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What is Frustration of Contract?

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Unfortunately, contracts may not always go according to plan. Unexpected events can sometimes make performance impossible or fundamentally different from what was originally agreed on. In such cases, the legal concept of frustration comes into play, which can help your business navigate unforeseen circumstances that disrupt your contractual obligations. This article will explain what the frustration of a contract means and what it entails under New Zealand Law.

Frustration of Contract

The law recognises frustration when, without the fault of either party, a contractual obligation becomes incapable of being performed. This arises because the required performance could be substantially different from what the parties initially agreed upon in the contract due to a supervening event beyond the control of either party. 

In the event of an unforeseeable incident, it might become impossible to complete an original obligation. Likewise, although an alternative option may be possible, that option would be significantly different from what was initially agreed upon by both parties. As such, you can use frustration as a defence against a breach of contract claim

Frustration stands as an exception to the general rule that parties must fulfil their contractual obligations. This clause allows a party to terminate a contract due to unforeseen circumstances. Therefore, understanding the scope and implications of frustration is crucial for your business, given its potential to impact your contractual relationships significantly.

Grounds for Frustration

New Zealand law recognises various grounds that may lead to the frustration of a contract. These grounds typically revolve around events that were unforeseeable and beyond the control of the parties. The key measure is that the event must make the performance of the contract impossible, illegal, or radically different from what the parties intended.

Examples of situations where a contract may be considered frustrated include:

  • natural disasters;
  • government interventions; or
  • death or incapacity of a key individual.

Notably, courts tend to uphold a high threshold before they consider a contract frustrated. For instance, it might be storming on the day you were due to deliver goods. Unless there are significant road closures, the other party may still expect your delivery. If you were planning to make a delivery with a motorbike and it started raining, you cannot typically claim the contract is frustrated. This is especially the case if the other party would expect you to find another mode of transport, like a car.

Your obligations under a contract becoming more expensive or difficult to perform will not amount to frustration. Ultimately, frustration depends on how you negotiate and draft your commercial contract. 

Whether a contract has been frustrated will depend on factors such as the:

  • terms of the contract; 
  • wider context of the contract;
  • parties’ knowledge, expectations and assumptions, particularly regarding risk at the time of contract formation; 
  • nature of the supervening event; and
  • parties’ reasonable calculations over whether the contract can proceed in new circumstances.
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When a contract is frustrated, parties are discharged from their future obligations. However, the consequences of past obligations can vary. The Frustrated Contracts Act 1944 governs these situations, providing a framework for apportionment payments made before the frustrating event. Generally, the Act allows for the recovery of expenses incurred before frustration but prevents unjust enrichment, otherwise known as an unfair advantage. 

Generally, a contract is void when it becomes impossible to perform. However, if your business has obligations to complete before the frustrating event arose, you may still need to complete them. 

Courts also have the discretion to allow a party to recover expenses incurred in performing the contract before the frustrating event. For instance, you might have a contract to bake and deliver a wedding cake. Before the wedding day, you would likely spend money on supplies and time baking the cake. If an earthquake hits on the wedding day and you can no longer deliver the cake or the wedding is completely cancelled, you may be able to recover some costs. Again, this will be the court’s discretion.

Reducing Risks Through Contractual Provisions

Predicting every potential event that could lead to frustration may be impossible. However, your business should still proactively reduce risks through well-drafted contractual provisions. Force majeure clauses, for example, allow parties to allocate risks associated with unforeseen events. Carefully defining the triggering events and their consequences can provide clarity and avoid disputes in the event of unforeseen circumstances.

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Key Takeaways

Frustration of contract is a legal concept that allows a contract to terminate when unforeseen circumstances beyond the parties’ control arise. When a contract is frustrated, parties are discharged from their future obligations under the agreement. To navigate unexpected disruptions, you can mitigate risks by incorporating well-crafted contractual terms, such as force majeure clauses. Additionally, seeking legal advice in cases of frustration and proactively preventing such instances is essential for effective contract management.

If you need assistance understanding and applying frustration of contract principles, LegalVision’s experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

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Helen Yu

Helen Yu

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