Frustration of Contracts: What causes a contract to break?

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What is frustration of contracts?

Frustration of contracts refers to a particular way in which contractual obligations can be discharged. A contract is frustrated where further performance of the contract becomes impossible due to an unforeseen event, or series of events, taking place through no fault of the parties to the agreement.1 In these circumstances, the parties’ contractual obligations are automatically discharged, and subsequently, neither party can demand further performance of the contract by the other party.2

The modern concept of frustration was stated in the following terms by Lord Wrenbury in Horlock v Beal [1916] 1 AC 486 at [525-526]:

Where a contract has been entered into, and by a supervening cause beyond the control of either party its performance has become impossible, I take the law to be as follows: If a party has expressly contracted to do a lawful act, come what will – if, in other words, he has taken upon himself the risk of such a supervening cause – he is liable if it occurs, because by the very hypothesis he has contracted to be liable. But if he has not expressly so contracted, and from the nature of the contract it appears that the parties from the first must have known that its fulfilment would become impossible if such a supervening cause occurred, then upon such a cause occurring both parties are excused from performance. In that case a condition is implied that if performance becomes impossible the contract shall not remain binding.”

The legal consequences of a contract that is found to have been frustrated are that the contract is automatically terminated at the point of the frustrating event(s) occurring. At common law, obligations that fell due before the frustrating event(s) took place will still be applicable and enforceable.

What is a frustrating event in contract law?

There is no specific or exhaustive definition as to what constitutes a frustrating event as this ultimately depends on the specific terms of the contract in question and the particular circumstances of each individual case. However, a contract will only be frustrated where the performance of that contract becomes impossible in a way that is radically different from what both parties intended at the time of entering into the agreement. Accordingly, frustration will only apply to a limited range of circumstances.

The frustrating event must not merely alter the circumstances in which performance of the contract is called for; there must be a radical change.3

The test to determine whether or not an event was frustrating involves the following steps:

  1. Step 1 – Did the event make further performance ‘a thing different in substance’ from that which was contracted for?4
  1. Step 2 – Did the event create a ‘fundamentally’ different situation from that which was contracted for?5
  1. Step 3 – Did the event deprive a party who still has further obligations to perform under the contract of substantially the whole benefit they were intended to obtain as consideration for performing those obligations according to the original terms of the contract and the original intentions of the parties to the contract?6

This list is not exhaustive.

What are some examples of frustrating events?

The doctrine of frustration is generally applied quite narrowly. Accordingly, not all events that might initially appear to be frustrating will necessarily be deemed a frustrating event.

The following is a few examples of circumstances where frustration is more likely to apply:

  • Destruction of the subject matter of the contract;7
  • Excessive delay in performance due to unforeseen circumstances;8
  • Death or incapacitation of a party to the contract;9
  • Contemplated method of performance becoming impossible due to unforeseen circumstances;10
  • State intervention;
  • Natural disasters;
  • War; and
  • Terrorist attacks.

The above list is not exhaustive.

What are the limitations of the Doctrine of Frustration of Contracts?

Frustration only occurs where performance becomes impossible without default by either party. As such, frustration will generally not succeed in the following circumstances:

  • Where the contract is merely delayed (unless the delay means performance is ‘radically different’);11
  • Where the contract is merely interrupted (unless the interruption means performance is ‘radically different’);12
  • Where the performance is not considered to be impossible (e.g. performance has merely become inconvenient or expensive);13
  • Where specific provisions have been made for the event (the matter is then to be dealt with in the manner that is provided for by the contract);14
  • Where the frustrating event is self-induced (e.g. where it is the result of some omission or conscious act by the party pleading frustration);15
  • Where one party has expressly or impliedly agreed to the event leading to the frustration of the event;16
  • Where the frustrating event was already in existence at the time of which the parties entered into the contract;17 or
  • Where the frustrating event should have been foreseen and provided for but was not, either before or after the parties entered into the contract (e.g. the possibility of performance being interrupted by a weather event such as heavy rainfall).18

The above list is not exhaustive.

COVID-19 changes

COVID-19 has had an unprecedented impact on what most of us generally consider the ordinary course of business, as well as on the performance of many contracts. Performance of otherwise ordinary business or contractual conduct has become difficult, risky, and in some cases, even impossible. Accordingly, many contracts have, or will become, frustrated as a result. The inherent risks of conducting business amidst the current pandemic are compounded by government regulation about how people are to go about their everyday lives. However, COVID-19 will not automatically frustrate the performance of all contracts, and it is important to note that each situation must be analysed on its facts as they relate to each individual matter.

Effect of frustration of a contract

Frustration will not merely suspend the parties’ obligations under the contract.19 When a contract is frustrated, it will automatically be discharged without the need for one of the parties to elect to terminate the contract. However, it is important to keep in mind that the contract will only be terminated from the point of frustration. This means that the rights, duties, and liabilities that accrued prior to the point of frustration remain on foot and enforceable. Generally, any payments already made at the point of frustration cannot be recovered. In addition, any payments that have accrued and are due at the date of frustration will also largely remain payable.20

Contracts may sometimes include specific clauses that prevent particular provisions of the contract from remaining in effect in circumstances where certain specified occurrences take place. Some clauses even go so far as to stipulate that the contract is to be terminated in the event that particular situations occur. The existence of these types of clauses can sometimes assist in establishing that a contract has been frustrated.

Frustration and Force Majeure Clauses

Force Majeure Clauses are often included in contracts to overcome the strict application of the doctrine of frustration in order to minimise or exclude liability when natural disasters, catastrophes or other unavoidable situations occur. Force majeure clauses are essentially contractual provisions that expressly stipulate how risk is to be allocated in the event that part-performance or non-performance of the contract occur as a result of a particular event occurring that is beyond the control of the parties to the agreement. Force majeure clauses generally specify the different types of events that the clause is meant to apply to.

The three elements that generally need to be established for a force majeure clause to be enforceable are:

  1. The event could have occurred with or without human intervention;21

  2. The event could not have been reasonably foreseen by the parties to the agreement; and

  3. The event, or the consequences of the event occurring, could not reasonably have been prevented by the parties to the agreement as the event was completely beyond the parties’ control.2

For when you need Assistance

There are numerous ways in which a contract can come to an end. When performance under a contract is affected by an event beyond the control of the parties to the agreement, it is important to know whether or not the parties are still liable to perform their obligations under the contract, or whether it is likely that the contract will automatically be discharged as a result of the event.

Whether a contract has been ‘frustrated’ is a legally complex area of law that generally requires careful consideration to ensure the parties to the contract don’t risk inadvertently failing to comply with their obligations by being under the impression that a contract has been automatically terminated when, in fact, it might not have been.

If you are a party to a contract and believe the contract might have been frustrated, you should seek immediate legal advice to ensure your legal rights are sufficiently protected at all times.

Contact Gibbs Wright today for a free and confidential initial consultation about your contractual rights and obligations.

[1] Horlock v Beal [1961] 1 AC 486 at 492.

[2] Taylor v Caldwell (1863) 3 B & S 826; 122 ER 309.

[3] Qantas Airways Ltd v Christie (1998) 193 CLR 280 at 317.

[4] Metropolitan Water Board v Dick Kerr & Co Ltd [1917] 2 KB 1 at 30.

[5] British Movietonews Ltd v London and District Cinemas Ltd [1952] AC 166.

[6] Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26.

[7] Appleby v Myers (1867) LR 2 CP 651; Taylor v Caldwell (1863) 3 B & S 826.

[8] Davis Contractors Limited v Fareham Urban District Council (1956) AC 969; Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125.

[9] Cutter v Powell (1795) 6 Term Rep 320; Jackson v Union Marine Insurance Co Ltd (1974) LR 10 CP 125.

[10] Davis Contractors Limited v Fareham Urban District Council (1956) AC 969.

[11] Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 Q.B. 26.

[12] Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 Q.B. 26.

[13] Tsakiroglou & Co Ltd v NobleeThorl GmbH [1962] AC 93.

[14] Claude Neon Ltd v Hardie [1970] Qd R 93.

[15] Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524; Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154.

[16] NSW Leather Co Pty Ltd v Vanguard Insurance Co Ltd (1991) 25 NSWLR 699.

[17] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.

[18] Walton Harvey Ltd v Walker and Homfrays Ltd [1931] 1 Ch 274.

[19] Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221.

[20] In re Continenatal C & G Rubber Co Pty Ltd (1919) 27 CLR 194; Fibrosa SA v Fairbarn Lawson Combe Barbour Ltd [1943] AC 32.

[21] Matsoukis v Priestman [1915] 1 KB 681.

[22] Lebeaupin v Crispin [1920] 2 KB 714.

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The content of this publication is intended as general commentary only and may not be suitable or applicable to your personal circumstances. It is not intended to replace independent legal advice. You can contact us at our Brisbane Office for a free consultation on a range of litigation matters on (07) 3088 6364.

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