Cecily Zamora
The COVID-19 pandemic and its associated public health orders have raised questions about the frustration of contracts under Australian common law. Frustration occurs when an event makes it impossible to perform a contract or radically differs from what the parties originally contemplated. This has led to discussions on the legal consequences of frustration and the potential harsh outcomes for parties involved. To address this, several Australian states have implemented legislation to allow for the recovery of money paid under certain frustrated contracts. The threshold for establishing frustration is high, and each case is largely dependent on the drafting of the contract and the surrounding facts.
| Characteristics | Values |
|---|---|
| Definition | There is no exhaustive definition of a frustrating event. Whether a contract has been frustrated depends on the drafting of the contract and the surrounding facts. |
| Threshold | A business must prove that the event renders the performance of a contract impossible or radically different from what was originally contemplated by the parties. |
| Illegality | A contract may become frustrated if it becomes illegal during the course of its performance. |
| Historical development | In the 19th century, courts developed a doctrine that contracts that became impossible to perform would be frustrated and automatically come to an end. |
| Common law | Under common law, it may be difficult for a party to recover payments made or seek recompense for services performed before the occurrence of the frustrating event as no party is at fault. |
| Legislation | Several Australian states have put in place legislation to allow money paid under certain kinds of frustrated contracts to be recovered. |
| Force majeure clauses | A contract can include a force majeure clause that would bring a contract to an end more easily than under common law construction. |
| COVID-19 | The COVID-19 pandemic has raised the question of whether a contract is frustrated, especially in relation to long-term commercial leases. |
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What You'll Learn
Frustration and force majeure
The COVID-19 pandemic and associated public health orders in Australia have raised questions about whether contracts have been frustrated. The threshold for establishing a frustrating event, such as the COVID-19 crisis, is high, as a business would need to prove that the event renders the performance of a contract impossible or fundamentally alters the obligations of the parties.
Frustration in contract law refers to the doctrine that a contract may be terminated if an unforeseen event occurs that makes it impossible to fulfil the terms of the contract. This doctrine has been recognised in Australia, where it is considered a \"narrow\" concept. The doctrine of frustration is a matter of construction of the contract, and it can be contracted around through "force majeure" clauses. Force majeure clauses outline events that, if they occur, will render the contract impossible to perform. These clauses are often included in contracts to provide a more straightforward means of terminating the contract than relying on the doctrine of frustration.
The effect of a contract being frustrated is that both parties are discharged from their future obligations. However, frustration does not apply retrospectively, and it may be difficult for a party to recover payments made or seek recompense for services performed before the frustrating event occurred, as no party is at fault. This has been addressed by legislation in New South Wales, Victoria, and South Australia, which allows for the recovery of money paid under certain kinds of frustrated contracts.
The doctrine of frustration has been applied in various cases, including those involving long-term commercial leases, where the lease allocates all risks, limiting the scope to argue that an event was beyond the contemplation of the parties. In Brisbane City Council v Group Projects Pty Ltd (1979), the House of Lords denied a claim for a contract to be declared frustrated due to an unforeseen shortage of labour and supplies, as the contract had not been rendered impossible to perform. Similarly, in Li Ching Wing v Xuan Yi Xing, a Hong Kong court held that a tenant subjected to a 10-day quarantine was unable to rely on frustration to discharge their lease, as the duration of the isolation order was minimal in the context of the entire agreement.
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Supervening events
The COVID-19 pandemic and associated public health orders in Australia have raised questions about contract frustration. While the pandemic has made some contracts more difficult to perform, it does not necessarily frustrate them. For a contract to be deemed frustrated, the event must render the contract impossible to perform or fundamentally change the obligations of the parties. This threshold is high, and businesses must provide evidence to support their claims.
In the case of Li Ching Wing v Xuan Yi Xing, a Hong Kong court ruled that a tenant in mandatory isolation for 10 days could not rely on frustration to terminate their lease, as the isolation order's duration was deemed minimal in the context of the entire agreement. This case highlights that a supervening event must significantly impact the original terms of the contract for frustration to be established.
Australian states like New South Wales, Victoria, and South Australia have implemented legislation to address the potential harshness of common law regarding frustration. These laws enable courts to adjust the positions of the parties to ensure fairness and allow for the recovery of monies paid under certain frustrated contracts.
The doctrine of frustration is a matter of contract construction, and it can be contracted around through "force majeure" clauses. These clauses outline the conditions under which a contract may be terminated or adjusted due to unforeseen events, providing a more straightforward path than relying solely on common law interpretations of frustration.
In summary, supervening events are a critical aspect of the test for frustration in Australian common law. They can lead to contract frustration if they render the contract impossible to perform or significantly alter the parties' obligations. However, the threshold for establishing frustration is high, and the specific terms of the contract and surrounding facts are crucial in determining whether frustration has occurred.
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Illegality
The COVID-19 pandemic and associated public health orders in Australia have raised questions about contract frustration due to illegality. For example, if Australian courts were to impose bans on the importation or exportation of particular goods, this could frustrate existing contracts. Similarly, mandatory isolation orders during the SARS outbreak in Hong Kong led to a tenant being unable to rely on frustration to discharge their lease, as the court deemed the duration of the isolation order minimal in the context of the entire agreement.
In the context of the COVID-19 crisis, businesses would need to prove that the event rendered the performance of a contract impossible or radically different from what was originally contemplated by the contracting parties. This threshold for establishing a frustrating event is challenging to meet. Even when the COVID-19 crisis made certain obligations more difficult to perform, it did not necessarily discharge parties from all obligations under the relevant contract.
To address potential unfairness arising from frustration, several Australian states, including New South Wales, Victoria, and South Australia, have implemented legislation. This legislation enables parties to recover money paid under certain kinds of frustrated contracts and allows courts to adjust the positions of the parties to ensure no one is unfairly advantaged or disadvantaged due to the frustrating event.
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Financial impact
The common law doctrine of frustration in Australian contract law recognises that an unforeseen event may occur through no fault of either party, making it impossible to perform or radically changing the nature of any obligations under a contract. This has significant financial implications for parties to a contract.
Firstly, frustration may result in the automatic termination of a contract. This means that parties are discharged from their future obligations under the contract. However, they are still liable for performance until the frustrating event occurred. As such, parties may have incurred significant costs in partially performing their contractual obligations up to that point, with no recourse to recover these costs. Under common law, it may be difficult for a party to recover payments made or seek recompense for services performed before the frustrating event as no party is at fault. This is known as the principle that "losses lie where they fall".
However, several Australian states, including New South Wales, Victoria, and South Australia, have introduced legislation to mitigate the harsh financial impact of this principle. This legislation allows courts to adjust the positions of the parties so that no party is unfairly advantaged or disadvantaged due to the frustrating event. This may include scope for money paid under certain kinds of frustrated contracts to be recovered.
Secondly, frustration does not occur if the contract can still be performed, even if one party's future financial returns are negatively affected. For example, a contract to purchase property was not frustrated when a heritage listing was made the following day that materially impacted its value. This means that parties cannot rely on frustration to discharge their contractual obligations if they are less profitable as a result.
Finally, the doctrine of frustration can also have financial implications for contracts that include force majeure clauses. Force majeure events are typically included in contract terms to deal with unexpected risks. However, frustration can affect contracts in Australia even in the absence of such a clause. This means that parties cannot always contractually provide for every eventuality and may still be vulnerable to the financial impacts of unforeseen frustrating events.
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Isolation orders
The COVID-19 pandemic and associated public health orders implemented in Australia have raised questions about whether certain contracts have been frustrated. In general, a frustrating event must render the performance of a contract impossible or fundamentally alter the obligations of the parties. This is a high threshold to meet.
In the case of Li Ching Wing v Xuan Yi Xing, a Hong Kong court ruled that a tenant placed in quarantine for 10 days could not rely on frustration to terminate their lease, which still had nine months left. The court reasoned that the duration of the isolation order was relatively short in the context of the entire agreement. However, it is unclear how Australian courts will address disputes arising from a defendant's inability to perform contractual obligations due to isolation orders.
In another case, Alliance Concrete Singapore Pte Ltd v Sato Kogyo (S) Pte Ltd, the legislative prohibition of sand exportation from Indonesia to Singapore was deemed a frustrating event as it significantly altered the obligations of the parties. This case provides insight into how Australian courts may interpret similar situations, such as bans on the importation or exportation of goods due to the COVID-19 crisis.
It is worth noting that frustration is generally considered an unappealing remedy as it results in automatic termination, and losses lie where they fall. Australian states like New South Wales, Victoria, and South Australia have implemented legislation to mitigate the harsh effects of frustration, allowing for the recovery of monies paid under certain frustrated contracts.
To summarise, while the doctrine of frustration exists in Australian common law, it is a narrow concept with specific requirements. The impact of isolation orders on contractual obligations will depend on the specific circumstances, the jurisdiction, and any relevant legislation or contractual provisions addressing unexpected risks.
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Frequently asked questions
Frustration is a common law doctrine that recognises that an unforeseen event may occur through no fault of either party to a contract, which makes it impossible to perform or radically changes the nature of any obligations that the parties intended under the contract.
Frustration occurs whenever the law recognises that without default of either party, a contractual obligation has become impossible to perform because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.
An example of frustration is when you rent a property, and the property burns to the ground. There is no more property to rent, so the contract is impossible to perform.
The contract is terminated at the time of the frustrating event, and the parties are discharged from their future obligations under the contract. They are still liable for performance until the frustrating event occurred.
The Australian courts have adopted the English House of Lords definition of frustration. However, with the COVID-19 pandemic, it remains to be seen how the Australian courts will address disputes arising from a failure to perform due to isolation orders.
