Coronavirus COVID-19: Construction, Frustration, Force Majeure - What Does Contract Law Say?

Contract obligations must be performed, with the sanction of a potentially painful trip to the courts, arbitration or adjudication standing behind them for failure to perform. No ifs, no buts. Unless, that is, something out of the ordinary happens. And now, many are asking, is that something coronavirus?

What are the legal possibilities?

Under English law there are two obvious mechanisms to be considered. The first, established by case law, is frustration. The second is force majeure, which depends for its existence, and effects, on the contract itself. Force majeure is a legal concept in civil law countries, created by a provision in their civil codes which set out the law, for instance in France. In England, however, where there is no civil code, provisions to deal with force majeure should be set out in the contract.

What is frustration of a contract?

This occurs when, after the contract is made, an event occurs (without either party's fault and for which the contract makes no sufficient provision) which so significantly changes the nature of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time it was made, that it would be unjust, in the new circumstances, to hold them to its literal wording. More expensive or more difficult is not enough.

What is its effect?

Under English law both parties are automatically discharged from further performance. Legislation deals with the recovery of monies paid and compensation for any valuable benefit provided.

Does it happen often?

There are very few cases where a contracting party has successfully claimed that a contract has been frustrated.

What is force majeure?

This can be similar to frustration but, as it is not an English law concept, it is open to the parties to define, via the contract, exactly what circumstances are agreed to constitute force majeure.

What is its effect?

For the same reason, the contract also needs to set out the consequences of any event of force majeure, for instance suspension of performance until the force majeure event ceases.

Could coronavirus be a legally frustrating event or force majeure?

Coronavirus has the potential to affect different contracts in different ways. If, for instance, a country imposes a legal quarantine ban on movement out of an area, so that a materials supplier cannot fulfil its supply obligation to a subcontractor, that might be a frustrating or force majeure event under the...