Frustration of Contract

Definition

Frustration of Contract occurs when a contractual obligation cannot be performed due to an unforeseen event, making the performance impossible, illegal, or radically different from what was originally contemplated by the parties. This unforeseeable event must not be the fault of any party to the contract.

Examples

Aircraft Crash: A contract for the sale of an aircraft would be frustrated if the aircraft crashes and is destroyed before the sale can be completed. The seller is no longer in a position to deliver the aircraft, and the buyer cannot take delivery and pay for it as per the contract terms.
War Declaration: If a country declares war on another, an existing export contract between businesses in these countries can be frustrated. The actions of war may make fulfilling the contract illegal due to new sanctions or impossible because of logistical disruptions.
Natural Disasters: A lease agreement for a building can be frustrated if the building is destroyed by an earthquake, rendering the premises unusable.

Frequently Asked Questions (FAQs)

Q1: What is the legal doctrine of frustration of contract?
A1: The legal doctrine of frustration of contract discharges parties from their contractual obligations when an unforeseen event fundamentally changes the nature of the contract, making it impossible or illegal to perform.

Q2: Can financial hardship be considered frustration of contract?
A2: Typically, financial hardship or changes in market conditions do not constitute frustration of contract as these are foreseeable risks. The event must significantly change the nature of the obligations originally agreed upon.

Q3: How is frustration of contract determined by courts?
A3: Courts assess whether the frustrating event renders the performance of the contract radically different or impossible/illegal. They will also consider whether the event was foreseeable and if the contract allocated risk for such events.

Q4: Can parties include terms to address frustration of contract in their agreement?
A4: Yes, parties can include force majeure or hardship clauses in their contracts, outlining specific events and consequences that cover unforeseen circumstances similar to frustration of contract.

Q5: What are the consequences of a contract being frustrated?
A5: When a contract is determined to be frustrated, the parties are excused from further performance, and any obligations already performed may be subject to restitution to place the parties in a position as if the contract had never been made.

Force Majeure: A contractual clause that frees parties from obligations due to events beyond their control.
Impossibility: Situations where fulfilling the contract cannot be done; a principle closely related to frustration.
Illegality: Contracts that become illegal to perform due to changes in law.
Hardship Clause: A provision that allows contract renegotiation if performance becomes excessively burdensome but not impossible.

Online References to Resources

Suggested Books for Further Studies

“Contract Law: Text, Cases, and Materials” by Ewan McKendrick
“Frustrated Contracts and Legal Reasoning” by Solene Rowan
“The Law of Contract” by Hugh Beale
“Anson’s Law of Contract” by Jack Beatson, Andrew Burrows, and John Cartwright

Accounting Basics: “Frustration of Contract” Fundamentals Quiz

### What does the term "frustration of contract" refer to? - [ ] Breach of contract by one party. - [ ] Mutual decision to end a contract. - [x] Termination of a contract due to an unforeseen event making performance impossible or illegal. - [ ] Renegotiation of contract terms. > **Explanation:** Frustration of contract refers to the termination of a contract due to unforeseen events that render its performance impossible or illegal. ### Is financial hardship alone usually enough to frustrate a contract? - [ ] Yes, financial hardship is always a ground for frustration. - [x] No, financial hardship does not typically constitute frustration. - [ ] It depends on the contract terms. - [ ] Financial hardship is considered only during natural disasters. > **Explanation:** Financial hardship or changes in market conditions do not typically constitute frustration; the event must be unforeseeable and fundamentally change the nature of the contract. ### What immediate consequence arises if a contract is frustrated? - [ ] Only penalties are imposed on the default party. - [ ] Both parties must fulfill the original obligations. - [x] Both parties are excused from their contractual obligations. - [ ] The contract is amended to adjust for new conditions. > **Explanation:** When a contract is frustrated, both parties are excused from further performances as the contract is considered terminated. ### If a war declaration makes trade with a party illegal, what occurs to an existing trade contract? - [ ] The contract remains enforceable. - [x] The contract is frustrated. - [ ] The contract is voidable at the parties' option. - [ ] The contract is automatically renegotiated. > **Explanation:** An existing trade contract can be frustrated if war makes the performance of obligations illegal or impossible. ### What must an event be for a contract to be frustrated? - [x] Unforeseen and radically alter the contract obligations. - [ ] Any minor inconvenience. - [ ] Stipulated within the contract. - [ ] Related to natural disasters only. > **Explanation:** An event causing frustration must be unforeseen and radically alter the nature of contract obligations. ### Can the parties specify events under which a contract can be considered frustrated? - [ ] No, frustration is purely determined by the courts. - [ ] Only natural disasters can be specified. - [x] Yes, through force majeure or hardship clauses. - [ ] Only when both parties are businesses. > **Explanation:** Parties can include force majeure or hardship clauses in their contracts, which specify events and consequences that may address unforeseen circumstances. ### How do courts typically decide on frustration of contract cases? - [ ] Based strictly on the hardship experienced by the parties. - [x] By evaluating whether an unforeseen event makes performance impossible or illegal. - [ ] Only through parties' previous business relations. - [ ] Based on insurance coverage for unforeseen events. > **Explanation:** Courts evaluate whether an unforeseen event renders performance impossible, illegal, or drastically different, adhering to the concept of frustration. ### What type of contractual clause might address frustration-like events? - [ ] Arbitration Clause - [ ] Confidentiality Clause - [ ] Non-compete Clause - [x] Force Majeure Clause > **Explanation:** A Force Majeure Clause can cover frustration-like events by outlining specific unforeseen events and their impact on contract obligations. ### Would frustration apply if the performance merely becomes less profitable but still possible? - [ ] Yes, any decrease in profitability can lead to frustration. - [ ] Yes, whenever profit margins change. - [x] No, frustration does not apply to changes in profitability alone. - [ ] It depends on the contract amount. > **Explanation:** Frustration does not apply simply because contract performance becomes less profitable; the performance must be impossible, illegal, or radically altered. ### Which of the following is NOT a related term to frustration of contract? - [ ] Force Majeure - [x] Assignment of Contract - [ ] Impossibility - [ ] Hardship Clause > **Explanation:** Assignment of Contract is not related to frustration; it refers to transferring contractual rights and obligations to another party.

Thank you for learning about the intricate concept of “Frustration of Contract.” Your attention to legal nuances will undoubtedly aid in mastering contractual relationships and their potential pitfalls.