What is frustration of purpose in contract law?
What are some examples?
How is it different from the doctrine of impracticability?
In this article, we will break down the notion of “frustration of purpose” so you know all there is to know about it!
We will look at what is the frustration of purpose, difference with impracticability of contracts or contract impossibility, we’ll look at what is the effect of frustration on a contract, is frustration a defense, its elements, examples and more!
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What is frustration of purpose
What is frustration of purpose in contract law?
The frustration of purpose is a legal defense that may be asserted against the enforcement of a legally binding contract.
This legal defense makes an exception to the strict liability rule representing a foundational concept in contract law where the parties are legally bound to perform the obligations they undertook to perform in a contract.
In the case of an argument of the frustration of purpose, a change in circumstances may result in a complete frustration of the purpose of the contract.
Imagine that you hire a company to organize a large outdoor event for up to 10,000 people.
However, due to major strikes affecting the entire transportation industry such as buses, trains, metros and taxis, the entire purpose of the contract is frustrated as nobody will come to the outdoor event.
Based on the doctrine of frustration of purpose, a contracting party may escape having to execute its legal obligations under the contract.
The difference between frustration of purpose vs impossibility is that the obligation under the contract can technically be performed.
In our example:
The event organizers can technically set the stage for 10,000 people to gather outdoors.
However, due to the city’s massive strike, the purpose of the contract is entirely frustrated.
One of the most important factors that courts consider when evaluating a legal defense of frustration of purpose is whether or not the event eliminating the purpose was foreseeable when the contract was signed.
If the event was entirely unforeseeable and not caused by a party’s actions or omissions, the courts may excuse a party to execute its contractual obligations.
The courts interpret such legal defense restrictively as it is an exceptional measure excusing party from its contractual obligations.
Generally, the expectation is for the parties to a contract to adhere to their contractual obligations, failure of which they may be considered in breach.
Frustration of purpose definition
How do you define frustration of purpose?
In this section, let’s define frustration of purpose to understand this concept better.
According to Cornell Law School’s Legal Information Institute, frustration of purpose is defined as:
Under contract law, an excuse that can be used by a buyer for non-performance of contractual duties when a later and unforeseen event impedes the buyer’s purpose for entering into the contract, and the seller at the time of entering the contract, knew of the buyer’s purpose.
What we can extract from this legal definition of the frustration of purpose are the following elements:
- An event impedes a party’s purpose of entering into a contract
- The event was unforeseeable and unrelated to a party or caused by its fault
- The other party was aware of the purpose at the time of entering into the contract
In essence, frustration contract law states that the “reason” or “purpose” of the contract is extinguished due to an unforeseen or unforeseeable event.
The purpose must be frustrated to such an extent that the parties would have never entered into a contract in the first place.
Frustration of purpose elements
To successfully invoke the legal argument of the frustration of purpose in court, the defendant will have the burden of proof to demonstrate the following elements:
- An event has frustrated the purpose of the contract
- Both contractual parties understood the purpose at the moment the contract was signed
- There is a substantial frustration of purpose leading to the contract having little to no value to a party
- The non-occurrence of the event causing the frustration of purpose was the basic assumption of both parties
This doctrine is one used to defend against asserted claims rather than to positively assert a claim against another by invoking frustration of purpose.
In other words, you can consider it as a shield against a lawsuit as opposed to a sword to assert a claim against another.
There are certain situations where the courts will not accept an argument of purpose being frustrated, such as:
- The defendant’s financial situation changed
- Due to some events, the defendant cannot expect to make the same level of profit as initially planned
- The defendant caused the event
- The defendant was negligent in not properly evaluating the contract risks
- The contract language provides that the defendant must remain responsible
- Commercial frustration grounds that were unexpected but not unforeseeable
Written notice requirement
What happens if there is an event that leads to a party’s purpose to be frustrated?
What should be done?
In the event a contracting party believes that an unforeseeable event has resulted in the elimination of the purpose to such a grave extent that the entire “reason of existence” of the contract is destroyed, an important step is to provide the other party with written legal notification.
A party who no longer sees any purpose in executing the contract has a duty to immediately inform the other party in writing as to the frustration of purpose.
For instance, if the terms of UCC govern a transaction, a party is required to notify the other in writing when there is a possibility of a delay in the delivery of the good or non-delivery.
If the obligations of the contract can be partially executed or executed in an alternative way, the parties should consider such options.
It’s important to evaluate the different options in complying with the contract’s terms to achieve its essence or objective.
However, when partial execution or alternative execution is not possible, then the final option is to demand the contract’s cancellation.
Frustration of purpose vs impossibility
What is the difference between objective impossibility and frustration of purpose?
The doctrine of frustration of purpose and doctrine of impossibility are often confused.
In some cases, the actual performance or execution of the contract may become entirely impossible.
If you wish to purchase a specific car and fire destroys that specific car, there will be an objective impossibility for the car owner to deliver the car to you as per the terms of a contract.
The difference between the legal theory of frustration of purpose and the doctrine of impossibility is that in one case, the obligations are possible (but the purpose is frustrated or there is contract frustration) and in the other case the performance is impossible.
Let’s look at another example.
Suppose you hired a specific singer to sign at your wedding and the person dies.
In that case, the same person can’t execute the contract due to the evident impossibility for the other contracting party to execute its obligations.
When the contract is objectively impossible to perform, the courts may choose not to enforce the contract.
In essence, the nuance between impossibility and purpose frustration is that one deals with a party’s impossibility to actually perform its contractual duties whereas the other deals with the purpose, reason or objective of having entered into the contract (the execution of duties remaining possible).
To conclude on this topic, think about the prohibition on alcohol in the early twentieth century eliminating the purpose of many bars, bar leases and businesses.
In that context, due to the government laws prohibiting alcohol, many businesses and individuals were in the objective impossibility to execute their contractual duties.
Frustration of purpose vs impracticability
What is the difference between impracticability and frustration of purpose?
Impracticality or impracticability is caused by an exceptional event excusing a contracting party or both to no longer execute obligations based on its terms.
Suppose you experience a sudden shortage of supply of raw materials resulting in the contract performance becoming impracticable.
It can also be caused due to violations of the law or public policy.
It’s worth noting that impracticability is not linked to how a contract is no longer commercially worth it for one party or impractical as a party’s financial situation has changed.
On the other hand, the frustration of purpose is when the actual execution of the contract is possible but the objective, purpose or reason of existence of that contract no longer exists.
Section 2-615 of the Uniform Commercial Code codifies the notion of impracticability when UCC applies.
In essence, a seller of goods will not be considered in breach of contract when the basic assumption on which the contract was entered into becomes impracticable.
Restatement (Second) of Contracts
The Restatement (Second) of Contracts defines frustration of propose giving us additional clarity of what it means in law.
Section 265 of the Restatement (Second) of Contracts states:
Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances [of the contract] indicate the contrary.
In other words, when a party’s purpose is frustration “without his fault”, then he or she may be discharged from contractual duties unless the contract expressly provides otherwise.
Frustration of purpose example
The perfect example we can use to illustrate an example of frustration of purpose is COVID-19 pandemic.
Many individuals and businesses were conducting business as usual and entering into routine contracts when all of a sudden, governmental laws, regulations, restrictions and orders resulted in mandatory social distancing measures, travel bans, confinement and the close of many non-essential businesses.
Suppose you did not have a force majeure clause or frustration of purpose clause in your contract to govern the parties’ relationship resulting from the COVID-19 pandemic or you did not have business interruption insurance.
In that case, you may find relief in the doctrine of frustration of purpose.
Example 1: Billboard advertisements
In this context, imagine that you had entered into a contract to advertise on billboards near a sports arena where you were expecting a sports team to play an important game.
However, due to COVID-19, the sports team is banned from playing any games.
Although it is always possible for you to advertise on the billboard in front of the arena, the advertisement’s purpose is destroyed.
In other words, since the games are cancelled and nobody will be attending any of the games due to the government ban and social distancing measures, the purpose of the advertisement contract is frustrated.
This is different from the doctrine of impossibility where the actual duties are impossible to perform.
Example 2: Sports team franchise owner
Using the same example, imagine that you are the sports team franchise owner.
Due to the government ban, you are legally prohibited from opening your area and having your sports team play.
In this case, if you had made contractual arrangements to have a signer sign the national anthem at the game, the execution of the contract becomes impossible due to the shut-down.
Another example is when a contractor is hired to renovate a building but before the work is completed, the building is destroyed by fire.
In this case, a party will no longer have an economic value in having a person perform further renovations (the purpose is destroyed).
What is the principle of frustration?
The frustration of purpose is a doctrine used to defend against contractual enforcement actions where the defendant raised the argument that the purpose of the contract no longer exists to justify contractual execution.
The defendant will generally need to present the following fact patterns to the court:
- What was the purpose of the contract
- The purpose was well-known to the contracting parties
- An unforeseeable or entirely unexpected event affected the purpose
- The impact is so significant that the purpose is extinguished or materially eliminated
- The event was not attributable to the defendant actions, omission or negligence
- The risk was unexpected by the parties when the contract was signed
If a defendant is successful in presenting a frustration of purpose defense against a breach of contract claim or contract enforcement action, the courts will excuse the defendant of executing its contractual obligations.
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