Covid, Frustration and your Commercial Contracts.

18 months into the global Covid pandemic and it’s safe to say most businesses –and their clients – are fed up and frustrated with the impact the virus has had on day-to-day commercial activity. But the question of whether a party to a contract can avoid their obligations by arguing that the contract itself has been frustrated by Covid is a purely legal one, and not something that’s easy to prove. This was highlighted by the 2021 English High Court case of Bank of New York Mellon v Cine-UK where tenants of various commercial leases sought to terminate their rental agreements because of Covid restrictions. ParrisWhittaker is a leading commercial law firm in the Bahamas. We advise on all aspects of commercial contracts and contractual liability, particularly in the context of global Covid restrictions. Here we look at the Bank of New York Mellon case and examine the ramifications it has for anyone seeking to base a claim of contractual frustration on the fallout from Covid19.

What Is Contractual Frustration?

Frustration of contract is a legal principle that, if established, relieves both parties to the contract of their obligations. The courts in England interpret the doctrine narrowly – it’s difficult to prove, and a similar approach is likely to be adopted by the courts in the Bahamas.

To successfully argue that a contract has been frustrated you need to demonstrate that an unforeseen event occurred after the contract was formed that’s outside of the parties’ control. This intervening or ‘superseding’ event must render the contract:

• Impossible to perform or
• So ‘radically transformed’ that it would be unfair to force a party to perform its original obligations under the contract

As we’ve said the courts interpret this test extremely narrowly. For example, a claim based on frustration will not normally succeed if the unforeseen event has simply made performance harder or more expensive.

The Bank of New York Claim Against Cine-UK

The case centred on whether tenants of commercial premises remained responsible for rent payments when government policy in the context of Covid19 required them to close their premises (a cinema, a bingo hall and a sports shop) for prolonged periods of time. The tenants advanced several arguments in support of their claim, including:

• The fact that the landlords had a responsibility to insure themselves against the situation where premises were closed and should not therefore look to their tenants to recover lost rent
• Government guidance around Covid19 restrictions required landlords to show flexibility when seeking to enforce rent payment provisions where commercial property was forced to close because of the pandemic
• Covid19 restrictions amounted to a ‘short-term frustration’ or temporary suspension of the contract. Once government restrictions were lifted rent payments would resume In the meantime rent shouldn’t be payable

All of these arguments were rejected by the court. The High Court Master hearing the case accepted that in principle:

• A commercial lease could be frustrated; and
• Government closure policies could in theory amount to the required ‘supervening event’ for the doctrine of frustration to apply.

However in the circumstances of the case the Master found that the closures did not reach the threshold of rendering the contract ‘radically different’ from what the parties had anticipated when they agreed the terms. Each side should still perform their part of the original agreement. In reaching his decision the Master took into consideration:

• The original term of each lease
• The likely period of the disruption
• The likely remaining term of the lease once the disruption ended.

When the likely period of closure of 18 months was seen in the context of leases of between 15 and 25 years’ duration it couldn’t be said that the Covid closures had altered the contract to the required extent.

As to the question of whether the contract was temporarily frustrated, the court rejected this out of hand. If the doctrine of frustration applies at all it has the effect of ending the contract – it can’t apply so as to suspend terms temporarily.

How We Can Help

The High Court Master stated in his opening remarks in the Bank of New York Mellon case that:

‘The COVID-19 pandemic and its consequences have had a massive effect on public, private and business life in this country and elsewhere in the world.’

Against this background it is of course legitimate for parties affected by government restrictions to seek to renegotiate contractual terms or avoid obligations altogether. The Bank of New York Mellon case demonstrates however that invoking the frustration doctrine may not be the best way to achieve your aims. If you are having difficulty performing or enforcing commercial contracts because of Covid restrictions our commercial attorneys can provide practical and effective advice on your best strategy. Is there an applicable force majeure clause in your contract for example? Or is it possible to informally renegotiate the contract so that an agreed and workable outcome is achieved for both sides?

To discuss any of the issues we’ve raised in this article schedule a meeting with a lawyer at ParrisWhittaker today to discuss any of the issues we have raised.