Covid-19 and frustration of contract
The effect of Covid-19 on a wide range of contracts, including employment contracts, consumer agreements and insurance, has yet to be decided by the courts. The application of the common law concept of frustration of contract is likely to be highly significant in deciding the rights and obligations of parties to contractually binding agreements disrupted by the virus.
Frustration of contract means, in summary, that a contract may be discharged if after its formation events occur which makes its performance impossible, illegal or, in some circumstances, incapable of performance.
The leading case is Krell v Henry (1903) where the defendant hired a flat in Pall Mall for the days in which the coronation processions for King Edward VII were to take place. The contract was frustrated when the processions were postponed because of the king’s illness. Performance of the contract was not physically impossible because the flat could have been used on the days agreed. The court stated that frustration of contract applies “to cases where the event which renders the contract incapable of performance is the cessation or non-existence of an express condition or state of things, going to the root of the contract, and essential to its performance”.
Whether Covid-19 can be a state of affairs which frustrates a contract depends on a number of factors, including:
Whether the frustrating event was specifically provided for in the contract
Whether there is a radical difference between the provisions of the original contract and fulfilment of those provisions which is possible, given the change in circumstances
In cases of delay, this must be such that it was outside the contemplation of the parties at the time when the contract was made.
In the context of employment, the contract of employment may be frustrated by the illness of an employee. This may arise where the nature of an illness or injury is such that the employee may never be able to carry out their contractual duties, or any performance would be radically different from what was agreed. The effect of this is that the contract comes to an end: there is no dismissal. Where the employee is disabled, the contract cannot be frustrated if the employer is in breach of a duty to make reasonable adjustments.
An example of the application of this concept is the case of Warner v Armfield Retail & Leisure Ltd (2012)
ARL was a small business specialising in refurbishing retail outlets and public houses. W was a site manager. The job required a high level of mobility and W had to carry out carpentry work when required. In February 2010 he suffered a severe stroke and it was accepted that he was a disabled person under the Equality Act 2010 from this point onwards. In June 2010 he was unable or virtually unable to walk and he had difficulty with concentrating. In January 2011 the employer sent W a P45 stating that his employment was at an end. On behalf of the employer it was argued that the contract of employment was frustrated for the purposes of the unfair dismissal and breach of contract claims made by W. It was accepted that W was dismissed, for the purpose of his claim of disability discrimination, but the employer denied that it had discriminated. The employment tribunal accepted this argument. W appealed to the Employment Appeal Tribunal.
The EAT ruled that the doctrine of frustration did apply to contracts of employment even where those were terminable on short notice. However, although as a matter of practical reality there are issues of disability, sickness and absence for other reasons, it was bad practice to do what the employer did in this case and simply send the P45 without making further inquiries.
In the case of a disabled person, before the doctrine of frustration can apply, there is an additional factor which is whether the employer is in breach of a duty to make reasonable adjustments. While there is something which it is reasonable to expect the employer to do in order to keep the employee in employment, the doctrine of frustration can have no application.
The tribunal at first instance had not made findings on whether the employer treated W unfavourably by failing to carry out any form of capability procedure and by dismissing him without any form of enquiry or procedure. There had been no findings and it was arguable that there was unfavourable treatment as a result of something arising in consequence of W’s disability which would need to be justified. Further, it was questionable whether the employer’s conduct could be seen as a proportionate means of achieving a legitimate aim. The matter was remitted to the same tribunal for further consideration.
Another example is the case of Notcutt v Universal Equipment Co (1986). N was employed by UE for 28 years as a milling machine operator. He suffered a disabling heart attack in 1983. Following several months of absence the employer asked for a medical report. This stated that he was unlikely to ever be able to return to work. Eight months after the heart attack, the employer gave N notice of termination of his employment. On behalf of the employer it was argued that the contract of employment had been terminated by frustration before the notice had been given.
The case reached the Court of Appeal which ruled that there was no reason in principle why a contract of employment determinable by notice should not be subject to the long established doctrine of frustration. The coronary which left N unable to work again was an unexpected occurrence which made his performance of the contractual obligation to work impossible and brought about such a change in the significance of the mutual obligations that the contract, if performed, would be a different thing from that contracted for.
Whether the impact of Covid 19 on contracts of employment can be treated as a frustrating event, making the contracts effectively null and void, has not yet been decided by the courts. It would seem to be inevitable that the issue will be the subject of litigation.