What is a frustration of contract and what makes a contract frustrated?
The doctrine of frustration applies in a narrowly defined range of circumstances, mostly where the new circumstance renders the performance of the contract either impossible or impracticable due to the situation being fundamentally different to what was originally anticipated by the parties. It must be deemed that the unforeseen events could not have been reasonably contemplated by the parties at the time of entering into the contract. The contract is terminated from the time of the frustrated event therefore deemed void. All future obligations are terminated from that point.
Frustration will not be accepted where:
- The event was provided for in the contract (Codelfa Construction v State Rail Authority of New South Wales)
- The event would have been reasonably foreseeable (Davis Contractors Ltd v Fareham Urban District Council)
- The event occurred by fault of the party seeking frustration Bank Line Ltd v Arthur Capel and Co)
- Where the event is deemed temporary in nature – it must be considered unjust to continue with provisions of the current contract
- The financial circumstances and inconvenience of one of the parties had changed
- Changes in the law make it impossible to perform contractual obligations
- In the event that compliance was reliant on the condition of another separate event which did not occur
Who has the onus of proof?
The onus of proof lies on the party seeking to have the contract deemed frustrated
Frustrated Contracts Act 1978 (NSW)
This act provides the authority for any contracts deemed to be frustrated:
- Any outstanding obligations that are due are to be discharged
- Money paid must be repaid and benefits must be paid for (before frustration)
- Schedule of adjustment and sharing costs (payment for all reasonable costs incurred in performing the contract)
Force Majeure and what is it?
Force Majeure is the suspension of performance of a contractual obligation in the circumstance of a supervening event which are not the fault of either party. Force majeure differs from a contract being deemed as frustrated as it still maintains the existence of the contract. A force majeure clause if often drafted into contracts as a term to determine how the contract is to proceed, how risks are to be handled because of part or non-performance occurring as a result of certain specified events.
This clause functions to exclude the liability of a party’s failure to comply with its contractual obligations where the failure is a direct consequence of an event which is beyond its control. The principle of freedom of contract means that parties are in full control to define and set parameters as they wish. For example, they can define specific events such as bushfires, floods and electrical supply cuts and they can specify whether the contractual obligation is to be suspended until after the event or changed happening or to relieve the parties entirely from the contract.
The 3 essential elements to enforce a force majeure event are:
- Cannot have been reasonably foreseeable by the parties
- Occur by either natural or human forces (such as acts of god)
- Beyond the control of the parties and the parties could not have prevented the consequences
The circumstances of the COVID-19 pandemic may relieve some contractual obligations in the instance that the contract may be deemed frustrated or deemed to have sparked a force majeure event. It is dependant on the exact terms of the contract whether the impacts of the pandemic deem contractual obligations to be frustrated or the occurrence of a force majeure event.