Define: Frustration Of Contract

Frustration of contract is a legal doctrine that applies when unforeseen circumstances arise after a contract is formed, making it impossible or impracticable for the parties to fulfill their contractual obligations. When frustration occurs, the contract may be terminated, and the parties are discharged from further performance. Frustration typically arises due to events beyond the control of the parties, such as war, natural disasters, or changes in law, which fundamentally alter the nature of the contract or make performance impossible. Courts may intervene to determine whether frustration has occurred and its consequences, such as whether any payments made under the contract should be refunded. Frustration of contract is an important legal principle that allows parties to address unexpected challenges that render contractual obligations unachievable.

A contract is said to be `frustrated’ if it becomes impossible to perform or if circumstances change to the extent that performance would be substantially different from what was anticipated by the parties. Consider the following (imaginary but typical) case:. X offers $50,000 to Y to build an extension on his (X’s) house. X pays a deposit of $2,000 with an agreement to pay the balance on completion. After Y has started work, it becomes apparent that the ground around X’s house is not stable enough to support an extension, and any attempt to do so would result in the foundations disappearing rapidly into the ground. Y cannot, therefore, perform his part of the contract. X has paid his deposit but has not received anything in return. Y has incurred considerable expense in designing the extension and getting supplies. So X would like to recover his deposit from Y, Y would like to recover his expenses from X, and both parties would like to be released from any further obligations under the contract.

The balance of losses in cases of frustration has been significantly modified from the common law position by the Law Reform (Frustrated Contracts) Act (1943). However, the circumstances in which the courts are prepared to find frustration have not changed, so the common law is still relevant. In particular, in deciding whether frustration has occurred, the courts have to balance two competing requirements. On the one hand, there is a desire for certainty of contract. Good business relations depend on the assumption that once a contract has been entered into, it will be performed by both parties, and if it is not, the wounded party is entitled to compensation. The courts should not lightly intervene to set aside a good contract, even if future events reveal it to be onerous for one party. It would be difficult to do business at all if money received as part of a contractual arrangement could not be spent until the contract was fully performed, in case a court acted to undo the contract. On the other hand, there is a requirement to try to do justice in the individual case. If it becomes impossible to perform a contract owing to events beyond the control of the parties, it is not particularly just that one party should end up having to compensate the other when he is not at fault. This tension is not easy to resolve, but in general, the courts will not set aside a contract that was good when it was made unless supervening events have made it essentially impossible to perform or performance would render to one or another party none of the benefits that were anticipated.

Although a contract is deemed to be discharged if it is frustrated, there remains the problem of how any losses should be apportioned between the parties. The rule at common law was first definitively set out by the King’s Bench in Chandler v. Webster (1904), although a number of earlier cases had reached the same conclusion. This rule said that losses should `lie where they fall. That is, any losses incurred before the supervening frustrating event could not be recovered. This was a simple rule but a harsh one, and it was often criticised. In our example of the extension builder, X would be unable to reclaim his deposit and, indeed, would still be under an obligation to pay the balance, this obligation having accrued before frustration.

The finding of the House of Lords in The Fibrosa (1943) partially overruled Chandler v. Webster. In this case, it was held that, where there was a total failure of consideration, losses that accrued up to the frustration would be recoverable. Under the Fibrosa principle, X might be able to recover his deposit from Y, as he has received none of the benefits that both parties expected to be delivered by the contract.

The Fibrosa principle was given statutory backing in the Law Reform (Frustrated Contracts) Act (1943). This says that monies paid under a frustrated contract can be recovered, but the party that has received payment is entitled to a quantum meruit award to compensate him for any expenditures he may have incurred in trying to perform the contract. In the house extension case, the builders Y can be forced to return the deposit they received from X, but they may be entitled to be paid in respect of work they have already carried out.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 9th April, 2024.