Introduction
In every contract, each party has obligations they are required to perform. The general rule in contract law is that, when parties enter into an agreement contemplating the performance of an obligation under the agreement by one or both parties, neither party is excused from performing their obligation. Ordinarily, the failure to perform a party’s obligations, is deemed a breach for which the affected party may sue to either ensure that the defaulting party performs or to recover damages.
However, after the formation of a contract, circumstances may arise which can make it legally, physically, or commercially impossible for the parties to fulfil the terms of the contract. When such events occur, the contract is said to be frustrated, and the parties are discharged from the obligations they undertook to perform under the contract.
The emergence of the novel coronavirus (“COVID-19”) outbreak in 2020 to date has had a serious impact on the performance of parties’ under many contracts. Some contracts generally contain a “force majeure” clause to excuse parties upon the occurrence of such uncontrollable and unforeseeable events. Force majeure refers to a clause that is included in contracts to limit liability against uncontrollable circumstances including but not limited to natural disasters, war and coup d’etats, that interrupt the expected course of events and prevent parties from fulfilling their contractual obligations.
Where a contract does not contain a force majeure clause, a contracting party may look to the statutory effect of frustration or the common law doctrine of frustration to relieve it from its obligations depending on the jurisdiction governing the contract. Unlike force majeure clauses which focus on the parties’ express intention on how to deal with supervening events, frustration is implied by law and thus would only be considered in the absence of an express force majeure clause.
This article seeks to define frustration, explain the consequences of frustration under common law and in Ghana, and conclude with a legal position in which a contracting party may plead frustration as a result of the Covid-19 pandemic.
What Is Frustration?
The doctrine of frustration provides one of the ways in which a contract comes to an end automatically at the time the frustrating events occur.
Lord Radicliffe in the case of Davis Contractors v. Fareham U.D.C, explained frustration as follows:
“Frustration occurs whenever the law recognizes that without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. It is not hardship or inconvenience or material loss itself which calls the principle into play. There must be as well such a change in the significance of the obligation that the thing undertaken would if performed be a different thing from that contracted for.”
The Supreme Court of Ghana noted in the case of Affordi v. Ghana Publishing Corporation, the doctrine of frustration presupposes conditions of factual impossibility or commercially impracticability of contractual obligations. Again, in the case of Barclays Bank v. Sakari, it stated that the doctrine of frustration will be applicable where external events of some kind, not the responsibility of either party render further performance of the contract impossible or radically different from what had been contracted for.
When parties are discharged from performing their contractual obligations due to frustration, it only affects their future performance of the contract and not any obligation they had before the circumstances arose. It must be noted that the mere rise in cost of performance or the change in the method of payment does not render a contract frustrated. (Davis Contractors v Fareham U.D.C, Affordi v Ghana Publishing Corporation)
Historical Background
The doctrine of frustration was developed to release innocent parties from obligations where the “thing is destroyed without the debtor’s act or default” and the contract purpose has “ceased to be attainable.” According to Roger Kiley in his article “Doctrine of Frustration” (published by the American Association in 1960), the doctrine was applied in situations such as where a slave died before delivery date, a horse died before it is delivered, or a painter or author of a book dies before completion of the painting or writing a book.
The original frustration rule in England took a strict approach to non-performance of a contractual obligation. A party who fails to perform his contractual obligations, for whatever reasons, is prima facie in breach of the contract. In pre-nineteenth century law, the general rule was that a change of circumstances after a promise was made did not excuse the promisor from performance, even if it made performance impossible. This view came to be known as the rule in Paradine v Jane (1647) or the rule as to absolute contracts.
In the case of Paradine v Jane (1647), the Defendant who had leased land from the Plaintiff was held to be liable for the rent although he had been driven from the land by invaders and was unable to use it. The court’s reasoning was that where a party creates a duty or charge upon himself by virtue of a contract, he is bound to perform the duty or pay the charge, notwithstanding any accident. It further held that the parties could have inserted a clause in the contract, which prescribes what is to be done with the rent in case of an accident.
The law has moved on from the strict approach taken in Paradine v Jane. In Taylor v Caldwell (1863) 3 B & S 826, where a hall which was booked for concerts on four days burnt down before the first concert, the court held that the Defendant was discharged from performing, and his failure to perform was not a breach of the contract.
Again in the case of Krell v Henry (1903) 2 KB 740, the Defendant rented the Plaintiff’s flat to view the king’s coronation procession, which was eventually cancelled. The court excused the Defendant from performance because his purpose for entering into the contract was frustrated.
Although the law has evolved to be more liberal than the common law rule found in Paradine v Jane, it is important to note that the doctrine still operates within very narrow bounds. Twentieth century cases such as Davis Contractors Ltd v Fareham Urban District Council (1956) AC 696, National Carriers Ltd v Panalpina (Northern) Ltd (1981) AC 675 demonstrate a restrictive approach to the scope of the doctrine of frustration.
The Effect of the Doctrine of Frustration
The effect or consequences of the doctrine will be looked at in two-fold. The effect of the doctrine under common law and the effect of the doctrine as it relates to the Ghanaian jurisprudence.
Effect Under Common law
Under common law, the occurrence of a frustrating event automatically ends a contract. This means that frustration does not render the contract void ab intio, but rather discharges the parties from the duties of “future performance”. Rights accrued before the frustration remain enforceable while those which would have accrued but for the frustrating event, do not come due.
This was illustrated in Chandler v Webster[1904] 1 K.B. 493, where the plaintiff agreed to hire a room from the defendant for the purpose of viewing the coronation procession at a price of £141, payable immediately. The plaintiff paid £100, but before he paid the balance, the coronation was cancelled and the contract was thereby frustrated. The plaintiff brought the action to recover the £100. The court held that not only could the plaintiff not recover the £100 he had already paid; he was also liable to pay the balance of £41 which he owed under the contract before it became frustrated because the obligation to pay became due before the frustration occured.
The harshness of this decision attracted criticism and was overruled in Fibrosa Spolka Akcyjna v Fairbain Lawson Combe Barbour Ltd [1943] A.C 32 (the Fibrosa case), thereby avoiding the consequences of the rule that the contract remained full force up to the moment of frustration. In the Fibrosa Case, an English company agreed to sell certain machinery to a Polish company for the price of £4800. Delivery was to be made in 3 to 4 months. The Polish company had paid £1000 when the war broke out and the contract became frustrated. The Polish company sued for the return of the £1000 they had paid to the English company.
The court held that the Polish company was entitled to recover the £1000 it had paid because there was a total failure of consideration, in that it got nothing for the money paid. The House of Lords reversed the decision in Chandler v Webster, stating that the conclusion in Chandler v Webster, that the doctrine of failure of consideration did not apply where the contract was frustrated was wrong. The principle which emerged from the Fibrosa case, therefore, was that where money is paid to secure performance of a contract, and performance fails as a result of the frustration of the contract, the party who paid can recover the amount if there is a total failure of consideration.
Even after the Fibrosa case, there still remained a loophole in the common law position since it operates only in the event of total failure of consideration. This meant that, where consideration had been partly performed, the principle would not apply and a party who had already paid could not recover any part of his money. Again, the rule in Fibrosa was unfair to one party who had spent money in commencement of the performance of the contract before frustration as illustrated in the Fibrosa case, where money had been expended in building the machinery, the Defendant was left with no compensation for the money spent in preparation for the contract.
Consequence of Frustration Under Ghanaian Law (Modification of Frustration Under the Contracts Act, 1960)
In view of the loopholes in the common laws on the effect of frustration, the legislature in Ghana has intervened by enacting specific provisions in the Contracts Act 1960 (Act 25) to address the rights and obligations of parties to a contract which has become frustrated.
Section 1-3 of Act 25 deals with the modifications of the rights and obligation of parties upon the frustration of a contract. The eminent author Christine Dowuona-Hammond in her book “The Law Of Contract In Ghana”(2016) at page 301-302 summed the modifications as follows:
- When a contract is deemed to have been frustrated, both parties are discharged from further performance of the contract. (Section 1(1)).
- All sums paid to any party under the contract before the frustration of the contract and the discharge of the parties are recoverable by the party who paid them. (Section 1(2))
- All sums payable or due to be paid to any party under the contract before the time of discharge cease to be payable. (Section 1(2))
- A party who has spent money on the performance of the contract can recover from the other party an amount which should not exceed his expenses or the total sum payable under the contract. (Section 1(2))
- In computing the expenses incurred by the party, the courts may include overhead expenses, cost of personal services rendered etc. However, insurance receipts are to be ignored where there is obligation to insure under the contract. (Section 1(3))
- The parties can agree expressly as to what should be the effects of frustration of the contract they made. If that is done, those provisions should be applied and not the provisions of the Act. (Section 3)
- Where it appears to the court that a part of any contract which has been wholly performed before the time of discharge can properly be severed from the remainder of the contract, the court shall treat that part of the contract as if it were separate contract and had not been frustrated, and shall treat section 1 of the Act 25 as only applicable to the remainder of the contract. (Section 2)
From the above, the effect of Section 1 of Act 25 is that, once a contract is frustrated and the parties are discharged, monies which have already been paid are recoverable from the party to whom they were paid. Monies which are payable or due to be paid under the contract cease to be payable, whether there is failure of consideration or not.
Section 1(2) confirms the common law position as laid down in the Fibrosa case but excludes the qualification that monies are recoverable only where there is a total failure of consideration. The operation of Section 1(2) is subject to the fact that a party who has spent money on the performance of the contract can recover from the other party an amount not exceeding his expenses or the total sum payable under the contract.
This position was illustrated in R.T Briscoe (Ghana) Ltd v. Essien [1962] 1G.L.R. 265. In this case, the Plaintiffs claimed £17,784.1455 as the value of equipment and balance of cash advances given to the Defendant for the supply of logs. The Defendant pleaded that while he was performing the contract, a legislation came into force which declared Ghana Timber Marketing Board the sole buyer of Ghanaian wawa and redwoods. The performance of the said contract was thus rendered impossible and subsequently both parties were discharged by the frustration. The court held that by Section 1 of Act 25, where a contract is frustrated monies paid thereunder are recoverable, subject to a deduction for reasonable expenses incurred in the performance of the contract.
Conclusion
The Covid-19 pandemic has undoubtedly made it impossible for many contracts to be fulfilled. However, the success or failure of a plea of frustration based on the Covid-19 pandemic as a defence for breach of contract will be determined primarily by the factors surrounding the contract’s subject matter and the length of delay or restrictions imposed on the subject matter. The court will consider whether the party seeking to invoke frustration has established that the outbreak of covid-19 and the associated government restrictions rendered the contract’s obligations physically or commercially impossible to fulfil.
Although Act 25 contains sufficient provisions to address issues of frustration, it is always in the interest of contracting parties to have a force majeure clause that contemplates unforeseen events and incorporates the parties’ intentions with regard to the handling of liabilities that arise as a result of a n uncontrollable and unforeseeable event.