To say coronavirus has been frustrating would be the understatement of the century, but its impact may have legally ‘frustrated’ your contracts. So, what exactly does that mean and could it free your business from its obligations as a result?
While businesses are continuing to suffer due to the impact of COVID-19, it is vital that they look to mitigate their losses.
Most will have undoubtedly reviewed the terms and conditions of their contracts. But what if your contract does not have a force majeure clause or what if the clause fails to respond to the current consequences you are suffering? Are there any other legal options available to you?
One option to consider is whether your contract has been legally ‘frustrated’.
What is frustration?
Frustration, in the legal sense, is when an event occurs that makes it both physically and commercially impossible to carry out the obligations under the contract, thus releasing you from those obligations. In other words, your contract will be terminated if it is proven to be frustrated.
Alternatively, the contract could be terminated where the obligations become significantly different from the ones that were agreed when you entered into the contract.
Frustration is applied to avoid injustice where neither party has done anything wrong and it is not their fault that the contract is now impossible to carry out. In practice though, it is a very difficult to establish that a legally frustrating event has occurred.
What do I need to establish?
Generally speaking, a frustrating event is one where:
- an event occurs after the contract has been formed;
- neither party is at fault;
- the event is beyond what was contemplated by the parties on entering into the contract and is so fundamental that it alters the contract; and
- the event renders performance of the contract impossible, illegal or radically different from that contemplated by the parties at the time.
Although these are general guidelines set out by the court, the specific circumstances of each situation must be taken into account.
Is COVID-19 a frustrating event?
Each contract and the circumstances surrounding it will be different. The key question will be whether COVID-19 makes performing your contractual obligations impossible. It won’t be enough if the virus just makes it more difficult (or expensive) and, in that case, the contract is unlikely to be frustrated.
If COVID-19 is simply delaying performance of contractual obligations, perhaps because of current government guidelines, but those obligations can still be performed in the future, the virus will not be classed as a frustrating event.
Frustration v force majeure
The main difference between frustration and force majeure are the consequences. Frustration will result in automatic termination of the contract. A force majeure clause usually only suspends performance temporarily – at least initially. The terms of each contract will differ and so it is always necessary to review the contractual terms in light of the current circumstances.
In the current situation, the more straightforward route is a contractual force majeure clause so you should look to this first. Check out our separate article which considers whether COVID-19 is a force majeure event.
Risks to consider
It is a high bar to argue that COVID-19 is a frustrating event which entitles you to terminate your contract and releases you from performing your obligations in future.
If you rely on it wrongly, you are likely to be on the receiving end of a claim for damages from your supplier or customer.
There are also additional aspects to consider if you have made or received payment in advance of the performance. Your right to recover or keep the payment will again depend on the circumstances and the contractual terms.
In these uncertain times you will need to review each of your contracts separately. If you are unclear what options are available to you, you should take legal advice to understand what rights you may (or may not) have and how you can go about enforcing those rights to protect your business.