and the terms of the contract in question.
Where express provision has been made in the contract for the occurrence of a particular event, for example through the inclusion of a force majeure clause, which generally provides for unusual intervening events such as flood, war and “acts of God”, the doctrine of frustration will not usually apply. Given the fact that these types of clauses are so commonly included in commercial contracts of all kinds, it seems likely that there is going to be a considerable amount of argument (and quite possibly litigation) over whether such clauses really do cover the current pandemic and deny the applicability of the doctrine of frustration.
Similarly, where the event could reasonably have been foreseen, or was in existence at the time the contract was formed and has not got any worse during the contract term, or it remains possible to perform the contract through an alternative method, the contract is unlikely to be considered frustrated.
When a frustrating event has occurred, however, the contract is discharged and the parties are no longer bound to perform their future contractual obligations. Because neither party is at fault, neither party is entitled to damages or compensation from the other.

The financial implications

The Law Reform (Frustrated Contracts) Act 1943 (“the Act”), which applies to most commercial contracts, provides that sums paid before the frustrating event may be recovered and any money which was due to be paid before the event ceases to be payable. Under the Act, where a party has incurred expenses prior to the frustrating event, the Court may allow a sum to be retained out of any money already paid by the other party or otherwise to be recovered from the other party. Where a party has gained a valuable benefit under the contract prior to the frustrating event, the Act also provides that the Court may require that party to pay a “just” amount for it.
Whether the current COVID-19 outbreak will amount to a frustrating event which will allow a contract to be discharged will depend on the facts of each case, the terms of the contract and, in particular, whether the contract remains capable of being performed as originally envisaged by the parties. The COVID-19 outbreak will not, however, give parties carte blanche to extricate themselves from contracts that are no longer commercially attractive.

Further reading

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