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How to avoid the pain of a frustrated contract

Frustration is a rare but inconvenient event facing today’s contractors and it’s important to understand it and its implications.

Frustration of a contract is the occurrence of a serious unforeseeable event that causes radical change and means that either party cannot be reasonably expected to continue with their contractual obligations.

Essentially, it becomes impossible for one or both parties to perform their duties and the contract is terminated by law. In some instances, therefore, it can be a valuable “get out of jail free” card for one of the parties.

For the contractor, however, this can all too often result in the risk of not being paid, as the contract becomes void when a frustrating event takes place.

When does frustration become frustration?

A basic test for frustration was set out by Lord Radcliffe in Davis Contractors v Fareham UDC, resulting in three basic points:

  • A frustrating event is not caused by the default of either party;
  • The contract becomes impossible to fulfil as it has become something entirely different from the original agreement between the parties;
  • There is no provision in the contract to cover the eventuality that is a frustrating event.

How might this occur?

Examples include the unavailability of a subject matter – for instance, if the subject of the contract was destroyed by fire or changed to such a degree that it no longer complied with the contract.

This unavailability may only be temporary. The old law school example concerning a ship trapped in an obscure location due to the outbreak of war has been given a new lease of life thanks to events in the Middle East.

“The main risk that contractors face when a frustrating event occurs is non-payment”

If the unavailability is only temporary then for the contract to be frustrated it must specify performance by a specific date or within a particular timeframe.

Frustration may also occur because of illegality, such as where new licensing regulations are introduced that prohibit the contract being performed.

The courts, however, have adopted a conservative approach to frustration over the years and the following issues, among others, cannot frustrate a contract:

  • Severe weather, including floods;
  • Arbitration agreements;
  • Financial difficulty or unexpected expenses.

The Law Reform (Frustrated Contracts) Act 1943 provides for contracts under English law that have become impossible to perform or have otherwise been frustrated.

This law applies in the absence of anything being explicitly mentioned in the contract. In the circumstances above for offsite materials, the act allows for employers to recover any advance payments made.

What should a contractor do?

Disputes may arise if contractors wrongly think that something that has happened to them prevents them, in their view, from completing the contract. Contractors should make sure they know what constitutes frustration and what does not – otherwise they may face opposition from their employer.

“Hindsight can be a wonderful thing. The best advice for contractors is to ensure they are aware of the doctrine of frustration before entering a contract and apply the hindsight test”

The main risk that contractors face when a frustrating event occurs is non-payment. Fortunately the provisions in many standard-form contracts protect the contractor and provide that they should be paid for the work they have done up until the frustrating event.

However, it is important to note that in many instances payment for offsite materials will generally not be recoverable.

As is all too often the case, hindsight can be a wonderful thing. The best advice that a contractor can have is to ensure it is aware of the doctrine of frustration before entering into a contract and apply the ‘hindsight’ test.

Bill Barton is a partner at Barton Legal

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