Following the current outbreak of Coronavirus (COVID-19) and the Government’s recent restrictions on economic and social activities, most businesses have experienced serious commercial disruption and may be either struggling to meet their contractual obligations, or in turn finding that their contract is not being fulfilled. In our recent article here, we considered whether resolution of contractual issues can be managed by invoking a force majeure clause. However, to rely on force majeure, an express clause must have been inserted into a contract. If your contract does not include such a clause, the doctrine of frustration may provide a solution.
The doctrine of frustration
Unlike force majeure, the doctrine of frustration is a legal presumption in Irish law and will be implied into a contract. If a contract is found to be frustrated, the entire contract will be set aside, rather than excusing parties from their obligations or suspending the contract, as is the case where a force majeure clause is invoked.
Frustration occurs when, without default by either party, a contractual obligation has become incapable of being performed. The legal presumption of the doctrine may provide some peace of mind for a business in the absence of a force majeure clause. However, in Ireland, the threshold for frustration of a contract is extremely high. The frustrating event cannot have been envisaged by the parties and a court will interpret this strictly. For example, if the event was anticipated or ought to have been anticipated and no clause was incorporated into the contract to deal with it, the doctrine cannot be relied upon. Following the SARS and MERS influenza outbreaks in recent years, often protection for a pandemic or epidemic is now provided for in a contract, which would preclude the parties from relying on frustration.
Will the doctrine of frustration apply to your contract?
In Ringsend Property Ltd. v. Donatex Limited IEHC 568, the High Court confirmed the narrow scope for relief provided by frustration. However, there are several situations where parties may be successful in claiming frustration of a contract, some of which may become relevant following the effects of COVID-19. For example, when there has been a death of a party to a personal contract; where the concept a business venture envisages is rendered impossible; where unforeseen events have increased the burden of performance or there has been a delay which could not have been anticipated in the performance of the contract, a claim of frustration may succeed.
However, the High Court confirmed in Zurich Bank v McConnon IEHC 75 that frustration will not provide protection from changes in the economy or markets which would affect the profitability of a contract.
It is clear that frustration of a contract is a difficult threshold to reach. During the SARS outbreak in 2002-2003, the Hong Kong District Court in Li Ching Wing v Xuan Yi Xiong 1 HKLRD 754 considered whether the epidemic could have the effect of frustrating a tenancy agreement as a result of an isolation order imposed on residents in the building. The Court rejected the argument as the agreement had a two-year term, and the isolation order was only for a period of 10 days. The epidemic did not sufficiently change the nature or obligations under the contract and did not meet the threshold for frustration.
Recent developments in England
Recently in England, the question of whether Brexit could constitute a frustrating event was considered in Canary Wharf (BP4) T1 Ltd v European Medicines Agency (EMA) EWHC 335. The EMA argued that as an EU body, it ought to have its headquarters located within the European Union. They consequently contended that their lease in London was frustrated following Brexit and sought to relocate to Holland. The English Court considered whether the threshold of frustration of the lease had been met. The Court held that the contractual obligations under the lease had not become incapable of being performed. The lease still provided the EMA with an office building fit for purpose. The decision to vacate the premises and relocate to Amsterdam was entirely that of the EMA. This decision confirmed the high threshold when considering the doctrine. We discuss some practical considerations for landlords and tenants during these uncertain times here.
If you have experienced complications in the performance of a contract, it is crucial to carefully examine and consider the following options before seeking to claim frustration:
- is there any insurance that may cover the losses incurred, such as business interruption insurance;
- consider if there is an express force majeure clause, as this could provide a resolution without terminating a contract entirely;
- could an alternative agreement between the parties be negotiated or could any steps be taken to mitigate the effects of the difficulties?
If none of the above options are satisfactory, frustration may be a possibility to consider. However, you must be sure that the reason for frustration of the contract is due to unforeseen circumstances which render the performance of the contract impossible not as a result of actions either party. As highlighted above, a court will scrutinise very strictly the circumstances of the inability to perform the contract when considering if the event has caused frustration.
How can we help?
As developments continue to unfold and evolve in relation to the effects of Coronavirus, it is likely that courts will be considering the doctrine on a more frequent basis as companies navigate these unprecedented contractual challenges.
If you have any queries in relation to the performance of a contract or any specific queries in relation to the COVID-19 virus, please get in touch with your regular William Fry contact. We also have a specific COVID-19 Hub on our website to assist you and keep you updated on developments.
Contributed by Sarah Plunkett