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.