What is a frustrated contract?
A contract that is incapable of being performed due to unforeseen event(s) is referred to as a “frustrated” contract. Frustration arises when, without the fault of either party, unforeseen event/s make the obligations under the contract impossible or radically different from those contemplated by the parties when the contract was entered into. A frustrated contract is terminated from the date of the frustrating event.
Whilst it may sound simple, alleging that a contract is frustrated is a high threshold to meet and, if not successful, can place the party alleging frustration in breach of the contract for repudiation. Contracts are also usually drafted broadly so they can be applied to unpredictable situations, rendering a frustration of contract argument a last resort.
When does a contract become frustrated?
A contract becomes frustrated when it is commercially impossible and/or legally impracticable for the parties (one or both) to perform their obligations under the contract. The fundamental premise of a frustrated contract argument is that a party must show that the circumstances are now so fundamentally different that the parties did not agree to be bound in those circumstances. It is not enough to suggest that a party has simply suffered loss or hardship as a result of the different circumstances or that it is much more burdensome for that party to perform its obligations under the contract.
The burden of proving impossibility of performance is usually placed upon the party which has been unable to complete their obligations.
How do I know if the circumstances are enough to frustrate the contract?
Unfortunately, there is no hard and fast rule as to what event will be deemed a frustrating event by the courts. Accordingly, consideration must be had to the specific circumstances that impact upon a contract.
A contract cannot be frustrated unless it is impossible to perform its obligations. It therefore cannot be frustrated for the following reasons:
- Either party suffers financial hardship, leading to an inability to meet financial obligations
- There has been, or is expected to be, a delay in performing responsibilities under the contract
- The event which caused the obligations to be impracticable could reasonably have been foreseen
- Either party is at fault for breaching the contract or failing to meet its requirements
- If the issue is short-term/temporary
- If there is a force majeure clause in the contract which can rectify the issue (discussed below).
What are the consequences of a contract being frustrated?
When a contract becomes frustrated, it is automatically terminated at the point of frustration, making void all future obligations. The contract is not void ab initio (“from the beginning”); only future obligations are discharged. This means any previously incurred obligations, prior to the frustrating event, still remain.
Different states have different legislation regarding expenses and costs which can be recovered. Victoria derives its authority from the Australian Consumer Law and Fair Trading Act 2012. Subsection 36 of this Act outlines that amounts paid to a party before the time of discharge of the contract are recoverable, however amounts payable at the time of frustration cease to be payable (unless the entire performance has occurred).
What if my contract already provides for unforeseen circumstances?
COVID-19 and frustration of contracts
How can Brennan Law Partners assist?
Brennan Law Partners can assist you to be proactive in protecting in managing your contracts. We encourage you to contact us to review any prospective contracts to ensure they are effective and protect you and your school.
If you are experiencing difficulties with a contract entered into before the COVID-19 Emergency we welcome you to contact us so we may support you in making fully informed decisions about the future of the contract.
This is meant as a guide only and should not be taken as legal advice.