Frustrated by frustration

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Frustration of contract is a concept has been the subject of much debate since the start of the Covid-19 crisis. Matt Gatenby, Senior Partner and Nick Parkinson, Associate, Travlaw LLP explain the law of frustration and whether it is a useful tool for travel companies involved contractual disputes.

The legal concept of “frustration” does not arise that much in travel law but it has been raised recently in light of the Covid-19 outbreak. It is worth noting that for regulated package holidays, the concept is largely irrelevant as the 2018 Regulations deal with situations in consumer contracts. However, there is still plenty to consider in a non-package situation (where even the Consumer Rights Act 2015 will have something to say), and, particularly, in respect of supplier contracts.

Why and when should I be interested in the law of frustration?

Well, it all comes down, in the end, to money. Frustration might be the legal solution to resolve a dispute about what, if any, refunds are due when a contract cannot proceed. It should be noted that this is a classic “double edged sword” in that frustration may be used by you, or against you. So, knowing how it works is crucial.

The law of frustration only applies where:

  1. the law that applies recognises it (the law of England & Wales, for instance);
  2. the contract was still ‘live’ when the ‘frustrating event’ occurred (i.e. it had not already been cancelled by one party before that event occurred)
  3. the contractual position cannot be first determined by looking at the T&Cs of the contract (NB there is often a ‘force majeure’ clause in the contract that may deal with it). 

Looking at each of these in turn:

Applicable law?

The law of frustration has its root in English law. That is not to say that a similar concept may not be applicable in other countries, but if a contract is subject to a different law, investigations with a lawyer in that jurisdiction will be required. However, even that might not be necessary if the position is essentially clear from the T&Cs. 

Is it too late to frustrate?

A contract can only be cancelled, or frustrated, once. We need to consider:

  • a) if either party has cancelled (or tried to) the contract previously; and if so
  • b) whether they did so before or after the ‘frustrating event’ (i.e. the event that we say may have triggered a force majeure clause, or which has frustrated the contract).

The order of events is critical. If, for example, a tour operator cancelled a contract with a hotel in Italy on, say, 1 February 2020, it doesn’t matter if the hotel was later closed down by the Italian authorities on 2 February 2020. The contract cannot be ‘frustrated’ on 2 February 2020 if it was already cancelled on 1 February 2020. In this situation, the tour operator may have been in a better position if they waited one day longer. 

The last resort

The courts will only apply frustration as a remedy of last resort, and only then pursuant to the rules (far too detailed to cover here) of the Law Reform (Frustrated Contracts) Act 1943. Contracts are a serious business and an attempt to end them in such circumstances more so. 

If the situation is already provided for in the contract, a court will feel no need to consider the application of frustration. However, it can be confusing as to what happens if the contract recognises the situation, eg services cannot be provided due to an epidemic, but it does not provide for all the consequences, eg what happens about refunds? Does frustration apply, or does a different legal remedy such as ‘restitution’ come in to play instead? More importantly, does that put you in a better, or worse, position when it comes to refunds? And does it matter whether that refund is due to a business or a consumer?

For contracts to which English law applies, it is possible for parties to agree (by way of a clause in the contract) that the 1943 Act does not apply. However, does that benefit the supplier or the other party to the contract? And, again, would that be enforceable against consumers? Albeit, the key point to take away here is that we only need to look at the law of frustration as a ‘last resort’ when all other solutions fail. If the contract deals with what happens in a situation like, for instance, Covid-19, then frustration never arises.

However, if frustration is in play, we can turn our attention to what that might look like. 

Types of frustration

We know that the law of frustration might help to resolve the details of a dispute. English law applies, neither party cancelled the contract before the ‘frustrating event’ arose and the T&Cs do not cover the situation. We now have to consider whether any of the three categories of frustration apply to our given scenario:

  1. Impossibility – Literally impossible to perform. A travel industry example would be where a tour was to be led by a specific person or expert – and that person is no longer able to lead the tour (eg he/she may have fallen ill);
  2. Illegality – This is something that was seen in the early stages of areas being locked down. UK travellers may have been able to travel at that stage, but the local authorities barred tourist accommodation from opening under a hastily enacted law;
  3. A specific Purpose has been frustrated – an example here is Krell v Henry [1903] in which the defendant had hired a room from the Claimant that provided a good view of the coronation procession of Edward VII. However, the King became ill and the procession was cancelled. The Court of Appeal held that the contract was ‘frustrated for purpose’ – this is because the room was still available, but it was now pointless for the Defendant to rent the room. If time allowed, an examination of frustration on the case of Jarvis v Swans Tours Ltd [1972] might be interesting, if only to be able to talk about “Gemütlichkeit” – but we digress.

Assuming one of the above can be shown, the effect of frustration is to:

  1. immediately end the contract;
  2. provide for refunds of monies paid to the supplier. Under the 1943 Act, any money paid in anticipation of the frustrated contract must be repaid, but subject to deduction of expenses provided they can be shown to be fair and just. The court will look to provide a conclusion that is as equitable to both parties as can be. 

We are finding that frustration arguments are there to be used, especially in supplier contract situations. Similarly, after many years of us never having to look at the effect of frustration in contracts, we are now all looking ahead to make sure that if there are similar events in the future, they are provided for. Drafting implements at the ready…

About the Authors

Matt Gatenby, Senior Partner, Travlaw LLP
Matt brings his experience in all areas of law to the firm’s tour operator, agent, airline, insurer and travel-tech clients. Be it in respect of litigation, regulatory, commercial, employment or any other area, Travlaw are longstanding, trusted advisors to the industry.

Nick Parkinson, Associate, Travlaw LLP
Nick has a broad range of experience with over 13 years experience in civil litigation with considerable expertise in the travel & leisure industry, regularly advising clients and handling claims in relation to a variety of travel-law related issues.

The views expressed by the contributors are personal and do not necessarily represent the views of ABTA. This document is intended as a general guide only and can’t be a substitute for specific advice. This document may not be reproduced without permission. Copyright ABTA Ltd 2020