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Frustrated Contracts

The common law ‘doctrine of frustration’ allows a contract to be discharged on the occurrence of certain events beyond the control of the parties which would make the performance of the contract impossible. As the doctrine is a departure from the traditional view that contractual promises are absolute, strict legal tests must be met to be successful in applying the doctrine. It requires an event to occur that is unforeseen and it must significantly alter the relationship between the contracting parties.

Categories of Frustration

Although not exhaustive, the following are five situations where the doctrine of frustration has been successfully applied.
  • Where the subject matter of the contract ceases to exist: In Taylor v Caldwell (1863) 3 B & S 826, a hall which was hired to host a series of concerts burnt down before the concerts could commence. Both parties were relieved of their obligations as the contract was held to be frustrated.
  • Non-occurrence of events - the purpose of the contract has become impossible to attain: In Krell v Henry [1903] 2 KB 740 a flat was rented for the purposes of viewing the King’s coronation procession.  The procession was cancelled due to the King’s illness and the contract was discharged as the sole purpose for which it was rented ceased to exist.
  • Death or incapacity of a party where the contract involves obligations of a personal nature: In Robinson v Davison (1871) LR 6 Ex 269, a contract by a pianist to perform on a specific day was held to be frustrated when the pianist became too ill to perform.
  • Delay and obstruction of performance: Where caused by external events, delay and/or obstruction may be held to be frustration if the delay is so long, or the obstruction so extreme that it would make the result of the contract fundamentally different from what had been contemplated.
  • Performance is rendered illegal by legislation: If a change in legislation that comes into effect after the creation of the contract renders its performance illegal, the contract is held to be discharged.

Frustrated Contracts Act 1944 (‘FCA’)

In New Zealand the doctrine of frustration is supported by the FCA.  It addresses the effect of the discharge of obligations on the areas of the contract already fulfilled. The FCA confers three major benefits on parties that are supplementary to the doctrine, it:
 
  • gives a party the right to recover money paid in consideration of the contract despite payment being made before the date of frustration, and
  • allows a party to claim compensation for work done and/or expenses incurred under a contract up until the date of frustration, and
  • permits the benefits received up to the date of frustration to be taken into account when determining the recovery of monies paid or expenses incurred.
  • In a contract, parties can contract out of the FCA by specifically addressing the event of frustration. In such instances, the contractual term will apply instead of the FCA.
The doctrine of frustration and FCA are examples of options that may be available to a party following the breakdown of a contract. Legal advice may assist in identifying possible resolutions of a dispute or breakdown through remedies available outside the contract.