Frustration of contracts: what causes a contract to break?

What is frustration of contracts?

The doctrine of frustration states that frustration occurs when an unforeseen event renders performance of a contract impossible or radically different from that originally contemplated by the parties. No party is considered at fault.

If a contract is found to be frustrated, it is automatically terminated. All future obligations of the parties to the contract are discharged.

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What is a frustrating event in contract law?

A frustrating event is one which makes performance of the contract radically different to what the parties intended when the contract was agreed upon.

The doctrine of frustration is applied narrowly, so not all events that appear to be frustrating will be deemed that way. Frustration is likely to apply when:

  • the subject matter of the contract is destroyed;
  • there is an excessive delay in performance due to unforeseen circumstances;
  • a party to the contract dies or is incapacitated;
  • the expected method of performance becomes impossible due to unforeseen circumstances; or
  • there is:
    • state intervention;
    • a natural disaster;
    • war; or
    • a terrorist attack.

Establishing frustration

There is no legislated test to determine whether a contract has been frustrated. However a court will consider factors such as whether the event in question was foreseeable and whether obligations under the contract have become impossible to perform. It will also look at whether the contract contains terms to deal with a frustrating event.

railroad construction

Codelfa case

The leading case associated with the doctrine of frustration in Australia is Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982). Codelfa had agreed to build tunnels for the rail authority on the basis of work being done 24 hours a day, 7 days a week, so as to complete the work on time. Noise complaints from residents led to an injunction which restricted work hours. The rail authority refused to pay additional costs, arguing Codelfa had not acted in accordance with the contract. Codelfa unsuccessfully argued that it was an implied term of the contract that the company be granted an extension of time to finish the work. On appeal, Codelfa was successful in establishing the contract had in fact been frustrated, with the court holding that the injunction was a frustrating event that had created a situation radically different to what the parties had originally contemplated. Key to the court finding was the fact both parties had relied on incorrect legal advice that there was no chance an injunction would hinder the work.

What are the limits of frustration of a contract?

A contract will not be found to be frustrated when:

  • a party faces loss, inconvenience or hardship;
  • the event in question event could have been reasonably foreseen;
  • the frustrating event is self-induced;
  • the contract is merely delayed or interrupted;
  • specific provisions have been made for the frustrating event (such as in a force majeure clause);
  • one party has expressly or impliedly agreed to the frustrating event; or
  • the frustrating event already existed when then the parties entered into the contract.

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Consequences of frustration of a contract

When a contract is frustrated, all future obligations are automatically discharged but obligations due to be performed before frustration remain. This means expenses incurred or costs paid to the point of frustration cannot be recovered, and payments due at that point will likely remain payable. This may result in a party having paid for goods or services it will not receive, or alternatively, having received goods or services for which it does not have to pay. Some states, but not Queensland, have legislation to ameliorate such consequences.

Frustration and force majeure clauses

Force majeure means “superior force” in French and refers to an unforeseeable event that renders performance of the contract impossible. A force majeure clause in a contract is designed to overcome the limited application of the frustration doctrine by providing what is to happen if a specified event hampers performance of the contract. The clause should define what is a “force majeure” event by providing an exhaustive list that includes wars, riots and certain weather events, or by using a general description such as “an event beyond the reasonable control of the parties”.

A force majeure clause generally states three conditions for an event. The event:

  1. could have occurred with or without human intervention;
  2. could not have been reasonably foreseen by the parties; and
  3. could not reasonably have been prevented by the parties because it was completely beyond their control.

If a force majeure clause is activated, the consequences could include termination of the contract, payment of compensation to an affected party, or suspension of obligations for the parties during the force majeure event.

Can COVID-19 frustrate a contract

Can COVID-19 frustrate a contract?

COVID-19 has had an unprecedented impact on businesses. However, the pandemic will not automatically frustrate the performance of all contracts; an assessment must be made of how COVID-19 has impacted the performance of a particular contract. If the virus makes performing the contract impossible or illegal, rather than more difficult or delayed, then it may be a frustrating event. 

Businesses should not rely on the existence of a force majeure clause, either, to ameliorate the effects of the pandemic on a contract. This is because such a clause may not be drafted in a way that considers a pandemic as an event that activates it; the definition of force majeure would need to include “infectious disease”, “epidemic” or “pandemic”, or other terms connected to COVID-19 such as “national emergency” or “government action”. If the clause were activated, the parties would then need to determine when the force majeure event began i.e. whether there was a triggering event, such as the imposition of government restrictions, or a triggering date, such as 11 March 2020, when COVID-19 was classified as a pandemic by the World Health Organisation.

Examples

  • A catering business is contracted to supply a buffet for a wedding. However, a government ban on gatherings of more than 10 people forces the wedding to be cancelled. In this case, the contract is frustrated because it is impossible for the wedding to take place and so neither party can fulfil their obligations under the contract.
  • A clothing company sources fabric from a warehouse overseas. Most staff at the warehouse are infected with COVID-19 and are on sick leave, meaning a three-week delay in the supply of fabric to the company. In this case, the contract is not frustrated because the delay would not be considered excessive, nor would the fact the delay makes the company’s operation more expensive or burdensome be enough to frustrate the contract.

For when you need help

There are many ways a contract can end. When performance under a contract is affected by an event beyond the control of the parties to the contract, it is important that the parties know what their liabilities are.

Frustration of contract is a complex area of law that needs careful consideration so that parties do not inadvertently breach their obligations.