Due to the effects of COVID-19, many people are finding it difficult to fulfil their obligations under a contract. What are your options? We have previously discussed the common law doctrine of frustration in this article. In the event where you find yourself in a situation where it is no longer possible to comply with your contractual obligations, the Frustrated Contract Act [RSBC 1996] (“the Act”) may provide you with a remedy.
Frustration
In their article, Aaron and Teio state that frustration occurs when an unforeseeable intervening event, through no fault of either party, so significantly changes the core of the contract that it would be unjust to hold the parties accountable to the strict contractual terms in light of the new circumstances. Unlike the operation of a force majeure clause, a successful claim of frustration ends the relationship between the contracting parties rather than suspending the contractual obligations.
Application of the Act
This Act does not apply to all contracts. If your contract does not include a clause for frustration, and an unforeseeable intervening act occurs altering the contract from the original intent, then the Act applies.
There are a few exceptions to which the Act does not apply to:
- A charter party or a contract for the carriage of goods by sea;
- A contract of insurance; or
- Contracts entered into before May 3, 1974.
Severance
If a party is able to fully perform part of the contract, then that part of the contract can be separated from the remainder of the contract. Essentially this would create two contracts:
- One contract for the part in which all obligations have been performed; and
- Another contract for the part of the contract that is frustrated and not able to be performed. The Act would apply to the remainder of the contract.
Effect
If the Act does apply, then what are you entitled to receive as compensation? If a party has completed part of its obligations under the contract, regardless if the recipient has received a benefit, a party may be entitled to restitution for benefits created by a party’s performance or part performance of the contract.
Further, if the Act applies, all parties will be relieved from fulfilling obligations under the contract that were required to be performed before the frustration or avoidance and not performed, except if the other party is entitled to damages for consequential loss as a result of failure to fulfil those obligations.
Restitution
If the Act applies, how much would you potentially be entitled to receive? The Act states if you are claiming compensation for the performance or partial performance of your contractual obligations, you would only be able to be reimbursed for reasonable expenses.
Compensation and the application of this Act was considered in Hull v Kang, 2003 BCPC 312. In this case, the plaintiffs were a husband and wife who were employed by the defendant to teach at their English language school in China. In an email correspondence, the defendant further assured the plaintiffs that a work visa would be delivered to the wife within two weeks of receiving the email. The plaintiffs obliged and taught in China, but the work visa never arrived. After the wife’s tourist visa expired, the plaintiffs resigned.
The court found that the work visa was essential to the contract between the two parties. As it was never delivered to the wife, the wife could not work legally in China—the very heart of the contract could no longer be performed. The Court stated, “that once the two weeks had elapsed, the Claimants were entitled to treat the contract as having been frustrated, which I consider them to have indicated by submitting their resignations” at paragraph 42.
In determining restitution, the Court noted, “I find that it must have been understood that in the event of frustration of the contract for whatever reason, the Claimants, having been invited to China, and being forced to relocate in a foreign country to comply with the terms of their contract, are entitled to be returned home by the person inviting such relocation” at paragraph 44. The Court found that the contract was frustrated and ordered the defendant to reimburse the plaintiffs for the cost of their return airfare.
Splitting Costs
The Act states that if circumstances gave rise to frustration or avoidance caused total or partial loss in value of the benefit, the loss is apportioned equally between the party required to make restitution and the party to whom the restitution is required to be made.
Additionally, if performance included delivery of property that could be returned within a reasonable time after frustration or avoidance, the amount of the claim must be reduced by the value of the property returned.
This part of the Act was considered in Grimsley v Roe, 2018 BCSC 985. While the Court in this case did not find that the contract was frustrated, it confirmed that Section 5(2) of the Act requires parties, “to account for the value of the benefit received. And, pursuant to s.5(4), any diminution in the value of the Guiding Territory caused by the logging would not be borne solely by the plaintiff, but would be apportioned equally between the plaintiff and the defendants” at paragraph 105.
Considerations When Calculating Restitution
When calculating restitution, parties should not consider:
- loss of profits, or
- insurance money that becomes payable,
but should consider any benefits which remain in the hands of the party claiming restitution.
When you may Not be Entitled to Restitution
There are circumstances when you unfortunately are not entitled to restitution under the Act:
- Party performing the obligation had previous similar contracts between the parties and effected insurance for this kind of event that caused the loss in value;
- Custom or a common understanding in the trade, business or profession of a party performing; or
- It is an implied term of a contract
in which case, the party performing the contract should bear the risk of the loss in value.
When is this Act Useful?
Due to the restrictions on how people have been able to conduct business in light of COVID-19, this Act may be useful in claiming compensation for frustrated contracts. If there is a claim for a breach of contract arising at the time of frustration or avoidance, then this Act may be useful in obtaining compensation. It is expected that this Act will be relied upon and considered more frequently in the foreseeable future as COVID-19 related cases are litigated.
