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I didn’t sign up for this! Can parties escape obligations when the deal changes?

28 April 2020

It is estimated that 20% of the world’s population is living under some form of lockdown as various governments roundly seek to combat the spread of Covid-19. The impact has seen businesses forced to adapt to a reality that they would never have envisaged. Measures in the UK have left a variety of sectors reeling as shops have shut, operations have been restricted and events have been cancelled.

Many businesses now find themselves left with obligations under contracts entered into before the lockdown which cannot be performed as intended.

The existence of such agreements can place an enormous strain on enterprises. Many will need to renegotiate or perhaps operate force majeure provisions in their agreement to postpone or excuse performance.

But many will be faced with contracts which do not respond to the predicament or unsympathetic counterparties who are unwilling to agree a compromise. Where does this leave those whose arrangements no longer make sense? Perhaps those who have agreed to sponsor a cancelled event? The Olympics? Cancelled. Wimbledon? Cancelled. The list goes on. This leaves a multitude of businesses caught in the wake of Covid-19 related issues. For example, what of those who have retained catering services but no longer have a venue they can use? And those who have retained security for an event which is not going ahead?

This is where the doctrine of frustration may step in.

Frustration

Frustration is a common law doctrine in English law. In appropriate cases it arises automatically, without needing to be invoked. Its effect is to discharge affected contracts, relieving parties of continued performance.Depending on the situation, deposits and advance payments may be recoverable.

Unsurprisingly – given the dramatic effect it has on private contractual matters – the doctrine is seldom invoked successfully. English courts have repeatedly held it to have only a very limited application. 

A particular type of frustration – frustration of purpose – is a narrow ground of the doctrine.  However, it has particular relevance today in light of the Covid-19 pandemic, particularly in relation to those affected by cancelled events. One only has to think of the Olympics, Wimbledon (and most recently the Oktoberfest in Munich) to appreciate Covid-19’s continuing disruptive effect on contracts formed across a range of sectors.

I didn’t pay for that

There are two separate lines of authority of particular relevance to cancelled events and the effect on those who have entered into contracts alongside the event. Both are Court of Appeal authorities from 1903, made within a short period of each other (by differently constituted Benches).The decisions are not easy to reconcile.

The first is the most famous of the so-called Coronation cases, Krell v Henry which arose from the postponement of the Edward VII’s coronation.

The other, Herne Bay Steamboat Co v Hutton arose from the cancellation of a Naval Review at Spithead, again linked to the King’s poor health.

Both cases explored whether the cancellation of an event could frustrate a contract, thereby releasing parties from their obligations.

In Krell, the defendant hired a room for two days (only during daytime, not overnight) in Pall Mall to watch the coronation procession of King Edward VII. Unfortunately, the procession was postponed due to the King’s ill health.This meant Henry had no use for the premises.He refused to pay the rent.

The claim seeking payment was unsuccessful. The defendant didn’t have to pay for the room hire.

In Herne Bay, the defendant hired a steamboat to take his customers from Herne Bay on the Kent coast to view the Naval Review and for a day’s cruise around the fleet.The Review event was also cancelled because of the King’s sickness. Hutton ignored Herne Bay’s queries about the hire and refused to make payment of a balance owing.  Herne Bay therefore took the boat out themselves and sued Hutton for the remainder of the hire fee.

The claim for the balance due was successful. The defendant had to pay for the boat hire in full.

Bad deal? or failure of common purpose?

The difference is obvious isn’t it? Or is it?

In Krell, the contractually agreed common purpose was for the defendant to use the room to watch the procession. It was not the hire of a hotel room conveniently placed next to a procession. The defendant could still access the room but doing so would be pointless: the deal made was for a room with a view of the procession, underlined further by the agreed use during the daytime only. The price they had paid was for that service and accordingly negotiations focused on the value to ascribe to that view. Without the procession the shared common purpose was frustrated, the contract discharged, and the defendant released from its obligation to pay.

In Herne Bay, Mr Hutton hired the boat to make a profit from paying customers. Hutton sought to take advantage of the inflated prices people were paying because the Naval display was in town. The absence of the display may have meant he was unable to make the profit he had hoped for, but the hire was still possible, and the steamship was available to him. The common purpose was not Hutton’s profiteering and so the contract was not frustrated. He was just unlucky and, in hindsight, had made a bad deal.

A modern application

You head to Monaco for the Formula 1 and hire a hotel room for the weekend with a view of the track. The race is cancelled because of Covid-19. The price you paid for the room would have been inflated because of the popularity of the event, but you’re still able use the room as a hotel room – just without the added perk of seeing the race. Now the event has gone, you’ve paid over the odds. But that’s just a bad deal, the purpose of the contract can still be performed.Here you are in the company of Mr Hutton.

Alternatively – you pay a provider for a Monaco F1 entertainment package. The deal includes the use of the same hotel room on race day to view the race in the company of an F1 legend. The race is cancelled. Even if the provider offered you substantially reduced rates you wouldn’t take them as the purpose of the contract would be undermined: there’s no race to enjoy in Nigel Mansell’s company. The common purpose would be frustrated.Here you are more fortunate and in the company of Mr Henry.

Consider again the above question as a further example - how can I sponsor a cancelled event? If your deal was to sponsor a specific event with onsite branding, but that event was cancelled - and nobody was going to attend to see the displayed banners - you could argue frustration of purpose. If you signed up to a two-year partnership deal to sponsor all activities, you are likely to struggle to show the common purpose has been frustrated if only one show of many is cancelled and your marketing is still everywhere else. Things are more complicated of course where a series of cancellations arises.

So, can I escape?

Frustration of purpose is highly fact-specific. The devil is absolutely in the detail.

But the irregular and far-reaching consequences of Covid-19 will undoubtedly give rise to more situations comparable to Krell and Herne Bay and therefore more parties arguing frustration of purpose when faced with outcomes they didn’t anticipate.

There is a fine and subtle distinction to be drawn between these cases.Since frustration is seldom invoked, it is not an area the courts have frequently had occasion to grapple with.  Most commentators see the Krell authority as of more limited application than that of Herne Bay.Certainly, this is an area which may be clarified in the fullness of time with Covid-19 related claims and cancelled events featuring widely in numerous sectors and giving rise to the potential for a more detailed review by the English Courts.

Whilst a difficult argument to run, and the outcome at trial may be unclear, parties can still look to the doctrine to provide the legal leverage desirable when entering into commercial negotiations with a difficult counter party. That application may prove the greatest practical benefit to parties in the immediate future, enabling them to obtain revised terms that alleviate the commercial strain imposed by the pandemic.

Longer term, the opportunity to argue the doctrine may see it become the focus of the courts again. The High Court revisited the issue more recently last year in Canary Wharf v European Medicines Agency. Krell and Herne Bay were both heard by the Court of Appeal, meaning appellate courts are yet to revisit the 1903 judgments until a suitable candidate makes its way up for review. So, whilst it may be some way down the line, the Coronation cases may yet be superseded by the Coronavirus cases.

  • To understand whether you may benefit from the protection of frustration or force majeure see our flowcharts here
  • If you are party to a sports sponsorship agreement that has been affected by cancellations see our sports sponsorship Covid-19 contractual impact assessment flowchart here

 

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