The doctrine that a contract may be discharged after its formation where an event beyond the control of either party renders their obligations radically different from those contemplated, effectively making performance illegal, impossible, or impracticable.

A contract which is determined to have been frustrated is automatically terminated from that point forward (only future obligations are discharged). Common law dictates that obligations arising before the point of frustration remain in operation.

Frustration is most commonly found where an impracticable delay has occurred, resulting in the defeat of the commercial purpose of the agreement.

Frustration will not be found where a bad bargain has been struck, a foreseeable event materialises, or where one of the parties is at fault. Frustration does not apply in situations of hardship.

Force majeure clauses are useful in preventing frustration, as they allow parties to postpone the contract if both parties are in understanding.

The leading case on frustration in Australia is Codelfa Construction Pty Limited v SRA of New South Wales. It holds the test for frustration which is as follows:

  • Where an event occurs;
  • By fault of neither party;
  • Unprovided for in the contract;
  • Which completely changes the situation as to make performance impossible or impracticable because the situation or performance are now radically or fundamentally different to what was originally contemplated;
  • A contract will be frustrated.

The Frustrated Contracts Act 1978 (NSW) constitutes a small shift from the common law position. Restitution can be claimed for frustration as a protection for parties from unjust enrichment (it may also be claimed for work done after a contract is frustrated). This would apply where a party has made a payment of consideration in return for performance. However, restitution is precluded where partial performance has occurred. The Act qualifies the common law position in that any amount paid before frustration must be returned to the payer regardless of performance. The Act also gives the court discretion to make orders in contractual matters (N.B. the Act does not apply to insurance contracts). Where there has been full, non-monetary performance without pay, the performing party is entitled to the payment agreed upon. Relief may also be sough under the act for parties that have partially performed without pay prior to frustration.