Update
MCW | In-Focus
Construction & Infrastructure
FEBRUARY 2014
Just because you’re frustrated doesn’t
mean it’s frustration
Andrew Mewing • Principal • T 07 3014 6534 • E amewing@mcw.com.au
Michael Batch • Principal • T 07 3014 6580 • E mbatch@mcw.com.au
The life of a construction project may give rise to any number of unforeseen events which could cause the work to
be substantially different from what was originally anticipated.
From the outset, parties should agree who bears the risk of remote unforeseen events and insert appropriately
worded clauses explaining each party’s entitlements upon the occurrence of those events.
Any assumption that the narrow doctrine of frustration will be available in such circumstances may be filled with
disappointment.
What is frustration?
Notwithstanding its complexity, the doctrine of frustration was explained simply by Mason J in Codelfa:
[1]
… a contract will be frustrated when the parties enter into it on the common assumption that some
particular thing or state of affairs essential to its performance will continue to exist or be available, neither
party undertaking responsibility in that regard, and that common assumption proves to be mistaken.
A frustrating event
In order for the doctrine of frustration to apply, a frustrating event must have occurred. But what constitutes a
‘frustrating event’?
An event which brings about a radically different situation
A frustrating event is an event which brings about a situation radically different from that contemplated by the
parties at the time the contract was made.
For example, in Codelfa, tunnelling works were agreed on the basis of work being carried out 24 hours a day/seven
days a week, but a court injunction restricted hours of tunnelling mid-way through the contract (on grounds of noise
disruption to local residents). The court injunction was a ‘frustrating event’ which rendered the contract radically
different from that which was contemplated by the parties at the time the contract was made.
The frustrating event must be so game-changing as to cause a party rightly to conclude “this is not the task I
[2]
promised to do”. Lord Radcliffe in Davis Contractors stated:
[1]
[2]
Codelfa Construction Pty Limited v State Rail Authority of New South Wales (1982) 149 CLR 337 at 357.
Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729.
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Just because you’re frustrated doesn’t
mean it’s frustration (cont.)
... frustration occurs whenever the law recognises that without default of either party a contractual
obligation has become incapable of being performed because the circumstances in which performance is
called for would render it a thing radically different from that which was undertaken by the contract ... It
was not this that I promised to do. (emphasis added).
[3]
It is important to note ‘some unusual elements’ in Codelfa which appeared to support the finding of frustration in
that case. Codelfa Construction relied on representations by the State Rail Authority of New South Wales that the
work could not possibly be impeded by the grant of an injunction. Codelfa Construction and the Authority both
accepted, without reservation, erroneous legal advice to this effect. The risk simply was not in the parties’
contemplation. This supported the conclusion that the situation resulting from the granting of the injunction was
fundamentally different from the situation contemplated by the parties.
The result in Codelfa may have been different if the parties knew that there was a risk of injunctions, even if that
risk was very remote.
An event which occurs mid-performance
A frustrating event must occur during the performance of the contract.
The event must occur after the contract has been made. Unfortunate and/or oppressive factors which already were
in existence at the time of formation, and only ‘came to light’ mid-performance, are not within the ambit of the
doctrine of frustration.
[4]
For example, in Burmic Pty Ltd v Goldview Pty Ltd , neither party realised that local law prohibited them from
mounting an advertising billboard on the rooftop of a commercial building. The parties unwittingly entered an
unlawful lease to rent the advertising space which never was capable of operation. The District Court found that the
law making the lease illegal was a frustrating event rendering the contract unworkable. The Court of Appeal
overturned that decision, finding that at all times before and during the contract, the lease was prohibited by local
law. The fact that neither party knew their contract could not operate until mid-performance was immaterial.
Neither party has assumed the risk
In order for the doctrine of frustration to apply, it is essential that neither party has taken on the risk that the
frustrating event will or may occur.
Even if neither party has expressly taken on the risk of the frustrating event occurring, courts willingly assume that
parties enter contracts ‘in the face of an uncertain future’. An unqualified promise usually will be regarded as an
[5]
undertaking to perform obligations notwithstanding the course of events.
In determining whether a party impliedly assumed a risk of the frustrating event occurring, courts will examine the
commercial risks and surrounding circumstances of the agreement.
This is important to keep in mind, given the many risks, swings and roundabouts in any construction project.
The effect of frustration
At common law, a frustrated contract results in the automatic discharge of all unperformed obligations by either
party. Where the contract has been partly performed before frustration, but no contractual rights have accrued in
[3]
Codelfa, per Mason J at 359.
Burmic P/L v Goldview P/L [2002] QCA 479 per McPherson JA (Cullinane and Holmes JJ agreeing).
[5]
Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169 per Latham CJ.
[4]
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Just because you’re frustrated doesn’t
mean it’s frustration (cont.)
respect of such part performance, the view is that the ‘loss lies where it falls’ and that neither recovery of money
[6]
paid nor compensation for partial performance is allowed.
For example, if a client has made progress payments to a contractor to supply and install equipment (before the
work has been carried out) and the contract becomes frustrated, at common law the client may not be entitled to
recover those progress payments.
AS4000–1997
Clause 40 of the general conditions of contract AS4000–1997 deals with the consequences of the contract
becoming frustrated. However, the clause does not define frustration or the scope of its application. The effect of
the clause gives the parties certain rights:
■
to payment for work under contract carried out to the date of frustration;
■
to recover costs of materials and equipment ordered and demobilisation costs caused by the frustration; and
■
to recover the relevant security provided to the other party under the contract.
Legislative intervention
In New South Wales, legislation governs the effect of frustration. Its effect is to allow the court to adjust the
position of the parties after frustration to prevent unfairness, so that money already paid under a frustrated contract
may be recoverable and performance already rendered may be compensable. Parties can avoid the effects of the
Act by contracting out of it. Otherwise, the legislation does not affect (or broaden) the common law doctrine of
frustration.
Practical tips
When negotiating construction contracts:
■
parties should assume that the doctrine of frustration will not be available in the event of a remote unforeseen
event; and
■
from the outset, parties should agree who bears the risk of remote unforeseen events and insert appropriately
worded clauses (for example in the Force Majeure or Extension of Time clauses) explaining each party’s
entitlements upon the occurrence of those events.
For further information please contact:
Andrew Mewing
Principal
Michael Batch
Principal
07 3014 6534
07 3014 6580
amewing@mcw.com.au
mbatch@mcw.com.au
The authors would like to thank Jean Hamilton-Smith and Andrew Hope for their contributions to this article.
[6]
N C Seddon & M P Ellinghaus, Cheshire and Fifoot’s Law of Contract, 9th Australian edn, LexisNexis Butterworths, Sydney, 2008, p 977.
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