Who bears the risk of remote and unforeseen events in a construction contract? As far as possible, that is for the parties to decide before entering into an agreement. Beyond that, the answer is murky.
Generally, parties try to anticipate most circumstances that may arise which could affect the performance of a contract. Obviously, in the realm of construction projects it is impossible to account for every single circumstance, and sometimes unforeseen events do occur which may cause the work to be substantially different from what was originally anticipated.
Beyond that, trying to predict every possible event that might happen can result in unnecessarily cumbersome and uncommercial contracts.
The doctrine of frustration has historically offered recourse in situations involving unforeseen events. If it applies, then a party can be released from any further obligations under a contract.
However, the doctrine is quite narrow and can be hard to rely on.
What is the Doctrine of Frustration?
The doctrine of frustration allows the parties to a contract to be released from their obligations due to unforeseeable circumstances that fundamentally affect the ability to perform the contract.
The doctrine of frustration was formally inducted into the common law in the case of Taylor v Caldwell in 1863. The case involved a contract regarding the hire of a music hall, however, the music hall burnt down before the date of hire specified in the contract. The court held that the existence of the music hall at the time of hire was an implied term of the contract when the parties entered into it, and therefore the parties were released from their obligations under the contract. Up until that point in legal history, the courts took a rigid approach in contract enforcement that at times could result in unreasonably harsh outcomes. For instance, in the famous case of Paradine v Jane it was held that one party was still liable to pay rent as per the rental agreement with their landlord, even though the land itself had been invaded and the tenant was unable to occupy the land for a period of 3 years. With the potential for harsh outcomes like that of Paradine v Jane it’s not hard to see why the doctrine of frustration is an integral part of the common law.
When does the Doctrine of Frustration Apply?
The doctrine of frustration is narrow and difficult to rely on. In order for the doctrine of frustration to apply:
- a frustrating event must have occurred;
- the event must occur during the performance of the contract;
- the risk must not have been previously contemplated
A frustrating event must bring about a radically different situation from that which the contracting parties imagined at the time of execution. In the past the courts successfully applied the doctrine of frustration in the following circumstances:
- Performance is rendered illegal by a change in legislation;
- Non-occurrence of events that the purpose of the contract relied upon;
- Where the contract involves obligations of a personal nature and a party becomes deceased or incapacitated;
- Delay or obstruction of performance;
- Where the subject matter of the contract ceases to exist.
These are just some examples, and the ability to successfully apply the doctrine of frustration will ultimately depend on the facts of the case and whether the other elements can be met.
The requirement that neither party has assumed the risk is a little vaguer than you would think. The view generally held by the courts is that parties to a contract enter into it with an assumed level of uncertainty, and therefore may find an implied assumption of risk to exist. Whether an implied assumption of risk exists generally depends on the particulars of the agreement, and therefore has no black and white answer. The subjective nature of this requirement is why parties should never assume that the doctrine of frustration will be available when things go awry.
Finally, for the doctrine of frustration to apply, the event must occur during the performance of the contract. This requirement appears simple, but is equally important. The frustrating event must occur during the performance of the contract, and therefore cannot be an issue that existed before execution that remained hidden until a later date.
What happens if it is Successfully Applied?
If the doctrine of frustration is successfully applied, the contract is automatically set aside from the outset of the frustrating event and there is no requirement on the parties to seek to terminate. Essentially, if the contract is frustrated, then the parties are discharged from most future obligations (the exception being clauses that were specified to survive the contract).
There are limited circumstances in which a party is either entitled to recover money paid under the contract, or claim for payment for work done.
A party to a frustrated contract will be entitled to the repayment of monies paid under the contract, only if, the consideration for that payment has ‘totally failed’. Total failure of consideration occurs when the paying party has received no amount of performance in respect of the works or service the payment was meant to secure. This requirement has the propensity to present inequitable outcomes because the paying party will not be entitled to recover any amount paid if even a portion of the consideration has been received. Likewise, the performing party will be unable to recover any costs incurred that might have gone into the planning of the job but failed to provide any consideration.
The ability to recover payment for work done under the contract up until the frustrating event is equally limiting in that generally, a party will only have a contractual right to payment if it has performed all of its obligations under the contract prior to the frustrating event.
The Doctrine of Frustration Successfully Applied in a Construction Dispute – Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982).
Codelfa is a widely cited Australian case in respect of its application of the doctrine of frustration. Codelfa Construction Pty Ltd (Codelfa Construction) agreed to build tunnels for the State Rail Authority of NSW (Rail Authority) on the basis that the works were to be performed 24 hours and 7 days a week in order to complete the works on time.
Midway through the project a few local residents complained about the noise and successfully applied for a court ordered injunction. The court injunction restricted the tunnelling hours, and the Rail Authority refused to pay the additional costs on the basis that Codelfa Construction didn’t act in accordance with the contract.
Codelfa Construction unsuccessfully argued that it was an implied term of the contract that they be allowed an extension of time to complete the works. However, it was successful on appeal in establishing that the contract had in fact been frustrated.
The Court of Appeal held that the court injunction was a frustrating event that brought about a situation radically different than what the parties had originally contemplated. Importantly, neither party had assumed the risk, and also, the frustrating event occurred during the performance of the contract.
A finding of frustration was assisted by the fact that both parties relied on incorrect legal advice that suggested there was a zero chance of an injunction impeding the works. The reliance on this information supported the notion that neither party could possibly have contemplated that an injunction would in fact impede the performance of the works. Without the reliance on this information, perhaps an injunction could have been deemed as an assumed risk by either party, and perhaps Codelfa may been decided differently.
Don’t expect that the Doctrine of Frustration can be relied upon easily.
The doctrine of frustration is an interesting element of the common law, but parties should never assume that it can be relied upon. It offers the potential for recourse in extreme cases that leave you in the lurch, however the scope of its application is extremely narrow. Contracting parties must make a concerted effort to consider risks and attempt to expressly delineate them. Despite this, it is practically impossible to consider everything, and therefore parties must apportion the burden of unforeseen risk within the contract through specific clauses (e.g. force majeure or extension of time clauses).
