What is Frustration of Contract?

In litigation involving contract claims, one of the defences a party can raise is frustration of contract. This comes into play when unforeseen events, outside the control of the contracting parties, fundamentally change the nature of the contractual obligations. If the contract has been frustrated, the parties may be released from their obligations without being held liable for non-performance. Understanding how frustration works, and the legal thresholds it requires to prove it is critical, particularly for businesses seeking to manage risk or protect themselves in disputes. 

Frustration occurs when a “supervening event” radically transforms the obligations originally agreed by the parties to the contract, rendering further performance impossible. Crucially, the event must occur after the contract was formed and must not be the fault of either party. The result is that the contract is automatically terminated at the point of frustration, and both parties are discharged from their future obligations.

Common examples of frustrating events include:

• Destruction of subject matter: a leading case being Taylor v Caldwell (1863), which involved a contract for the hire of a music hall. The hall was destroyed by fire, making performance impossible. The court held that both parties were discharged from their obligations.
• Legal changes: A change in the law or government regulations that makes performance illegal.
• Outbreak of war or civil disturbance: A war or major political upheaval that prevents the contract from being carried out.
• The subject matter being unavailable: in a more recent case, Atwal v Rochester (2010), a building contract with a sole trader was held to be frustrated following the sole trader having a heart attack.

It is important to note that frustration of contract does not cover events that simply make performance more difficult or costly. The event must go to the purpose of the contract.

Application in Commercial Litigation

In commercial litigation, frustration arises when there are unexpected business disruptions, such as the COVID-19 pandemic, natural disasters, or supply chain issues.

Conclusion

Frustration is an important aspect of commercial contract law, but it is one that the courts apply carefully. For businesses, the key takeaway is that contracts should be carefully drafted to allocate risk for foreseeable and unforeseeable events. When frustration is raised in litigation, the outcome will largely depend on whether the supervening event has truly rendered the performance of the contract radically different from what was originally agreed.

In commercial disputes, obtaining expert legal advice at an early stage is critical, as the complexity of frustration claims requires a deep understanding of both contract law and the specific circumstances of the case. At Pinney Talfourd LLP, our experienced commercial litigation team are experienced in dealing with such matters, ensuring that businesses are protected and their legal interests are secured.