DOCTRINE OF FRUSTRATION
For an agreement to be a legally binding contract, it must possess three elements: offer, acceptance and consideration. Once these three elements exist, the agreement is legally recognized and each party is required to perform their contractual duties; otherwise, the non-breaching party will have grounds to sue for breach of contract. However, there are cases in which an intervening event occurs that renders one or both of the parties unable to continue or complete their contractual obligations after a contract is formed.
This creates difficulties in situations where one party has pre-paid the purchase price, performed more than the other or taken on expenses in reliance on the contract, which raises the question of whether the parties should be excused from their duties under the contract or whether they should be strictly held to them.
In order to introduce fairness into the law of contract in situations where the breaching party has no control over their ability to perform under a contract, Courts have created the Doctrine of Frustration which results in the automatic termination of the contract at the point of frustration, if successfully applied. Obligations that arose before the contract became frustrated remain enforceable and obligations that arose after frustration are discharged.
In order for the Doctrine of Frustration to apply, it must be impossible and impracticable for a party to perform their contractual obligations due to an unforeseeable event that arose without the fault of either party. Foreseeability is an objective test based on what a reasonable person would have foreseen at the time of contracting. The objective of the contract must no longer be attainable because the parties are not getting substantially what they bargained for. Essentially, one of the parties would have the position that “this is not what I promised to do”. This test has been endorsed by the Supreme Court of Canada in Naylor Group v. Ellis Don Construction, 2001, in which the court held that a contract was not frustrated due to delay caused by a third-party event because delay in the construction context was not unforeseeable.
In the Real Estate context, the law of frustration is often applied in cases involving greenbelt legislation, downzoning, expropriation, heritage designation, refusal to approval subdivision plans and refusal to provide sewer or water allotments. In other contexts, the Doctrine of Frustration is applied to cases involving the shipment of goods, construction and export sale contracts in which one of the contracting parties dies or becomes incapacitated, or there is destruction or unavailability of the subject matter.
The Doctrine of Frustration will not apply in the following circumstances:
1. Where it is merely inconvenient for one party to perform under the contract;
2. Where one party would suffer a material loss or additional expense;
3. Where a contract expressly provides for the event that has occurred since the parties have consciously accepted the risk;
4. Where the third-party event should have been foreseen by the parties; and
5. Where the third-party event that is attributable to the fault of one of the parties or is self-induced.
If a contract is silent on the issue of third-party events that frustrate the purpose of the contract, it is read into the contract such that it can be rescinded for frustration without damages. However, many contracts do contain a force majeure clause, but the ultimate impact of this clause will depend on its language, which can be specific or broad.
In light of the outbreak of the COVID-19 Pandemic, a party seeking to excuse themselves from further obligations under a contract would have to prove that COVID-19 has made performing the contract impossible and that the outbreak and its consequences were objectively unforeseeable at the time the contract was entered into. It is uncertain what the impact of COVID-19 will be, but courts generally do not easily set a contract aside absent extraordinary circumstances. Ultimately, it will be an extensive fact-finding exercise that will be contract specific.
If you have any questions or concerns about a contract that you are no longer able to perform, please contact one of the lawyers at Vakili Law Group for a consultation and a review of your contract.
© Vakili Law Group PC 2020 All rights reserved. The content on this website is provided for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Many factors unknown to us may affect the applicability of any statement or comment that we make on our website to your particular circumstances. Users of this website are advised to seek specific legal advice by contacting members of Vakili Law Group regarding any specific legal issues. Vakili Law Group does not warrant or guarantee the quality, accuracy or completeness of any information on this website. The articles published on this website are current as of their original date of publication, but should not be relied upon as accurate, timely or fit for any particular purpose. Accessing or using this website does not create a lawyer-client relationship