The COVID-19 pandemic and the frustration of contracts

INTRODUCTION

The COVID-19 pandemic has led to businesses taking a different turn of which may have many repercussions on contracts entered into. To the defaulting party on the contract, the immediate defense that comes to mind is the defense of frustration. Some defaulting parties on a contract usually interpret frustration of contracts as time off the contract (contractual holiday) to discharge them of their obligations. Other defaulting parties see this as a permission to perpetrate a breach of the contractual terms. In this paper, what amounts to frustration of contracts and its implications on contractual relations will be critically examined. 

In law, frustration of a contract occurs when the nature of the outstanding rights and obligations are so radically changed by some supervening events from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to performance. Simply put, a contract is deemed frustrated when the nature of obligations under the contract have been changed due to certain factors beyond the contractual parties. It will thus be unfair to require the parties involved to proceed under the contract. As a result, the parties are relieved of their legal obligations. 

Preceding the doctrine of frustration in time was the doctrine of absolute obligation to perform a contract. Here, parties were expected to fulfil their contractual obligations irrespective of the prevailing circumstances. Now, the law, under the doctrine of frustration, permits parties to be excused from honouring their contractual obligations in certain instances known as supervening events.

PRINCIPLES OF FRUSTRATION

For a party to a contract to successfully plead that the contract has been frustrated, that party must be able to establish some principles underlying the doctrine of frustration.

Firstly, frustration of a contract will ensue where there has been a supervening event. As a preliminary observation, whatever supervening event to be alluded to by the contractual party must have ensued after the parties entered into the contract. Where the frustrating event was present at the time the parties entered into the contract but were ignorant of its existence, the party in breach cannot rely on it as a supervening event. It will at best be deemed a mistake in contractual law and such will not be seen as a frustration of the contract. A supervening event is said to be any event that changes the circumstances of performance of the contract so significantly that the parties are unable able to perform the contract. Invariably, an event such as a war or a state of emergency, depending on the exact nature of the emergency and the nature of the contract may be deemed a supervening event. 

Secondly, the contract must have been rendered impossible to perform. A contract that has become unprofitable or has lost commercial practicality is not considered a contract that is impossible to perform.  Also, an unexpected change in the economic situation in the country which makes the performance of the contract rather difficult or expensive to perform does not amount to a factor frustrating the contract on grounds that it has been rendered impossible to perform. The threshold of establishing this element is quite high. 

Next the foreseen or foreseeable risks involved in the contract must be considered. The scope and peculiar nature of the contract must first be ascertained. Ordinarily in contracts, the parties specify some contingencies which when they occur may free the parties of their obligations. These clauses in the contract are often referred to as force majeure clauses.  The event therefore complained of should be one which either falls in this category of events or must be of a nature which is reasonably within the contemplation of such contingencies. In the alternative case where parties in the contract specify contingencies which shall not relieve them of their contractual obligations, the defaulting party must show that the event as ensued was not one which fell within the specified set of events. This event should also be one which was not reasonably forseen as ensuing. The inability of the defaulting party to prove same results in the defaulting party still being bound to honour its contractual obligations.

Lastly, fault and self-induced frustration is considered. Frustration can only ensue when the event in question is one which is beyond and out of the control of the parties. In the circumstance where the act complained of was caused by a party to the contract, an attempt to invoke the frustration doctrine, will not hold. Self-induced events therefore do not count under the doctrine of frustration.

By way of illustration, in a situation where there is a contract of sale between a seller and a buyer for the sale of fish which can only be obtained from China by the seller to the buyer in Ghana. Where all the borders are closed as a result of the COVID-19 pandemic, preventing any form of imports into the country, the seller may plead the doctrine of frustration.  If this plea satisfies the elements of the principles of frustration discussed in the paper, the seller may be discharged of its obligations to sell under the contract.

After a party successfully invokes the doctrine of frustration, the contract is brought to an immediate and automatic end and parties are discharged of their contractual obligations. In addition, the parties in the circumstance will be prevented from being unjustly enriched. Where the party is unsuccessful in the invocation of the doctrine, that party is said to be in breach of the contract and the necessary punitive measures shall be meted out. Nonetheless, each case is assessed on its own merit and not necessarily based on strict legal precedents.

CONCLUSION

In conclusion, whether a contract has been frustrated or not means one of two things- that a party is liable for a serious breach of the contract or a party shall be relieved from the performance of the contract. However, some contracts are of such a nature that discharging parties and bringing the contract to an end may be at a rather huge cost to the parties involved. Parties are therefore advised to re-negotiate on such amicable terms to prevent heavy losses to them.

Source:Kweku Attakora Dwomoh, Adjunct Lecturer, University of Ghana

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