A frustration defense excuses a party from breaching a contract when the contract has lost all value to one of the parties. If the contract loses all value, its purpose has been defeated.
Changes in circumstances must be beyond either party’s control for the loss of value to occur.
Despite commonly occurring as the result of government action, any party, including nature, can frustrate an individual’s primary goal for entering a contract. A similar concept is commercial frustration.
Let’s say Jay gets a mortgage for a new home, and after three years, the home is destroyed through no fault of his own. In the absence of a hell or high water clause, Joe may be exempt from paying the rest of the mortgage, as the original purpose of the contract, to own a home, has been compromised. However, he might still have a foreclosure on his credit report.
People often confuse frustration of purpose with the closely related doctrine of impossibility.
There is a distinction between impossibility and frustration of purpose. Impossibility pertains to the obligations specified in the contract, whereas frustration of purpose relates to the reasons for entering into the contract. Let’s say entrepreneur Eva leases space from landlord Lewis so that she can open a restaurant that only serves Tibetan Speckled Lizard meat. Lewis and Eva are excused from performing the contract if the city rezones the property and makes it illegal to use for commercial purposes or if a tornado destroys the property.
Should the Tibetan Speckled Lizard suddenly become extinct, Eva may be excused from performing the contract because Lewis knew her primary purpose for entering into the lease was to serve the Tibetan Speckled Lizard. As for the second scenario, the parties could still perform their obligations under the lease, but one of them no longer has a reason to do so.
In the event of a successful defense, the contract is terminated, and the parties remain as they were at the time of the lawsuit.
What Is the Likelihood of a Frustration Defense Succeeding in Court?
Sometimes the frustration defense is brought up, but the courts will not grant it unless it is absolutely necessary. A frustration defense can only be used if the contract has lost all of its value. If a contract has only lost some value or has not met expected profits, a frustration defense will fail. Getting into a contract that isn’t as lucrative as you expected won’t help you out.
Explanation of Impossibility, Impracticability, and Frustration of Purpose
Practically speaking, impossibility, impracticability, and frustration of purpose are all variations of the same theme and are often used interchangeably by courts.
As a result of the defense of impossibility (also called impracticability or commercial impracticability), a party’s duty to perform under a contract is discharged if:
- After entering into the agreement, an unexpected intervening event happens.
- The non-occurrence of the intervening event was a fundamental premise underlying the contract.
- The intervening event rendered performance wholly impossible or objectively economically impracticable.
An unexpected, intervening event–whose non-occurrence was an underlying assumption of the contract–discharges contractual duties to perform.
There is a distinction between frustration of purpose and impracticability because neither party is actually hampered from performing. Instead, circumstances have changed so much that one party’s performance is virtually worthless to the other.
Temporary or partial impracticability may lead to frustration of purpose. An unexpected, intervening event causes performance to be temporarily impracticable. As a result, the duty to perform is not discharged but is suspended until it can be performed. A duty to perform is discharged only if, after the impracticability has ceased, the performance would be materially more burdensome. It is possible to experience partial impracticability or frustration when an unexpected, intervening event renders only some of a party’s performance impossible, in which case the promisor must render the part of the performance that is feasible.
Demonstrating the Impossibility of Something Can be Difficult
It is difficult to prove impossibility. Many states strictly enforce the doctrine of impossibility. In New York, for example, courts consider several factors in determining whether the doctrine of impossibility can excuse a non-performing party’s failure to perform-the foreseeability of the event, the fault of the non-performing party in causing or not protecting against the event, and other factors affecting the just allocation of risk.
It is common for courts to differentiate between subjective and objective impossibility, declining to excuse subjective impossibility or impossibility related only to the individual promisor but allowing objective impossibility relating to the nature of the promise.
What Are Some Common Examples of a Frustration Defense?
These are a few examples of when a frustration defense might work:
- Purpose of contract frustrated: For example, let’s say you bought a summer home so that you can fish on the lake. Then a massive mudslide occurs, and you can’t fish in the lake for a decade. The frustration defense can invalidate the contract to purchase the house, but only if the seller knew your purpose in buying the home was to fish.
- Necessary for performance: If a person or thing necessary for the performance of the contract becomes unavailable, a frustration defense can be used. Imagine, for instance, that you contracted to buy a healthy racehorse that broke its leg. A racehorse in poor condition defeats the purpose of the contract.
Using Impossibility, Impracticability, and Frustration as a Defense
Parties who wish to rely on the defenses of impracticability, impossibility, or frustration of purpose to either excuse delay or discharge their contractual responsibilities should observe these best practices:
Review the Contract
If you intend to rely on these doctrines, you should check your contract first. An agreement may disallow relying on the doctrine of impossibility, impracticability, or frustration of purpose. A party’s power to rely on these doctrines may also be affected by provisions concerning risk allocation. As jurisdictions may treat these doctrines differently, parties should identify the governing law of their contract.
Negotiate a Provision that Specifically Addresses COVID-19
If you are negotiating a contract during the pandemic, consider adding a clause related to COVID-19. Address any underlying assumptions and conditions related to:
- The pandemic.
- The present restrictions on construction.
- The availability of labor and materials.
Addressing these assumptions appropriately can help ensure that these defenses will be available if things go wrong.
Pay Attention to Subcontracts, Suppliers, and Other Contracts.
Even if the doctrines of impossibility, impracticability, and frustration of purpose apply in one circumstance, they may not necessarily apply in other contractual situations. You must ensure that, if certain assumptions or conditions are inherent in the performance of one contract, you have taken the necessary steps to preserve their applicability downstream.
Document Impacts and Issues as They Arise and Notify the Public Frequently
Keep a record of impacts and issues as they occur and provide notice frequently and often. Documentation will be crucial if forced to establish one of these defenses down the road.
How Can an Attorney Help Me?
The frustration defense must be applied correctly to a situation to be effective. Find out if the frustration defense applies to your situation by speaking with an attorney. Even if it is not, an experienced contract attorney can devise other defenses to support your position.
