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. Unfortunately, parties do not always perform their contractual obligations 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?

What is Frustration?

The essential aspect of a contract is the mutual trust and confidence placed in the other party to perform their promise. This is why the law, in most cases, requires each party to satisfy the promises made to the other. However, there are certain events, or ‘triggers’ that can lead to frustration. This refers to circumstances which are 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 understanding. This is because certain events will validate the termination of the commercial contract. It is important to understand the types of scenarios under which a contract becomes frustrated.

Unforeseeable Events

A court will consider several important criteria when determining whether a contract has become frustrated.

Here, termination of the contract is only warranted when the nature of the contract has shifted due to an unforeseeable, uncontrollable and totally unanticipated event.

It is important to remember that the contract becomes frustrated only when neither party had knowledge or contemplation of the event before its occurrence. You can often demonstrate this requirement by the absence of any provision in the contract aimed at dealing with such an unforeseen event.

This means that parties that have inserted a clause that contemplates the possibility of such unforeseen events occurring will not be entitled to terminate the contract for frustration. This is because they: 

• have made provisions relating to such events; and 
• established a protocol for dealing with such events should they occur. 

In addition, frustration may not be an available option 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.

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 unforeseen event; and 
• impact it has had on the entirety of the contract.

Unable to Perform the Contract

A contract becomes frustrated when certain conditions or circumstances make it impossible to perform the contract. This might occur when the: 

• law changes, which affects the legality of the contract; or
• 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, you cannot perform the contract.

How Does Frustration Impact a Contract?

When a contract becomes frustrated during its term, this may discharge you and the other parties to the contract from your 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. Rather, the termination will be in effect from the date on which the frustrating event occurs.

If you have drafted the contract 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.

Key Takeaways

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’s contract lawyers on 1300 544 755 or fill out the form on this page.

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