What Is Frustration Of Purpose? A Valid Contractual Defense!

In most cases, you enter into a business contract for a reason. Each party stands to gain or derive some benefit from the contract being performed fully, and in compliance with the contractual terms. But what happens when that purpose is gone? Or when the entire reason for entering into the contract suddenly disappears?

Inability vs Frustration

Let’s first clarify that there are a lot of defenses to breach of contract that relate to the complete inability to perform. Perhaps the materials needed to complete a contract aren’t available, or the law makes completion illegal, or there is something out of someone’s control, like war, plague, or weather, that makes it absolutely impossible to comply with the terms of the contract.

There are valid defenses in those situations. But what about where none of those exist? What about situations where it is absolutely physically possible to complete the terms of the agreement, but it no longer makes sense to do so? The entire reason for entering into the agreement is now gone?

Frustration of Purpose

Let’s assume that you contract with a company to make you 1000 devices. As the devices are being made, the government says that selling the devices is now illegal. The company making the devices can make them. You can pay for them, and take delivery of the devices. The contract can be performed.

But the devices can never be sold, because of the law change. The entire purpose of the agreement has now disappeared.

This is called frustration of purpose, and it’s a valid contractual defense, in certain limited situations.

Limitations on the Defense

The thing that causes the frustration must have been unforeseen. Otherwise, courts will assume that the parties voluntarily didn’t account for the event, and didn’t want to make any contractual allowances for the event.

The unforeseen event must really frustrate the entire purpose of the agreement. Simply costing more, taking longer, or some lost profits won’t cut it. The entire underlying purpose of the agreement must be gone.

The contract must have been entered under the premise or assumption that the thing causing the frustration, was not going to happen. Courts will ask, if the parties had known about the unforeseen problem from the beginning, would they still have entered into the agreement (or at least, accounted for it in the contract)

In our example, the fact that the public may no longer want to buy the devices being made, wouldn’t be a frustration of purpose. But laws that make selling the devices suddenly illegal, may be a valid frustration of purpose. The parties in our example could argue that the entire purpose of the agreement was based on the premise that they could be sold legally.

Call the West Palm Beach business litigation lawyers at Pike & Lustig for help if you have a business contract problem or any lawsuit related to a business litigation problem.