The Doctrine of Frustration
Global events in the last few years have made it increasingly difficult for companies to fulfil their contractual obligations. As a result many businesses have had to consider whether they can delay their obligations under a contract without inviting a breach of contract claim. In specific circumstances the doctrine of frustration may come to a business’ aid.
In the ordinary course of events if one party fails to perform their key obligations under a contract they will be liable to pay damages as a result of the default.
However, the doctrine of frustration establishes an exception to the general rule. The doctrine of frustration is triggered when an unforeseen event makes performance of the contract impossible or the contract itself has become something radically different from what was contemplated by the parties at the time it was entered into.
A contract is effectively brought to an end if the ground of frustration is successfully replied upon. Unlike some other doctrines there is no specific or narrow test for establishing frustration. The court takes a broad approach when considering frustration and will consider all the facts and circumstances of the case. That being said there are some general key factors which will be common to almost all frustration matters:
- The frustrating event occurred after the contract was formed.
- The frustrating event is not due to the fault of either party to the contract.
- The frustrating event results in performance of the contract being completely beyond what either party had in mind when the contract was formed and the impact of the event strikes at the root of the contract.
- The frustrating event means that further performance of the contract is impossible, in some cases illegal or makes it drastically different from that contemplated by the parties.
In certain cases, a party may have already paid money to another party under the terms of the contract prior to the frustrating event. In such circumstances it may be possible to recover such monies if the contract comes within the Law Reform (Frustrated Contracts) Act 1943 and certain elements of the act are satisfied. Further, under common law a party may also be able to recover sums paid but only if there is a total failure of consideration.
It is important to note that the Law Reform Act can be contracted out of and does not apply to certain contract.
Recent cases involving the doctrine of frustration have shown that the threshold to be met in order to satisfy the doctrine is high. As such it is important for businesses to carefully examine contractual clauses prior to entering into them.
If you think that the doctrine of frustration may apply to a contract you are a party to or need general advice as to a potential contractual dispute, please contact our Dispute Resolution department.