Commercial

Covid-19, frustration, and force majeure

Richard Colbey analyses how Covid-19 will give rise to more frustrated contracts which are likely to be governed by force majeure.

The Covid19 crisis will give rise to litigation in numerous forms, the most frequent of which may arise out of contracts that cannot be performed because of it. The cavalier attitudes airline have taken to their statutory obligations to refund consumers when flights are cancelled has attracted the most publicity, but many other contracts, consumer and commercial, will have been rendered impossible to perform.

Occasionally force majeure clauses will govern the position but the doctrine of frustration which has rarely surfaced in practice, is likely to become more frequently considered, where there is no such clause. It applies where a contract becomes impossible to perform through the fault of neither party. This included legal impossiblity. If the lockdown decrees under the Coronavirus Act 2020 prevented performance, then both parties’ obligations would be discharged.

The termination of the underlying purpose of a contract may frustrate it. Krell v Henry [1903] 2 KB 740involving the rental of a flat on Pall Mall to view the canceeled coronation of Edward VII remains the exemplar of this principle. Although the flat could still have been occupied the renter was entitled to his money back. Where goods or services were ordered specifically for a purporse rendered nugatory by Covid19, such as viewing a sporting event, that line of authority may be dusted down to obtain discharge of the contract.

The position is partially governed by the Law Reform (Frustrated Contracts) Act 1943. This does not define frustration, but governs its consequences. Broadly speaking, any consideration given for a frustrated contract has to be returned but there is a discretion by virtue of s1(2) of that Act give the court a power to allow a party who has incurred expenses in connection with the performance of that contract to retain or claim some or all of those amounts. It might be a caterer who has bought a lot of food in anticipating of serving it at a frustrated function could seek to retain a deposit up to the cost of the food, but not, of course, for any profit element. Conversely s1(3) gives a similar power when one party has received a benefit from the contract to order that party to make payment up to the equivalent of the value of the benefit.

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