Is your business facing a drastically altered reality as a result of COVID-19? Is it putting your ability to fulfil your contracts in doubt?
In our previous article, we talked about force majeure clauses and how they might assist parties navigating the current landscape here.
Even in the absence of a force majeure clause, there can be circumstances where the changes caused by the COVID-19 pandemic would render a contract unenforceable.
The legal principle that applies is known as the doctrine of frustration.
In this article, we will explain how the doctrine of frustration might apply, in the absence of a force majeure clause.
What is frustration?
Contracts are said to be “frustrated” at law when the circumstances change so fundamentally, through no fault of the parties, that performing the contract becomes either impossible, or something radically different to what the parties had agreed to do.
If this happens, the doctrine of frustration steps in to discharge the contract, releasing the parties from liability for failure to perform from the date of the change in circumstances.
However, changes in circumstances that are reasonably foreseeable at the time of contracting do not frustrate an agreement.
The circumstances in Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 and Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255 are helpful illustrations of contractual frustration.
Contract frustrated: Brisbane City Council v Group Projects Pty Ltd
Brisbane City Council and Group Projects agreed that:
- Group Projects would undertake a suite of civil works to service a proposed sub-development site owned by Group Projects; and
- Brisbane City Council would apply for re-zoning of the area so that Group Projects’ sub-development could proceed.
The land was resumed by the Crown for use as a school before it was re-zoned, so the sub-development could not proceed.
In light of this, even though it was not impossible to carry out the civil works, Group Projects argued that neither they nor the Council would obtain any benefit from doing so.
Brisbane City Council’s attempt to force Group Projects to complete the civil works was unsuccessful, although the parties had to go to the High Court to get that result.
The mutual purpose of the contract was said by the Court to be wholly destroyed.
Contract not frustrated: Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd
Diamond Wheels rented a rooftop billboard from Ooh! Media in the Melbourne CBD. A building was subsequently constructed which reduced visibility of the billboard from traffic moving in one direction on a major arterial road.
The value to Diamond Wheels of the billboard was diminished by the reduction in visibility, but it was still valuable advertising space. The fundamental nature of the bargain was unchanged (as distinct from its value).
The skyline in the area had changed numerous times. At the time of contracting, it was reasonably foreseeable that it would continue to be developed, which could impact visibility of the billboard.
The Victorian Court of Appeal found that the contract was not frustrated by the changes to the skyline.
The Court found that if Diamond Wheels had wanted to insulate itself from the risk of reduced visibility, it should have done so in the contract.
Frustrating, but not frustration – the effect of temporary changes
A contract is not frustrated merely because a venture does not work out the way the parties envisioned.
But it will be if the circumstances have shifted so fundamentally, and through no fault of the parties, that the reason for contracting no longer exists.
For example, in the Diamond Wheels case, if the billboard had been so obscured by the new buildings that it could no longer fairly be called advertising space, that contract would almost certainly have been frustrated.
However, if the obstruction had been complete but temporary, the contract might not have been frustrated, at least according to the law as it currently stands
This is the issue that is likely to give rise to a lot of litigation in the months and years to come. The COVID-19 pandemic and the restrictions imposed because of it will, we hope, come to an end shortly.
The COVID-19 restrictions might have made it impossible or impractical for a party to perform contractual obligations in time, without necessarily altering the underlying nature of the contract.
If time is not an essential term of the contract, the doctrine of frustration will not help that party defend a claim for breach of contract.
Working out whether the circumstances of contractual performance have been so altered by the COVID-19 pandemic that the contract can be said to be frustrated starts with the terms of the contract, and an analysis of the nature of the bargain. We can help you there.
Please contact any one of our Property, Commercial or Local Government partners for advice on your specific situation.
Emma Leys – Partner – firstname.lastname@example.org
Anne Wood – Partner – email@example.com