If you’re worried about breach of contract and COVID-19, you need to be familiar with the contract law concept known as frustration.
If you need legal advice from an Ontario Contract Lawyer, book your legal consultation with Supply Law today.
*Disclaimer: this guide is for informational purposes only. It does not constitute legal advice nor create a solicitor-client relationship between the author and reader. As with all legal matters, a lawyer should be properly retained and consulted where legal advice may reasonably be considered necessary.
This blog post will cover the basics of frustration, including:
1. What is frustration?
2. When is a contract frustrated?
3. When is a contract NOT frustrated?
4. What happens when a Contract is frustrated?
Ready? Here we go!
1. What Does It Mean When a Contract Is Frustrated?
Parties looking to escape their contractual obligations will be quick to turn to the doctrine of frustration to shield themselves against a claim for breach of contract. Frustration provides a remedy for parties to put an end to a contractual relationship (and therefore their legally binding obligations) on the grounds some intervening event occurred, after the contract was entered (and without the fault of either party), that rendered the contract substantially different from what was agreed to. Frustration arguably falls within the umbrella of the doctrine of mutual mistake (which may also invalidate an agreement) because a contract is not legally binding unless there is “consensus ad idem”, or a meeting of the minds between the parties (see When is a Contract Legally Binding? for more on this subject). The theory of frustration holds, it would be unjust for the courts to compel a party to perform an obligation, where they would be forcing that party to do something radically different from what they agreed to when the contract was entered.
2. When is a Contract Frustrated?
Whether a contract has been frustrated will depend on an analysis of the agreement and surrounding circumstances. This analysis (like most contract disputes) will be highly fact-specific. Unfortunately, this means the courts have been somewhat inconsistent in their determinations of when an agreement will be considered frustrated. Generally though, a contract may be found frustrated in the following instances:
- Frustration by Destruction of Subject Matter – where the object being contracted for no longer exists i.e. where a rare vintage automobile is destroyed in a fire before being delivered to the purchaser.
- Frustration of Purpose – where a radical alteration in the fundamental conditions under which the contract was to be performed render performance physically or commercially impossible or highly impractical i.e. where a strike by unionized employees forced a plant to permanently close, the courts held the employment contracts of the non-unionized employees were frustrated.
- Frustration by Acts of State – where the contract requires a consent, license, or permission from a government authority, and the parties have been unable to secure it i.e. where an export permit is required to ship goods sold to a party overseas and that permit is denied.
- Frustration by Supervening Illegality – where a change in the law renders it illegal to perform the contract i.e. where subsequent legislative changes prevent a person with a criminal record from providing consulting services to recreational cannabis companies, that agreement may be frustrated.
3. When is a Contract Not Frustrated?
Again, the courts have been inconsistent here, but the larger theory is that a contract will NOT be frustrated where performance simply becomes more onerous, where the risk was foreseeable, based on the impecunity of a party, and even on the death of one of the parties. But as you’ll see, you can’t always draw clear distinctions between the categories of what is and is not frustration.
Frustration Where Performance Becomes More Onerous
While the doctrine of frustration is flexible and evolving, the courts have been hesitant to intervene where performance has merely become more difficult or onerous for a party (though frustration has arguably been justified on these grounds albeit through frustration of purpose). For instance, in First Real Properties Ltd. v. Biogen Idec Canada Inc. the Court found an offer to lease was frustrated because the premises could not be modified in accordance with the tenant’s proposed fit-up plans. Here, the Court held the frustrating event was the discovery of a load bearing wall which prevented windows being installed without massive expense to the Landlord. However in Wilkie v. Jeong it was held the imposition of a new Canadian foreign buyer tax, which had the effect of significantly increasing the sales taxes a purchaser was required to pay under an agreement of purchase and sale of a residential home, was not a frustrating event despite the unanticipated increase in costs payable by the purchaser.
Foreseeable Risk, Impecunity and Death
Generally, it has been held that if the risk was foreseeable as being inherent in the type of contract in question, the parties will not be relieved, no matter how remote the frustrating event may appear. It has also been held that the impecunity of one of the parties (or the inability to pay) will not serve as a frustrating event. In certain circumstances, even a contracting party’s death may not frustrate an agreement, as the obligations will pass to the executor or administrator of the deceased’s estate. In any case, where frustration is relied upon, the party claiming frustration has a duty to mitigate against the frustrating event by attempting to fulfill the contract when circumstances change.
4. What Happens When a Contract is Frustrated?
Effect of Frustration
Where a contract has been frustrated, the effect of frustration is that both parties will be relieved from further performance under the contract. In essence, the effect is that the relationship will operate as if there was never a contract between them at all. But what about the expenses or resources parties have incurred prior to frustration? Traditionally, under the common law, the courts would look to equitable remedies such as unjust enrichment to allow a party to recover money paid under a frustrated agreement. The reason being, that the other party should not be able to profit despite no longer having to perform its own obligations. While in principle this theory made sense, its application often resulted in a scenario where one party (typically the vendor to a sales contract) ended up bearing more of the cost.
Enter Ontario’s Frustrated Contracts Act
The often harsh consequences which resulted from the application of the common law, eventually lead to the enactment of the UK’s Law Reform (Frustrated Contracts) Act, a codification of rules governing what should happen when a contract is frustrated. Most Canadian provinces have followed the UK’s lead and enacted their own legislation to deal with the effects of a frustrated agreement. In Ontario, the Frustrated Contracts Act provides general instructions for what should happen after an agreement has been found frustrated. Generally, under the Act:
- Money paid or payable before the agreement was frustrated is recoverable from the other party
- in the case of sums payable, that money ceases to be payable
- Expenses incurred in connection with performance may be recoverable (in whole or part) if the court considers it just in the circumstances, and
- if one party has gained a benefit from the other’s part performance other than money, the value of that benefit may be recovered from the other party.
While these rules are intended to provide clarity as to how loss should be allocated between the parties to a frustrated agreement, an obvious problem (and source of civil litigation) is quantifying the non-monetary benefit a party has received. So, before arguing an agreement has been frustrated, parties should carefully consider the compensation the other party may be entitled to claim.
There is a high threshold for claiming frustration and it is often difficult to draw clear distinctions between the categories of what is and is not a frustrating event. Parties should exercise great caution before arguing a frustrating event has occurred as, similar to force majeure, a failed attempt to rely on this remedy will usually result in a claim for breach of contract.
If you need legal advice from an Ontario Contract Lawyer, book your free legal consultation with Supply Law today.