November 28, 2022
The third part of this article series will discuss termination of a contract through frustration. Frustration occurs when an event makes it impossible for a party to perform its obligations under a contract or the event significantly changes the party’s obligations under the contract.
When determining whether a contract has been frustrated, you will need to establish that the event, which causes the contract to be frustrated, is an event which was not foreseeable by either party and that the parties never intended to be bound by the substantially different obligations which the event has changed.
In one of the leading Australian cases on frustration, Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, the High Court recognised that frustration occurs when, “without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.”
It is important to note that the effect of the event on the contract is what needs to be considered, the mere existence of an event will not frustrate a contract. However, if an event makes the contract more expensive or more difficult, the event will not be considered to have frustrated the contract. Further, frustration will not be established if the event was induced by one of the parties. Some examples of frustration events include:
- destruction or unavailability of the subject matter;
- method of performance no longer possible;
- excessive delay; and
- performance of the contract becomes illegal.
If frustration is established, the contract will automatically be terminated and both parties will no longer be required to fulfil its contractual obligations as from the date of the frustration.
Termination by Frustration Clause
Some building and construction contracts, such as the Australian Standard Form Contracts suite and the Queensland Department of Transport and Main Roads TIC-CO contract, have a termination by frustration clause which details the obligations of each party in the event the contract is frustrated.
Generally, the contract will provide that the superintendent shall issue a progress certificate for the works carried out up to the date of frustration, which evidences the amount which would have been due and payable had the contract not been frustrated.
The principal will usually have to pay the contractor for:
- works executed prior to the date of frustration;
- cost of materials and equipment reasonably ordered by the contractor for the works, but only if they become the property of the principal;
- the costs reasonably incurred by the contractor in the expectation for completing the whole of the work under the contract; and
- costs reasonably incurred by the contractor for removing temporary works and construction plant and returning to their place of engagement.
Force Majeure
It is important to check your contract before trying to claim frustration as your contract may already contain a clause which covers the frustrating event, such as a Force Majeure clause. A Force Majeure clause will detail a party’s rights and remedies should an event, outside its control, impact their ability from performing its obligations under a contract. Events which are covered under a Force Majeure clause will be defined in the contract and may include:
- catastrophic events caused by nature causes such as an earthquake or fire (but not including inclement weather);
- strike, lockout, act of the public enemy, war or terrorism; and
- any lockdown, direction or law imposed by an authority arising in connection with the outbreak of disease or pandemic.
How a force majeure event is defined will vary depending on your contract so it is important you read your contract carefully and understand what events may be covered under the clause and events which are excluded.
If you are impacted by a force majeure event, you will generally have to notify the other party detailing the force majeure event and reasons why you will be unable to perform your contractual obligations.
Unlike frustration, a force majeure event may not entitle you to automatically terminate a contract and release you from your contractual obligations. A force majeure clause may provide that a party will only have an option to terminate a contract once the force majeure event has not resolved by a specific timeframe.
Lamont Project and Construction Lawyers have the industry knowledge and experience to assist both Principals and Contractors in the construction industry. If you would like to discuss any of the matters raised in the above article as it relates to your specific circumstance, please contact Lamont Project & Construction Lawyers.
The content of this article is for information purposes only; it does not discuss every important topic or matter of law, and it is not to be relied upon as legal advice. Specialist advice should be sought regarding your specific circumstances.
Contact: Peter Lamont or Vanessa George
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