Frustration: the end of the line
Across the country, parties to construction contracts are facing the question of whether and if so how to continue their works, amidst the extraordinary circumstances brought about by the coronavirus outbreak. However, if the facts of the current situation are unique, the construction industry is no stranger to risk: in most cases, construction contracts contain carefully drafted provisions dealing with the allocation of risks, and what relief is available when those risks arise.
In previous blogs, we considered how two commonly-used forms of construction contract – the SBCC and the NEC ECC – made provision for, among other things, ‘force majeure’ events. Those provisions allow contractual performance to continue in the face of uncontrollable occurrences, by adjusting the time and/or payment for completion of the works. On most projects affected by the coronavirus pandemic, parties will look to these provisions for an answer to how risk will be allocated.
But what if a contract makes no provision for how a risk like the coronavirus pandemic should be dealt with? Could the common law doctrine of frustration be used by either party, to relieve them of obligations or entitle them to recovery of any losses? Frustration is by no means a common law alternative to a force majeure clause; it has much more limited function. Further it is difficult to establish and does little to compensate the contractor, as we explain below.
What is frustration?
Frustration describes a situation where some supervening event, arising after the parties entered into their contract, and which is out of the parties’ control, renders future performance of the contract:
(i) impossible; or,
(ii) radically different to what the parties had in mind at the time they made the contract.
When an event has this effect on performance of a contract, frustration occurs by operation of law; it does not depend on the parties operating some clause of the contract.
If future performance of the contract is frustrated, then the contract comes to an end. When is performance impossible or radically different?
Performance may be ‘impossible’ where it becomes physically or legally impossible to render, in light of the supervening event. It may also be that it becomes impossible to achieve the commercial purpose of the contract.
Whether an event would render performance of a contract ‘radically different’ from what the parties would have contemplated will depend on the circumstances of the case. Well-known examples of performance becoming impossible or radically different include where a venue for lease was destroyed by fire before it could be used, and where a particular person needed to perform a contract became unavailable (for an excusable reason).
There are, however, many more examples of changes in circumstances which courts have found fell short of frustration. Importantly, an increase in the cost or onerousness of performance will generally not mean that performance is frustrated.
What is the result of frustration?
If frustration occurs, both parties will be released from any liability for further performance. This means that they cannot sue, nor be sued, for a failure to perform any further obligations under the contract. Accordingly, the parties do not attain, by frustration, entitlement to more time or money to perform; rather, the contract is simply brought to an end.
This does not mean the contract has no more relevance to the parties’ relationship. Generally, parties will retain any rights which they accrued up to the point of frustration. Further, some secondary provisions of the contract – for example, dispute resolution clauses or limitations of liability – may survive frustration, and continue to apply to matters arising in connection with the contract.
Depending on the particular contract, the financial consequences of frustration may be difficult to resolve. This is especially so in cases where parties have made payments in advance of performance – or where one party has partially performed, but would not be entitled to payment until performance was complete. In these situations, there is a question as to where the parties’ losses fall. There is no one-size-fits-all rule that applies here. However, in Scots law, depending on the facts of the case, the courts may make an equitable adjustment between the parties in relation to sums paid in advance. They may also consider whether partial performance should be compensated on a quantum meruit basis.
How does frustration relate to force majeure clauses?
Frustration and force majeure clauses are both concerned with the effects of supervening events on a contract. However, as we mentioned above, a force majeure usually makes provision for how the contract will continue in the face of such a risk event.
On the other hand, it is usually thought that frustration cannot arise if the supervening event was something which the parties either foresaw, or provided for in their contract. It could therefore be that an event which might otherwise result in frustration will not have that effect, if the event falls within the scope of a force majeure clause.
Asserting that a contract is frustrated
A court will not lightly accept that a contract is frustrated. There are several reasons for this, but among them: (i) it will often be difficult for a party to show that performance of a contract is impossible or radically different, as opposed to merely more onerous to carry out; and, (ii) the result of frustration – i.e. the end of the contract – is considered severe.
A party considering asserting frustration should consider the commercial and legal risk. Bringing the contract to an end (and therefore losing all future rights under it) will not be a practical solution to every risk event. Additionally, asserting that a contract is frustrated, without having a prepared a strong case for why that is so, could be interpreted as a statement that the asserting party simply does not intend to be bound by the contract any more. That party might then be exposed to a claim for wrongful termination.
Frustration and coronarvirus
As we said at the beginning of this article, most construction contracts make detailed provision for how risk events are to be dealt with. It is likely only if the effects of the pandemic do not give rise to any relief under these clauses that frustration will become relevant.
However, even in those cases, it would not necessarily follow that the contract is frustrated. That is because, in many contracts, an event need only delay or hinder performance in order to trigger a force majeure (or other relief event) clause. Generally, this is easier to establish than impossibility, or a radical change in performance. The effects of the pandemic on a given project would need to be severe in order to show these criteria were met. In most cases then, if no contractual relief is available for any of the effects of coronavirus, the result is more likely that the contractor will remain obliged to perform (possibly at increased cost), than the ending of the contract by frustration.
In light of these points, frustration may in reality be of limited assistance to parties to construction contracts in the current situation: frustration rarely arises, has far-reaching consequences, and is unlikely to provide the contractor with any financial relief.
18th December 2020
How has the pandemic affected construction disputes?
17th November 2020
We look at the effect Covid-19 is having on the drafting and negotiation of construction contracts.
12th November 2020
Our speakers do a whirlwind round-up of recent cases.