As a law student I remember learning about frustration of the purpose of a contract in what became known as the "Coronation cases", which arose from events surrounding the Coronation of King Edward VII and Queen Alexandra in 1902. A man hired a room with a view of the street to observe the Coronation procession, but the procession did not take place on the days originally set. The punter refused to pay the balance for the room and litigation ensued. It was held at trial, and upheld in the Court of Appeal, that the purpose of the contract had been frustrated; this wasn't just hiring a room, it had a particular purpose which had been thwarted.

In the last few days, I have been inundated with requests for advice from consumers, business owners, and commercial landlords and tenants, and others in relation to the impact of the Coronavirus on their contractual obligations.

When is a contract frustrated?

It is established law (Paradine v Jane, 1647, and earlier) that even where the performance of a contract becomes more difficult or even impossible, the party who fails to perform can be sued for damages.  

But the common law evolved (see Taylor v Caldwell, 1863) to provide an exception in the doctrine of frustration. A frustrating event is an event:-

• which occurs after the contract has been formed.

• far beyond what was contemplated by the parties when they entered the contract

• not due to the fault of either party, and

• renders performance physically or commercially impossible, illegal or is radically different.   

If a contract is frustrated, the parties can then seek the consequences set out in the Law Reform (Frustrated Contracts) Act 1943:

• each party is discharged of its obligations under the contract

• money paid under a contract before it was discharged will be refunded, subject to the Court's discretion on

  • the other party retaining, specific expenses incurred in performance of the contract to date, and

  • if either party retains a valuable benefit, the Court may require them to pay for it

Where does that leave us with Covid-19?

Well, it will depend on each contract on a case by case basis. Where, for example, performance of the contract would be contrary to the state-imposed lockdown, which may involve illegality in attempting to perform the contract, it is likely that frustration could be established.  Arguments about impossibility due to effect on supply chain and staff, for example, will likely be more complex and fact-sensitive. That a contract is far more difficult or more expensive to perform will not get you home on frustration.   

The Courts will consider, as Rix LJ described in The Sea Angel (2007) case:  “the nature of the supervening event, and the parties' reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances”.  

So, an important point to consider is that if the supervening event was or could have been in contemplation at the time the parties made the contract. If the Coronavirus was a known threat but perceived to be less immediate, the Courts may consider the parties considered it and allocated risk accordingly. This would make frustration arguments more challenging.  

We might therefore expect a raft of claims to follow, and received further case law guidance as to whether frustration applies to particular contracts affected by Covid-19, and how Courts will approach the discretionary matter of expenses incurred and benefits obtained by the party in part performance.   

Is the contract impossible to perform now?

There may be other situations in which contracts are not, or do not appear yet to be, impossible to perform. For example, a contract to provide a venue for a baptism or wedding in 8 weeks’ time. Whilst it may be uncertain, it may not be correct at this point to say it is impossible to perform, especially before the Government’s promised 3-week review of lockdown measures. There is no such thing as anticipatory frustration; a contract can only become frustrated at the time it becomes impossible to perform. That said, that parties should be encouraged to talk to each other and take a pragmatic view, perhaps mitigating and sharing the loss between them. Rarely will it be in anyone’s interests to litigate to find out the Court’s view on frustration, unless there are serious sums of money involved.

Hope for consumers?

In addition to the strict contractual position, and whether frustration may apply or not, I am aware that groups such as Which? are lobbying with some success on behalf of consumers, particularly in the realm of package holiday providers and airline companies for full refunds. Particularly with social media and online reputations to protect, I expect larger companies will want to go above and beyond their strict legal rights, as for example Airbnb are doing for deposits and service charges for cancellations for check ins between 14 March – 14 April 2020.

What about commercial rent payments?

In the recent Canary Wharf (BP4) T1 Limited v European Medicines Agency [2019] it was held that the event of Brexit did not frustrate the lease. It is well established law that a lease will ‘hardly ever’ become frustrated. Unless your lease says otherwise, you will likely be held to its strict terms despite Covid-19.  However, you may be aware that the Government has issued policy on non-payment of rent on commercial premises, now enshrined in law. The Coronavirus Act 2020 received royal assent on 25th March 2020. Section 82 applies during the current ‘relevant period’ which is 26th March 2020 to 30th June 2020, and during which there are restrictions on rights of forfeiture for non-payment of rent as well as limiting the courts’ powers to make orders for possession. It is sensible for landlords and tenants to speak with each other to negotiate provisions, as all businesses face unprecedented uncertainty. I would strongly recommend that any rent concession or rent-free period is properly documented in a side letter or, if applicable, a deed of variation.

Insurance and force majeure clause

Modern commercial contracts will often include a force majeure clause and set out who is to carry the risk and/or take out insurance to cover certain events. Such clauses will be the starting point to govern whether and how Covid-19 impacts on those contracts. In the absence of contractual provisions, parties will then look to the common law principle of frustration as set out above.

Toby Walker is a Partner at Allan Janes LLP and leads the Dispute Resolution team. Please do not hesitate to get in touch if you require any advice on your contracts, business or business premises.