Frustration
When an unforeseen event ends a contract automatically in NSW, why frustration is rarely established, and how money paid and work done are adjusted.
Contract law basics / 5 min read
A contract is frustrated when, without the fault of either party, an event after it is made renders performance radically different from what was agreed. The contract then ends automatically. In NSW, the Frustrated Contracts Act 1978 (NSW) adjusts the parties' positions, including by returning money paid and paying for performance already received.
What is frustration of contract?
A contract is frustrated when, without the default of either party, an event after the contract is made renders performance a thing radically different from what the parties undertook. The High Court adopted that test in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337. Classic examples are the destruction of the thing the contract is about, a change in the law that makes performance illegal, or the cancellation of the event the whole contract was built around.
When frustration occurs, the contract ends automatically at that point. Neither party needs to give notice of termination, and neither is in breach for failing to perform afterwards.
Why is frustration rarely established?
Because the test is demanding. In Codelfa, Mason J and Aickin J relied on the principle that hardship, inconvenience or material loss is not enough on its own. The change must alter the significance of the obligation itself, so that performing it would be a different thing from what was contracted for. A contract that has simply become more expensive, slower or less profitable to perform is usually not frustrated.
Frustration is also unlikely to be made out where the contract itself deals with the event, where the parties foresaw the risk and allocated it, or where the event was brought about by one of the parties. The court compares the terms of the contract, read in light of the circumstances when it was made, with the events that have actually occurred.
How does the Frustrated Contracts Act 1978 (NSW) work?
Under the general law, the consequences of frustration could be harsh, with losses often left where they fell. In NSW, the Frustrated Contracts Act 1978 (NSW) provides a scheme for adjusting the parties' positions:
Obligations end
Promises that were due before the frustrating event but not performed are discharged, except so far as needed to support a claim for damages for that earlier breach (section 7).
Money paid is returned
Money paid as the agreed return for performance under the contract is paid back (section 12).
Performance received is paid for
A party whose work or goods were received before frustration is paid by reference to the agreed return, in full if performance was complete and proportionately if it was partial (sections 10 and 11).
Wasted costs are shared
Where a party reasonably spent money or did work towards performance that was never received, the other party pays one half of fair compensation for that detriment (section 13).
The court can adjust
Where the statutory scheme would be manifestly inadequate or inappropriate, would cause manifest injustice, or would be excessively difficult or expensive to apply, a court can substitute its own adjustment (section 15).
The Act does not apply to some contracts, including contracts of insurance, certain charter-parties and contracts for the carriage of goods by sea. It also does not apply to a contract to the extent the parties have agreed that it will not (section 6).
What is a force majeure clause?
A force majeure clause is the contractual alternative to frustration. It sets out what happens if specified events outside the parties' control, such as natural disasters, government orders or industrial action, prevent or delay performance. Depending on its wording, it may suspend obligations, extend time, or allow a party to terminate. Because the parties have allocated the risk themselves, a clear clause can leave little room for frustration, and its exact words, including any notice requirements, will usually decide what happens.
What does this look like in practice?
Suppose, hypothetically, a business hires a waterfront function venue for a product launch and pays a deposit, and a week before the event a storm destroys the venue. Neither party caused the damage and the event cannot be held there, so the contract is likely to be frustrated. Under section 12 the deposit would generally be repaid. If the venue had reasonably incurred costs preparing for the launch, section 13 would generally require the business to pay half of fair compensation for those costs. If the hire agreement contained a force majeure clause covering damage to the venue, that clause would be the starting point.
If the business instead cancelled because ticket sales were disappointing, that would not be frustration, and cancelling could amount to repudiation or a breach of contract.
Frequently asked questions
Usually not. Increased cost, delay or reduced profit is generally not enough. Performance must have become something radically different from what was agreed.
Yes. Under section 6, the Act does not apply to a contract to the extent the parties have agreed that it does not apply. Many commercial contracts deal with these events through force majeure and termination clauses instead.
If the contract was not in fact frustrated, refusing to perform can amount to repudiation, which exposes you to a claim for damages. The guide to remedies for breach of contract explains what the other party could recover.
Speak with Vamp Law about a frustrated contract
This guide is general information, not advice on your situation, and whether a contract has been frustrated depends on its terms, the facts and the documents. Vamp Law acts in contract disputes, including disputes about force majeure clauses and how losses should be shared after an unexpected event. Make an enquiry or call +61 431 569 686 to discuss your matter with Kyra Pastrovic.
More contract law basics
When the question has become a dispute, these are the pages on how Vamp Law acts in it.
Repudiation
What repudiation of a contract means in NSW, the choice it gives the innocent party, and the risk of terminating without a proper basis.
Breach of Contract
What counts as a breach of contract in NSW, when a breach lets you end the contract, and what to do next if it does not.
Remedies for Breach of Contract
What you can recover when a contract is broken in NSW: damages, liquidated damages, specific performance, injunctions, restitution, interest and costs.
In a dispute?
Talk to us about your contract
This guide explains the law in general terms. For advice on your own contract, send us the documents and we will explain where you stand.