Frustration of Purpose in Contract Law Explained

Key Takeaways

• Frustration of purpose applies when an unforeseen event destroys a party’s principal reason for entering a contract.
• It differs from impossibility and impracticability, which focus on performance feasibility.
• Courts apply a strict standard and often reject claims unless the frustrated purpose was truly foundational and known to both parties.
• Examples include legal changes, property destruction, or major event cancellations.
• The doctrine saw renewed attention during COVID-19 shutdowns that disrupted business operations.
• Parties may protect themselves using force majeure clauses or express conditions in contracts.

A frustration of purpose example would include an emergency that prevents a person from executing a job in a contract. The frustration of purpose deals with contract law and occurs when unforeseen circumstances undercut the sole aim of a contract. It’s a term reserved for the defense of non-performance based on unexpected occurrences, making the performance of any duty commercially impossible.

This area pertains to the reasons for the contract and is used to describe why the contract would be void. It is also known as commercial frustration, as unforeseen events take place and make the execution of a contract impossible. This would entitle frustrated parties to cancel the agreement without violating the agreement and paying any damages.

Example: Jack Smith enters into a contract to purchase a commercial building to rent to another party. While the business transaction is pending, the building in question gets condemned by city officials due to dilapidated conditions. Mr. Smith can rescind the agreement with no obligation.

Another instance would include Sally leasing a store from Andy to sell exotic animals. The lease is for three years. After two years, a law gets passed making it illegal to sell exotic animals in the U.S. Sally can be excused from the last year of the lease because Andy was aware of the specific intent behind the lease, which was to sell exotic animals. With such a ban on exotic animals, she does not have a reason to continue with the business, unless she chooses to proceed. On the flip side, Andy may also end the agreement and lease the land to another party.

Impractical Circumstances

The excuses from a party regarding a certain function outlined in a contract is called an impractical excuse. The courts rely on various conditions when assessing impracticability, such as:

• An instance of unforeseen condition or circumstance
• An unforeseen occurrence that must render an obligation expensive or difficult to achieve
• Extreme difficulties or expenses that arose unexpectedly be either side of the agreement

For instance, Jim’s business enters into an agreement with city officials to remove all gravel from a certain area. After assessing the area, the business learns that a large part of the gravel is submerged in water, and the cost of removal amounts to 10 times the initial assessment. The business could cite impracticability since the cost of removal would exceed the initial cost.

The commercial impracticability aspect takes place when contract performance by a party is too costly or difficult to execute. The primary difference between impossibility and impracticability is that impracticability is physically impossible to execute. With that, the performance results in undue hardship by the party performing the action.

Impracticability excuses performances where an excused party has no control over a situation or is not at fault for an occurrence during the business transaction. Overall, impracticability is only reserved in extreme cases.

• Example: You enter into a contract with someone performing services or selling goods. The cost associated with the agreement increases due to regulatory burdens and government taxes, etc. When entering into the agreement, you did not consider such factors. If executing the agreement results in undue financial burdens, you can exit the agreement by citing the commercial impracticability in executing the contract.

Impossibility Factors

Impossibility happens regarding a certain duty that’s under contract is impossible to complete because of sudden circumstances.

• Example: Rick pays Ben $10,000 to paint his house in March, but a fire destroys the property in February before payment is used. This would excuse Rick from the agreement because the house cannot be painted. Therefore, Ben has no recourse in seeking damages in a courtroom due to the issue of impossibility.

Another instance is if Rick, who owns several apple farms, enters into a contract with a business and promises to provide two hundred bushels of apples annually. The agreement notes that all apples must be Granny Smith apples and come from the southern part of the field. Due to a harsh winter, however, the apples failed to grow. Due to the effects of the harsh weather, Rick does not have to provide the apples due to circumstances that fell beyond his control.

Key Legal Requirements for Frustration of Purpose

For a party to successfully invoke the frustration of purpose doctrine, most courts require the following elements to be met:

1. Principal Purpose Destroyed: The event must substantially frustrate the core reason the party entered into the contract—not a peripheral or minor benefit.
2. Unforeseeable Event: The frustrating event must have been unforeseeable at the time the contract was made.
3. No Fault: The party seeking relief must not be responsible for causing the frustrating event.
4. Purpose Known by Both Parties: The contract's primary purpose must have been mutually understood and recognized by both sides at the time of contracting.

Courts will not excuse performance merely because the contract is no longer profitable or convenient. The change in circumstance must strike at the very heart of the deal.

Frustration of Purpose vs. Impossibility and Impracticability

While all three doctrines may excuse contractual performance, they operate under distinct legal theories:

Understanding these differences helps parties determine the most appropriate legal strategy when facing disruptive events.

Modern Examples of Frustration of Purpose

Here are a few modern examples where courts have considered the doctrine of frustration of purpose:

• COVID-19 Closures: A gym leased space to operate fitness classes, but pandemic restrictions shut down indoor exercise facilities. Courts examined whether the tenant's inability to operate nullified the lease's purpose.
• Event Cancellations: A company rented a venue for a major tradeshow that was later canceled by government order. If the sole purpose was to attend the tradeshow, the lessee may be released from the lease.
• Regulatory Changes: A business contracted to sell a product that was later banned. Courts may discharge the agreement if the sale of that product was the central aim of the contract.

These examples illustrate that the doctrine is limited and fact-intensive. Courts will closely examine whether the event was truly unforeseeable and whether it obliterated the contract’s foundation.

How to Mitigate Frustration Risks in Contracts

To avoid potential disputes related to frustration of purpose, parties can:

• Include Force Majeure Clauses: These provisions allocate risk by specifying which events (e.g., natural disasters, government shutdowns) excuse performance.
• Clearly State the Contract’s Purpose: If the contract’s goal is narrowly defined, courts may be more likely to recognize a frustration claim.
• Use Contingency Clauses: Express conditions that void the agreement if specific events occur can offer clarity and avoid legal ambiguity.
• Consider Insurance: Event cancellation or business interruption insurance can help offset losses if frustration occurs.

Consulting a qualified attorney can help draft contracts that appropriately manage these legal risks.

Limitations of the Doctrine

Despite its usefulness, courts apply the frustration of purpose doctrine cautiously. Common limitations include:

• Economic hardship alone is insufficient.
• The event must strike at the root of the agreement, not just reduce profitability.
• The doctrine may not apply if the frustrating event was foreseeable and unaddressed in the contract.

As a result, businesses are advised not to rely solely on frustration of purpose as a safeguard and should proactively negotiate risk allocation clauses.

Frequently Asked Questions

1. What is the frustration of purpose in contract law?
   It is a legal doctrine that allows a party to cancel a contract when an unforeseen event destroys the fundamental reason they entered the agreement.
2. How is frustration of purpose different from impossibility?
   Frustration involves loss of value or purpose, while impossibility refers to literal inability to perform the contract’s terms.
3. Can economic hardship alone justify frustration of purpose?
   No. Financial losses or declining profits typically do not meet the high bar required for this doctrine.
4. What are some real-world examples of frustration of purpose?
   Examples include business shutdowns due to COVID-19, banned product sales, and government-mandated event cancellations.
5. How can I protect my business from frustration-related risks?
   Include force majeure and contingency clauses in contracts and clearly define the contract’s purpose to strengthen your legal position.

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