Business News

5/05/2010 | The Doctrine of Frustration

We all experience frustration, particularly when things happen that are totally beyond our control.

No doubt many people were somewhat frustrated with events arising from the volcanic eruption in Iceland. Flights were grounded due to volcanic ash over the UK and Europe, affecting not only travellers, but also deliveries of goods.

From stories of grooms being unable to make it to their own wedding, to young companies being unable to get their very first international order of perishable goods delivered, the papers have been filled with tales of volcano-related woe.

In the world of contracts, such an event can have a major effect on the ability of one party to fulfil their end of the deal.

So what happens to a contract when disasters occur that cannot possibly have been pre-empted?

Enter the doctrine of frustration.

As a general rule in contract law, there is a principle that promises must be kept, no matter what the circumstances. When a contract is written, risk is often included. For example, contractors might write into the contract what should happen in the event that certain circumstances occur, such as a labour shortage which affects a building company being able to complete work on time.

Known as a ‘force majeure’ clause, this means that parties map out the course of action if certain events occur that affect one party being able to perform their job.

But unexpected things happen, and you can’t cover every possible risk when you draw up a contract.

The doctrine of frustration is basically a court order that means the contract is immediately brought to an end because of some disaster that is no one’s fault, and which couldn't reasonably have been foreseen when the contract was entered into. It’s the only excuse for a failure to perform contractual duties.

But all aspects of the contract leading up to the actual frustrating event must still be fulfilled. In other words, if one party owed the other a payment the day before the frustrating event, they will generally still have to pay it.

So when the disaster occurs is crucial. And it must be extraordinary circumstances. For this reason, these cases are not that common.

Passengers and companies who were recently forced to miss important deadlines may be interested to know this; the frustration doctrine is valid where one party cannot fulfil their end of a contract due to ‘government interference’. In terms of the recent disaster, it was a government decision to force the airlines to ground flights, preventing airlines from fulfilling their contract with passengers.

This means there may be scope for passengers to seek to have their tickets refunded.

It will be interesting to see how this plays out in the future months.





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