Could Contract Frustration Save Your Business from Coronavirus?

The effect of the coronavirus on our local economy is devastating. The hospitality and tourism industry has ground to an unprecedented halt, interstate travel in Queensland is now strictly prohibited, and individuals are being urged not to leave home unless absolutely necessary. 

Corney and Lind Lawyers is committed to helping our clients navigate the vast complexities arising from this global pandemic. One way we aim to do so is to advise on the terms and conditions arising from the contractual framework that many business dealings are subject to. If a contractual obligation has become incapable of being performed because of circumstances that render a thing radically different from that which was originally undertaken by the contract, the law may recognise that your contract has been frustrated. If your contract is deemed to have been discharged by frustration, all parties to the contract are released from further obligations. 

Thus, frustration of a contract may offer you relief from the devastating impacts of the coronavirus. 

When Does Contract Frustration Occur?

The classic formulation of the test for frustration is as follows:

Frustration occurs whenever the law recognises that, without the default of either party a contractual obligation has become incapable of being performed, because the circumstances in which performance is called for would render it a thing radically different from that which was originally envisaged when the contract was entered into. 

It is the effect of the supervening event, that is the coronavirus, rather than merely its nature that must be considered. This necessarily involves a consideration of terms of the contract, and the circumstances of your particular case. For example, if the effect of the coronavirus is merely to render performance of the contract more onerous or expensive, then performance will not be considered radically different, merely more burdensome and the contract will stand.

However if the coronavirus has resulted in you being unable to perform your obligations under the contract, or if the performance of your obligations can only be undertaken in a radically different way, you may have an argument for frustration of contract. 

Does this Doctrine Apply to My Contract?

The doctrine of frustration is flexible, and at face value applies to any type of contract. In the past, the courts have, for example, held the doctrine to apply to employment contracts, contractual licences, construction contracts, trading agreements, and contracts for the sale or leas of goods. 

We have already been able to use the doctrine of frustration to help our client’s terminate or re-negotiate the terms of their contracts affected by COVID-19.  

Effect of Express Contractual Provisions:

It is important to carefully analyse the terms of the relevant contract. This is because a contract will not be frustrated where there is an express contractual provision in which a party undertakes an absolute promise to perform, or to be found to have accepted the risk of such an intervening event; known as an absolute obligation. If an absolute obligation is present, and you are the promisor, you must perform your obligations under the contract. If this is not physically possible, you are liable to pay damages for breach of contract. 

Conversely, if the parties have failed to expressly deal with the event alleged to have frustrated the contract, then the contract must be construed in light of the existing circumstances at the time the contract was made. 

This will be the more likely scenario, as most of the contracts we have reviewed to date have not included terms which deal with a pandemic like coronavirus. 

Common Instances of Frustration:

It is not possible to generate an exhaustive list of circumstances in which a contract may be recognised as have being frustrated, but previous decisions in which a contract has been found to have been frustrated include:

(a) Where the subject matter of the contract has been destroyed, or ceases to be available to the parties. For note however, that where the contemplated duration of the contract is long, a temporary unavailability will not frustrate the contract.

(b) Death or incapacitation of a party. For example, the death or permanent incapacitation of a tradesman may frustrate a contract of service. In cases of temporary illness or incapacitation, the effect will depend on a consideration of the nature and probable duration of the illness, and the term and nature of the contract. Furthermore, the effects of illnesses must be contemplated in light of modern employment contractual provisions for sick leave.

(c) Contemplated method of performance is no longer possible. If a contract expressly provides for a particular method of performance, and a supervening event renders that method of performance impossible, the contract may be regarded as frustrated. However, the contract will not be deemed frustrated if the change in the method of performance is neither substantial nor radical.

(d) A supplier’s stipulated source of supply is not available due to an event capable of amounting to frustration. The supplier may invoke the doctrine of frustration if the event renders performance of the contract radically different from that intended by the parties. Close consideration of contractual provisions is again necessary, for if the supplier has expressly agreed to bear the risk of the particular source being unavailable, then frustration will not occur. Similarly, the supplier cannot rely on frustration merely on the basis that an intended source of supply has dried up if they agreed to supply goods of a generic description.

(e) Excessive delay. Where an event causes a temporary delay in performance, the contract may be frustrated where the delay is such as to render performance something radically different from what was originally undertaken. The impact of the event must be assessed at the time of its occurrence. Factors the court will consider when making a determination include the time the contract still has left to run, and the probabilities of the length of the delay. Significantly, if, as assessed at the relevant time, the commercial probabilities suggest a frustrating delay, it is irrelevant that this does not in fact eventuate.

(f) Supervening illegality or change in the law. Where after formation of the contract, performance becomes illegal, or the law changes in such a way as to prohibit further performance of the contract, the contract will be discharged.

(g) Increased burden of performance such as to radically alter what was contemplated by the parties. Simply because performance has become more onerous does not itself amount to frustration.

(h) Disappearance of the foundation of the contract. Where an event that the parties have agreed to be the basis of the contract fails to occur, the contract may be frustrated.  

Effect of Frustration:

Unlike termination for breach of contract or repudiation, it is not necessary for one party to elect to terminate the contract. When frustration occurs, it is discharged by force of law; both parties are automatically discharged from the obligations to perform their contractual duties. Significantly however, rights or liabilities accrued prior to the frustrating event will be unenforceable if there has been a total failure of consideration. 

What Next?

Frustration may be a valid (or even strong) argument for a renegotiation of contractual terms (or, termination of a contract), but needs to be considered in the context of other factors in your circumstances. There are no “silver bullets” and if you are seeking to rely upon frustration, it is important to ensure that the advice and negotiations are measured and considered. In most circumstances, it is likely that the other party to the contract will insist that there has been no frustration, to be able to achieve some commercial outcome for themselves. Tailored legal advice is needed if frustration is to be pursued as an argument. 

We are committed to  helping you face this period of uncertainty. We can provide a comprehensive review of your contracts to determine whether frustration has occurred, or alternatively what other remedies may be available to you. 

This article was written by James Tan, Barry Klopper and Courtney Linton.

References:

Codelfa Constructon Pty Ltd v State Rail Authority of New South Wales  (1982) 149 CLR 337

Comptoir d’Achat et de Vente du Boerenbond Belge SA v Luis de Ridder Lda (The Julia) [1949] AC 293

Cooper & Sons v Neilson and Maxwell Ltd [1919] VLR 66

Cornish & Co v Kanematsu (1913) 13 SR (NSW) 83

Cutter v Powell (1795) 6 Term Rep 320

Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696

FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397

Hirji Mulji v Cheong Yue Steamship Co Ltd [1926] AC 497

Horlock v Beal [1916] 1 AC 486

Howell v Coupland (1876) 1 QBD 258

Krell v Henry [1903] 2 KB 740

Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119

Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169

Simmons Ltd v Hay [1964-65] NSWR 416

Taylor v Caldwell (1863) 3 B & S 826

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