When is a Contract Frustrated?

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When is a Contract Frustrated?

February 2, 2022         openlegal

A contract is frustrated when a supervening event causes a significant and unforeseen change that affects the contract. Neither party is to blame for the event, and so frustration serves to protect them from being unjustly held to the contractual terms in now vastly different circumstances. This is particularly relevant now due to the COVID-19 pandemic, where lockdowns or other restrictions can prevent parties from fulfilling their obligations e.g. booking a holiday home but then regional travel becomes disallowed. 

The key issue in establishing frustration is proving that due to the frustrating event, the obligations under a contract are now impossible or radically different from the obligations at the time of entering into the contract.

If frustration is established, the contract is automatically terminated and neither party is required to perform their obligations under the contract.

Events that can frustrate a contract 

Note the key requirement that the frustrating event renders performing obligations impossible or radically different than originally contemplated. This is a narrow application, and may not apply as often as you think. 

Illegality 

Any changes in law that makes the performance of the contract illegal will almost definitely frustrate the contract. This is especially relevant now given the new laws/public health orders being passed to deal with COVID-19. 

Unavailability 

Where a specific item/service becomes unavailable to due factors outside the parties’ control, then the contract may be deemed to be frustrated. However, it should be noted this is only if the item/service is specific and cannot be easily substituted. A good example would be a rental property as houses are normally unique, whereas an unavailable hotel room can usually be easily replaced. 

Other potential reasons for frustration include:

  • physical destruction of the subject matter of the contract; 
  • death of one of the parties to the contract;
  • natural disasters;
  • war; and 
  • terrorist attacks 

Events that cannot frustrate a contract 

Delay  

The unforeseen event must cause significant delay or prevent completion of the contract before a specified deadline. Timing is more important in some types of contracts than others, and so whether frustration will be established shall turn on that. 

For example, a dinner booking in mid 2021 would have been frustrated due to the lockdown introduced by the government. A ‘non-refundable’ deposit would therefore indeed be refunded to the customer, as the contract was frustrated through no fault of theirs. However, you would not be entitled to a refund for a restaurant gift card if the gift card does not expire before the restrictions lift.

Hardship 

Remember, frustration has a high bar to meet. Unforeseen hardship, whether financial or anything else, will not establish frustration. This includes situations where a contract is no longer profitable for a party, or where a party has lost their job and can no longer afford to pay for goods or services. 

Other disallowed reasons for frustration include:

  • the event was foreseeable and should have been anticipated by both parties; this is the case even if both parties underestimated the impact of the event;
  • the event already existed when the parties entered into the contract;
  • one party is at fault; and
  • realisation the bargain was bad

Force Majeure clauses

A Force Majeure clause is where parties recognise unforeseen events may prevent them from performing the contract and thus allow them to suspend or terminate the contract (if the event occurs through no fault of that party). 

These clauses are normally non-exhaustive lists. Some common items are natural disasters e.g. floods, earthquakes, or war. These events normally overlap with events that would establish frustration, and so Force Majeure clauses can make frustration irrelevant. Nevertheless, the concepts of unforeseeability and lack of fault remain the same, and so it is still helpful to have an understanding of them. 

Contact OpenLegal if you require any help with business contracts, or any commercial legal matter.

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