Frustrated contracts and coronavirus

English contract law is built around the notion that parties are free to agree the terms of the contract and are then bound by those terms. The courts will not generally step in to relieve a party of their obligations just because the outcome is not as intended or even because the outcome is unfair.

But what if a new disease emerged in Asia and, in response, governments around the world started imposing bans preventing people and goods moving around the world, thus preventing the performance of the contracts to do exactly that?

In English law, the first step when faced with such a scenario will be to look to the terms of the contract. Commercial contracts will usually contain detailed provisions concerning termination for various causes, and if the contract caters for such an event that will usually be the end of the matter. If the contract is silent, consumer law and insurance schemes like ABTA may also provide relief for certain in categories of contract.

Otherwise, the parties may look to the doctrine of 'frustration'. This will apply when an unforeseen event makes makes it impossible – through no fault of either party – to perform the contract. The legal effect of a finding that a contract is frustrated is that all sums paid or payable under the contract are recoverable, less incurred expenses.

Government bans already in place and the effect of the pandemic itself may well have 'frustrated' some contracts. Each case will depend on its facts, but the coronavirus crisis may raise issues which are not contemplated even in complex commercial contracts.

For instance, while many commercial contracts will seek to cater for the possibility of government travel bans or sanctions regimes, how will the courts deal with contracts which are in practical reality impossible because (as has started to happen) airlines stop flying to particular regions?

It should be noted, however, that market movements in themselves – even sudden dramatic falls, as witnessed in the equities markets over the last week – are very unlikely to be held by the courts to be a frustrating event, even if the practical result is to make the contract uncommercial for one of the parties.

It is now clear that the coronavirus crisis will cause significant disruption to the movement of people and goods in some regions, and in construing contracts negotiated now that the courts are very likely to assume that the parties had (or should have had) the crisis in mind when they signed the contract (and thus that the crisis cannot be an unforeseen frustrating event).

It is therefore vital that, when negotiating the terms of fresh contracts – the performance of which could be affected by the crisis – thought is given as to how the contract should cater for the possible effects of the crisis, and likely government actions in response to it.