When is a contract frustrated?

At common law, a contract will be frustrated when unforeseen events occurring after its formation, through no fault of either party, result in the situation for performance becoming fundamentally different from the situation contemplated by the contract and the obligations under the contract becoming incapable of performance.

The classic test, which has been followed by Australian Courts1, comes from the English case of Davis Contractors Limited v Fareham Urban District Council [1956] AC 969. In this case, Lord Radcliffe said: “frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstance in which performance is called for would render it a thing radically different from that which was undertaken by the contract.2

Frustration is difficult to establish. Classic examples are often extreme, such as the destruction of the site or structure on which works were to be performed3 or the death of the party contracted to deliver services4.

Frustration will not be found merely as a result of hardship, inconvenience or material loss. It will also not be found if the parties have made provision in the contract for the relevant event.

Could COVID-19 frustrate a contract?

COVID-19 has potential to cause delay and disruption to construction projects for a range of reasons, including labour shortages, supply chain interruptions, changing legislative requirements, and potentially closure of sites. Parties whose performance has been affected by these circumstances may be considering whether their construction contracts have been frustrated.

Whether a construction contract is frustrated as a consequence of COVID-19 will depend upon the drafting of the contract and whether the situation for performance has become fundamentally different from that contemplated by the contract.

In many cases, it may be that frustration is unavailable since the terms of the construction contract deal with the impacts of COVID-19. For example, common terms of construction contracts such as force majeure regimes, extension of time regimes, change in law provisions or termination rights may address the altered situation.  It should also be emphasised that hardship, inconvenience or material loss will not automatically frustrate a contract. For example, even if a contractor is forced to find another (and materially more expensive) source of supply it will not necessarily mean the contract is frustrated.

In order for delay of performance to result in frustration, it must be shown that the delay is more than temporary or transient, particularly in the context of the contract’s length.5 For example, an order closing down a construction site for a month is unlikely to trigger frustration of a large-scale two-year contract. However, notwithstanding the existence of an extension of time regime, frustration might still be available in circumstances where time is of the essence and/or the delay to performance is of a character and duration which would make the contract, when resumed, a different contract from the original agreement between the parties.

Frustration might also be available if a contract requires personal performance (or at least supervision) by a particular person (for example, where this person is the only licensed supervisor and is not entitled to subcontract) and that person falls ill or dies6. Similarly, frustration might be found if a party is engaged to construct structures for a specific one-off event and that event is cancelled due to COVID-19.7

Consequences of Frustration?

If a contract is frustrated, it will automatically terminate at the time of the frustrating event and the parties will be discharged of all future obligations (but remain liable for obligations that were due to be performed prior to frustration).

At common law, losses lie where they fall, meaning they will be borne by whichever party suffers them. This could result in onerous financial consequences. For example, a party who made a prepayment but did not receive the relevant goods or services may be reliant on the law of restitution to recover that amount.

However, the consequences of frustration are regulated by statute in New South Wales, Victoria and South Australia. In New South Wales, the Frustrated Contracts Act 1978 (NSW) regulates the consequences of frustration unless it is expressly excluded by the terms of the relevant contract. This Act addresses some of the harsher aspects of the common law position, including by providing:

  • where a party has performed part of its obligations under a contract prior to frustration, the performing party is to be paid:
    • An amount equal to that which is proportionate for that part of the party’s obligations that have been performed; or
    • Where the reasonable cost of performance exceeds the amount that would be paid as per the above – an amount equal to the amount noted above plus one half of the amount that the reasonable cost exceeds the amount noted above;8
  • where a contract is frustrated and one party has paid for the performance of an obligation that has not occurred prior to frustration – the amount paid is to be returned by the recipient; and9
  • where a party is entitled to money (other than as damages for a breach) such amount may be recovered as a debt due and payable in Court.10

Conclusion

If performance of your construction contract is affected by COVID-19, the first step is to review the available contractual regimes and remedies. In many cases, the consequences of COVID-19 may be dealt with by clauses addressing force majeure, extensions of time, changes in law or termination.

If your construction contract does not deal with the relevant event and that event results in a fundamentally different situation from that contemplated by the contract such that the contract becomes incapable of performance, the common law doctrine of frustration may apply. However, frustration is difficult to establish and turns on a case by case analysis of the contract and its factual matrix.

If you require any assistance interpreting your contract and assessing your rights and remedies arising from COVID-19, please do not hesitate to contact Morrissey Law + Advisory.

 


[1] Including Codelfa Construction Pty Limited v SRA of New South Wales (1982) 149 CLR 337.
[2] Lord Radcliffe (1956) AC, at p 729
[3] Taylor v Caldwell (1863) 122 ER 309
[4] Graves v Cohen (1929) 46 TLR 121
[5] Li Chin Wing v Xuan Yi Xiong [2004] 1 HKLRD 754
[6] Chapman v Taylor & Ors; Vero Insurance Ltd v Taylor & Ors [2004] NSWCA 456
[7] Krell v Henry [1903] 2 KB 740
[8] Frustrated Contracts Act 1978 (NSW) s 11
[9] Frustrated Contracts Act 1978 (NSW) s 12
[10] Frustrated Contracts Act 1978 (NSW) s 14

Morrissey Law + Advisory communications are only intended to provide commentary and general information as at the date of publication. They are for reference purposes only, do not constitute legal advice and should not be relied upon as such. Formal legal advice should always be obtained about particular transactions, contracts or matters of interest before taking any action based on this communication. Authors and contributors may not be admitted in all State and Territories.