The Termination and Frustration of Contracts during COVID-19
by Zaid Anwar
We are clearly in testing and unprecedented times so first and foremost; I hope everyone is staying safe and taking care of their health.
This is not only a testing time for us as individuals but also on our businesses and economy at large. Therefore, it is important to offer some guidance on the doctrine of frustration, in terms of a contact, as I have had several enquiries on this area of law in the last few weeks.
To give some brief background, a contract is made up of 3 key elements; (1) an offer which is (2) accepted for (3) consideration (usually in monetary terms). A contract can be formed expressly or implicitly by way of written or oral agreement. A contract, in some cases, can be formed by the actions of the parties. A contract is an agreement between two or more parties which is binding and if breached, may enforceable by law.
However, what happens when the contract cannot be carried out for reasons which are outside the control of the parties for example a fire in a factory, acts of God or, a more relevant example, a global pandemic? In these circumstances the law of frustration should be considered.
What is frustration and when will a contract be frustrated?
Generally speaking, a frustrating event is one which:
- Occurs after a contract is formed.
- Is so fundamental that it is regarded by the law as striking at the root of the contract and beyond the contemplation of the parties in the contract.
- Not the fault of the parties involved.
- Renders the performance of the contact impossible, illegal or fundamentally different from the way the parties envisaged the contact to be performed.
Some contracts will have a force majeure clause which will detail what should happen in the event a contact is frustrated. However, in absence of this, Law Reform (Frustrated Contracts) Act 1943 (in most cases) will apply.
Some notable points provided for within The Law Reform (Frustrated Contracts) Act 1943 are:
– Sums which have been discharged before the frustrating event may be recovered and monies owed, prior to the frustrating event may not be payable.
– A party may be permitted to retain funds spent on expenses, if the Court sees fit, for an amount up to the value of the expense; or recover monies, for expenses, which were due at the time of the frustrating event.
– A Court may require a party, who has obtained a benefit from the contract, prior to the frustrating event, to pay a just sum for it.
Should you wish to consider this doctrine further or are party to a contract which has been affected by COVID-19 in any way, I would be happy to discuss this further with you. Given the testing times, I am happy to offer a free 15-minute consultation with you over the telephone. Alternatively, please feel free to send me an email on [email protected] providing a brief description of your matter and I will be pleased to assist. To find out more about me and my services, please click here.
Please note that this article is not intended to be legal advice, as it is only intended to be used as a guidance.