Frustration And Pandemic - A Long Term Perspective On COVID-19 And Frustration Of Contracts

In these times of global health uncertainty and economic troubles it is tempting to jump to the "frustration of contract" conclusion. While we acknowledge that it is tempting to see the current economic trouble as frustrating the performance of contract there are a number of factors that must be considered when undertaking an analysis to determine if a performance of a contract has been frustrated as a result of the COVID-19 global pandemic. In some case, such as sit-down restaurants, it is difficult to imagine frustration not applying when there is little flexibility in running the business. However, the analysis is much complex given the potential and unknown possibilities for remote work in other industries.

Force Majeure and Frustration

Force majeure and frustration are often confused with one another. While there is some overlap between the two, they are distinct.

In order for force majeure to apply, a specific provision must be contained in the contract. Force majeure clauses provide that parties to a contract may be excused from performance, in whole or in part, or entitled to extend or suspend the time of performance, as a result of some specific event or condition, an "Act of God". Force majeure clauses can be tailored to specific events that the parties agree should change the parties' performance obligations of the contract.

In contrast to force majeure, the common law doctrine of frustration may relieve parties of their contractual obligations, but only where a force majeure clause is not present. Frustration may apply when an unforeseen event renders performance of the contract radically different than what was bargained for. When invoked, frustration automatically results in both parties being discharged from the contract.

Elements of Frustration

The doctrine of frustration is applicable where, "a situation has arisen for which the parties made no provision in the contract and the performance of the contract becomes a 'thing radically different from that which was undertaken by the contract.'"1 The contract must at its essence become impossible to fulfil due to an unforeseen event outside the control of the parties. Performance must not be simply more onerous or more expensive; it must be radically different than initially anticipated. Price volatility is generally viewed as an inherent risk in any market, and most claims of frustration based on fluctuations in price, even extreme swings, will fail.2

High Bar for Success...