Covid-19 and Frustration of Contracts

Matthew Howe 10-08-2020

The Covid-19 pandemic has caused problems for a wide range of businesses, who have been unable to fulfill their contractual obligations through no fault of their own. How does the law treat parties who are unable to perform contracts, because of the Covid-19 pandemic?

How are contracts formed?

In order to form a legally binding contract between parties, the following elements must be satisfied:

An offer is made from one party to the other;
The other party accepts that offer;
Both parties provide consideration to the other. Consideration could be the promise to pay money or a promise to do something;
Both parties intend to be legally bound by the agreement; and
Both parties have capacity to enter into the contract. So, individuals must be at least 18 years old and be of sound mind.

If all of the above elements are satisfied then there will be a legally binding contract between the parties, regardless of whether the contract was agreed verbally, in writing or a combination of the two.

When one party fails to fulfil their obligations under the contract, perhaps through failing to pay money or deliver goods, the other party has the grounds to claim for breach of contract.

What is frustration of a contract?

A contract is frustrated if becomes impossible for one or both of the parties to meet their obligations under the contract, due to circumstances beyond their control.

This is known as frustration of contract and in those circumstances, the law treats the contract as terminated, discharging both parties' obligations.

Has a contract been frustrated by the Covid-19 pandemic?

The ongoing pandemic caused by Covid-19 has left many individuals and businesses uncertain as to their future. In these circumstances, some parties may be unable to perform their obligations under contracts they entered into prior to Covid-19 causing lockdowns and other disruption throughout the world.

Each contract is different and whether or not a contract has been frustrated by Covid-19 can vary on a number of factors. It could depend on the type of goods and services being supplied. For example, if in order to perform the contract one party had to travel to a country that has closed its borders due to Covid-19, it would be seen as unreasonable for the other party to sue for breach of contract. Instead, the contract would be frustrated.

Just because an event or circumstances occur beyond the parties’ control does not automatically frustrate and subsequently terminate the contract. Parties enter into a contract with expectations and often the failure of one party to perform their obligations can have devastating effects on the other party. This is why contracts will only be considered as frustrated in very strict circumstances.

Parties should consider whether their contractual obligation has become incapable of being performed because the circumstances would render their obligation radically different from that which was agreed.

Most large corporate contracts contain clauses that deal with the possibility of frustrating events such as war, changes in law or acts of God. Even so, any party entering into a contract should consider agreeing with the other party as to what should happen if circumstances prevent either from performing the contract.

Can I bring a claim if a contract has been breached?

If one party claims that a contract has been frustrated, but the other believes that they perform the contract, even in light of the circumstances, then the party who wishes the contract to continue may have a claim for breach of contract against the other party.

The courts will consider a range of factors when determining if a contract was frustrated. These include the parties' knowledge, expectations, assumptions as to the risk and the parties’ potential for performing the contract in the future.

If the parties entered into the contract knowing there was a risk that the contract could not be fulfilled, then the courts will be less sympathetic if one party then claims it cannot perform the contract.

At Samuels Solicitors LLP, we have a great deal of experience in dealing with many different types of contractual disputes. If your contract has been breached by someone you have been in business with, we will be happy to discuss it with you.

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