Frustration of purpose

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Frustration of purpose, in law, is a defense to enforcement of a contract. Frustration of purpose occurs when an unforeseen event undermines a party's principal purpose for entering into a contract such that the performance of the contract is radically different from performance of the contract that was originally contemplated by both parties, and both parties knew of the principal purpose at the time the contract was made. [1] Despite frequently arising as a result of government action, any third party or even nature can frustrate a contracting party's primary purpose for entering into the contract. The concept is also called commercial frustration.

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For example, if Joe gets a mortgage for a new home, suppose after three years, the home is destroyed, through no fault of Joe's. Without a hell or high water clause, Joe might be exempt from the remainder of the mortgage, as the principal purpose of the contract, to have a home to live in, has been compromised. However, he might still have a foreclosure on his credit rating.

Frustration of purpose is often confused with the closely related doctrine of impossibility. The distinction is that impossibility concerns the duties specified in the contract, but frustration of purpose concerns the reason a party entered into the contract. An example is if entrepreneur Emily leases space from landlord Larry so that she can open a restaurant that serves only Tibetan Speckled Lizard meat. If the city rezones the property to forbid commercial uses or if the property is destroyed by a tornado, both Larry and Emily are excused from performing the contract by impossibility.

However, if the Tibetan Speckled Lizard suddenly goes extinct, Emily may be excused from performing the contract because Larry knew her primary purpose for entering into the lease was to serve Tibetan Speckled Lizard, and the purpose has been frustrated. In the second scenario, the parties could still carry out their obligations under the lease, but one of them no longer has a reason to.

The Restatement (Second) of Contracts , Section 265, defines frustration of purpose:

Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances [of the contract] indicate the contrary.

A circumstance is not deemed to be a "basic assumption on which the contract is made" unless the change in circumstances could not have been reasonably foreseen at the time the contract was made. As a result, it is rarely invoked successfully. Successful invocations usually come in waves during times of substantial tumult, such as after the passage of Prohibition, when bars and taverns no longer had a reason for their leases, or during major wars, when demand for many consumer goods and services drops far below what is normal.

If the defense is successfully invoked, the contract is terminated, and the parties are left as they are at the time of the litigation.

In English law

The English case of Taylor v Caldwell established the doctrine of frustration, alleviating the potential harshness of "sanctity of contract". [2] Here, two parties contracted on the hire of a music hall, for the performance of concerts. Subsequent to contract, but prior to the dates of hire, the music hall burned down. Since the contract was impossible to perform, Judge Blackburn held that the absolute liability set forth in Paradine v Jane would not apply here, as there was an implied term that the music hall would be in existence at the date of the planned concerts. [3]

The requirement of "impossibility" in Taylor v Caldwell was modified in the 1903 case of Krell v Henry , [4] which concerned a party who had rented a room for the purpose of watching the coronation procession of Edward VII. The king fell ill and the coronation was indefinitely postponed. The hirer refused to pay for the room, so the owner sued for breach of contract; and the hirer then countersued for the return of his £25 deposit. The court determined that the cancellation of the coronation was unforeseeable by the parties, and discharged the contract, leaving the parties as they were: the hirer lost his one-third deposit, and the owner lost the rest of the rent. The court reasoned that the doctrine of "impossibility" could not be applied in this case because it was technically possible for the hirer to take possession of the flat and sit on the balcony. However, the owner knew the only reason the hirer would want to rent the flat was to watch the procession; had the hirer actually gone to the flat and sat on the balcony, he would have seen nothing of interest. Thus, the purpose of the contract had been frustrated by an outside event (the King's illness and consequent cancellation of the parade), justifying termination (but not rescission) of the contract.

In Australian law

The Australian case of Codelfa Construction Pty Ltd v State Rail Authority of NSW, The case of Codelfa is a pre-eminent case in Australian law of frustration of a contract, applying a tripartite test, namely, an obligation under the contract is incapable of being performed, without fault of either of the parties (eg, the parties didn't cause the frustrating event to occur), because the circumstances have rendered performance to be radically different.

Frustration will not be recognised if:

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<i>Krell v Henry</i>

Krell v Henry [1903] 2 KB 740 is an English case which sets forth the doctrine of frustration of purpose in contract law. It is one of a group of cases, known as the "coronation cases", which arose from events surrounding the coronation of King Edward VII and Queen Alexandra in 1902.

<i>Taylor v Caldwell</i>

Taylor v Caldwell is a landmark English contract law case, with an opinion delivered by Mr Justice Blackburn which established the doctrine of common law impossibility.

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<i>Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd</i>

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<i>Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd</i> 1962 English contract law case

Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 [1961] EWCA Civ 7 is a landmark English contract law case. It introduced the concept of innominate terms, a category between "warranties" and "conditions".

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<i>City and Westminster Properties (1934) Ltd v Mudd</i>

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<i>Chandler v Webster</i>

Chandler v Webster [1904] 1 KB 493 is an English contract law case, concerning frustration. It is one of the many coronation cases, which appeared in the courts after King Edward VII fell ill and his coronation was postponed.

Frustration is an English contract law doctrine that acts as a device to set aside contracts where an unforeseen event either renders contractual obligations impossible, or radically changes the party's principal purpose for entering into the contract. Historically, there had been no way of setting aside an impossible contract after formation; it was not until 1863, and the case of Taylor v Caldwell, that the beginnings of the doctrine of frustration were established. Whilst the doctrine has seen expansion from its inception, it is still narrow in application; Lord Roskill stated that "the doctrine is not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains."

Herne Bay Steamboat Co v Hutton [1903] 2 KB 683 is a case on the subject of frustration of purpose. It is one of a group of cases arising out of the same event, known as the coronation cases.

<i>Maritime National Fish Ltd v Ocean Trawlers Ltd</i>

Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] UKPC 1, is a case on the subject of frustration of purpose, specifically establishing that foreseeable or self-induced frustration will not render a contract frustrated.

<span class="mw-page-title-main">Law Reform (Frustrated Contracts) Act 1943</span> United Kingdom legislation

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Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265 is an English contract law case, concerning the frustration of an agreement.

<i>Davis Contractors Ltd v Fareham UDC</i>

Davis Contractors Ltd v Fareham Urban District Council [1956] UKHL 3 is an English contract law case, concerning the frustration of an agreement.

<i>Great Peace Shipping Ltd v Tsavliris (International) Ltd</i> English contract law case

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<span class="mw-page-title-main">South African contract law</span> Law about agreements between two or more parties

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<i>Codelfa Construction Pty Ltd v State Rail Authority of NSW</i> Judgement of the High Court of Australia

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References

  1. Codelfa Construction Pty Ltd v State Rail Authority of NSW [1992] HCA 24 , (1982) 149 CLR 337(11 May 1982), High Court (Australia).austlii
  2. Beale (2002) p. 611
  3. Koffman, Macdonald, p. 520
  4. Krell v Henry [1903] 2 KB 740.