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Frustration of a Contract

Posted on 5th May, 2020

Following on from our recent article on force majeure, some people have asked what the position is if there is no force majeure clause in their contract. The default position is that the parties must comply with their contractual obligations, but there is another possibility: that the contract is frustrated. Frustration is a common law doctrine which has evolved to mitigate the law’s strict insistence that parties to a contract do as they agreed.

The first thing to note is that frustration of a contract is only possible where the contract does not provide for the situation. If there is a clause in the contract (such as a force majeure clause) then the parties will need to abide by that clause instead.

If a contract becomes impossible to perform, or if performance becomes ‘a thing radically different’ from that agreed, and the cause is an outside event, then the contract may be frustrated. If a court finds the contract frustrated then it has the effect of killing the contract and ending the parties’ obligations to each other.

With such a dramatic effect, it is not surprising that the courts do not invoke the doctrine of frustration lightly. This must be borne in mind when assessing if the elements of the doctrine apply to the situation. For a contract to be frustrated, the court must find that there has been an unforeseen event which makes the contract either impossible to perform or transforms the parties’ obligations into something radically different. We will look at each in a little more detail in turn, then some practical points and examples.

Unforeseen event

An event that was foreseen is very unlikely to qualify. If the parties foresaw an event before contracting, the contract should deal with that event, if it does not there is a presumption that the parties agreed that the event should not affect performance of the contract.

It is also necessary that the event is not the fault of the person seeking to rely on frustration. It must be an outside event.

When looking at the ‘unforeseen event’ and trying to assess if it could be capable of frustrating the contract, remember that the doctrine operates at the very edge of contractual obligations to mitigate the worst effects. If a party claims a contract is frustrated, there is another party whose view needs to be considered. They may have considered the event a possibility, or perhaps such events are the very reason for the contract. Frustration must not undermine the certainty from contracts.

Impossible/radically different performance

Frustration is not a way of ending a bad bargain. It will not be sufficient that a contract just becomes more expensive or onerous to perform. To be impossible to perform, it must be genuinely impossible, not just very difficult.

In the case where performance is ‘radically different’, the difference must be beyond what the parties could reasonably have contemplated, to such an extent that it would be unjust to hold them to the literal bargain they made. You should not just consider the parties’ views here but take an objective view, look at it as an outside observer and consider what their view may be. It is generally viewed as a three-stage process:

  1. The court will consider the contract and its meaning. What were the parties thinking when they entered the contract and in what circumstances? From this the court should understand what the parties would have done had the contract ran smoothly.
  2. Consider what the situation is after the alleged frustrating event and what the parties would have to do to meet the letter of their obligations under the contract. From this the court will have a comparator.
  3. To decide if the contract is frustrated, compare the two to decide if the new obligation is a radical or fundamental shift from the old obligation. Would it be unjust to enforce?

And finally…

A few final points and examples, to give a bit of an insight into the attitude of the courts when assessing.

If a contract is frustrated, it is an automatic end of the contract. There are no steps that a party must take, it is an operation of law. In practice, of course, the counterparty will need to be informed and there is the potential for litigation. Because the contract ends, both parties are released from their obligations, this means that payments made under the contract can be recovered (subject to setting-off any claim for expenses incurred); details are codified in Law Reform (Frustrated Contracts) Act 1943.

Frustration had a recent airing in the context of Brexit, and an indication of how lightly courts apply it. The European Medicines Agency (EMA) tried to end its lease on its London offices. As an EU agency, it is required to be based in an EU member state. The EMA told its landlord that it considered the lease frustrated, and the landlord applied to the court for a declaration that it was not. The result was that the lease was not frustrated; the EMA could not be based in the UK but it was not barred from holding a lease in the UK (permission to appeal was given but the appeal will not go ahead because the EMA has sub-let the building).

To demonstrate how ‘final’ the frustration need be, some examples of frustrating events upheld by the courts:

  • a change in the law;
  • other illegality (outbreak of war, for example, preventing dealing with citizens of another country);
  • death where the contract is for personal services; and
  • destruction of a building where a builder is contracted to work on it.

Arguing that a contract is frustrated is an onerous task as it strikes right at the heart of the main benefit of a contract: certainty. COVID-19 will have frustrated contracts, but it may not be as obvious as it first appears. It is far better to have proper provision in your contract (obviously, with the benefit of hindsight) but if it is too late, independent advice is a must.

If you need to speak to someone about any of the issues above, please email Tony Wentworth at twentworth@jacksons-law.com or David Artley at dartley@jacksons-law.com or call 01642 356500

David Artley, Solicitor, Corporate and Commercial

 

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