The frustration of contracts is one of the barriers that can hinder the forward-looking ambitions of various businesses.
Such barriers can compromise contractual obligations, significantly impacting business operations and profitability, forcing even the most experienced entrepreneurs to look for solutions.
As the saying goes: forewarned is forearmed — so let’s dive deep into the complexities and consequences of commercial contract frustration to find out key tactics and review some legal advice on how to best navigate them.
- Contract frustration means an occurrence of any unforeseen event which leads to the impossibility of fulfilling contractual obligations.
- Apart from frustration, a breach of a contract is an inability or failure to fulfill the contractual obligations of just one party, triggered by events that aren’t unforeseen.
- Under English law, there are three types of frustration-triggering events: making performance completely impossible, unlawful, or changing it significantly.
- Among the certain reasons for the frustration of a contract are natural and technological disasters, new government regulations coming into force, serious economic fluctuations, failures of supply chains, force majeure events, as well as counterparty non-performance, impracticability or impossibility, and regulatory restrictions.
- The frustration of a contract may lead to its discharge, restitution of any already received benefits, and allocation of losses. Under English law, contract frustration causes monies paid to be recovered, discharge of liabilities, and also an allocation of losses in a manner that can be considered just.
What is the frustration of a contract?
The frustration of a contract refers to a legal concept when unforeseen events or circumstances occur that make it impossible or difficult for the parties to fulfill them.
These unforeseen circumstances fundamentally alter the terms of the agreement, making it unenforceable, commercially unviable, or impossible.
A typical supervening event of contract frustration is its automatic termination.
It may affect how the parties assume responsibility for sharing losses, liabilities, and potential remedies available to both parties.
Common law doctrine definition of frustrated contracts
Under English law, a doctrine of frustration of contract applies when an unforeseen event occurs after the formation that makes the performance of a contract:
- impossible (it becomes impossible to perform due to the occurrence of an unforeseen event), or
- unlawful (if its performance becomes illegal due to changes in the law or government regulations), or
- significantly different (so fundamentally changed that it would be unjust to hold the parties to their original obligations) from what the contracting parties initially envisioned.
This concept relies on the idea that holding parties accountable for the performance of the contract when circumstances have drastically changed in ways that are not their fault is unfair.
In such cases, the agreement automatically terminates, releasing the parties from any future obligations.
You can find out more details on how special the English law approach is by reviewing this regulating law text in full.
The frustration of purpose
There are some situations when terms of the contract can still be performed but the purpose for at least one party entering the contract becomes unattainable.
In other words, the frustration of purpose (commercial frustration) occurs when the fundamental reason or purpose for entering into a contract is destroyed or significantly altered due to unforeseen events or circumstances.
Frustrated contracts vs. breached contracts
The legal environment is bound to precise accuracy.
To avoid confusion among different legal concepts, there are specific terms you cannot use interchangeably.
The topic we’re covering today references this very principle — the terms “frustration of contract” and “breach of contract” are separate legal constructs.
Using the chart below, we can easily see how the frustration of contract and breach of contract are distinct legal concepts with key differences:
|Legal concept →
|Frustration of contract||Breach of contract|
|Triggering event||This happens due to unforeseen events or circumstances that profoundly change the basis of the contract||This happens when one party fails to fulfill its obligations as outlined in the contract|
|Performance of the contract||Makes performance impossible, illegal, or significantly different from what the parties originally intended||Arises due to non-performance, late performance, or improper performance|
|Time of termination||Automatic termination of the contract without any fault or violation of one of the parties||Does not automatically terminate the contract unless the innocent party decides to terminate the contract on the basis of a breach|
|Accountable parties||Beyond the control and responsibility of the parties||May be intentional or unintentional, but is due to non-compliance with contractual requirements|
|Future obligations||The parties are released from their future obligations and may demand restitution or compensation for the losses incurred||The innocent party may claim damages, specific performance, or termination of the contract|
As you can see, the core difference here lies in the nature of triggering events and their impact on contractual performance.
Contract frustration arises due to unforeseen circumstances that make performance impossible or significantly different, resulting in automatic termination.
On the contrary, a breach of contract occurs when one of the parties fails to fulfill its obligations under a signed agreement.
However, this doesn’t automatically result in the contract termination.
Reasons and examples for the frustration of contract
In contract law, numerous events can occur that violate the ability to fulfill contractual obligations and can be considered the reasons for contract frustration.
Let’s review the examples demonstrating contract frustration within different situations.
1. Natural disasters
Aside from possible hurricanes and other extreme weather conditions, recent notorious global events have shown us the scale of damage it can cause to people and businesses.
Earthquakes in Turkey and volcanic eruptions in Japan severely disrupted the ability of business partners to fulfill contractual obligations.
Example: a manufacturing facility is destroyed by an earthquake, making it impossible to deliver products as contracted.
Exception: a party affected by an unforeseen event cannot be bound to fulfill its contractual obligations if there is a force majeure clause in the contract explicitly relating to such events.
2. Government regulations
Government statutes, policies, or changes to the law may result in stricter compliance requirements or restrictions on specific activities, making it difficult or impossible to execute contracts.
Example: recent environmental restrictions prohibit the use of certain materials, making it difficult for the project to proceed according to a construction company’s plan.
Exception: if a contract includes a clause addressing the change in laws and regulations, the affected party may be released from performance obligations.
3. Economic instability
Economic downturns, currency fluctuations, and financial crises may hinder businesses’ ability to fulfill their contractual obligations due to declining revenue, limited assets, or higher costs.
Example: a severe economic downturn leads to a significant drop in demand, which causes the business to experience financial difficulties and be unable to meet its supply obligations.
Exception: economic hardships or market fluctuations are no reliable defense against the frustration of a contract unless the contract explicitly specifies provisions for such situations.
4. Supply chain disruptions
The timely delivery of the goods or services stipulated in contracts may be hampered by supply chain disruptions, such as material shortages, delays in the delivery process, or a supplier bankruptcy.
Example: a supplier is facing a significant manufacturing problem that results in shortages of critical components needed to manufacture the product, preventing delivery as agreed.
Exception: contract provisions relating to disruptions in the supply chain, alternative sources, or substitution of materials may provide some flexibility or exceptions in such circumstances.
5. Technological failures
Fast technological advances or cybersecurity risks can render existing contracts outdated or make it challenging to fulfill contractual commitments.
Example: unforeseen technology problems prevent a software company from delivering a software solution by a predetermined deadline.
Exception: the contract may contain clauses that allow for acceptable time delays or other performance methods in case of technological failures.
6. Force majeure event
Events beyond the parties’ control, such as wars (e.g., the war in Ukraine), terrorist attacks, pandemics (e.g., COVID-19), or labor strikes, may render the performance of the contract impossible or commercially unfeasible. Such events are called ‘force majeure’.
Example: an event company cannot host their scheduled conference due to the widespread lockdown and travel restrictions caused by a pandemic such as COVID-19.
Exception: epidemics, pandemics, and government actions are often subject to force majeure clauses that offer relief from performance obligations when they occur.
7. Non-performance of counterparty
Getting the anticipated outcomes can be challenging and frustrating when one party fails to fulfill its obligations or violates the contract.
Example: late delivery of required components by a subcontractor results in delays in the execution of the construction project and affects the timing of the entire project.
Exception: if the contract includes provisions for non-performance or breach by the counterparty, the affected party may seek remedies such as compensation or termination.
8. Impracticability or impossibility
Situations render the performance of contractual obligations impractical or impossible for reasons beyond either party’s control.
Example: unexpected strikes make it impossible for the shipping company to deliver goods as agreed due to a shortage of workers.
Exception: the doctrine of impracticability or impossibility may justify performance if the event falls within the legal framework and the criteria for such exceptions.
9. Legal or regulatory restrictions
Specific contract clauses may become unenforceable or impracticable due to changes in laws, rules, or court decisions, which can be (legally) frustrating and require contract renegotiation or termination.
Example: a change in the import/export rules prohibits the shipment of certain products; as a result, the company under contract cannot fulfill international sales obligations.
Exception: the affected party may have grounds for non-performance or renegotiating terms based on these terms if the contract explicitly considers legislative or regulatory changes.
What happens after frustration has been declared?
The legal consequences following a contract’s frustration can differ based on the jurisdiction and the specifics of the contract.
As a rule of thumb, the contract expires immediately, releasing both parties from any remaining liability but not from any previous obligations or responsibilities that existed prior to the frustration event.
Here are the possible legal consequences of frustration, based on jurisdiction and some other obstacles:
- Frustration leads to the discharge of the contract, which means that both parties are released from their contractual obligations.
- To prevent unjust enrichment, the law may require restitution of any benefits the contract brought to the parties before it was frustrated.
- The law generally allocates frustration-caused losses based on the benefits the parties have already received or the expenses they have incurred.
- In English law, the consequences of frustration are specifically governed by the Law Reform (Frustrated Contracts) Act 1943. The Act provides rules for the recovery of money paid or payable, the recovery of valuable benefits conferred, and the discharge of liabilities. The Act also allows the court to allocate losses between the parties in a manner it considers just.
Unforeseen challenges can unleash a labyrinth of complexities in contract frustration.
As we have examined a number of cases and the resulting legal consequences, it becomes clear that navigating this area requires an in-depth knowledge of local laws, contractual clauses, and the particular circumstances at hand.
By anticipating these risks and taking measures like force majeure clauses into account, parties can easily strive for more resilient and adaptable agreements.
Using PandaDoc for careful planning means end-to-end control over your documents.
Advanced notifications keep you and your team aware of any changes you should take into consideration. Collaborative editing mode helps accelerate negotiations significantly.
Finally, a built-in free e-signature feature helps get your contracts and other documents signed much faster, and with less effort required.
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