HM Insights

Is Covid-19 frustrating [your contracts]?

Contracts between parties may (despite often being extremely lengthy documents) not provide for all possible circumstances. If something happens, which has the effect that the contract cannot be performed and that situation is not provided for within the contract, that intervening event may have the effect of causing the contract to be "frustrated".

Frustration operates to bring a contract to an early end because of the effect of a supervening event. If a contract is frustrated, it comes to an end automatically. The contract simply ends because at least one of the contractual obligations upon one of the parties can no longer be performed, or the purpose of the contract has radically changed, in either case as a result of external circumstances.

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An 'intervening event'

The intervening event must bring about such a fundamental change in circumstances as to allow a court to find that the contract no longer reflects the "bargain" that the parties had originally entered into, so their bargain must be treated as being at an end.

In deciding whether a contract has been frustrated, as well as looking at the intervening event, a court will look at a variety of different factors that existed at the time at which the contract was entered into, which might include the knowledge, expectations and assumptions of the parties at that time.

It should be noted that, while no action is required by any party to the contract to bring the contract to an end as a result of frustration, in practice the timing of communication on a position that a contract has been frustrated may be critical, particularly in light of the changing circumstances in relation to Covid-19.

A key question that many businesses and their advisers are currently grappling with is whether Covid-19 is an "intervening event" that may lead to a contract being frustrated. Finding the correct answer to that question will require careful consideration of the nature and terms of each individual contract, the particular facts and circumstances around performance, and whether Covid-19 and its consequences create a situation that would allow for the operation of the doctrine of frustration.

In addition to the terms of the contract itself, the effect of current government advice, legislation and regulation at any given time may have a bearing upon whether a party to the contract should seek to rely upon an argument that the contract has been frustrated or whether they would be better served by giving notice of termination in terms of the contract or relying upon any specific force majeure provisions within the contract.

Get in touch

We can review your contracts and the factual matrix within which they operate and help you to assess whether a contract has been frustrated and, if so, the implications arising from frustration of contract, including risks of litigation.

Please contact us for further advice.

Jennifer Jack | [email protected]0131 247 2548

James McMorrow | [email protected]0141 227 9329

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