High Court confirms limited application of frustration of contract

Important changes to the People with Significant Control (PSC) regime

The High Court has recently emphasised the limited availability of the doctrine of ‘frustration of contract’ in a case concerning a theatrical production amid civil unrest in Greece.

 

Background

It is well established that the parties to a binding contract are liable to perform their contractual obligations.  However, in some limited circumstances, a contract may be “frustrated” where an event occurs that changes the nature of the outstanding obligations from what the parties could have reasonably contemplated them to be at the time the contract was formed, such that it would be unjust to hold the parties to the original terms.  An event will only be a “frustrating” event if:

  1. the event occurs after the contract is formed;
  2. there is no express provision in the contract for dealing with its consequences (e.g. a force majeure clause);
  3. the event is not caused by the default of one of the parties; and
  4. the event renders future obligations radically different from what was reasonably contemplated, rather than merely more difficult or expensive.

In the case of Flying Music Company Ltd v Theater Entertainment SA & Ors, a theatrical producer claimed sums allegedly due under a contract by which the defendants had agreed to put on a series of performances in Greece.  One of the issues to be decided was whether the contract had been frustrated due to civil unrest in Greece, allowing the parties to abandon their otherwise binding contractual obligations. 

Decision

The High Court held that the contract had not been frustrated by the events of civil unrest.  The evidence was that the situation in Greece was already volatile when the contract was signed and the parties were aware of the situation.

The judge reviewed previous case law on frustration to conclude that "it would not be correct in fact or law" to release the parties from their contractual obligations by reason of events after the contract was signed. The parties both knew enough about the risks that the already existing civil unrest posed to the success of the production for it to be wrong, with the benefit of hindsight, to re-allocate those risks by releasing the defendant from its contractual obligations.

Comment

This outcome, whilst not surprising, reminds us that in practice a plea of frustration rarely succeeds in relieving a party from contractual obligations. The criteria for applying the doctrine of frustration are well established, and all must be met in order to succeed with this line of argument.  If a party feels they should be relieved from contractual performance due to civil unrest then they would be well advised to agree to this expressly in the contract.  A suitable force majeure clause may well assist here.

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Oliver Kidd

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