COVID-19 and Contract Frustration

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COVID-19 and Contract Frustration

In a previous blog post, COVID-19 and how the force majeure clause could apply to it was discussed.  For a force majeure clause to be activated, there has to be one in a contract.  Sometimes contracts are drafted without force majeure clauses.  Without the force majeure clause, are the parties bound to their agreement even if something arises that makes it impossible to perform the contract?  Contracts can be “frustrated” meaning subsequent to its formation, and without fault of either party, the contract becomes incapable of being performed due to an unforeseen events, resulting in the obligations under the contract being radically different from those contemplated by the parties to the contract.

The legal consequence of a contract that is found to have been frustrated is that the contract is automatically terminated at the point of frustration. The contract is not void ab initio (from the beginning), it is only void with regard to future obligations.

For frustration to operate, it is not sufficient that the performance of the contract is more onerous or unreasonably harsh. Instead, there must be a fundamental change in the circumstances governing performance.  The performance contemplated by the contract must become impracticable in a legal sense. The contract must become something drastically different from that which was initially contemplated by the parties.

Frustration is interpreted narrowly by the courts as there is a public interest in people being bound to the contracts they enter into.  COVID-19 could be grounds for deeming a contract frustrated but this is obviously context-specific.

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COVID-19 and Contract Obligations

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COVID-19 and Contract Obligations

Contracts are of vital importance to the workings of society.  They hold people accountable to their promises and actions.  When a contract has the necessary elements (offer, acceptance, and consideration) as well as being properly signed, the parties will be bound to whatever promises were made in the contract.

Often, contracts have stipulations that address situations in which a party does not meet their contractual obligations.  It is easy to see why such stipulations are placed in contracts.  If you exchange promises with someone else and you fulfill your obligations and the other party does not, you should have recourse against the other party.

However, what if something arises that couldn’t be anticipated by either party to the contract which stops one or both parties from fulfilling their promises under the contract.  A “Force Majeure” clause is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, plague, or an event described by the legal term act of God prevents one or both parties from fulfilling their obligations under the contract.

Could COVID-19 activate a force majeure clause in a contact?  It depends on a multitude of factors.  A non-exhaustive list is as follows:

  • The wording of the particular force majeure clause;
  • What the obligations were under the contract; and
  • The steps the parties have taken to try to fulfill their obligations.

The force majeure clause must have language broad enough to capture events such as COVID-19.  Further, the obligations under the contract must be such that the effects of COVID-19 would make it impossible for the party to complete their obligations under the contract and the parties must act with the honest intention of actually fulfilling their obligations.  A party cannot simply rely on COVID-19 as an excuse for not performing.

It is always advisable for one to fulfill their contractual obligations but sometimes situations arise in which contract performance is impossible through no fault of their own.  In those situations, a force majeure clause may save a party from recourse by the other.

 

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