Frustration

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A contract will be 'frustrated' when an event (unprovided for in the contract) renders the contract practically incapable of being performed, not by fault of either of the parties. The test for frustration is:

  • If an event occurs, by fault of neither party and unprovided for in the contract, which completely changes the state of things, making the performance of the contract impossible or impracticable because the situation or performance are now radically or fundamentally different to was what originally contemplated, a contract will be frustrated.[1]

However, frustration will not be recognised when:

  1. The event was provided for in the contract.[2]
  2. The event should have been reasonably foreseeable.[3]
  3. The event occurred by fault of the party seeking frustration.[4]

If a contract is determined to be 'frustrated', it means that the contract immediately ended as the frustrating event occurred:

  • This means that all rights and liabilities which have accrued unconditionally prior to the time of the frustrating event remain in place, while the parties will be discharged from future obligations. - case reference needed.

This article is a topic within the subject Contracts.

Contents

Required Reading

Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009), pp. 460-467 [17.35]; 453-460 [17.05-17.30]; 467- 472 [17.40]; 472-478 [17.50-17.75].

Introduction

Frustration occurs when an event renders the contract practically incapable of being performed, not by fault of either of the parties.

  • For example, A hires a hall off B for a musical performance. The day before the musical performance, the hall burns downs by a random fire.
  • It is now impossible to perform the contract, but neither party is at fault.
  • The contract is frustrated. The effect of frustration is to excuse A from performance - he does not have to pay B for the hall.

The development of frustration

Frustration has always been applied narrowly by the courts, only in exceptional circumstances. Over the years, the courts have expanded the doctrine to cover more scenarios.

Impossibility of performance

Originally, frustration could only occur when the performance was rendered absolutely impossible.

  • For example, A and B enter into a contract for A to paint B's house.
  • A dies before performance.
  • It is now absolutely impossible for A to perform the contract. The contract is frustrated.

An absolute impossibility thus rises from the destruction of the subject matter of the contract. This was discussed in Taylor v Caldwell.

  • Note: In early cases such as this, there was no reference to frustration. The approach by the courts was to decide that the contract was subject to an implied term that the subject matter would continue to exist.
  • There is a distinction between a positive, definite contract to one where there is an implied or express condition underlying the contract.
  • "The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance[5]."
  • For example, an employment contract has an implied condition that the person to be employed will be alive...he does not 'breach' the contract if he dies.

Taylor v Caldwell is an example of the early approach of the court. The parties could only be excused from performance if the subject matter was destroyed and performance was rendered absolutely impossible.

Foundation of the contract ceases to exist

However, this strict view was relaxed in Krell v Henry, where the court discussed how contract may be frustrated if the assumption or foundation under which the contract was entered into ceases to exist:

  • I think that you first have to ascertain, not necessarily from the terms of the contract, but, if required, from necessary inferences, drawn from surrounding circumstances recgonised by both contracting parties, what is the substance of the contract, and then ask the question whether that substantial contract needs for its foundation the assumption of the existence of a particular state of things[6]."
  • "If the contract becomes impossible of performance by reason of the non-existence of the state of things assumed by both contracting parties as the foundation of the contract, there will be no breach of the contract thus limited[7]."

Effectively, this means that absolute impossibility of performance is not a requirement any more. If the unforeseen events brought about a new situation where the purpose to which the contract was entered into ceased to exist, a contract will be frustrated. This can also be seen as performance being rendered impractical.

This was also discussed in Brisbane City Council v Group Project Pty Ltd, in which the commercial purpose behind the defendant's agreement ceased to exist:

  • A comparison needs to be made between the contemplated situation, as revealed by construction, and the situation in fact resulting from the frustrating event.
  • In this case, "There has arisen, as a result of the compulsory acquisition of the land by the Crown for a school site, such a fundamentally different situation from that contemplated when the contract was entered into that it is properly to be regarded as having come to an end at the date of acquisition by the Crown[8]."
  • Thus, if a frustrating event completely changes the situation which was originally contemplated by the parties, a contract may be frustrated.

Modern approach

The doctrine was expanded further in Codelfa Construction v State Rail Authority of New South Wales, which is now the modern approach:

  • If an event occurs, by fault of neither party and unprovided for in the contract, which completely changes the state of things, making the performance of the contract impossible or impracticable because the situation or performance are now radically or fundamentally different to was what originally contemplated, a contract will be frustrated.
  • The 'implied term' way should not be used anymore, although previous decisions are still valid.

Limitations of Frustration

[9] Frustration will not be recognised when:

  1. The event was provided for in the contract.[10]
  2. The event should have been reasonably foreseeable.[11]
  3. The event occurred by fault of the party seeking frustration.[12]

The consequences of frustration

Common law

[13] Frustration means that the contract immediate ended as the frustrating event occurred. This means that "all rights and liabilities which have accrued unconditionally prior to the time of the frustrating event remain in place, while the parties will be discharged from future obligations[14]".

Statute law

Legislation has been enacted in NSW[15], SA[16] and VIC[17] which varies the consequences of frustration.

References

Casebook refers to Paterson, Robertson & Duke, Contract: Cases and Materials (Lawbook Co, 11th ed, 2009).

Textbook refers to Paterson, Robertson & Duke, Principles of Contract Law (Lawbook Co, 3rd ed, 2009).

ACL refers to the Australian Consumer Law.

  1. Davis Contractors Ltd v Fareham Urban District Council; Codelfa Construction v State Rail Authority of New South Wales (1982) 149 CLR 337
  2. Codelfa Construction v State Rail Authority of New South Wales
  3. Davis Contractors Ltd v Fareham Urban District Council [1956] AC, 696, 731
  4. Bank Line Ltd v Arthur Capel & Co [1919] AC 435, 452
  5. (1863) 3 B & S 826, 839
  6. [1903] 2 KB 740, 749
  7. [1903] 2 KB 740, 749
  8. (1979) 145 CLR 143, 162
  9. Casebook, p. 474 [17.55]
  10. Codelfa Construction v State Rail Authority of New South Wales
  11. Davis Contractors Ltd v Fareham Urban District Council [1956] AC, 696, 731
  12. Bank Line Ltd v Arthur Capel & Co [1919] AC 435, 452
  13. Casebook, p. 474 [17.60]
  14. Casebook, p. 474 [17.60]
  15. Frustrated Contracts Act 1978 (NSW), ss 5-15
  16. Frustrated Contracts Act 1988 (SA)
  17. Fair Trading Act 1999 (VIC), ss 32ZE - 32ZO
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