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How is a contract frustrated in Australia?

An Overview on Frustration of Contract

A contract may be frustrated if through no fault of the parties to a contract, a contract can no longer be performed due to exceptional circumstances and are events outside the parties’ control to a contract.

In this article, we address the frequently asked questions that local Australian businesses may ask about contracts and frustration, including:

What is a frustrated contract?

Historically, while there was a general doctrinal view that contractual obligations were absolute between parties, there were also exceptions for non-performance of contract such as illegality and incapacitation (Treitel & Peel, 2014). In forming the exceptions, the doctrine of frustrated can be originally found in Roman law. These principles were interpreted in Pothier’s work, Traites des Obligations (as translated in Taylor v Caldwell [1863] 122 ER 309), that a person:

“is freed from [their] obligations when the thing has perished, neither by [their] act, nor [their] neglect, and before [they] are in default, unless by some stipulation…taken on [themselves] the risk of the particular misfortune which has occurred.”

Notwithstanding, the doctrine of frustration was adopted and further developed under English common law carving-out positive obligations when the performance of a contract became impossible.

How was the doctrine of frustration developed in England?

In English common law, a historical recording and application of frustration can be found in the 1863 decision of Taylor v Caldwell [1863] 122 ER 309 that involved a venue-hire and an accidental fire affecting contractual performance. In that decision, the early doctrine of frustration was articulated. Blackburn J stated that a positive obligation to continue a performance of a contract should not be supported, if:

 “…the parties must from the beginning have known that it could not be fulfilled…. performance becomes impossible from the perishing of the thing without default of the contractor.”

The principle of frustration was subsequently further developed in England. For example, in Krell v Henry [1903] 2 KB 640, citing Taylor v Caldwell [1863] 122 ER 309, extending the concept of impossibility towards:

… the cessation or non-existence of an express condition or state of things, going to the root of the contract, and essential to its performance.”

Notwithstanding historical developments during the 19th century, there have been transitions in the application of frustration as the English Courts are reluctant to “allow a party to rely on the doctrine as an excuse for escaping from a bad bargain” (Triedal & Peel, 2014, p 1718).

How did Australia adopt the doctrine of frustration?

In Australia, the modern definition on frustration was set out in the High Court decision of Coldelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337. The Court stated that:

Frustration occurs whenever the law recognises that without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract….

Generally, if either party are not at fault, and an event arises that are “radically” or “fundamentally” different to the contemplated performance of a contract, then the contract may likely be frustrated. The result of frustration of contract, is that the contract is discharged. However, whether a contract is frustrated will be based on the proper construction of the contract, and the allocated risks between the parties at the time of making the contract.

In other topics, we explore the legal principles about formation of contract:

What happens if a contract is frustrated?

When a contract is frustrated, then the legal obligations expected to be performed are discharged. Parties to a contract will not be liable to the other for failure of performances expected after the frustrating event arises.

However, generally, this does not extinguish the rights and liabilities accrued prior to the frustration of contract. Notwithstanding, legislation has been created across some Australian jurisdictions amending the effects of common law frustration.

When is a contract frustrated?

Generally, a contract is frustrated if the events cause the performance of a contract to be radically different to the contemplated performance of a contract at the time when the contract was made. This will often require an understanding of the construction of the contract, and what the parties contemplated.

What is illegality?

A change in law may make a performance of contract illegal, and this will likely frustrate a contract.

For example, if a law changes that make selling cars illegal, then contracts that involve cars will likely be frustrated. This is because the performance of that contract cannot be performed, by either party to a contract, and this arises from the illegality prohibiting performance.

What is inordinate delay?

A contract may be frustrated if events, outside the parties’ control, arises that will cause or are likely to cause delays that seriously affect the performance of a contract. However, mere delay will not be sufficient.

What is unavailability, destruction or disappearance of subject matter?

A contract may be frustrated if a specific object or subject matter disappears or is destroyed by events that were outside the parties’ control. However, if there are substitutions available, then contract may also not be frustrated. The difference between rendering a performance radically different that the contract is frustrated, and substitutions or alternatives that make performance more onerous is often not a clearly demarcated and will require a legal assessment on the facts and circumstances.

What is death or incapacity?

If a party has passed away, or is permanently incapable, then a contract may be frustrated.

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When is a contract not frustrated?

There may be a number of situations that a contract is not frustrated by reason of an event because the event does not render the performance of the contract so radically different, or incapable of being performed. These may include unforeseen or mere hardship, bad bargains, force majeure events, and foreseeable events.

What is hardship?

Unforeseen or mere hardship by a party to a contract will likely not cause a contract to be frustrated. These kinds of situations will generally involve when a contract is not profitable to a party any longer, when a bad bargain was agreed, or the hoped expectations of the contract did not come back. Therefore, generally, hardships will not frustrate a contract.

For example, a construction contract was agreed to be a fixed price for the delivery of a project within a specific timeframe. However, if the builder cannot meet the timeframe as originally agreed, then the contract will likely not be frustrated.

What is a bad bargain?

If a party experiences material loss or inconvenience, then the contract will likely not be frustrated. The risks of those experiences are generally viewed as part of the commercial risks when parties enter into an agreement. A bad bargain will generally not frustrate a contract.

What is Force Majeure?

In commercial contracts, parties may allocate risks by preparing force majeure clauses, that anticipate events, and prescribe the conditions that parties must follows when the events arise. Often, these kinds of clauses will describe the consequences that follow expressly stated events.

Generally, force majeure clauses may include events such as strikes, floods, war, and terrorism, and that if those events arise, either parties may either suspend or terminate the performance of the contract if the performance cannot be remedied when those events arise.

Therefore, if an event is expressly contemplated in a contract, then a contract will generally not be frustrated because the events were in the contemplation of the parties by being expressly included in a contract and will not make performance radically different to the original contemplation.

Read More: For further information on express terms, “What is an Express Term in a Contract?” explores the general concepts with how express terms apply in contract law.

What are foreseen events?

Generally, when an event may be foreseen or is reasonably foreseeable, then the event is an allocated risk that the parties have accounted for when contract was being negotiated between the parties. These events are often not the kind of events that may frustrate a contract.

Bibliography

  • Treitel, H., & Peel, E. (2014). Treitel on the Law of Contract (4th ed). Sweet & Maxwell.

Implied Terms | Express Terms | Enforceable Contract | Legally Binding Agreement | Termination | Consideration | Intention To Create Legal Relations | Offer and Acceptance | Frustration | Certainty | Repudiation | Privity | Classification of Terms | Contract Law (Theories) | Causation | Remoteness | Damages |

If you are looking for legal expertise and have any questions, connect with an author or a member of our litigation and dispute resolution team.

Do you need legal advice? Call us on (03) 5331 1244 to get in touch and arrange an appointment with one of our lawyers.

You can also connect with us by filling out your details and telling us about your information for legal advice below:

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Authored by:
Ben Franklin, Managing Partner (LIV Accredited Specialist – Property Law), &
Matthew Tran, Lawyer.

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