Background

• The doctrine of frustration is a common law principle by which a contract is terminated by operation of law on the emergence of a fundamentally different factual situation to that which was originally envisaged at the time the parties entered the contract.
• There does not appear to be any Australian case law squarely addressing contract frustration purportedly caused by epidemics or pandemics.
• Accordingly, there is little guidance on whether the common law will accept that a contract has been frustrated because of the COVID-19 pandemic.
• However, government restrictions on trade and commercial activities have been judicially examined in the past throughout both the English and Australian courts. For example, in Court Line Ltd v Dant and Russel Inc [1939] 3 All ER 314, the Court of King’s Bench held that the subject contract was frustrated because the delay of performance was indefinite due to the outbreak of war between China and Japan.
• In the more recent (and Australian High Court) judgment of Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, Justice Brennan (quoting Lord Radcliffe) observed that:

“…frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract: non haec in foedera veni. It was not this that I promised to do.”

Where do we stand?

• It is strongly arguable that the COVID-19 pandemic loosely resembles a wartime scenario in that:
  • neither party created the purported cause of frustration;
  • the time-frame on restrictions is indefinite and continues to change from week to week; and
  • no amount of mitigation could circumvent complete frustration if it becomes illegal to proceed with performance (for example, hosting a large wedding in New South Wales).
• This analogy may (arguably obviously) justify the position that where performance is now illegal, the contract is frustrated and doomed.
• However, it becomes a bit trickier when considering those contracts which are not illegal but which are simply now subject to more burdensome requirements to achieve performance.
• For example, what if all that has changed in order to achieve performance is that a party must incur additional costs to comply with the SafeWork NSW COVID-19 guide? It is likely that the doctrine of frustration would not apply in such a case and the performing party would simply need to absorb those additional costs. This is because frustration does not apply if performance is possible to proceed in some way not radically different from that originally envisaged, even if it costs more to the performing party.

Frustrating outcome? 

• There is little doubt that many contracts will be frustrated by COVID-19.
• However, if the current circumstances continue for the duration of the pandemic, it is likely that the majority of contracts will remain on foot because the parties can achieve performance through alternative means. Costly alternatives, but alternatives nonetheless.
• This will prejudice many entities which cannot rely upon the doctrine of frustration in their defence and are also unable to perform their contractual obligations due to additional financial pressures caused by COVID-19.
• We encourage parties to actively communicate with each other and try to resolve disputes as soon as they arise.
• Any resolution to a dispute should be reduced to writing and signed by the parties, preferably in the form of a deed to avoid doubts regarding consideration and the formation of an agreement.