20 April 2020

This article considers in a little depth what frustration actually means (in the legal sense), focusing on the concept of frustration as it applies to contracts into which we all enter, especially so at the moment.

What is Frustration?

Frustration is a concept which becomes relevant if the contract itself does not, for example, include a force majeure clause – a term with which we are all now so familiar.

The basics – in brief:

• With few exceptions, a contract is enforced in accordance with its terms. Exceptions might include where the contract is illegal.
• A contract is binding only if matters remain as they are at the point at which the contract is entered into.

Where does Frustration apply?

• Where something happens after the contract has been entered into, that event is outside the control of the party seeking to rely on it and the contract does not make any provision for dealing with the event.
• As a result of that event, performance of the contract, if even possible at all, would be radically different from that contemplated by the parties when entering into the contract.

This is different from the situation where impossibility exists at the time the contract is entered into – that impossibility may not allow a party to escape their obligations (or, more likely, liability for breach of contract).

What is the result of frustration applying to a contract?

The result is that the parties are discharged automatically from further performance of the contract. Note that it is not the contract itself which is frustrated – it is the parties’ future performance which is frustrated. The consequence of this is that certain provisions of the contract may continue, for example, parties’ confidentiality obligations if provided for.

Why does the concept of frustration exist?

It is said to exist for pragmatic reasons to do justice in unforeseen circumstances. The courts in Scotland seek an equitable adjustment of the position between the parties rather than losses simply lying where they fall on frustration of the contract. For example, a party who has carried out services ought to be remunerated a reasonable sum for those services.

How do the courts decide whether frustration applies?

In considering whether frustration does apply, the courts will look at the contract between the parties in the circumstances pertaining when the contract was entered into. The obligations of the parties are then compared to the obligations arising under the new circumstances. If there is a radical change in obligations, there is frustration. As mentioned already though, if the contract might accommodate the new circumstances, there is no frustration (in the legal sense at least). Once the courts have considered the contract and decided that what happened is capable in law of frustrating the contract, the next question is whether in fact the contract was frustrated.

To avoid uncertainty around the application of frustration, force majeure clauses developed. However, they often go beyond anticipating when frustration might apply, as they often apply to also anticipate circumstances which might only delay the parties, rather than frustrate their obligations entirely. When frustration applies, the parties’ obligations under the contract are not merely suspended – it ends the parties’ rights and obligations of future performance.

What constitutes Frustration?

A change in market prices or a shortage of supplies or such other commercial difficulties in performing a contract in accordance with its terms would not normally fall within frustration. Accordingly, whether Covid-19 triggers frustration will depend on the circumstances in each case.

It is not the nature of the event which occurred after the contract was entered into which is relevant, but rather its effect on the performance of the parties’ obligations. As already mentioned, that event should not have been anticipated by the contract.

If you feel frustrated (in a legal sense), speak to us.

Contact

Jeremy Glen, Partner: E: jsg@bto.co.uk  T: 0141 225 5259