Terminating Contracts During a Pandemic: Frustration

By Keira Koch and Sharelle Staff

The Doctrine of Frustration is applicable to many types of contract. A contract can be frustrated where holding the parties to the contract would be considered unreasonable.

The event that leads to frustration of the contract must be unforeseen, and the current circumstances must be substantially different to the nature of the circumstances prior to signing the contract. Substantially different means where execution and performance of the contract is not possible and, would consequently be unfair to one or more parties. If a situation has arisen which could have been anticipated or there is an element of knowledge of the circumstances which arise, the courts are very unlikely to grant an application for frustration of a contract.

Frustration has significant relevance this year as a result of the Covid-19 pandemic. As an example, new businesses have claimed that their contractual obligations could not be upheld as a result of the substantially different circumstances the pandemic has created. In the Queensland case of Happy Lounge Pty Ltd v Choi & Lee Pty Ltd and Anor [2020] QDC 184, the purchaser alleged that the seller could not fulfil its obligations to hand over the business as a ‘going concern’, as a direct result of government orders to close all non-essential businesses. The Queensland District Court decided that in this instance, the purchaser was likely to have known about the coronavirus pandemic and its potential impacts upon execution of the new sale of business contract in February 2020, despite the virus only being discovered approximately a month beforehand. Therefore, the seller was deemed to have fulfilled its obligations under the contract, and the contract was said not to have been frustrated, hence rendering it unable to be terminated by the purchaser.

If you have entered into a contract and are now unable to fulfil your obligations due to circumstances outside of your control, you may be able to claim that the contract has been frustrated.

We recommend that you contact a lawyer to receive advice about your specific circumstances if you are having contractual issues. This article is for informational purposes only and does not constitute legal advice.