Frustration and Covid-19

Frustration is a contractual remedy that comes into effect in limited circumstances.

This remedy may be relied upon where;

• there is a serious event;
• the event was unexpected and out of the control of all parties; and
• the event renders the contract either (a) physically/legally/commercially impossible to fulfil or (b) radically alters the contract in such a way that the obligations/duties now imposed are nothing like those agreed upon during the formation of the contract.

It is not enough that performance is made more costly or more difficult: the frustrating event should be so fundamental that it strikes to the root of the contract and is entirely beyond what was contemplated by the parties when entering into the contract.

Frustration should usually be a last resort, particularly in circumstances where the parties wish to continue a commercial relationship or continue the contract in future.

The courts take a very narrow view of this remedy, which, if established, allows the parties to walk away from the contract as if it had never existed.

In attempting to deal with some unforeseeable events, parties will often include force majeure clauses in contacts however whilst these often cater for ‘pandemics’ it is rare that they would include provisions for the effects of government restrictions such as lockdowns. Since the Covid-19 pandemic, a number of contracts have been tested in Court.

Frustration and the Covid-19 Pandemic

The Covid-19 pandemic has disrupted many areas of everyday life for businesses and individuals alike.

A court recently ruled on a matter of frustration due to Covid-19 regulations in relation to property leases. The case of Bank of New York Mellon (International) Ltd v Cine-UK Ltd [2021] raised a question: do Covid-19 Regulations amount to a ‘temporary frustration’ of leasehold interests? The court decided that there cannot be such a thing as “temporary” frustration. The leases had not been frustrated entirely and there would be time following the pandemic where the leases could be legally viable. Specifically, the court stated that “an anticipated closure of around 18 months would not be sufficient to result in frustration in the context of leases of 15 years or more, where the leases would still have more than a year to run after the disruption had ceased”.

In a second case from 2020, Salam Air SAOC v Latam Airlines Group SA [2020], it was decided that aircraft leases could also not be frustrated by Covid-19. Foxton J decided that aircraft leases are drafted very meticulously and the risk belongs to the airline. Where the terms of the contract state that one party’s rental obligations are absolute, frustration cannot be relied upon.

Summary

The doctrine of frustration is exceptionally complicated and its application is not decided upon lightly. The courts are strict when determining if to allow frustration to terminate a contract and Covid-19 has not changed that. The Court expects parties to now draft contracts with relevant bespoke clauses setting out the steps that should be followed if a contract was to become burdensome or difficult to fulfil.

If you would like further information on the issues discussed in this article, please contact Lucy Clarke or another member of the Litigation and Dispute Resolution team.