In a post-pandemic world, many businesses have had to change how they do things. Most importantly, they have learnt that sometimes, things do not go to plan, and contractual obligations cannot be fulfilled. Although businesses were able to adapt and move forward from COVID-19, it continues to impact a range of contractual arrangements. One area of contract law that may be relevant is the doctrine of frustration and how it affects ongoing contracts. This article outlines the factors that may result in a contract becoming frustrated.
Establishing Frustration
Frustration only applies in certain situations. A court will consider the following points in determining whether a contract is frustrated.
Frustrating Event
When considering whether a contract has become frustrated, a court will consider whether either party anticipated such an event occurring. They will also consider whether a party caused or contributed to the event or where at fault in some way for the event occurring. An event that results in frustration of the contract is called a ‘frustrating event’.
Common events which may constitute a frustrating event include:
- fire;
- flood; and
- the outbreak of war.
Impossible Obligations
To establish frustration, the obligations of a party under a contract must become impossible or radically different to perform. This must arise as a direct result of the frustrating event.
Terms of the Contract
A court will look at the entire contract in question to determine whether it has been frustrated. Separately, the contract may include a force majeure clause which will establish a framework under which particular unforeseen and uncontrollable events impact one or more parties’ obligations.
Events That May Frustrate a Contract
Not all events that may initially appear to be a frustrating event will necessarily be considered a frustrating event. This is because the doctrine of frustration applies narrowly. Generally, there must be a supervening event for frustration to occur.
Continue reading this article below the formEvents That May Not Frustrate a Contract
Establishing frustration can be difficult and will not typically occur in the following situations, where:
- the event was foreseeable and anticipated by both you and the other party, even if both parties failed to contemplate the severity of the event;
- there is a bad bargain, hardship or inconvenience;
- a party to the contract is at fault, whether by an act or omission of such party; or
- the event already existed when the parties entered into the contract.
Know which key terms to negotiate when buying a business to protect your interests and gain a favourable outcome.
Consequences of a Frustrated Contract
If frustration is established and a contract becomes frustrated during its term, the contract will usually be discharged. This means that both you and the other party to the contract will be discharged from any outstanding contractual obligations. However, note that liability remains for any obligations that parties to the contract performed prior to frustration.
Before claiming that a contract is frustrated, you should also consider the impact of frustration. For example, if you have a long-term contract in place with a valuable commercial partner, asserting frustration will terminate the contract and not suspend it. The frustration of a contract may lead to the end of your contractual business arrangement with an important partner.
What are the Limits of Frustration?
Occasionally, you may find your frustrating event does not ultimately constitute a frustrated contract. For example, if the event was reasonably foreseeable or if the party claiming frustration induced the event, then the contract cannot be frustrated. Similarly, if the frustrating event was a pre-existing condition when the parties entered the contract, they cannot claim frustration.
Likewise, parties will not be able to rely on frustration if they have agreed in the contract to proceed in the face of a frustrating event. It is advisable you seek legal advice to determine whether your frustrating meets these conditions as they will differ for each contract and case.
Key Takeaways
A contract may come to an end when a frustrating event occurs. You should consider whether the obligations of a party under a contract have become impossible or radically different from their obligations at the time they entered into the contract due to the frustrating event. It is essential you seek legal advice before acting (or failing to act) in connection with the frustration of a contract.
If you have any questions or need assistance with determining whether or not your contract may be considered frustrated and therefore terminated, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Frustration occurs in certain situations where continuing to perform a contract becomes impossible due to an unforeseen event or series of events at neither party’s fault. If a contract is frustrated, both parties are discharged from their obligations to perform under that contract.
This clause in a contract will usually acknowledge that a party may not be able to deliver or perform contractual obligations in unforeseeable circumstances. The force majeure clause will typically provide a framework for how force majeure affects liabilities and obligations under the contract and what parties need to do in response (e.g. notice obligations, mitigation obligations).
Examples of contract frustration include a change in the law, making the performance of a contract illegal. Alternatively, it could be an excessive delay in performance due to unforeseen circumstances. Likewise, a contract will be frustrated if the method of performance of the contract becomes impossible.
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