Chapter 8 Key facts checklist

Contractual impossibility and risk: frustration and common mistake

This chapter is concerned with situations where a contract is impossible to perform and, in particular, the consequences of contractual impossibility.
Where the contract terms expressly or impliedly allocate the risk of a contract being or becoming impossible to perform on a particular ground to one party (such as on the ground of the destruction of the contractual subject matter) and that event occurs, that party cannot rely on the impossibility of performance as an excuse to a claim for nonperformance or breach of that contract
However, in the absence of a contractual allocation of the risk, a contract may be void (of no effect from the very beginning) if unknown to the parties at the time the contract was made, it was impossible to perform from the outset (common mistake). Non-performance in such circumstances is excused since there is no valid contract to perform.
Circumstances falling short of impossibility, such as mistakes as to the quality of the subject matter rather than as to its existence, do not render the contract void and the contract must therefore be performed in accordance with its terms or the non-performing party will be in breach.
This is an 'all or nothing' principle, i.e. a contract is valid or void. The courts have no equitable jurisdiction to set aside the contract for a fundamental mistake as to quality.
Equally, in the absence of a contractual allocation of the risk, if an event occurs after the contract has been made which renders further performance of the contract 'impossible' and that event occurs without the fault of either party, the contract may be discharged by frustration and parties have an excuse for future non-performance.
If the subsequent event which renders further performance impossible can be attributed to one of the contractual parties, that party may be in breach and cannot rely on frustration as a defence to a claim based on non-performance.
Where a contract is discharged by frustration both parties are excused performance of their future obligations and the application of the Law Reform (Frustrated Contracts) Act 1943 (LR(FC)A 1943) usually determines what happens to advance payments (such as deposits) due before the frustrating event, and claims for reimbursement for contractual expenses and performance conferred prior to frustration.
The legal treatment of initial and subsequent impossibility is very different. It is important to appreciate this and to attempt to explain the difference in treatment.