Coronavirus, art and contract

Posted on: April 3, 2020 by

The impact of the Coronavirus epidemic is likely to be felt for many years across a wide range of legal issues including employment, the supply of goods and services and even human rights. In the art world, major fairs in Asia and Europe have been cancelled at comparatively short notice, auctions postponed and major exhibitions curtailed, all with significant financial implications. A key legal issue that arises is, what becomes of contractual arrangements in the face of massive unforeseen disruption? Are parties still bound by the terms of their contract when the assumptions that underlay their agreement have been completely undermined?

The most obvious response may be for both parties to negotiate a mutually acceptable variation of their respective obligations which maintains good will and the possibility of future cooperation. It is a trite observation that commercial parties often do not enforce their strict legal rights if it makes no business sense to do so. For example, it is already evident that some hotel chains and airlines have unilaterally altered their agreed terms to enable customers to cancel bookings without penalty even when this is at odds with a ‘no cancellation’ clause in an agreement. It reflects the basic legal principle that a party may always waive a clause which is in their favour.

Image credit: JamesAlan1986 CC BY-SA 3.0 via Wikimedia Commons (English Wikipedia)

If mutual agreement is not forthcoming the next matter to be considered may well be a force majeure clause. What that phrase embraces depends upon what the parties have agreed, it does not have a defined legal meaning in itself, which is why the parties generally particularise the specific events which will trigger its operation so as to release both parties from their original obligations. At least up until now, it would be unusual in most contracts to use the word ‘pandemic’ but ‘disease’ is a common enumerated event. It is also not unusual to include, after a catalogue of problems such as strikes, accidents or Acts of God, some general residual clause such as ‘incident of any nature beyond the control of the relevant party’. This could cover a pandemic such as Coronavirus. It is ultimately a question of construing what any clause means in the light of what has happened. The great advantage of such a clause is that parties can at least, to some extent, anticipate and control the consequences of a massive disruption without resorting to the uncertainties inherent in any general legal doctrine.

If a force majeure clause does not resolve the issue, a more general response to legal disaster is the doctrine of frustration. The classic Victorian case which still underlies the modern law, Taylor v Caldwell (1863) 32 L.J. Q. B. 164, concerned the hire of a music hall which was destroyed by fire after the contract was made but before the first concert was due to be performed. The hirer sued on the basis that he had contracted for a benefit that he had not received, but he lost. The court held that the unforeseen destruction of the subject matter, without the fault of either party, meant that both parties were excused from further performance under the contract. A century and a half of subsequent caselaw, however, shows that the bar to trigger a successful plea of frustration is set very high.

A relatively clear example would be where a change in the law renders it illegal to carry out what had hitherto been a completely ordinary commercial agreement. Many cases involve a change in legal regulations on the outbreak of war. An example from the current crisis might be a government ban on travel or large gatherings. Indeed, such a ban may even be, in one sense, beneficial to the parties in making it unarguable that the contract has come to an end. The high watermark of the doctrine was reached in a number of cases that arose out of illness, the so-called ‘coronation cases’, that followed the postponement of the coronation of King Edward VII because of an appendicitis. In one case, a contract for the hire of a room in Pall Mall to view the procession was held to be frustrated not because the room was now unavailable but because to use it would, in the circumstances, have been futile. This principle might translate to any event where, although the venue is still in existence, the state of things that supported and justified its use is not. An obvious problem is that this could involve a degree of evaluation in a way that outright illegality does not.

A recent important case has considered the doctrine of frustration in the context of another arguably unforeseen event, Brexit. It acts as a reminder that merely because an event is unexpected and potentially very disruptive it does not automatically guarantee a successful plea of frustration in the context of a particular contract. In Canary Wharf v European Medicines Agency [2019] EWHC 335 (Ch), the issue was whether the effect of the United Kingdom leaving the European Union was to frustrate a 25 year lease between the claimants and the European Medicines Agency which had decided, in the light of Brexit, to move its operations from London to Amsterdam. The court held that it did not. Of course, it would be unusual for any long lease to be frustrated, not least because in most cases the ratio between the length of the contract and the period when use was impossible, or perhaps futile, would be too short to justify a finding that the situation had been rendered radically different from what was originally contemplated. This consideration would clearly not apply in the same way to the cancellation of an event of a few days. What is of interest, however, is that whilst Smith J. described the advent of Brexit as ‘seismic’ it was held not to be sufficiently earth shaking to justify a plea of frustration in this particular context. Nevertheless, one crucial aspect of the case is that this was a long-running contract governed by an extraordinarily extensive and comprehensive agreement drafted by prestigious lawyers between powerful and well-matched parties. There must be relatively few contracts in the art world which would be routinely drafted with this degree of care and comprehensiveness so as to justify a finding that the parties had anticipated, and allowed for, even such a major disruption to their performance.

Whilst the law’s reaction to the novel issues posed by Coronavirus is unpredictable, what seems certain is that just one of the legal consequences of the unprecedented disruption caused by the present pandemic is that there will be reliance on the doctrine of frustration, amongst other legal considerations, to absolve parties from their obligations.