Frustration of Purpose

When creating a contract, few people imagine that they will need to use the frustration of purpose to stop performing under the contract. However, no one can foresee how things will happen as the contract moves on, and events can render the contract useless to its purpose. Contracts are agreements between two or more parties to exchange goods or services.

Once the parties create a contract, they cannot remove themselves from the contract except for a few particular situations or any options in the contract. The ways that a party can get out of performing under a contract are called defenses, and frustration of purpose is a defense to performance or lack thereof under a contract.

This article will define frustration of purpose, the element of frustration of purpose, and the best ways to use the frustration of purpose to excuse performance from a contract.

The Frustration of Purpose Defined:

As stated above, the frustration of purpose is a defense to a contract. This means that if a party can meet all the elements of the defense, they will be able to get out of their obligations under the contract, which is often payment. The frustration of purpose means that one of the parties had a purpose for the contract that both parties were aware of.

Before the contract can be completed, that purpose disappears or become impossible. The distinction for this defense is that one of the parties had a purpose or a reason to make the contract. Therefore, that purpose cannot be carried out, even though the contract could be completed.

Because this defense does excuse a party from performance, it is crucial that when the purpose is frustrated, it effectively alters the purpose of the contract as the parties understood it. Therefore, a minor inconvenience with the purpose will likely not rise to the level of frustration of purpose.

Because it involves an impossibility with a contract, the frustration of purpose is often confused with impossibility and impracticability, both of which mean that the actual object or essence of the contract is impossible or impracticable. Alternatively, the frustration of purpose is why one of the parties made the contract in the first place.

For example, consider a contract where a music lover agrees to rent a vintage convertible from a rental company for $750 to drive to a festival four hours away. If a hail storm destroys the vintage convertible, the contract would be impossible to complete because the car no longer exists.

If the car broke down and needed a part, the company would have to pay a lot of money to get it in time, and the contract may become impracticable. Finally, if the festival was canceled, the music lover could have the contract canceled due to frustration with the purpose.
The distinction is that it focuses on the purpose rather than the contract itself.

The Elements of Frustration of Purpose:

For a party to be able to cancel a contract based on the frustration of purpose, they must meet all of the elements of frustration of purpose.

Understanding these elements can help evaluate when a party’s frustration with purpose is an option. Again, because this defense can allow a party to cancel a contract and the courts tend to favor a finding that a contract is enforceable, the law has placed very narrow parameters on how and when this may be used. The elements that a party needs to meet to prove frustration of purpose are:

Both parties knew about the purpose of the contract when it was formed.
The parties made the contract with the nonoccurrence of an event in mind.
An event occurred that has frustrated that purpose.
The frustration leads to the contract having little to no value to the party any longer.

To better illustrate this, let us consider each element using the above car rental example.

Knowledge: One of the most common elements missing from the frustration of purpose argument is the knowledge requirement. Both parties must be aware of the purpose of the contract when signing for the defense to work. In the car rental example above, the rental company would need to be aware that the music lover intends to use the vintage convertible to drive to a music festival.

Nonoccurrence: The defense also requires that the parties make the agreement dependent on the nonoccurrence of the event. This means that both parties entered the contract assuming the event would not occur. In the example, this would mean that the parties made the contract assuming the music festival would not be canceled.

Event: For a party to use the frustration of purpose defense, they have to prove that an event happened that frustrated the purpose of the contract. This event must be outside either party’s control, meaning neither party could have caused the event. In the example, the music lover would need to prove that the festival was canceled and that neither party had any control over the music festival. If the music lover were also a festival organizer and canceled the festival, they would have a more challenging time winning on the frustration of purpose defense.

No Value: The final piece of the puzzle is that the contract holds little or no value for the party because of the event and how it frustrated the purpose. It must be frustrated to such a degree that the entire reason the contract existed is destroyed. In the example, the music lover would need to prove there was no value in renting the vintage convertible without driving it to the music festival, which he would likely be able to do.

Again, these are elements, which means that the party claiming frustration of purpose would need to prove all four exist. Running through these examples, it would seem that the music lover should be able to argue that the purpose was frustrating.

Using the Defense:

Because this is a defense, it is usually not used to cancel a contract outright. Instead, it is more commonly used when the other party sues the party whose purpose was frustrated for not performing on the contract. This would happen in the example if the rental company sued the music lover for $750 because they did not pay.

To protect the defense, if a party believes such an event has happened, they can send the other party a written legal that they believe the contract is unenforceable due to frustration of purpose. This notification helps protect both parties because it preserves the defense and helps keep the other party from starting to perform on a contract with no purpose.

It is also crucial for the parties to discuss if there is anything that can be done to at least partially complete the contract before entirely canceling it; however, this is often not the case if there is a frustration of purpose defense.

For example, in the car rental scenario, the music lover could immediately tell the rental company that they would like to cancel the contract because the festival was canceled. Therefore, they have no reason to drive the car on those days.

The rental company may understand and cancel the contract, or they may suggest that the music lover instead rent the car for a day for $100 and take it for a spin. The music lover could either accept the partial performance or refuse to perform. Suppose the rental company chooses to sue the music lover, and the music lover can prove the elements. In that case, they can argue that the contract was voided because the music lover’s purpose was frustrated, which can be a powerful defense in contract cases.

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Emily Holland

Contributing Editor at ADR Times

Emily is a recent graduate of Pepperdine Caruso Law.
While in law school, Emily served as an executive editor on the Pepperdine Dispute Resolution Law Journal and had the opportunity to learn about ADR from world-class professors of the Straus Institute for Dispute Resolution.

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