Monday, 1 April 2013

What is Frustration?

Frustration of a contract is when an event occurs after the formation of a contract that renders performance radically different from the original agreement. In such a case the contract will be said to be discharged by frustration, and the parties are released from further obligations under the contract.

In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1992) 149 CLR 337 a railway in eastern Sydney was under construction, with the work required to be completed within a fixed period. Construction was to occur in three shifts a day, seven days a week. Codelfa Constructions, the contractor, had quoted the State Rail Authority on the basis of their contractors being able to work for these hours. The local residents were unhappy about the noise and sought an injunction from the courts. The injunction awarded prevented Codelfa from working on Sundays, and for a maximum of two shifts per day. This ultimately delayed the completion of the railway, and increased the cost of construction. After a failed attempt to show an implied term that the State Rail Authority would indemnify Codelfa against the additional costs, Codelfa were successful in showing that in the alternative the contract had been frustrated by the injunction. The performance was now radically different to what had originally been agreed upon.

In the course of discussion about the proper basis for the operation of the doctrine of frustration, Mason J made it clear that the court’s task is to compare performance of the contract under the new conditions with the performance contemplated by the contract before the changed circumstances. If performance is radically different, then the contract is frustrated. (1) The usual way in which the Frustration is raised is where some disaster, such as a supervening event, has overtaken the contract and one party then fails to perform. The answer to this may be that failure to perform is not a breach because the contract has been frustrated as a result of the disaster. In short, frustration, if successfully argued, is an excuse for failure to perform. (2) For a supervening event to be classified as frustrating, it must (Also see Chandler v Webster): 

a) Not have been contemplated by the parties at the outset of the agreement;
b) Not have been caused by either parties’ actions (self-induced);
  1. Cause a fundamental change to parties’ rights and obligations. (the event would cause the parties to perform ‘radically different’ obligations)

Please note that an event that merely makes the contract expensive cannot be a frustrating event. For example, in  Davis Contractors Ltd v Fareham Urban District Council 1956, Davis Contractors agreed to build 78 houses for Fareham Council within 8 months for an agreed price of £85,000. Due to a shortage in skilled labour and material the contract took 22 months to complete and was much more expensive than anticipated. Davis Contractors were paid the contractually agreed price but bought an action arguing for more money based on the fact that the contract had become frustrated and therefore they were entitled to further payment based on a quantum meruit basis. It was held, the contract was not frustrated. The fact that a contract becomes more difficult to perform or not so profitable is not sufficient to amount to frustration. It was still possible to perform the contract.

Impracticability is also not an excuse to make a contract frustrated. In British Movietonews Ltd v London & District Cinemas Ltd 1952, where the law made it impractical to showcase certain newsreels did not make the contract frustrated just because it was no longer commercially viable for one party. 

No comments:

Post a Comment