Acceptance of risk

The general assumption is that when parties enter into commercial agreements they are assumed to bear the risk inherent in the exercise. An obvious example would be a contract for the lease of a unit in a shopping centre. If, having signed up and occupied the property for a number of years, there was a radical downturn in the market, that would not be a basis upon which the terms of the contract could be avoided or the tenant could force the renegotiation of the lease terms. The risk of economic down turns and up turns rests with the parties, and in this way, there will always be winners and losers.

The current circumstances brought about by the Coronavirus pandemic are however truly unprecedented; we are obviously not here dealing with a downturn in the economy but with something potentially far more radical. Do these circumstances give you a basis to avoid the contract?

Frustration of contracts

At common law, performance under a contract can be avoided where the doctrine of frustration applies. This occurs where an event occurs after the contract is entered into where some supervening event, outwith the control of the parties, renders performance impossible or radically different to what was contemplated when the contract was entered into. The classic example might be the burning down of a music hall which makes it impossible for a performer to appear. Both the performer and the audience would be relieved of their respective obligations in those circumstances. Frustration can also occur   where there is no physical damage to the property but something else happens which makes it impossible for the lease to continue. It may be arguable that because the premises can't be used by the tenant because of the current restrictions imposed by the Government the doctrine of frustration applies. For example, when a property was requisitioned during the Second World War, it was held that it was impossible for the tenancy to continue and the tenant was entitled to abandon the lease.

Frustration of Purpose

This is another way to look at frustration. Going back to the shopping centre unit example, arguably the current events do not directly interfere with the letting, the landlord can still provide the property identified for which rent can be demanded. The essential context and nature of the contract is unchanged. However, cases have been considered where the purpose of the contract is frustrated.  Frustration of purpose was identified in cases concerning, for example, rooms let for the viewing of a coronation in 1902. When the coronation was postponed the purpose of the room letting was held to have been frustrated relieving the hirer of the obligation to pay.

The law in this area is by no means settled, however. For example, a tenant's purpose may be different to that of the landlord; further, at what point does frustration occur - for example, where there is a complete absence of customers or where there is simply a material downturn making letting more difficult and the enterprise less profitable?

In other cases, the failure to obtain a new drinks license a number of years into a lease was not considered to be a basis to end the contract relying on frustration of purpose. Likewise, a ban on exporting jute, imposed by law, was held not enough to frustrate the purpose of the contract particularly where the purpose of the lease was unknown to the landlord. Despite these difficulties, frustration of purpose would nonetheless give you a stateable basis to seek termination or to negotiate a commercial compromise.

Force Majeure clauses

The kind of difficulties discussed above have led the drafters of contracts to insert specific clauses specifying the circumstances where performance will be relieved. External events such as war, acts of nature, strikes, acts of terrorism and falls in the value of currency have been specified in this connection. A worldwide pandemic could certainly be added to this list.

The primary difficulty parties face in a contract is often that it contains no force majeure clause and when that is the case we can see no compelling reason why one should be implied (the law relating when clauses are implied and not implied by the courts is in itself complex and uncertain suffice to say that a clause entitling one party to avoid performance entirely would be very highly unusual). As such, in the absence of express provision, force majeure is not an argument that could be deployed. 

The law provides no "silver bullet" giving an easy exit from most contracts. However, there may be a stateable argument of frustration. Whether that argument would succeed if tested in court remains to be seen. However it gives an opening gambit and dependent on who the opposite party is, that combined with goodwill might prove fruitful. We can, however, expect to see litigation around this in the coming months as the issue of Coronavirus continues to develop.