Frustration of Contract: COVID-19 and Lessons from the 1956 Suez Crisis

Gurkirat Singh Dhillon

By Gurkirat Singh Dhillon, lawyer.

The ongoing COVID-19 pandemic has cast a shadow over the performance of contracts, with employers in particular facing an unprecedented business downturn, finding themselves pushed to the wall in their attempts to meet their contractual obligations. Such parties, having suddenly found their contractual obligations turn into onerous nooses, may well be tempted to invoke the common law doctrine of frustration of contract.

The doctrine of frustration relieves parties from performing their contractual obligations where it becomes impossible to do so as a result of a change in circumstances beyond the parties’ control. A radical change, not contemplated by the contract the parties entered into, renders the contract impossible to perform from the point of view of the object and purpose of the parties. However, it must be noted that the mere fact that the change in circumstances has rendered performance dangerous, difficult or unprofitable is no reason in law to relieve the parties of their contractual obligations.

How does the doctrine of frustration apply to the current global crisis? An analysis of cases decided in the wake of the Suez crisis of 1956 is instructive.

The Suez Crisis

The Suez crisis was sparked by the Anglo-French invasion of Egypt, which led to the closure of the Suez Canal from November 2, 1956 to April 9, 1957.

Since 1869, when the Suez Canal opened to navigation, the Canal had been the customary route for the transit of shipping traffic between Europe on the one hand and East Africa and Asia on the other. The Suez crisis led to cargo carrying ships being stranded either within the canal zone or on either side of the canal, unable to pass, and the resulting breach of mercantile contracts which were premised on the delivery of goods by scheduled dates.

The Legal Aftermath

The case of Albert D. Gaon & Company v. Societe Interprofessionelle des Oleagineux Fluides Alimentaire, [1960] 2 Q.B. 348, 359 (C.A.) involved two contracts for the delivery of unshelled Sudan groundnuts to the Societe c.i.f. Nice and Marseilles. The Suez crisis resulted in no shipment being made under either contract and an action for breach of contract with the defendant claiming frustration. The defendant argued that availability of the Suez Canal route was an implied term of the contracts in question such that the closure of the Canal and the performance of the contracts, possibly by shipment around the Cape of Good Hope, would bring about a radical change in the obligation of the defendant. This argument did not find favor with the court which held that shipment by the Cape route would not be a performance radically different from that envisaged by the contracts. The distance travelled would be much  greater,  and  the  expense  would  be  increased,  particularly  if   shipment   was  delayed, but these matters themselves would not necessarily be sufficient to transform the  nature of the  undertaking as to bring about a radical change in the obligation undertaken by the parties to the contracts.

Societe Franco Tunisienne d’Armement v. Sidermar, [1961] 2 Q.B. 278 (1960) involved a contract for the transport of iron ore from India to Italy. The contract was held to be frustrated because it included a stipulation that the Captain of the ship would telegram Genoa on passing the Suez Canal. The court held this to mean that passage via the Suez Canal was a term of the contract and the Canal route not being available meant that the contract stood frustrated.

Application to COVID-19 and Contracts of Employment

A number of readers might well wonder what is common between contracts for the sale/purchase or transport of commodities on the one hand and contracts of employment on the other. While there may be little in common when it comes to the factual circumstances underlying the contracts, the doctrine of frustration applies (when it does) to all contracts without discrimination.

The implication of the decisions in the above two cases gives us some direction on the operation of the doctrine of frustration  with respect to employment contracts. Where a contract of employment specifies, by implication or otherwise, a specific mode for the performance of that contract, the inability of the parties concerned to adhere to that mode will lead to the frustration of the contract in question. As an example, a direction from the Provincial Health Officer mandating the closure of barber shops will likely result in the frustration of contracts of employment between such shops and their employees as the nature of the work is such that it cannot be done remotely.

On the other hand, contracts of employment where performance can be undertaken by more than one method will not be frustrated. In the context of COVID-19, businesses whose employees continue to work from home or elsewhere cannot plead frustration to avoid employment contracts even if the businesses are facing unprecedented economic adversity.

 

 


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