Frustration of contract occurs in common law when, without fault of either party to a contract, an unforeseen event (or unforeseen events) makes it impossible for the contract to be performed (this could include COVID-19).
Frustration of contract occurs if the unforeseen event renders the performance of the contract radically different from that which the parties intended the contract to be performed.
If a frustrating event occurs, then the contract is automatically terminated, and the parties are discharged from their obligations under the contract.
This common law doctrine of frustration is different (albeit similar) from a contractual ‘force majeure’ clause which may also allow for termination of the contract.
A frustrating event may not allow for a party to claim damages. This means that the other party may not seek to recover losses (with exceptions).
Frustration of contract is a very complicated area of law but can allow the contract to be terminated and the parties discharged from their obligations. Each contract is different and will need to be assessed on its own merits.
In this article our commercial litigation lawyers explain the frustration of contract & force majeure clauses.
What is Frustration of Contract?
Contract frustration occurs where without default of either party a contractual obligation has become incapable of being performed.
In the House of Lords case of Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, Lord Radcliffe said:
So perhaps it would be simpler to say at the outset 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. Non haec in foedera veni. It was not this that I promised to do.
This was adopted in Australia by Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, and others.
Breaking this statement down, a person must look at:
- What does without default by either party mean?
- What does impossibility of performance mean?
- What does radically different mean?
These questions will be addressed in more detail below.
What does Without Default by Either Party Mean?
A contract will not be frustrated if the frustrating event is because of an act or omission of one of the parties to the contract.
Breach of Contract
A contract will not be frustrated if the frustrating event is because of a breach of contract. In Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 Lord Justice Sellers said:
If a party by his breach induces delay, he cannot claim frustration which would have been self-induced
See also – Ocean Tramp Tankers Corporation v. V/OSovracht, The Eugenia [1964] 2 Q.B. 226; and Universal Cargo Carriers Corporation v Citati [1957] 2 QB 401.
Self-Induced Frustration of Contract
There is distinction between a breach causing frustration and a deliberate self-induced frustration. The distinction is that the deliberate act which caused frustration may not be a breach of the contract.
A party is not allowed to rely on deliberate self-induced frustration because of the ‘moral rule’ that a person should not be allowed to take advantage of his or her own wrong.
In Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] UKPC 1 the Privy Council said:
[I]t cannot in their Lordships’ judgment be predicated that what is here claimed to be a frustration, that is, by reason of the withholding of the licence, was a matter for which the appellants were not responsible or which happened without any default on their part. In truth, it happened in consequence of their election. If it be assumed that the performance of the contract was dependent on a licence being granted, it was that election which prevented performance, and on that assumption it was the appellants’ own default which frustrated the adventure: the appellants cannot rely on their own default to excuse them from liability under the contract … the appeal should be dismissed with costs
So, without default means without fault of the parties to the contract. This may be because, unless there is a breach or a deliberate self-induced frustrating event, it is impossible to perform the contract.
What does Impossibility of Performance Mean?
The case of Taylor v Caldwell (1863) 122 ER 309 is the start of the modern-day doctrine of frustration, which relied on the impossibility of performance.
The contract in this case was for the rental of a hall. After the hall burned down, it was impossible for the renter to rent the hall.
Since Taylor v Caldwell there has been a number of cases which have expanded the meaning of literal impossibility of performance to also mean commercial impossibility, or commercially impracticable.
The scope of impossibility of performance includes:
- Where specific subject matter of the contract is destroyed;
- Where specific subject matter is unavailable;
- Where a party to the contract dies or is incapacitated;
- Where the method of performance of the contract is not possible;
- Where there is an increased in the burden of performance;
- Where non-occurrence of a particular event renders the contract pointless;
- Where a contract becomes illegal during the course of its performance;
- Where a contract has been delayed for an unreasonably long period; and
- Some other reasons.
It may not be enough that this frustration event makes parts of the contract impossible to perform. The frustrating event must render performance of the contract ‘radically different’ from that which was promised.
What does Radically Different Mean?
The dictionary definition of radically is:
completely or extremely
So, to make a legal argument for frustration, the contract must be completely or extremely different than the agreement made.
In Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd [2014] SGCA 35 the Singapore Court of Appeal added a layer of understanding when it said frustration will occur when:
the contract can no longer justly be said to be the same as that which was originally entered into by the parties.
In National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, the House of Lords said:
Frustration of a contract takes place when there supervenes an event … which so significantly changes the nature … of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution.
So, the contract must be completely or extremely changed, must no longer be the same, and must have significantly changed the nature of the agreement.
Whether performance of the contract is radically different from that which was promised is a question of contract construction.
The party will have to rely on the:
- Specific terms of the contract; and
- Frustrating event(s).
The combination of both the construction of the contract, and the frustrating event, is what is required to make a cogent legal argument for frustration of contract.
Construction of the Contract
Contract construction is an objective test rather than a subjective test.
To construct a contract is to interpret what a reasonable person in the position of the parties to the contract would have meant by the term of the contract, and the contract as a whole, at the time of entering into the contract.
See for example – Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; and Byrnes v Kendle [2011] HCA 26; and Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37.
The parties must construct the contract in conjunction with the frustrating event.
If the frustrating event does not reasonably stop the performance of the contract, then the contract may not be frustrated.
The Frustrating Event
Obviously, because this must be read in conjunction with the objective terms of the contract, there is no one definition as to what constitutes a frustrating event.
However, as mentioned above, the consequences of the frustrating event must render the contract completely or extremely changed, must no longer be the same, and must have significantly changed the nature of the agreement.
The frustrating event must not be foreseen by the parties. In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 the High Court followed Krell v Henry [1903] 2 KB 740 and Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 when it said:
No doubt it is more difficult in such a case to show that the grant of injunctive relief was not foreseen or could not reasonably have been foreseen, but if that can be shown then the doctrine of frustration should apply.
It is incumbent on the party making the allegation of frustration to bear the onus of proof.
If a party can provide evidence to support the elements mentioned above, then the contract may be frustrated.
What happens when a contract has been frustrated?
Consequences of Frustration of Contract
If frustration of contract has occurred, then at the time of the frustration event, the contract is terminated, and the parties are discharged from their obligations.
However, the parties can always enter into a new (and different) agreement.
Frustration of contract discharges the parties’ obligations ‘in futuro’ (in the future), it does not rescind the contract ‘ab initio’ (from the beginning).
Right to Recover Damages
After the frustration event, there is no right to recover damages, as there would be for breach of contract or repudiation.
However, if there is a right which accrued prior to the frustration event, then the injured party can seek to recover those damages. For example, if a party paid money but did not receive the goods.
Right to Restitution
Subject to the terms of the contract, and any legislative provisions, restitution for unjust enrichment may be available to an injured party if:
- There is a total failure of consideration; or
- The non-injured party was benefited; and accepted the benefit.
There may not be a right to restitution if the contract has been partially performed. However, in these cases the injured party may be able to rely on a secondary contract to perform that obligation.
Debt Recovery of Money Paid
Subject to the express and implied terms of the contract, the injured party may have the right to recover the debt unless they party is in default of the contract.
This would occur if there is a total failure of consideration.
However, if the contract says that the money can be retained by the payee, then it may not be recovered. A typical example of this would be a non-refundable deposit.
Money is not able to be recovered if that money has been earned. This would rely on the contractual provision which triggers the payment to be made.
When does Frustration of Contract Apply
Frustration can apply to almost any contract, under the common law and various pieces of legislation.
In some jurisdictions, States have legislation which can deal with frustrated contracts. They are:
- New South Wales – Frustrated Contracts Act 1978 (NSW);
- Victoria – Australian Consumer Law and Fair Trading Act 2012 (VIC); and
- South Australia – Frustrated Contracts Act 1988 (SA).
This article only relates to Queensland, so the common law of the doctrine of frustration of contract applies.
Contracts which Frustration Applies
The Courts have found that frustration can apply to a number of different contracts, including:
- Construction contracts;
- Contracts between the members of an unincorporated association;
- Contracts to promote a concert at a particular;
- Contracts for the lease of goods;
- Contracts for the sale of goods;
- Contractual licences;
- Employment contracts;
- Trading agreements; and
- Contracts for the settlement of legal proceedings.
Currently in Australia the doctrine of frustration may not apply to an executed lease in the same way as above.
Does Frustration of Contract Apply to a Lease?
Short answer – yes!
The long answer is that it is a lot more difficult for a lease to be terminated for frustration.
In Willmott Growers Group Inc v Willmott Forests Limited (Receivers and Managers Appointed) (In Liquidation) [2013] HCA 51, the High Court of Australia said:
[i]t may be difficult to envisage circumstances in which conduct of the tenant short of actual abandonment would properly be held to constitute repudiation or fundamental breach or in which anything less than a cataclysmic event such as the ‘vast convulsion’ … would warrant a finding of frustration.
A “cataclysmic event” would warrant a finding of frustration. The definition of cataclysmic is:
(of a natural event) large-scale and violent; or an event that changes a situation or society very greatly, especially in an unpleasant way
As you can see, the bar is set quite high for frustration to apply to a lease.
The cases are still relatively undecided, but with COVID-19 there could be scope for the law in Australia to change in regard to frustration of leases.
However, an alleged frustration of a lease must be looked at very carefully by a legal professional to provide advice as to the likelihood of successfully arguing frustration of a commercial lease.
Alongside the common law, and legislation, a force majeure contract provision may apply to certain contracts, and allow a contract to be terminated.
Force Majeure Clauses
Force majeure is a French phrase which means “superior force“.
Force majeure is defined in Butterworths Legal Dictionary to mean:
A circumstance beyond the control of a party to a contract, which enables the party to escape liability for failing to perform the contract as a result of the circumstance.
This can include acts of God, war, strikes, storms, earthquakes, and of course pandemics (like COVID-19).
The common law does not recognise the doctrine of force majeure and so it is a creature of contract only. If there is no force majeure clause in the contract, then the parties cannot rely on it and can only seek relief under the doctrine of frustration.
As stated above, because force majeure clauses are a contractual provision, they are constructed objectively, with what a reasonable person would have meant them to mean, at the time of contracting.
Express Provisions
A force majeure clause may expressly state that the parties are excused from their duty to perform the contract in the event that the following makes the contract impossible to perform:
- An act of God;
- Act of terrorism;
- Government action;
- Inclement weather;
- Floods and bushfires;
- Prohibition of export/import;
- Strikes or industrial action;
- War or other conflicts;
- Perils of the seas; and
- Pandemics (such as COVID-19).
As well as an excuse to allow non-performance, a force majeure provision may also create a performance obligation, such as the obligation to make every effort to continue with the contract subject to a force majeure event, or only allowing termination upon the occurrence of certain events.
Force majeure clauses will be different in every contract, so it if vitally important to have an experienced contracts lawyer provide advice prior to alleging that the contract is terminated.
Practical Points
As with frustration of contract, the onus is on the party alleging the force majeure event to prove that it meets the requisite standard of proof, as per the force majeure clause.
Also, to rely on a force majeure clause, the party will need to show that the party had taken reasonable steps to avoid the situation (if applicable) and tried to mitigate its impact (if applicable).
A badly drafted force majeure clause may be void if it is uncertain. A contract clause must be certain, and so the clause will need to be correctly drafted.
Frustration of Contract & Force Majeure FAQ
In this FAQ section, we’ll tackle the most commonly-asked questions relating to frustration of contract and force majeure clauses.
Whether you’re trying to wrap your head around how COVID-19 has frustrated your contracts or figuring out what force majeure actually means, these FAQ should give you a starting point to the answer.
What is frustration of contract in common law?
Frustration of contract occurs when, due to unforeseen events beyond the fault of either party, the performance of a contract becomes impossible or radically different from what was intended at the time of contracting.
Can COVID-19 be considered a frustrating event under a contract?
Yes, COVID-19 could potentially be considered a frustrating event if it renders the performance of a contract impossible or radically different.
How does frustration of contract differ from a force majeure clause?
Frustration of contract is a common law doctrine, while a force majeure clause is a contractual provision that excuses non-performance due to specific events. Frustration is automatic, whereas force majeure relies on the contract’s terms.
Can a party claim damages for a frustrated contract?
In most cases, a party cannot claim damages for a frustrated contract, except for any rights or benefits that accrued before the frustration event.
What is meant by “without default by either party”?
Frustration requires that the unforeseen event causing contract impossibility is not due to a breach or deliberate act of one of the parties.
What constitutes an “impossibility of performance”?
Impossibility of performance means that due to the frustrating event, the contract cannot be performed as intended. It may include physical destruction, unavailability of subject matter, method of performance, legal changes, and more.
How is “radically different” performance defined?
Performance becomes “radically different” when it is fundamentally altered from what the parties initially agreed upon, making it significantly distinct from the original intent of the contract.
Can a frustrated contract be terminated?
Yes, a frustrated contract is automatically terminated upon the occurrence of the frustrating event.
Can parties recover damages for a frustrated contract?
Damages are generally not recoverable for a frustrated contract, except for pre-frustration rights or benefits.
Can a contract be frustrated if it has been partially performed?
Frustration may still apply to a partially performed contract if the frustrating event renders the remaining performance radically different or impossible.
What are force majeure clauses?
Force majeure clauses are contractual provisions that excuse non-performance due to specified events, such as acts of God, wars, pandemics, and more.
Is force majeure recognised in common law?
No, force majeure is a contractual concept and not a part of common law.
How is a force majeure clause interpreted?
A force majeure clause is interpreted objectively, based on what a reasonable person would have understood at the time of contracting.
Can parties rely on a force majeure clause to terminate a contract?
Parties can rely on a force majeure clause to excuse non-performance, but the specific terms of the clause and the occurrence of the qualifying event are crucial.
Can force majeure clauses be void if they are poorly drafted?
Yes, poorly drafted force majeure clauses might be considered void if they lack certainty.
How does a party demonstrate that they took reasonable steps to avoid or mitigate a force majeure event?
To rely on a force majeure clause, a party may need to show that they attempted to prevent or mitigate the impact of the event, depending on the terms of the clause.
Can frustration of contract apply to leases?
Yes, frustration can apply to leases, but the threshold for a lease to be terminated due to frustration is generally quite high.
Can a lease be terminated due to COVID-19 under frustration of contract?
The applicability of frustration to leases, including those affected by COVID-19, requires careful legal consideration and analysis.
Can parties still enter into a new agreement after a contract is frustrated?
Yes, parties are free to negotiate and enter into a new agreement after a contract is frustrated.
Are there laws specific to frustration of contract in different jurisdictions?
Some jurisdictions, like New South Wales, Victoria, and South Australia, have legislation dealing with frustrated contracts, but this FAQ primarily focuses on the common law doctrine.
