News & Insights

A contract is a legally binding agreement between two or more parties, made orally or in writing, that promises performance of specific tasks by those parties.

Sometimes, uncontrollable events can disrupt the performance of a contract. A road might flood, preventing delivery in circumstances where time is of the essence, or a warehouse might catch on fire and destroy the goods inside. When events like these happen, you might wonder — can the contract still be completed?

If an unforeseen event makes it impossible to fulfil the terms of a contract — and neither party is at fault — the contract might be considered “frustrated.” When a contract is frustrated, any obligations that have not been performed are discharged, effectively bringing the contract to an end.

Examples of frustration

While it may seem like it is uncommon for contracts to be frustrated, it can happen more often than you may realise. There are a few common types of examples of when a contract is frustrated.

Illegality

A contract may be frustrated if changes in the law prevent the contract from being legally fulfilled. Take the example of a contract for the purchase and importation of vapes or e-cigarettes between an overseas vendor and an Australian purchaser. If, subsequent to that contract being entered into, the Australian Government passed legislation banning the importation of vapes into Australia, that contract would be frustrated because the vendor would be prohibited from importing the goods into Australia.

Delay

In many contracts, timing of performance can be a critical factor. In these circumstances, a contract may stipulate that “time is of the essence”. If there is delay in the performance of a contract, depending on the nature of the delay and the extent to which that delay affects the intended performance of the contract, the contract may be frustrated. To put this into context, often, the prompt delivery of goods to a business by a specified time is critical to the business operations because, for example, the goods are perishable and will be worthless if there is any delay in their delivery. If there is a natural disaster that prevents the goods being delivered by the specified time and, as a result, the goods perish, the contract would likely be frustrated.

Destruction

If the subject matter of a contract is destroyed, perhaps because of a warehouse fire, there is a chance that the contract will be frustrated.

Death or incapacity

The death or permanent incapacity of a party who is essential to the performance of the contract may result in the frustration of that contract. If tickets are sold to a concert and the performer passes away prior to the concert, the contract formed with the ticket holders could be frustrated.

Limitations to contract frustration

Like with many other legal principles, there are limitations to the application of the concept of frustration. While there are several established limitations, the most common include:

• Express provisions or clauses in the contract that state that the contract will not be frustrated if a particular event is to occur.
• Reasonably foreseeable events which could have been anticipated by the parties. For example, entering into a contract for the provision of construction services in an area which is well known to be flood prone and a flood occurs during the course of the construction.
• If a contract becomes harder or more inconvenient to perform, that is generally not enough to frustrate a contract. Similarly, factors such as price fluctuations, changes in the profitability of the contract and other obstacles may not be enough to frustrate a contract alone.
• In contracts for the sale of land, such a contract will only be frustrated if something happens to the land itself, not any buildings on the land. For example, if an earthquake destroys a home once the contract is signed, the contract is unlikely to be frustrated. However, if the earthquake causes the ground itself to be destroyed in a fissure, then the contract could be frustrated.

Consequences of a frustrated contract

Frustration of a contract automatically brings the contract to an end, discharging each party from most future obligations. However, parties may have rights or claims over money paid, or due to be paid, prior to the occurrence of the frustrating event. Those rights will need to be resolved.

For a party to establish a right to be repaid funds that it has paid under a frustrated contract, there must be a total failure of consideration. That means that whoever has received the funds has not performed any of its obligations under the contract, like not delivering any goods, despite receiving payment for those goods.

From another perspective, if the party providing services under the contract has partially performed the services, it may be entitled to payment for the services which have already been performed. For instance, if a contract was made for a painter to paint portraits of several individuals but only completes two paintings and is unable to complete the contract as a result of an injury to their hands, they could be entitled to payment for the portraits that were completed.

Force Majeure clauses

The ramifications of a frustrated contract may be affected by a clause known as a “Force Majeure” clause. Put simply, this clause will identify what is a “force majeure” event, which is usually things like natural disasters, acts of terrorism, war, pandemics and other unforeseen events, and the extent to which the parties are relieved from their obligations under the contract if such an event occurs.

Help!

Trying to determine whether a contract is frustrated and, if so, the consequences of the frustrating event is usually not a simple exercise. Accordingly, it is best to seek legal advice as soon as possible, which our team is more than happy to provide.

The information contained in this article is general in nature and cannot be relied on as legal advice nor does it create an engagement. Please contact one of our lawyers listed above for advice about your specific situation.