Contract Frustration in Queensland

Contract frustration occurs if, through no fault of either party, an event has caused a contract to be unable to be performed without changing the essence of what was agreed, a contract will be considered frustrated.

Or in other words, if the contract is radically different from what was agreed upon.

This issue has become more prevalent with the emergence of COVID-19 and restrictions, which has consequently rendered a large number of in place contracts radically different or impossible to perform.

Australia’s virus mitigation measures, such as closing borders, implementing a range of travel bans and engaging a range of health procedures, have in turn created a number of legal consequences.

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Contract Frustration Sunshine Coast

In the case of Thaluntha Pty Ltd -v- Citic Pacific Mining Management Pty Ltd [2019] WASC 196, the court defined the concept as:

“A contract may be discharged for frustration when something occurs after the formation of the contract, which is not the fault of either party, rendering it physically or commercially impossible to fulfil the contract or transforms the obligation to perform into a radically different obligation from that which was undertaken by the contract.”

If frustration is established, it may excuse the parties of performance of a contract without default of either party where an external event makes the contract impossible or illegal to perform, or makes the obligations radically different from what was contemplated by the parties.

The external event must not have been caused by either party, and the contract itself must not deal with what is to happen in the face of such an event.

If a contract is deemed frustrated, the contract is automatically discharged, and the losses will generally lie where they fall.

However, if one party has made a payment to the other without receiving the associated goods or services, they likely have a claim for the return of the money paid.

The case of Island Helicopters Pty Ltd v Central (Qld) Aviation Pty Ltd & Anor [2017] FCCA 1665 sets out the required characteristics needed in order to discharge a contract through frustration:

1. The first is that the parties to a contract – or more accurately, reasonable persons in the position of the parties – are taken to have entered into the contract on the basis of one or more mutually held assumptions.

2. Second, on the proper construction of the contract, neither party has assumed the risk of the assumptions not being or not remaining correct.

3. Third, through no fault of either party, one or more of the assumptions are or prove to be incorrect.

4. Fourth, one or more of the assumptions’ being incorrect or turning out to be incorrect would radically alter the nature of at least one party’s obligations under the contract if that party were to be required to perform those obligations in the altered circumstances brought about by the assumptions’ being or becoming incorrect.

Proper Construction of a Contract

In regard to the requirement of ‘on the proper construction of the contract, neither party had assumed the risk of the event occurring’, or in other words the event was unforeseeable, a number of cases have demonstrated this in practise.

The case of Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255 involved a contract for the permitted use of outdoor advertising and promotional material displayed on a large sign board erected on a city building.

An office tower ended up being built nearby that obstructed that view, rendering the benefit that Diamond Wheels received near useless.

However, it was held there was no frustration. 

Foreseeability is objective and involves a question of degree. An event may be foreseeable, but not necessarily the true nature, extent, or effect of it. Because most events are arguably foreseeable, the degree of foreseeability is important.

There needs to be a high risk of occurrence to the point where an objective person could have reasonably foreseen there was a real possibility this would occur. In this case, the parties clearly knew there was a high rise being built at the time the licence was entered into and that would probably obstruct the visibility due to development works at the time.

As seen within this principle, the foreseeability of an event needs to be obvious and substantial.

No Fault of Parties

The third requirement refers to the event occurred, which has in turn rendered a contract frustrated, must not be at the fault of either parties.

The case of Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] UKPC 1 involves the respondent’s steam trawler business which utilised otter trawlers.

A new law was introduced at the time in Canada which prohibited the use of otter trawling without a license. Ocean Trawlers licensed a number of their vessels, but not the vessel used in their contract with Maritime National Fish Ltd.

The respondent argued there was no breach of the contract as the failure to provide a licence was a frustrating event in that the decision to grant licences rested with the secretary of state.

It was held the contract was not frustrated since the claimant had chosen to keep the three licences granted for himself rather than using one to fulfil his contractual obligation.

He had therefore induced the frustrating event and was therefore in breach of contract.

This case displays the requirement of frustration that the frustrating event must not be self-induced by either party.

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Frustration of Contract

The concept of frustration in terms of altering the contract radically different can in some cases be difficult to establish.

The case of Davis Contractors Ltd v Fareham Urban District Council [1956] UKHL 3 involves a building contract.

Davis agreed with the claimants to build 78 houses over eight months for £92,425. The building work actually took twenty-two months due to Davis not having the required staff or materials. Davis attempted to argue the contract was frustrated due to the change in circumstances.

However, the contract was found to be not frustrated as the obligations of Davis had become more difficult, but not radically different.

The principle arising from this case places a higher threshold on what is considered radically different, a contract will not be deemed frustrated if it is simply more difficult to perform.

The Case of Codelfa Construction Pty Ltd

A well-known case within this area of contract law is Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337.

Majority of the High Court rejected the implied condition theory of frustration in favour of the test propounded by Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council.

Codelfa was engaged to excavate tunnels for Eastern Suburbs rail in Sydney within 130 weeks, and this was assumed to be done round the clock without the effect of noise restrictions. However, residents sought multiple injunctions.

The latest injunction limited their shifts to 2 x eight-hour shifts for six days a week. That significantly delayed the project and made it impossible to complete the works the agreed time frame.

After 28 June 1972, Codelfa’s work was done in performance of the contract and it was entitled to remuneration in accordance with its terms. There was found to be no frustration due to the principles set out by Latham C.J. in Scanlan’s New Neon Ltd. v. Tooheys Ltd. (1943) 67 CLR called “the general rule”:

” . . . a man who makes a promise is bound to perform it or to pay damages if he fails to do so, and that he cannot excuse himself by relying upon circumstances dehors the contract for the purpose of showing that he did not mean what he clearly said, or that he should be excused from performance because the contract did not work out in the manner expected by one or even by both of the parties.

Contract Frustration Conclusion

In conclusion, the doctrine of frustration has evidently become a prominent issue in today’s world due to the impacts of COVID-19.

However, the principles set out in court some time ago still apply and is good law in determining what contracts may be deemed frustrated.

If you believe you have a contract which may be frustrated, please use of website today to find a suitable contract lawyer on the Sunshine Coast.