How to know when a contract becomes frustrated

When you enter into a contract with another business or an individual, you always hope that both parties will keep to their side of the deal and uphold their contractual obligations. Unfortunately, we do not live in an idealistic world where contracts are always performed without fail. In certain cases, when a party does not satisfy their own obligations, the contract becomes frustrated and, as you can imagine, so does the other party!

When a contract becomes frustrated, what can the parties do to remedy the situation? May either party ‘frustrate’ or ‘end’ the contract? What are the requirements to terminate a contract that has become frustrated?

The essential aspect of a contract is the mutual trust and confidence placed in the other party to perform their promise, where the law, in most cases, requires each party to satisfy the promises made to the other. Having said all that, there are certain events, or ‘triggers’ that can lead to a contract becoming frustrated, which is often of no fault to either party.

If you are looking to terminate a contract with another business or individual, the doctrine of frustration is worth learning, as there are certain circumstantial events that will validate the terminate of the commercial contract. It is important to understand the types of scenarios under which a contract becomes frustrated.

Unforeseeable events

For a Court to successfully terminate a contract that has become frustrated, there are several important criteria that should first be satisfied.

One such event, where a contract becomes frustrated and termination of the contract is warranted, occurs when the nature of the contract has shifted due to an unforeseeable, uncontrollable and totally unanticipated event. This unforeseeable event has to have had such an effect on the contractual duties of both parties, that the primary purpose of entering the contract is no longer obvious or evident. It is important to remember that the contract becomes frustrated only when neither party had knowledge or contemplation of the event prior to its occurrence. This is sometimes evidenced by the lack of any provision in the contract aimed at dealing with such an unforseen event.

This means that parties that have inserted a clause that contemplates the possibility of such unforseen events occurring will not be entitled to terminate the contract, as they have made provisions relating to such events and protocol for dealing with such events should they occur. In addition, if either party frustrated the contract by their own (mis)conduct, and as a result there has been some loss suffered (financial or otherwise) to one of the parties, termination of the contract may not be an available option. And lastly, the event must be more than just a passing inconvenience in nature. It must be wholly unfair and unreasonable to uphold the contract given the gravity of the unforseen event and the impact it has had on the entirety of the contract.

Unable to perform the contract

A contract becomes frustrated when certain conditions/circumstances make it impossible to perform the contract. This might occur when the law changes, which affects the legality of the contract, or when the subject has become damaged or lost. In addition, a contract becomes frustrated when an event that the contract relied on never happens and, as a result, the contract cannot be performed.

How does frustration impact a contract?

When a contract becomes frustrated during the term of the contract, it is possible for the parties to be discharged from their contractual duties. It is worth noting that when a contract becomes frustrated and the parties want to terminate the agreement, the termination does not begin from the start date of the contract, but rather from the date on which the frustrating event occurs. Other examples of when a contract becomes frustrated might be following the death or bankruptcy of either party.

If the contract has been drafted so that it contains provisions that cause the contract to become frustrated because of certain events occurring, this may also be a ground for enlivening the doctrine of frustration.

Conclusion

There are several circumstances under which a contract becomes frustrated, however, the most common way this occurs is when one of the contracting parties does not fulfil their contractual obligations. When this happens, the party that has suffered loss can recover this loss by seeking damages in the courts. If you are unsure about when a contract becomes frustrated, contact LegalVision on 1300 544 755 for a review of the terms of the contract and advice on how to proceed. Our contract lawyers are skilled in contract reviews and will provide you with a fixed-fee quote for advice.