Contract Law

Ceasing the Contract

Frustration

At times it becomes impossible to complete the performance of a contract to its desired outcome. This can be the result of a change in government policy, a court injunction, a natural disaster, a war, or a range of other things. When performance is impossible due extraneous factors that the parties have no control over and could not anticipate, we call this frustration. When recognised by a court, frustration allows a contract to be terminated with no award of damages claimable by either party.

 

A court declares a contract frustrated when continuing the performance of obligations requires very different actions from those agreed to. The bar is set high because courts try to keep contracts afoot.

 

A party’s own failure to perform is different. A party to a contract cannot stop performing for some lesser reason such as unprofitability or inconvenience and claim that that has frustrated the contract.

 

The remedy given by a court is to terminate the contract from the moment when frustration began. Money, goods and services already exchanged are mostly non-returnable. However this is not a lottery. While damages for non-performance are unavailable, parties may still sue for unjust enrichment if they fail to perform in spite of already having been paid.

 

An important case on the doctrine of Frustration is Codelfa Construction v State Rail Authority of New South Wales. Codelfa contracted with the NSW State Rail Authority to build a railway tunnel going to King’s Cross. There were complaints of night time noise from nearby residents. A court trial ensued and an injunction was given so that they could only work two shifts, instead of the three shifts contracted for, allowing residents peace at night time. This injunction made it impossible to build the rail tunnel within the specified time (and was in conflict with legislation that had been passed to protect the work).

 

Codelfa, unable to complete the contract on time, faced heavy liability and sued the SRA. In this matter the court found the contract was frustrated.

 

The court said that, ‘Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract…. It was not this that I promised to do.’

 

On first inspection it may look like the court was just helping Codelfa avoid an unfair situation where penalties (liquidated damages – see earlier pages) would fall payable. But for frustration to be recognised there must be a fundamental change in what is necessary to fulfill the promises made.

 

 

 

[1] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337.