Covid-19 is going to be used as a reason to terminate all sorts of contracts and agreements.
Principally this will be by activating Force Majeure clauses and or the doctrine of Frustration.
For more information on force majeure clauses please refer to the article written by Simon Morris in our Corporate team titled, ‘Force Majeure in the UK and the Coronavirus’.
If there is a force majeure clause that covers a coronavirus then frustration will not apply.
However, in the absence of a force majeure clause or in circumstances where the force majeure clause is not drafted so as to cover events such as coronavirus, parties to the contract may be able to bring the contract to an end by relying on Frustration to avoid liability for breach of contract.
In broad terms, a contract will be frustrated if:
- The frustrating event occurred after the contract had been formed;
- The frustrating event was not the fault of either party to the contract;
- The frustrating event was beyond the contemplation of the parties at the time the contract was entered into; and
- The frustrating event made the performance of future obligations under the contract impossible, illegal or radically different.
Whether a contract will be frustrated by a supervening event occurring as a result of coronavirus will very much depend on the individual facts of each case. The bar for frustration is high. However, it is very likely that this bar will be reached in some cases, for example when it becomes illegal to provide a service.
What happens if a contract is frustrated?
If a contract is frustrated, it is automatically discharged at the time of frustration. This means that the parties to the contract do not need to perform any future contractual obligations. In addition, parties to the contract cannot claim damages for non-performance of these future obligations.
Under the Law Reform (Frustrated Contracts) Act 1943, any money paid pursuant to the contract before the frustrating event occurred is repayable. Further, parties are released from future performance.
Can expenses incurred before the frustrating event be recovered?
If a party has incurred expenses before the frustrating event occurred they can seek to retain or recover these expenses from any money paid or payable at the time of frustration. The court may decide that all of the expenses can be recovered or that only some or indeed none of the expenses can be recovered. Much depends on the individual circumstances.
A party will not be able to retain or recover a sum greater than the amount of money paid or payable at the time of the frustrating event. This means that if no money was paid or payable before the frustrating event then expenses will not be recoverable.
What happens if one party to the contract has obtained a valuable benefit before frustration?
In circumstances where one party to the contract has already obtained a valuable non-monetary benefit before the contract is discharged, that party may be ordered by the court to pay to the other party a sum that the court considers just.
We will be continuing to share updates as the situation around COVID-19 evolves. You can find the contingency plans that we have put in place, along with further advice, here.