The Doctrine of Frustration
Frustration operates to bring a contract to an end in circumstances where an intervening, post-contract event has occurred through no fault of the parties, which makes a contractual obligation impossible to perform or transforms a contractual obligation into a fundamentally different obligation.
Frustration in contract generally and its application to leases and other contracts concerning land continues to be developing in Australia.
Contract
In Dyco Hotels Pty Ltd v Laundy Hotels (Quarry) Pty Ltd (2021) 396 ALR 340, Laundy the seller of the hotel, was obliged to carry on the business of the hotel pending completion of the sale to Dyco, as a ‘going concern’ in the usual and ordinary course of business. Prior to settlement, Covid public health orders came into effect causing the hotel to provide accommodation and take away sales only. At settlement, Dyco argued that the contract for sale of the hotel was frustrated because the public health orders meant the business could not operate in the ‘usual and ordinary manner’ as required by the contract. Laundy issued a Notice to Complete and then terminated the contract when Dyco failed to complete the sale.
Dyco sued for return of its deposit and Laundy counterclaimed for breach of contract.
The essential question was whether Laundy was entitled to terminate the sale contract.
The Supreme Court at first instance found there was no frustration as Laundy’s obligation to carry on the business was secondary to the main purpose of transferring assets for an agreed price as to which there was no warranty and the value of the asset had in any case dropped by less than 9%.
The Court of Appeal did not dispute the conclusion that there had been no frustration, but found that Laundy would have been excused for non-compliance with its obligation to continue to operate the hotel as a ‘going concern’ in the usual and ordinary course of business due to the potential supervening illegality to do so in light of the public health orders. However, because of the non-compliance, Laundy was not ready, willing and able to complete the sale contract at the time of serving the Notice to Complete or at termination.
The Court found that Laundy had repudiated the sale contract as it was not entitled to terminate.
The decision is pending appeal in the High Court and it is hoped that the High Court will address the issue of whether frustration has occurred.
It is an interesting case, but in terms of frustration in particular, pending the High Court’s decision, the takeaway is that the obligation under the sale contract to carry on business in the usual manner was secondary to the primary obligation to sell and purchase the asset, so as that was still achievable, no frustration had occurred.
Leases
While contracts can be determined to be frustrated, the instances of whether or not the doctrine of frustration can apply to a lease is less common and was historically resisted.
The present position in respect of frustration in leases was discussed by the Court in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 and although the Court in that case found frustration not to have occurred by reason of the temporary nature of the disruption to the tenant’s rights, the Court accepted that the doctrine of frustration was, in principle, applicable to leases, albeit in exceptional circumstances.
In Panalpina, road closures by the local council of the only access road to the leased premises for a period of 20 months in a 10 year lease with four and a half years to run was considered to be a temporary event and not a ‘cataclysmic’ event such as to give rise to frustration of the lease by rendering the parties to be unable to fulfil their obligations for the outstanding term of the lease.
Likely the argument for frustration would have been successful if the event was to occur and exist for the remainder of the term of the lease.
The Panalpina decision is consistent with earlier decisions in which the issue of whether frustration of a lease had occurred was considered having regard to whether the supervening event made performance of the lease impossible for the whole, balance or majority of the term or was just a temporary event compared to the balance of the term.
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This publication is for general information purposes only and does not constitute legal advice. You should seek legal advice regarding your particular circumstances.