Frustration Of Contract And Covid

• Published date: 15 December 2022
• Subject Matter: Corporate/Commercial Law, Transport, Coronavirus (COVID-19), Corporate and Company Law, Contracts and Commercial Law, Aviation, Government Measures, Litigation, Contracts and Force Majeure
• Law Firm: W Legal
• Author: Mr Steven Loble

COVID has had a wide-ranging effect on contracts. The government introduced various schemes to mitigate the effects, for example in relation to the recoverability of rent and the ability to forfeit property for a certain time due to the pandemic. There has also been litigation relating to business interruption insurance policies, which went to the Supreme Court.

The Courts have also dealt with some cases in which it was alleged that contracts had been frustrated as a result of the pandemic.

The fundamentals of the law of frustration

According to the leading English textbook on the English law of contract, Chitty on Contracts (34th Edition, 2021),

" ...in J. Lauritzen AS v Wijsmuller BV (The Super Servant Two), Bingham LJ set out the following five propositions which describe the essence of the doctrine. These propositions, he stated, were "established by the highest authority" and were "not open to question". The first proposition was that the doctrine of frustration has evolved "to mitigate the rigour of the common law's insistence on literal performance of absolute promises" and that its object was:

"... to give effect to the demands of justice, to achieve a just and reasonable result, to do what is reasonable and fair, as an expedient to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances."

Secondly, frustration operates to "kill the contract and discharge the parties from further liability under it" and that therefore it cannot be "lightly invoked" but must be kept within "very narrow limits and ought not to be extended". Thirdly, frustration brings a contract to an end "forthwith, without more and automatically". Fourthly, "the essence of frustration is that it should not be due to the act or election of the party seeking to rely on it" and it must be some "outside event or extraneous change of situation". Finally, a frustrating event must take place "without blame or fault on the side of the party seeking to rely on it". (my emphasis)

Each case must be looked at on its own merits, examining the contract in detail and bearing in mind that the doctrine of frustration cannot be lightly invoked, meaning that there is a high hurdle to be jumped before a court can find that a contract has been frustrated.

The importance of certainty in the law was set out in Bank of New York Mellon (International) Limited v Cine-UK Limited, Aew UK Reit Plc v Mecca Bingo Limited
Aew UK Reit Plc v Sportsdirect.com Retail Limited [2021] EWHC 1013 (QB), 2021 WL 01600624. In that case the court granted summary judgment for rent arrears against three commercial tenants who had argued that the terms of their leases had been overtaken by wholly unforeseeable events when they were forced to close their premises during the COVID-19 pandemic. Rent cesser clauses in the leases were not operative because they required physical damage or destruction. In light of that, the tenants were not entitled to rely on the landlords' insurance for loss of rent because the landlords had not suffered any loss of rent. Nor had the leases been temporarily frustrated. Importantly, in relation to matters of legal principle and the approach which the courts should take, the judgment concluded as follows,

"248. However, I feel that I should end this judgment in somewhat similar terms to the end of the judgment in TKC v Allianz. The situation of COVID and the COVID Regulations has (at least in modern times and as a matter of degree) been unprecedented and in particular with regard to its effect upon the Entertainment (and Hospitality) Sector but also the Non-Essential Retail Sector who have been deprived of the turnover which is the life-blood of their businesses (and especially where there is no on-line equivalent). It is impossible not to feel sympathy for them.
249. As stated by Mr Salter QC as the section 9 Judge in the TKC v Allianz case (at paragraph 133) "Some may also argue that the common law should therefore change its approach... and should adapt its principles of contractual interpretation and implication to the present unprecedented circumstances, so that they assist in transferring the burden of the present emergency to those, such as insurance companies and other major financial Institutions. who may perhaps better be able to bear it."
250. On the other hand, the Landlords, BNY and AEW, will say that they are trustees (actual or in effect) for others (for example, pensioners) who have invested in their funds, and who may themselves be reliant upon their returns from such funds (and thus the underlying properties) for their own financial condition and well-being.
251. Mr Salter QC proceeded in his paragraph 134 to quote authors of a note as having "wisely observed":

"In times of uncertainty the law must provide a solid practical and predictable foundation for the resolution of disputes and the confidence necessary for an eventual recovery... Contractual rights are to be evaluated by applying settled principles to the contract in question. Legal certainty remains...