Frustration Under English Law - Key issues in a global pandemic

The extraordinary circumstances that COVID-19 has forced us to adapt to are demonstrated by the fact that we are routinely looking at an area of law that has developed, primarily, as a result of world-changing events such as wartime shortages, the first Gulf War and the global financial crisis of 2008.

How does Frustration operate?

  1. Frustration discharges both parties from all of their future obligations pursuant to the contract.
  2. It operates automatically. It requires no positive act by either party.
  3. It requires there to have been an “outside event or extraneous change of situation” which has arisen without blame of the person seeking to rely on it.
  4. The key is whether the situation makes the obligation pursuant to the contract impossible to perform, not simply more difficult, or even financially catastrophic for one of the parties.
  5. The circumstances that you must find yourself in have to be “radically different” from when the contract was concluded.
  6. The test has a high bar and requires you to prove that the contractual obligations have changed beyond what could have reasonably been anticipated at the time the contract was entered into.

Key Points

  1. If the contract sets out what should happen in circumstances where there is a pandemic, a claim for frustration is likely to fail. The reason for this is that you are unlikely to get over the hurdle of finding yourself in a “radically changed” situation if such a circumstance (however unlikely) was considered at the drafting stage.
  2. The contract may provide an obligation for one party to insure against the risk. If so, the risk is likely to be deemed as having been assumed and again, frustration is likely to fail.
  3. Were the circumstances unforeseen and unforeseeable? This might be questionable where the contract has been entered into this year for example, after the outbreak of COVID-19 was announced. The courts have not yet considered the concept of whether, once announced, the spread was a likelihood and therefore foreseeable. Arguably, whilst a spread of the virus might have been likely, the magnitude of the interference and the damage that COVID-19 has caused could not have been foreseeable by anyone.

What contracts are most likely affected?

  1. Goods not being delivered.
  2. Services unable to be provided.
  3. Cancellation of events.

The key is that the performance of the contract becomes impossible. Note however that if the contract could be performed in a different manner, a claim for frustration is likely to fail.

Is the impossibility to perform temporary?

We can say with certainty that lockdown is temporary. That said, the duration of lockdown is uncertain as is whether its lifting will be phased and the likely incremental improvement of the economy.

Impossibility to perform will bite where you are looking at specific events that have had to be cancelled. The delay, however, isn’t always a “frustrating event” and if a part of a contract can be performed, then this must be considered. The key is whether it is proportionate to do so.

Illegality – is it illegal to perform it?

A prohibition that effects the main purpose of the contract is likely to be frustrated. The prohibition must, however, affect the means of performance for a claim for Frustration to be successful. If it can be carried out in a different manner, frustration will fail. It is also necessary to look at whether part of the contract survives, i.e. is it severable and still capable of performance? The extent of the effect of any illegality might be that any surviving clauses constitute a “radical change”. If so, the contract may be frustrated despite the possibility of the clauses being capable of severance.

Issues of public policy will also arise in circumstances where performance wouldn’t necessarily be illegal, but performance would not be in the interest of public policy because of the current restrictions.

What about if performance is now totally pointless?
There will be many contracts where parties have contracted to pay for goods or services for which they now have no use whatsoever. Arguably, the purpose of the contract has therefore been frustrated. Such an argument has rarely succeeded but the current circumstances may well see new cases on this point.

For example, Company A contracts to buy a new piece of machinery. Company A now has no need for that machinery. All of Company A’s factories are closed, all profits are now non-existent and the finance that Company A anticipated to obtain is no longer available.

Performance of the contract is still possible. The fact that Company A now has no need for the machinery or the fact that it cannot obtain finance because of its lack of profits, is immaterial.

Conclusion

Covid-19 will undoubtedly result in an increase in frustration cases. Some will be clear cut such as the cancellation of events and supply contracts where time is of the essence. Where the situation is less clear, Covid-19 has demonstrated the importance of express contractual terms regarding force majeure and the allocation of risk to the parties. A cleverly drafted force majeure clause can allow for the suspension of obligations during temporary frustrating events, thus avoiding the potentially catastrophic consequences of frustration. In the absence of such a clause, the key will be whether any delay is sufficient to constitute the radical and fundamental change that frustration requires.

A review of the scope of frustration of purpose also seems inevitable if we are to avoid a multitude of contracts being performed entirely unnecessarily, as a result of the commercial and economic consequences that Covid-19 has forced us to endure.

This article was written by Claudine Morgan, Legal Director, Litigation and Dispute Resolution, Charles Russel Speechlys, and reproduced for the ICCP with her permission.

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Are Contractors Playing with Fire? Construction Projects and "Uncertified Revenue"

Uncertified revenue is the value of work as assessed by a contractor which has been completed but not yet certified and paid by an employer. It typically could include the value of measured works, changes to the works and / or other claimed entitlements.

Practices in the industry vary hugely. However, some contractors account for uncertified revenue on a basis which is – at best – optimistic and – at worst – wildly unrealistic. They may assume that the vast majority or even 100% of uncertified revenue will be realised when reporting internally and externally. This approach can pose serious risks.

Following the collapse of Carillion in the UK in 2017 it was found that £294 million of the £729 million revenue reported in its accounts but which it would not actually receive concerned unapproved variations and other claims submitted to clients (i.e. uncertified revenue). Although there were many other failings, this unrealistic accounting of uncertified revenue was a major factor in masking Carillion's failing health.

While Carillion is a dramatic example, any inaccurate reporting regarding the likely recovery of uncertified revenue can have dire consequences. With profit margins on projects so tight it can disguise problems and delay remedial action which can be the difference between financial success and failure.

Why do some contractors fail to account for uncertified revenue realistically?

Large projects are extremely fast-paced and involve arduous reporting obligations, both externally to the employer and internally to management. Project teams are often ill-equipped to make accurate, timely assessments of their claims and other risks, and of the financial repercussions.

Both the construction market and the environment during project execution are also extremely competitive. Major projects typically involve high capital spend, neutral cash flow, and very narrow profit margins. Individuals and teams at various levels of contractor businesses may feel under great pressure to paint an optimistic picture regarding financial positions and projected outcomes (what psychologists refer to as 'optimism bias').

The key question, however, is not whether uncertified revenue should be accounted for when reporting internally and externally. In many cases, it has to be in order to track progress and the likely financial outcome of a project with any degree of accuracy. Doing so is critical for identifying problems, avoiding any sudden deterioration in margin, and informing key business decisions.

Rather, the burning question is how best to account for uncertified revenue?

Unfortunately, there is no simple answer. The solution is robust and effective commercial management combined with processes which enable the contractor to make accurate assessments of entitlements and risks in real-time, as they arise. In turn, this enables the contractor to make timely, realistic assessments of the uncertified revenue which is likely to be realised and should be accounted for.

While this can be easier said than done, the following steps are particularly important (being in addition to all the normal – but nevertheless important – advice as regards fully understanding and carefully administering the contract).

The construction programme needs to be accurate, to show a clear critical path, and to be agreed with the employer from the outset. It must set out the sequence of works and durations of activities. Progress must then be updated periodically (usually monthly) on an as-built basis.

This allows the contractor properly to understand progress and any delays, and promptly take appropriate action. If the contractor can understand the causes and impacts of delays as and when they occur it will be far better placed to mitigate any delay and to pursue (and make realistic assessments of) any entitlements to time and time-related costs.

The costs of indirect, time-related preliminaries should be measured from the outset on a monthly basis. The direct costs of the various major activities and their production rates, and of any claimed entitlements (including changes to the works), should also be measured carefully on a monthly basis. This enables the project team accurately to track costs against budget and to identify potential over-spend and other risks at an early stage.

Critically, these steps enable the contractor to have an informed understanding of the financial health of its project at all times, including as regards its measured and claimed entitlements and the recovery of uncertified revenue.


This blog was written by Sean Hardy, Partner, and Mark Arden, Commercial Director, Clyde & Co., and reproduced for the ICCP with their permission.

About the authors: Sean advises contractors and other project participants on project delivery and the resolution of disputes in the infrastructure and energy sectors. Mark is a commercial director based in the Singapore office, with over 20 years’ experience in the commercial, contractual and financial management of construction-related projects, including oil and gas, civil, civil marine, tunnelling, mechanical, steelwork and process works.

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Announcement | New Steering Committee Members

Steering Committee Election Results

Throughout the month of February, institute members were invited to vote for two new Steering Committee members. From the four Fellows who put themselves forward for the role, Mark Watson and Lee Sporle were selected by the membership community. Please join us in welcoming them!

The newly-elected Mark Watson is a Construction Claims Specialist, Mediator, and Adjudicator. He brings decades of experience in construction claims to the ICCP.

I am very much aligned with the goals and focus of the ICCP and look forward to using the skills gained in my time as a professional within the construction claims arena to help the ICCP reach its objectives - Mark Watson.

Lee Sporle is a planning and delay specialist and similarly brings extensive experience to the institute.

I am delighted to have been appointed to sit on the committee and look forward to sharing my knowledge and experience to assist the growth of the organisation - Lee Sporle.

Prior to joining the Steering Committee, both Lee and Mark were already involved with the institute through our Mentoring Programme; a program designed for Fellows to support our less-experienced members who are looking for guidance and advice whilst shaping their career as a construction claims practitioner.

The Executive Steering Committee was formed in 2018. Its key objectives are to set standards, policies and drive growth of the ICCP. Committee members are ICCP Fellows who have been voted in by members to represent the broader membership community.

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6 Tips For Studying Online

Online learning has become a great way for busy professionals to study whilst balancing a busy professional and family life…but, as I’ve learnt recently, it’s not without its challenges.

First, a bit of background. A couple of years ago I studied for a professional marketing qualification through the Chartered Institute of Marketing in the UK, delivered via distance / online learning.

Now switch to my professional life, I am the General Manager for the ICCP and also Operations Director for Claims Class - the ICCP's training partner. My role at the ICCP involves supporting our members and helping Associate members to develop their skills and expertise as a claims practitioner so that they can attain full membership. We have various initiatives to support this, including our mentoring programme, monthly CPD webinars and routes to membership through training. My role at Claims Class includes management of our course portfolio and students.

So, between both professional roles, I have a pretty good grasp of the importance of continued learning and professional development. But through my own studies, it has been interesting to experience things from a student perspective and understand first-hand the challenges that students go through when studying online.

I’ve discussed the pros and cons of online learning, and the types of personality types that thrive in an online environment in another blog and I would say that I share the characteristics of both the Type A and Type B student personality types:

  • Highly motivated, but can fluctuate at times
  • Highly focused, but can lose focus at times
  • Ability to fit study in, regardless of work or family responsibilities (fortunately I didn’t have a family at this time, so this made things easier)
  • Good time management and sets structured study times
  • Comfortable with online learning systems and navigating online content
  • Like to study alone but also thrives on student/tutor connection and like to feel part of a community

On paper, these qualities look like a recipe for success but nevertheless, I have still struggled with certain aspects of the online learning experience and have had to put simple systems and processes in place to help myself overcome them. As a result, I’ve broken these down into 6 tips for success when studying online:

1. Find your why – it’s been proven by psychologists that we don’t have endless resources of motivation and willpower. It’s there in spades when we start something new, but it can quickly fade. So, what do you do when this happens? Find your WHY. Your why is the absolute core reason or reasons why you are doing what you’re doing. Let’s take my why as an example:

Why am I studying a professional marketing qualification?

  • I want to have the skills, knowledge and understanding to empower me to do my job well and add value to my business
  • I want to gain recognition for my skills and expertise as a marketer
  • I want to position myself amongst the leading marketers in the UK and to continue to learn from best-practice
  • I want to become a Chartered Marketer with the Chartered Institute of Marketing in the UK. This course is part of the route to getting there.

When you are clear on your why it becomes easier to maintain motivation and keep studying to get to the end goal that you had in mind when you started. Find your why, write it down, and stick it somewhere you will see it every day (your
fridge, the wall behind your desk, etc.).

Your why can also be broken down. If your course is a demanding one, for example, that consists of a number of modules and lots of study hours, thinking about completing it can be overwhelming. Breaking your why down into smaller chunks helps you to focus on what needs to be done now and studying therefore, becomes much more manageable.

2. Get organised and know your resources – After signing up for an online course you’ll usually be given access to a student website full of resources. Take time to review everything thoroughly, understand what is mandatory to go through, what is optional to go through (but possibly valuable to spend time on) and make use of everything available to you.

3. Plan – Most people will be familiar with the phrase ‘by failing to plan you are planning to fail’ and this definitely applies in the context of learning. It’s crucial to create a study plan and stick to it. In my case, I printed monthly calendars (something like the one below), wrote my study days in and what I would be studying on that day. It’s also important to add key dates such as assignment deadlines and make sure you are on track to meet those deadlines. Keep the plan with you and tick the days off as you go.

4. Take Breaks – As part of the planning process, plan study breaks. If you’re a gym bunny, plan your gym time. If you’re going on holiday, plan your dates and study around it. By creating space for the activities that you enjoy, you’ll return to studying with renewed energy and are more likely to avoid burn out.

5. Ask questions – The online learning space can be a barrier, but only if you let it get that way. It’s easy to feel like you’re in it alone and don’t have support but tutors want to help, they want you to be successful and they expect you to ask questions. Make a note of questions that come up as you’re studying and email them to your tutor at the end of each week. If you prefer to talk, arrange a call with your tutor and email your questions in advance so they have time to prepare and can offer the best support possible.

6. Make connections – Online learning providers will often provide student groups or forums. Join them and engage with them. It will help you to feel part of a community and keep you going. If there are students in your area, you could also set up monthly get-togethers.

Nina Hewitt-Tyrrell is the General Manager of the ICCP. Looking for an online course on contracts and claims? Check out e-courses from Claims Class.

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The ICCP Welcomes New President, Paul Gibbons

The ICCP is proud to announce that a new president has been selected. Paul Gibbons will be replacing outgoing president, Keith Kirkwood, following Keith's year of leadership.

"I am extremely proud and feel privileged to be President of the ICCP. I feel that as an industry we can do so much better in the development and presentation of entitlement. This will ensure that disputing parties can resolve their differences more quickly, based on the credible facts of their case, which are presented in the right way. I look forward to providing my thoughts and to working on initiatives on how we can deliver this as an institution, for the benefit of our members."

Paul Gibbons

Paul has been an active member of the ICCP community since he joined as a Fellow in early 2017. He immediately put himself forward to mentor Associate members. He volunteered to sit on the Steering Committee when it was established in November 2018 and was subsequently voted in by members. As Managing Director of his own consultancy practice in the UK, Paul brings a wealth of knowledge and experience to the role of president. Moreover, as is evident by his impressive list of qualifications, including but not limited to:

  • BSc (Hons);
  • MSc (Const Law & Arb Kings);
  • FRICS;
  • FCInstCES;
  • FICCP;
  • PAAE;
  • MCIArb;
  • MCIOB;
  • RICS APC Assessor;
  • Practicing Associate of the Academy of Experts; and
  • Advanced Professional Award in Expert Witness Evidence,

Paul believes that we must achieve the highest levels of expertise and professionalism to make a positive impact on our industry. As such, we believe that he is very well-placed to contribute to the growth of the ICCP and we are delighted to welcome him to his new role.

If you would like to get in touch with Paul, he can be contacted on paul.gibbons@decipher-group.com.

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