Since the COVID-19 pandemic hit the world in early 2020 businesses and organisations have faced a number of serious challenges in fulfilling their contractual obligations. Many have been forced to explore whether they can defer or avoid those obligations without breaching their contracts. In a previous article we looked at how force majeure clauses and the doctrine of frustration may help contracting parties.
Frustration applies where an unforeseen event makes performance of the contract impossible. If a contract is frustrated it effectively comes to an end and the parties are released from their obligations. That may sound good to a party that is struggling to meet its obligations. However, two recent cases have emphasised that frustration will only apply in very narrow circumstances. This note distils the Court’s approach to frustration from these cases and identifies the key lessons to be learned.
Eyes down… the Court’s approach to “temporary frustration”
In the case of Bank of New York Mellon (International) Ltd v Cine-UK Ltd  EWHC 1013 (QB), a High Court Master granted summary judgment to the landlords of commercial properties which required their tenants to pay rent despite the extensive restrictions imposed by the Government in response to the pandemic.
The tenants were Cine-UK, Mecca Bingo and Sports Direct. They claimed that their leases had been “temporarily frustrated” because their premises were forced to close or because it would be commercially unfeasible for them to open.
The Court rejected the tenants’ claim that a concept of “temporary frustration” exists in English Law. A contract is either frustrated in its entirety or not. The effect of frustration is to end the contract so it cannot be temporarily frustrated and then revived at a later stage.
The Court accepted that forced closure of a premises as a result of a supervening event, particularly when the leases permit only certain uses that had become impossible, could in principle result in frustration. However, even if premises were closed completely, frustration would only apply in rare cases. The test remains whether the situation has become so “radically different” to the situation contemplated by the parties at the time the contract was entered into that it would render it “unjust” for the contract to continue (The Sea Angel  2 Lloyd's Rep 517).
Whilst the parties in this case could not have predicted a global pandemic, the Court decided that the leases had not been frustrated, in large part because of their length. Even a closure of 18 months had still left the tenants with the majority of the benefit of the leases as a whole.
Fasten your seatbelts… the effect of contract terms on frustration
The case of Wilmington Trust SP Services (Dublin) Ltd v SpiceJet Ltd  EWHC 1117 (Comm) concerned a claim for unpaid rent and other amounts due under the leases of three Boeing aircraft by Spice Jet Ltd.
These leases were “dry leases”, meaning that the lessee assumed all of the risk and responsibility in operating and maintaining the aircraft for a term of ten years. As a result of the pandemic, SpiceJet’s use of the first aircraft was significantly reduced. The remaining two had been grounded in 2019 following the fatal Boeing 737 Max crashes in that year. SpiceJet argued that the restrictions on its use of the aircraft resulted in the contract being frustrated.
In principle, the Court agreed that these circumstances could give rise to the frustration of a contract. However, the leases included a “hell or high water” clause which expressly provided that the lessee’s obligation to pay rent (and make other payments) would be absolute and unconditional, irrespective of, amongst other things, the unavailability of the aircraft.
The Court therefore held that the intervening events did not render the contract “radically different” from what had been envisaged at the outset. SpiceJet had assumed the “entire commercial risk of operating the aircraft” including the risk of the aircraft being grounded. It did not matter that the aircraft were unprofitable as the leases did not specify that they had to be. As in the Cine-UK case, the Court also considered the length of the leases and stated that an operational suspension for roughly 10 per cent of the lease term did not constitute frustration.
Points to consider when entering a new contract
Both cases illustrate that the Court will take a focused approach and examine the terms of the contract and the surrounding circumstances rather than simply looking at the severity of the event that is alleged to have frustrated it. In uncertain times, this does not give much assistance to those affected by the pandemic or other significant events who may be looking for a release from their contractual obligations. However, lessons can be learned for parties entering into new contracts:
- It is important to ensure that the contract provides for a clear allocation of responsibility and risk between the parties in case of unexpected events.
- If the purpose of the contract and the obligations undertaken rest on a key factor, such as the profitability of an aircraft or premises, then ensure this is specified in the contract.
- Do not sign up to clauses such as a “hell or high-water clause” unless you are clear as to the effect of the wording. Ask yourself if there are any circumstances in which you are not willing to pay or to provide the goods or services under the contract and negotiate wording to deal with those circumstances where possible.
- Have regard to the term of the contract or lease. Whilst longer terms can provide stability and often pricing benefits, it may be harder to argue that a longer contract has been frustrated by a supervening event.
In summary, the doctrine of frustration will only apply on rare occasions. Contracting parties should not rely on it as an automatic remedy should an unprecedented event take place, even a global pandemic. Whilst the Courts have recognised the possibility of a lease or contract being frustrated, they have consistently affirmed that the threshold for proving frustration remains high. This is an important note of caution for parties entering into contracts of all types.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, July 2021