Frustration of purpose

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Contract law
Formation
Capacity Offer and acceptance Meeting of the minds2 Abstraction principle4,5 Posting rule1 Mirror image rule Invitation to treat Firm offer Consideration1,4 Implication-in-fact Collateral contract
Defences
Misrepresentation Mistake Threats and unequal bargaining power Illegality and public policy Unconscionability Culpa in contrahendo2 Force majeure Frustration of purpose Impossibility Impracticability Hardship Set-off Illusory promise1 Statute of frauds1 Non est factum1 Unclean hands1 Accord and satisfaction1 Exculpatory clause
Interpretation
Parol evidence3 Contract of adhesion Integration clause Contra proferentem UNIDROIT Principles
Dispute resolution
Choice of law clause Forum selection clause Hague Choice of Court Convention Arbitration New York Convention UNCITRAL Model Law Mediation Singapore Mediation Convention Enforcement of foreign judgments Hague Judgments Convention
Rights of third parties
Privity of contract1 Assignment Delegation Novation Third-party beneficiary
Breach of contract
Anticipatory repudiation Cover Exclusion clause Efficient breach Deviation Fundamental breach
Remedies
Specific performance3 Money damages Liquidated, stipulated, or penal damages3 Rescission
Quasi-contractual obligations
Promissory estoppel1 Quantum meruit1 Unjust enrichment Restitution Negotiorum gestio2
Duties of parties
Duty of honest contractual performance (or doctrine of abuse of rights)6 Duty of good faith (also implied covenant of good faith and fair dealing or duty to negotiate in good faith)7 Contract A and Contract B in Canadian contract law6
Related areas of law
Conflict of laws Commercial law
By jurisdiction
Australia Canada China (mainland) Ireland India Saudi Arabia United Kingdom England and Wales Scotland United States
Other law areas
Tort law Property law Wills, trusts, and estates Criminal law Evidence
Notes
1 Specific to common law jurisdictions 2 Specific to civil and mixed law jurisdictions 3 Historically restricted in common law jurisdictions but generally accepted elsewhere; availability varies between contemporary common law jurisdictions 4 Specific to the German Bürgerliches Gesetzbuch and other civil codes based on the pandectist tradition 5 Explicitly rejected by the UNIDROIT Principles of International Commercial Contracts 6 Specific to Canadian contract law both in Québec and in the country's common law provinces 7 Specific to civil law jurisdictions, the American Uniform Commercial Code, and Canadian jurisprudence in both Québec and the common law provinces pertaining to contractual and pre-contractual negotiation
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Frustration of purpose, in law, is a defense to enforcement of a contract. Frustration of purpose occurs when an unforeseen event undermines a party's principal purpose for entering into a contract such that the performance of the contract is radically different from performance of the contract that was originally contemplated by both parties, and both parties knew of the principal purpose at the time the contract was made.^[1] Despite frequently arising as a result of government action, any third party or even nature can frustrate a contracting party's primary purpose for entering into the contract. The concept is also called commercial frustration.

For example, if Joe gets a mortgage for a new home, suppose after three years, the home is destroyed, through no fault of Joe's. Without a hell or high water clause, Joe might be exempt from the remainder of the mortgage, as the principal purpose of the contract, to have a home to live in, has been compromised. However, he might still have a foreclosure on his credit rating.

Frustration of purpose is often confused with the closely related doctrine of impossibility. The distinction is that impossibility concerns the duties specified in the contract, but frustration of purpose concerns the reason a party entered into the contract. An example is if entrepreneur Emily leases space from landlord Larry so that she can open a restaurant that serves only Tibetan Speckled Lizard meat. If the city rezones the property to forbid commercial uses or if the property is destroyed by a tornado, both Larry and Emily are excused from performing the contract by impossibility.

However, if the Tibetan Speckled Lizard suddenly goes extinct, Emily may be excused from performing the contract because Larry knew her primary purpose for entering into the lease was to serve Tibetan Speckled Lizard, and the purpose has been frustrated. In the second scenario, the parties could still carry out their obligations under the lease, but one of them no longer has a reason to.

The Restatement (Second) of Contracts, Section 265, defines frustration of purpose:

Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances [of the contract] indicate the contrary.

A circumstance is not deemed to be a "basic assumption on which the contract is made" unless the change in circumstances could not have been reasonably foreseen at the time the contract was made. As a result, it is rarely invoked successfully. Successful invocations usually come in waves during times of substantial tumult, such as after the passage of Prohibition, when bars and taverns no longer had a reason for their leases, or during major wars, when demand for many consumer goods and services drops far below what is normal.

If the defense is successfully invoked, the contract is terminated, and the parties are left as they are at the time of the litigation.