Frustration in the time of COVID-19

Monday 16 March, 2020

As country after country closes its borders or shuts down all non-essential businesses, the effects of coronavirus are really starting to be felt. Some businesses may find themselves unable to meet their contractual obligations, whether because of shortages of labour or materials, movement restrictions, or downturns in their business.

Some businesses have force majeure clauses in their contracts that may enable them to delay performing their contractual obligations. Businesses who don’t, or whose force majeure clauses don’t cover this situation, might find that they have to rely on the contractual doctrine of frustration.

What is a frustrated contract?

A frustrated contract is one where the obligations in the contract can’t be performed because of an unexpected event or events. The event must significantly alter the obligations under the contract and cannot be the fault of either party.

A contract can be frustrated if it becomes illegal for one party to perform its obligation, for example, contracting to hold a large event when large gatherings of people are banned. A contract can also be frustrated if external events will cause significant delay or obstruction, particularly if time is of the essence in performing the contract.

When is a contract not frustrated?

A contract is not frustrated because a change in circumstances makes the contract more expensive or inconvenient to perform. For example, an increase in the cost of materials or labour alone is unlikely to result in a contract being frustrated, but a sudden inability to source essential materials might.

At the time the parties entered into the contract, the event, or its effects, can’t have been reasonably foreseeable. If the effects were reasonably foreseeable at the time, the Court might conclude that the parties saw and accepted the risk of the event occurring.

What is the effect of frustration on a contract?

If a contract is frustrated, the contract ends, and the parties do not need to perform any future obligations under it. In New Zealand, the Contract and Commercial Law Act 2017 allows parties to recover money paid up to the date of frustration or claim compensation for work done before that date.

If you are struggling to meet your contractual obligations due to the effects of COVID-19, and your contract doesn’t contain a force majeure clause, you may be able to rely on frustration to bring the contract to an end.  Remember that this is a complex area and it is important for you to obtain legal advice before seeking to rely on frustration. 

If you have any questions, or you need any help with your contracts, contact James MacGillivray or Phil Taylor.