The onset of the COVID-19 outbreak has led some commentators to suggest that English law contracts may be capable of being discharged under the English law doctrine of frustration.
However, it is important to note that the applicability of the doctrine is in practice likely to be limited and there are relatively few reported cases in English jurisprudence where contracts have been held to be frustrated as a matter of English law.
The doctrine of frustration applies where a supervening event, occurring after the formation of the contract and which has not been expressly provided for in the agreement, renders further performance of the contract impossible or illegal, or radically changes the nature of the parties’ rights and obligations such that it would be unjust to hold them to their original bargain.
A classic example of the operation of the doctrine of frustration is the case of Appleby v Myers where the claimant contracted to build certain machinery upon the defendant's buildings but when the machinery was only partly erected, an accidental fire destroyed the whole of the buildings and the machinery thereon. It was held that since the buildings were entirely destroyed without the fault of either party, the contract was frustrated and both parties were discharged from their contractual obligations.
Whether an event will lead to the frustration of a contract will depend in each case upon the precise contractual terms, the factual circumstances, and the effect of the factual circumstances upon the parties' obligations under the contract.
In the context of shipbuilding projects, there is relatively limited scope for the application of the doctrine of frustration, as it does not apply (1) where the contract itself makes express provision for the particular event(s) that has occurred and/or (2) where the alleged frustrating event causes the parties' performance merely to be more time-consuming or expensive.
Almost all shipbuilding contracts contain express provisions for the consequences of occurrence of specified events such as plagues or epidemics, usually under force majeure clauses. In such cases, a party seeking to invoke the doctrine of frustration will be met with the argument that the event (e.g. the outbreak of COVID-19 and the resulting delay in delivery of materials, shortage of labour, government order, etc.) is specifically covered by the express terms of the contract.
Because force majeure clauses in shipbuilding contracts typically deal with events such as epidemics which cause delay, the doctrine can only be invoked in the unlikely situation where the supervening event (e.g. the COVID-19 outbreak or any other event) renders the performance of the contract impossible or illegal.
Examples of cases where frustration was successful
The limited situations where an invocation of the doctrine has been successful include:
- destruction by fire (with no fault of parties) or other cause (e.g. war) of the subject matter of the contract;
- supervening illegality where it becomes illegal as a matter of English law for the contract to be performed (as in the case of one of the contracting parties becoming an alien enemy upon the outbreak of war);
- wartime situations in which new buildings had either been requisitioned or their constructions prohibited;
- 'abnormal' delay due to an unexpected event or change in circumstances, that falls outside what the parties could contemplate at the time of contracting.
Recent case on Brexit
By way of illustration, the question of frustration arose in the recent case of Canary Wharf (BP4) T1 Ltd and others ("CW") v European Medicines Agency (“EMA”). This case concerned a dispute over a 25-year lease of the headquarters of EMA, an agency of the EU, at Canary Wharf, London. The lease was entered into in 2014 and runs for a term of 25 years with no break clause.
EMA argued frustration on the grounds of supervening illegality and common purpose. The High Court rejected both points.
As to supervening illegality, EMA argued that after Brexit, it would no longer be lawful for EMA to make use of the premises and to pay rent to CW pursuant to the lease, as EMA would be acting ultra vires or without capacity. The court rejected this argument holding that, following Brexit, EMA would still retain legal capacity to deal with immovable property in the UK even if the UK is no longer an EU member state. Also, the court held that the legal effects of Brexit on EMA was self-induced by the EU (EU legislating in 2018 that the EMA was required to leave London for Amsterdam) and such “self-induced frustration” (EMA being an emanation of the EU) could not be a reason for bringing the contract to an end.
As to common purpose, EMA claimed that both parties to the lease intended the premises to be used throughout the term as EMA's headquarters, and that Brexit would block this common purpose. Rejecting this argument, the court held that there was no common purpose between the parties outside the lease, and in fact, the parties had diverging interests and bargained as counterparties to get what each wanted.
The judgment was one of the first cases where the High Court considered the legal effect of Brexit on a key commercial contract.
In general terms, frustration is difficult to prove, and a claim based on frustration by reason of the COVID-19 outbreak under shipbuilding contracts seems unlikely.
Parties may therefore wish to consider carefully their force majeure and permissible delay provisions dealing with events like the outbreak of coronavirus and its consequences to ensure that in future at least they are suitably drafted to provide an appropriate level of protection.
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