How to Know When a Contract Becomes Frustrated

Covid-19 has impacted everyday life. As it continues to spread, more and more businesses are finding themselves unable to fulfil their contractual obligations. As a business, it is natural to ask yourself, especially in light of the current climate, what happens if you cannot do something you have previously contractually agreed to do? In certain situations where continuing to perform a contract becomes impossible due to an unforeseen event, or series of events due to neither party’s fault, the contract can be considered frustrated and come to an end. This article outlines the doctrine of frustration to assist you in working out when a contract may become frustrated.

Establishing Frustration

Frustration only applies in certain situations. There is no definitive test to work out whether a contract is frustrated. However, a court will consider the following points.

Frustrating Event

When considering whether a contract has become frustrated, a court will consider whether an event occurs that is unforeseeable. For instance, neither party anticipated such event before it occurred. Furthermore, the event must be due to no fault of either party. This event is known as the frustrating event. 

Impossible Obligations

To establish frustration, the obligations of a party under a contract must become impossible or radically different from their obligations at the time they entered into the contract, due to the frustrating event.

Terms of the Contract

A court will look at the contract in question to see whether the contract itself deals with what may happen if parties cannot fulfill their contractual obligations due to a frustrating event. A force majeure clause in a contract will ordinarily acknowledge that a party may not be able to deliver or perform contractual obligations in unforeseeable circumstances.

If your contract has a force majeure clause that operates to cover the circumstances you seek to establish as a frustrating event, frustration will not be established. If your contract does not have a force majeure clause or if the clause does not address the frustrating event, then you may be able to establish frustration.

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. Therefore, a frustrating event is likely to occur in the following circumstances:

• a change in the law, making the performance of a contract illegal;
• excessive delay in performance due to unforeseen circumstances;
• physical destruction of the subject matter of the contract; 
• death of one of the parties to the contract;
• natural disasters;
• war; and 
• terrorist attacks.

Events That May Not Frustrate a Contract

Establishing frustration can be difficult and will not typically occur in the following situations, where:

• there is a delay, unless the delay is so excessive that it causes performance of the contract to be substantially different; 
• 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; and
• the event already existed when the parties entered into the contract.

Consequences of a Frustrated Contract

If frustration is established and a contract becomes frustrated during its term, the contract will usually terminate automatically. Upon frustration, 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. 

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.

Can Covid-19 Frustrate a Contract?

Covid-19 has had an impact on the course of business and how people perform contracts. Performing contracts in light of Covid-19 can sometimes be risky and in certain scenarios impossible. Whether or not you can deem the Covid-19 pandemic as a frustrating event will depend on how Covid-19 has impacted the contract’s performance. An important point to consider is whether Covid-19 makes performing a contract impossible rather than more difficult. A mere delay in a contract’s performance is not a frustrating event. 

In this situation, a delay in supplying the building materials to the construction company by two weeks is not an excessive delay affecting your ability to perform your obligations under the contract. Therefore, it is unlikely that Covid-19 will be a frustrating event under these circumstances. As a result, the contract will not be frustrated.

Key Takeaways

A contract may come to an end where a frustrating event occurs. The frustration of a contract will largely depend on assessing the situation and the frustrating event. You should consider whether the obligations of a party under a contract must become impossible or radically different from their obligations at the time they entered into the contract due to the frustrating event. If you have any questions or need assistance with determining whether or not your contract may be considered frustrated and therefore terminated, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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