Frustrated by COVID-19? Tell that to your contract

By Annie Townley

The law of frustration has reared its head at some memorable moments in British history: King Edward VII’s cancelled coronation; the First World War; the Second World War; and Brexit. Will the COVID-19 pandemic join this list?

It is unlikely that we will know the answer for a little while, although I think most would agree that it is inevitable. It will take businesses time to get back to “normal” so that they can assess the decisions that were made in the many months before and evaluate what damage has been caused. Certainly, the government’s decision to lockdown the country was unprecedented and has caused widespread disruption to all walks of life.

Parties often allocate risk in a contract by way of a force majeure clause. No doubt individuals and businesses have been frantically searching through their contracts to find such a clause and determine whether they can rely on it to delay delivery of raw materials, refuse to fix a boiler or cancel an event. As a term of the contract, a force majeure clause is construed against the background of the contract as a whole and may be subject to challenge under the Consumer Rights Act 2015 or the Unfair Contract Terms Act 1977. The effect of the force majeure clause will depend on its precise wording, but most boilerplate force majeure clauses will essentially prevent one party from being liable for any loss suffered as a result of the unforeseen event.

Where a force majeure clause either does not exist or is not drafted in a way that covers the COVID 19 pandemic, it may be the case that the contract has been frustrated. A force majeure clause will not be implied into a contract precisely because the doctrine of frustration exists. The stringent approach of this doctrine was reiterated in Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch) which confirmed that a contract will only be frustrated when an unforeseen event occurs after the formation of the contract which either renders the contract impossible to perform – as opposed to more expensive, time consuming or difficult – or transforms the obligation under the contract into a “radically different obligation”. In Canary Wharf the lease was not frustrated in circumstances where the EMA could still legally perform its obligations under the lease.

If a contract has been frustrated, both parties are released from their obligations under the contract and neither party many sue for breach of contract. In contrast to a force majeure clause which allocates the risk between the parties and is often weighted in favour of one of the parties, the Law Reform (Frustrated Contracts) Act 1943 allocates the risk for a frustrated contract such that:

  1. All money payable under the contract ceases to be payable;
  2. Any money already paid may be recovered.
  3. Where expenses have been incurred this may be deducted or retained from the amounts payable or paid. This is at the discretion of the court and is subject to what is just and equitable in the circumstances of the case. The court may include such expenses as are reasonable.
  4. Where a valuable benefit has been conferred this must be paid for.

On its face, the lockdown and forced closure of many businesses and sectors will be an unforeseen event. However, there will still be significant obstacles for parties to overcome and each case will, of course, turn on its own facts. The doctrine has a narrow application and parties must be able to evidence that the sole cause of the impossibility to perform a contract was the lockdown and not an act or election of the party seeking to rely on it or due to the fault or blame of either of the parties.  

Whilst no one cannot predict the future, particularly when it is impossible to predict what the next few weeks and months will look like, I will not be surprised if we see a gradual increase in frustration and force majeure clauses forming an important part of pleadings in future contract claims arising out of lockdown.

Read a short interview with Annie on her pupillage:

Was your first six months of pupillage like?

It has been a whirlwind full of mostly ups and very few downs! Everyone at No5 has been extremely welcoming and I have been particularly lucky to have such a great supervisor in Yasmin Yasseri who has made sure I have been exposed to as many areas within the Business and Property group as possible. I would be lying if I said there haven’t been some challenging moments, particularly when I first got to grips with some of the intricacies of the Insolvency Act and Insolvency Rules. However, each of these challenges has presented a further opportunity to learn, develop and improve, which I think is the point of a pupillage.

Have there been any stand out moments for you?

I have really enjoyed the variety of the work I have undertaken, covering a range of topics such as partnership agreements, undue influence, misfeasance, retention of title clauses, unlawful eviction, rectification for common mistake, COMI and possession proceedings. However, my stand out moment so far was during a case concerning a dispute over the existence of a  common intention constructive trust. There were no contemporaneous documents that evidenced the agreement between the two friends over 12 years ago so the witness evidence was key. Yasmin’s cross examination was so focussed, well prepared and direct that whilst the witness didn’t quite shout Jack Nicholson’s famous line “You can’t handle the truth”, in my humble opinion, he was very close.

What are you looking forward to in your second six?

Now that I am “on my feet” (although in current circumstances it should really be “on the other end of the phone/a video call” –  my first hearing was conducted over skype for business) I am really excited to get going. I have studied and mooted for so long always with the goal that one day I would be doing it for real so it feels a bit surreal that I have now reached this point!

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