Understanding Frustration in relation to contracts
The most fundamental principle of contract law is that parties should be bound by what they have agreed to do. Common sense dictates that there may be negotiations, disputes or settlements but, after the rodeo has left town and the dust has settled, the law will require a person to perform the deal they have made irrespective of whether it is a profitable arrangement or a bad bargain.
However, what happens when parties are prevented by an external factor from performing the obligations they have undertaken. What would happen if no animals were available for the rodeo? Should the rodeo continue perpetually, or does it come to an end of its own accord? Like it does for most things, the law has a word for this, “frustration”.
In a legal sense, frustration is a very apt description and relates to the entire agreement itself. In essence, frustration will only arise where obligations are to arise at a point in the future but, between entering into and performing the contract, a supervening event has arisen that makes the contract radically different to the one originally envisaged.
The law holds that it would be unfair to require parties to fulfill those future obligations which are now different to those they have agreed to and voids the contract. However, the contract is not void from the beginning; rather, it is void from the date of the frustrating event. Therefore the loss can fall on one party or another if their respective obligations arise at different points in time.
Frustration is a useful doctrine, however it has its limitations. For instance, a party will be unable to avoid the requirements of a contract where the frustration was self-induced nor will it be applicable if the events were reasonable foreseeable. The distinction might be that the rodeo organizer failed to organise animals or the star rider was unavailable rather than all animals being unavailable due to a force of nature.
Protection from Frustration
In order to protect yourself from the outcomes that can arise from frustration you can include in your contracts:
(a) a “force majeure” clause which excuses a parties performance of their obligations, whether entirely or for a period of time to allow the contract to remain on foot; or
(b) simultaneous obligations so that one party does not carry the risk of loss.
In addition, where there has been no performance by one party the other party may rely on the equitable doctrine of unjust enrichment. In particular, the remedy of restitution.