COVID-19 and the Common Law Doctrine of “Frustration”


Few of us could have predicted the sudden and dramatic impact that the COVID-19 pandemic has had on our everyday lives, not to mention on both local and global economies. We have already seen some of the initial government responses to it, in the form of legislation aimed at addressing the legal and economic fallout. It is safe to say that in the coming months and perhaps years, we will see a new normal that is unlike what we were used to prior to COVID-19.

On a more individual level, the impact of COVID-19 has also greatly impacted commercial contracts of all types. With government-imposed restrictions on all but essential services, and with contractual performance hampered in many unforeseen respects, the wording of existing agreements will come under intense scrutiny, in the hope that the parties’ respective obligations toward each other will be clearly mandated within.

However the full extent of the disruption caused by COVID-19, and the character of its legal impact, is presently uncertain. Even for those parties who had the foresight to include a Force Majeure clause into their commercial agreements, the answer will still be tied to the specific wording they used, which in turn will dictate whether the pandemic is caught within the terms of the clause.

But what happens if the parties’ agreement has no Force Majeure clause in place? How are their contractual rights determined in that situation?

Fortunately, the next available recourse for untangling and ascertaining the parties’ legal rights and remedies is found in the common law, under a doctrine known as “frustration of contract”.

The Concept of “Frustration”

Under the legal concept of “frustration”, the contracting parties must determine whether their existing agreement has become “impossible”, “impracticable”, or “radically different” from what they committed to. In other words, they must examine whether the COVID-19 pandemic has so significantly changed what they anticipated, and has rendered their contract so different from the one they expected, that they are excused from doing anything further under it.

What Kinds of Events Does the Doctrine of Frustration Cover?

In an everyday conversation, the term “frustration” can be a broad one. In law, however, it has a very specific meaning, and essentially covers two types of factual scenarios:

  1. 1) where the parties’ contract has become vastly more difficult or onerous than they originally envisioned; or
  2. 2) where it has become outright impossible for the parties to perform their contract.

In either case, the determination of whether a contract has been legally frustrated will hinge on the specific facts, and can only be determined on a case-by-case basis. In the event of a dispute between the contracting parties, a court will be called in to examine all the facts and apply it to the governing legal threshold, which is considered to be a high one.

The Stated Test for Frustration in Law

The test for frustration under the common law has been stated many times by the courts and legal authors over the years, but the essential elements remain unchanged. As the Ontario Court of Appeal confirmed very recently:1

“... the basis of frustration is impossibility. By this is meant physical impossibility and impossibility resulting from a legal development that has rendered the contract no longer a lawful one. However, frustration goes further, and comprehends situations where the contract may be both physically and legally capable of being performed but would be totally different from what the parties intended were it performed after the change that has occurred.”

It is important to note that for frustration of contract to arise, it must be evident that the parties did not contemplate or explicitly deal with the possibility of the unforeseen event in their agreement. If they did – for example by including a Force Majeure clause in their contract2 – then there is no room for the common law doctrine of frustration to operate.

An Illustrative Scenario

To understand the contours of the frustration doctrine, we can look at a simple example. Assume that A and B have a longstanding contract that obliges B to supply A with certain automobile parts in a timely

1 ACT Greenwood Ltd (c.o.b. ACT Greenwood Office Management) v. Desjardins-McLeod, [2019] O.J. No. 1052, 2019 ONCA 158 at para. 17, citing G.H.L. Fridman, The Law of Contract in Canada, 6th ed. (Toronto: Carswell, 2011), at p. 619.
2 In a case called Hanna (M.A.) Co. v. Sydney Steel Corp. (1995), 136 N.S.R. (2d) 241 at 263, [1995] N.S.J. No. 3 (N.S.T.D.) the court observed that “Generally force majeure clauses operate in circumstances falling short of frustration.”

manner, and on an ongoing basis. The parts are produced by B using expensive, customized machinery that is geared specifically to create the parts that A needs. The contract between A and B contains no Force Majeure provision to deal with the prospect of unpreventable natural disasters and other cataclysmic events.

Now let us assume that B’s small manufacturing facility experiences an explosion. The resulting fire and other damage effectively destroys the premises, including the customized parts-making machinery needed to produce A’s auto parts. B is no longer poised to fulfill his agreed obligations to A, at least within the parameters of meeting A’s time-sensitive needs.

With B’s operations at a complete standstill – and with no feasible way to resume them in the foreseeable future – B seeks to rely on the common law doctrine of frustration to relieve it of the contractual commitment to supply further parts to A.

If a court was asked to resolve a dispute between A and B as to their respective legal rights, it would examine whether the destruction of the manufacturing facility generated a situation that made it fully impossible for B to perform its end of the bargain. To succeed in avoiding further obligation to A, B must be able to persuade the court that there was a “radical change” to the nature of the contractual obligations between them, and one that arose from a situation that they had not contemplated when they entered into the agreement together.3

As Applied to the COVID-19 Pandemic

Using the same example of a contract between A and B, now let us assume that instead of the total destruction of the facility, the problem is staff-related: The vast majority of the workforce at B’s manufacturing plant has been stricken with COVID-19, and are too ill to work. B has no alternative workers, and has no healthy, competent staff available to train any newly-hired replacement staff. Moreover, the health and safety risks are too great for B to continue operations using the staff who remain. In effect, B’s manufacturing plant must completely shut down for the time being.

Should the matter come before a court, it will be asked to resolve the specific legal issue of whether the impact of the COVID-19 outbreak on B’s staff at the manufacturing facility is so serious, and amounts to such an unanticipated change, that it discharges B from the obligation to provide parts to A. Again, this will depend on the court’s view of the facts.

3 This is the modern-day test as stated by the Supreme Court of Canada in Naylor Group Inc. v. Ellis- Don Construction Ltd., 2001 SCC 58, [2001] 2 S.C.R. 943, at paras. 53-56.

As the COVID-19 outbreak continues to spread around the globe with no end in sight, the full disruptive effect on commercial contracts is yet-to-be-determined, and will likely take a significant amount of time to unravel.

More daunting is the commercial reality that the task of determining individual legal rights and allocating the pandemic-related losses will be highly fact-specific. It can only be undertaken on a case- by-case basis, perhaps with the assistance of a court.

For this reason, and especially for those with commercial agreements in place and who face serious COVID-19-related impediments to their performance and fulfilment, it is important to obtain prompt legal advice. This is a necessary first step towards determining a resolution to the pandemic’s disruptive and irreversible business effects.