Understanding Frustration of Contract

Contracts are an integral part of business and many other aspects of life. It is essential for parties to understand their rights and obligations under a contract and the legal implications of a breach of contract. But what happens when a contract becomes impossible to fulfil due to unforeseen events; that is, if a contract is frustrated .

In this article, we will discuss frustration of contract – what it is, how it is different from breach of contract, examples of frustration of contract, legal implications of frustration of contract, how can parties avoid, mitigate or minimize the risk of frustration of contract, and the benefits of using a contract disputes resolution process.

What is Frustration of Contract?

Frustration of contract is a legal doctrine that states that a contract is discharged when it becomes impossible to perform due to an event that occurs after the contract is signed. This event could be an act of God, conduct  of government, or any other event that is outside of the parties’ control. The doctrine of frustration relieves the parties of their contractual obligations when the purpose of the contract has been frustrated by an event that was not anticipated by either party or was not within the reasonable contemplation of the parties when the contract was made.

It is important to note that frustration of contract does not apply in all cases. The event must be unforeseeable and must have rendered the performance of the contract impossible or illegal. In addition, the event must not be caused by any of the parties to the contract.

How is Frustration of Contract Different from Breach of Contract?

The key difference between frustration of contract and breach of contract is frustration of contract is event-driven, while breach of contract is party-driven. Breach of contract occurs when a party fails to perform its contractual obligations, regardless of the circumstances. On the other hand, frustration of contract is only applicable when an unexpected event makes the performance of the contract impossible or illegal.

Another important difference is frustration of contract is not dependent on a breach of contract. This means that even if a party has not breached its obligations, the doctrine of frustration could still apply if an event has occurred that has made it impossible or illegal to perform the contract.

Singapore Frustrated Contracts Act 1959

In Singapore, the Frustrated Contracts Act 1959 governs the enforcement of frustration of contract. Under this Act, a contract is frustrated if the contract becomes impossible or illegal to perform due to an event or change of circumstances that was not anticipated by the parties at the time of signing the contract. The Act also states that a contract can be considered frustrated if the event or change of circumstances renders the performance of the contract radically different from what the parties had expected.

For example, if a contract was made for the sale of a property, but the property is damaged by a natural calamity such as a flood. I this case, the contract is frustrated and the parties are relieved of their obligations under the contract.

When is Frustration of Contract Enforceable?

Frustration of contract is only enforceable when the event that causes the impossibility or illegality of the performance of the contract was not anticipated by either party and was not within the reasonable contemplation of the parties when the contract was made. This means that if either party was aware of the possibility of the event occurring, the contract cannot be frustrated.

In addition, the event must have rendered the performance of the contract impossible or illegal. If the event only makes the performance of the contract more difficult, but not impossible or illegal, the doctrine of frustration does not apply.

Examples of Frustration of Contract

Here are some of the most common examples when a contract is frustrated:

1. Act of God: Any natural event such as a flood, earthquake, or other natural disaster that makes the performance of the contract impossible can be considered an act of God.
2. Conduct of Government: If a government imposes a new law or regulation that makes it impossible or illegal to perform the contract, it can be considered an act of government.
3. Change of Circumstances: If the circumstances under which the contract was made change, and the performance of the contract becomes impossible or illegal, the contract can be considered frustrated.
4. Death or Incapacity: If a party to the contract dies or becomes incapacitated, the contract can be considered frustrated.

Legal Implications of Frustration of Contract

When a contract is frustrated, the parties are relieved of their obligations under the contract and the contract is discharged. This means that the parties are no longer legally bound by the contract and are not liable for damages or losses caused by the frustration of the contract.

However, it is important to note that not all contracts can be frustrated. If the event that causes the impossibility or illegality of the performance of the contract was anticipated by either party or was within the reasonable contemplation of the parties when the contract was made, the contract cannot be considered frustrated.

How Can Parties Avoid, Mitigate or Minimize the Risk of Frustration of Contract?

There are several steps that parties can take to avoid, mitigate or minimize the risk of frustration of contract:

• Anticipate Potential Events: Parties should make an effort to anticipate potential events that could render the performance of the contract impossible or illegal.
• Draft a Force Majeure Clause: Parties should consider drafting a force majeure clause that outlines the events that constitute force majeure and the parties’ respective rights and obligations in the event of a force majeure.
• Use Risk Mitigation Strategies: Parties should consider using risk mitigation strategies such as insurance and hedging to protect themselves in the event of a force majeure.
• Use a Contract Disputes Resolution Process: Parties should consider using a contract disputes resolution process such as arbitration or mediation to resolve disputes that may arise out of a frustration of contract.

What Are the Benefits of Using a Contract Disputes Resolution Process?

Using a contract disputes resolution process such as arbitration or mediation can provide several benefits when it comes to the frustration of contract. These benefits include:

• Faster Resolution: A contract disputes resolution process can provide a faster resolution than traditional court proceedings.
• Cost-Effective: A contract disputes resolution process can be more cost-effective than traditional court proceedings.
• Confidentiality: A contract disputes resolution process can provide a confidential forum for parties to resolve their disputes.
• Flexibility: A contract disputes resolution process can provide parties with more flexibility in terms of the process and the outcome.

Conclusion

It is important to understand the legal implications of frustration of contract and the steps that parties can take to avoid, mitigate or minimize the risk of frustration of contract.

Parties should consider using a contract disputes resolution process such as arbitration or mediation to resolve disputes that may arise when a contract is frustrated.  This process can provide several benefits such as faster resolution, cost-effectiveness, confidentiality, and flexibility.

If you require any assistance with understanding the doctrine of frustration of contract or resolving contract disputes, please reach out  to  our experienced team of contract lawyers. We will be more than happy to assist you.