In these uncertain times, some people may have entered into contracts prior to 26 March 2020 when the Coronavirus Act 2020 was passed. Here is a brief Q&A on how this might affect those contracts.
What is frustration?
The common law doctrine of frustration is where a contract may be discharged due to an unforeseen event occurring after the contract has been formed, rendering its performance impractical and/or impossible e.g. a death or incapacity of one party; or illegal due to a change in the governing law.
What are the grounds for frustration?
The grounds for frustration are, in general, if the intervening event is not the fault of either party; it occurred after the contract was formed and was unforeseeable by both parties at the formation; and it makes performing the contract impossible or performance as something radically different from what was in the contemplation of the parties when the contract was made. The result is that the contract can be discharged and both parties relieved of their obligations.
Is there a force majeure clause?
The contract may contain a force majeure clause which can be relied on if it provides for a foreseeable event such as a pandemic occurring. In the context of the coronavirus COVID-19 lockdown, the enactment of the Coronavirus Act 2020 imposed restrictions on businesses opening, travelling, gatherings at public events, and regulations to stay at home and self-isolate if showing viral symptoms or if in close contact to someone with the virus; thereby creating the force majeure event of a change in the law.
What if there is no force majeure clause?
In the absence of a force majeure clause or one which is silent on the specific mention of a pandemic; the doctrine of frustration will operate to discharge the contract, automatically relieving both parties from the performance of their contractual obligations.
What happens if an advance or expenses have already been paid?
Advance payments made prior to the frustratory event are recoverable and any prior part performance and or expenses incurred can be claimed if a valuable benefit was conferred.[i]
What should you do if you think your contract has been frustrated?
Any decision to assert frustration in order to discharge a contract should only be made after first taking legal advice as each case is dependent on the relevant facts of whether or not a contract is frustrated.
[i] Law Reform (Frustrated Contracts) Act 1943 s1(2).
Disclaimer. The above is a blog commentary and should not be relied on as legal advice. The advice of a solicitor should always be sought in all circumstances.