COVID-19 And The Law Of Frustration

We are flying blind into this storm. The pandemic is certain to affect, and has already affected, all kinds of contractual relations. I think it possible, even probable, that COVID-19 will be held to be an “Act of God” and available to excuse performance of all kinds of contracts, contracts of employment and contracts of sale or supply. That said, the application of Frustration, as an excuse for one or both parties' performance, will depend on the terms and details of each contract involved. The common law test is usefully described by Diplock L.J. in Hongkong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., [1961] EWCA Civ 7, [1962] 2 Q.B. 26, at 66, [1962] 1 All E.R. 474, at 485:

The test whether an event has this effect or not has been stated in a number of metaphors all of which I think amount to the same thing: does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that [it] should obtain as the consideration for performing those undertakings?

What's important is that it's the event that provides the excuse, not the cause of the event. In other words, the test is as applicable to a breach by one party as it is to consequences of COVID-19. The phrase, “fundamental breach” is properly applicable to this situation.

First, with respect to deposits or pre-payments, it is likely that an immediate demand for repayment will not be sustainable. A court, even if one could get before one, is likely to say that a deposit, at least at the moment, can't be recovered. Of course, if actual performance under the contract is excused (and not just suspended), the deposit will be immediately recoverable, whether the contract provides for such repayment or not. If the contract does not deal with the return of a deposit or part-payment, any amount paid can be claimed in Restitution.

The more important aspect of Frustration is that it provides an excuse for non-performance. If the contract has a force majeure clause, the terms of the clause will govern. Many such clauses are standard and include a laundry list of events that provide an excuse for non-performance. Such clauses often contain a general excuse forActs of God. If a force majeure clause does not offer or list some event that is wholly unexpected and random, there is a risk that a court may say that such an event is not available as an excuse. In other...