Frustration of contract is the premature termination of an agreement owing to the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the agreement, and as entirely beyond what was contemplated by the parties when they entered into the agreement.

Doctrine of frustration excuses non-performance of contract

By Paul Sandori

Ens v. Pacific Home Products Ltd.

The Facts

Dennis and Anne Ens wanted to build a deck and a glass sunroom in the backyard of their home in Warman, Saskatchewan. Pacific Home Products Ltd. quoted $11,848 to supply and install a glass sunroom and deck supported by ten-foot concrete piles. The homeowners agreed, signed the contract, and paid a $2,200 deposit.

The project started well: Pacific obtained a building permit, and bought the sunroom from the manufacturer for $5,529 plus $400 shipping. Then everything came to a halt. When it started excavation, Pacific found high groundwater under the surface, and concrete piles could not be built. The Ens rejected alternate methods suggested by Pacific because one cost $1,500 extra, and the other could damage their weeping tiles. They suggested another method but Pacific would not guarantee the work if that method was used.

The relationship between the contractor and the homeowners became strained. They could not agree on a satisfactory solution. In the end, the Ens contracted with one of Pacific's competitors to supply and install a sunroom using a different method to support the deck.

Pacific salvaged $1,000 worth of parts from the custom-made sunroom. When the homeowners sued for the return of their $2,200 deposit, Pacific counterclaimed for about $3,600 – the cost of the sunroom less salvage, plus the cost of shipping, building permit, excavation, and permit drawings.

At trial before Provincial Judge Arnot, the homeowners took the position that Pacific had abandoned the contract; Pacific argued that the homeowners repudiated the contract. The judge found, on a balance of probabilities, that both of them failed to prove their claims. Instead, he applied the legal doctrine of frustration.

The Law

The doctrine of frustration operates as an excuse for the non-performance of a contractual obligation. The accepted view of this doctrine was discussed by the House of Lords in Davis Contractors Ltd. v. Fareham Urban District Council. Lord Radcliffe described the test of frustration as a radical change in obligation that effectively rewrites the bargain in terms that were not previously intended. He said:

… frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract… it is not hardship or inconvenience or material loss itself which calls the principles of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.

Another definition was provided by the House of Lords in the case of Cricklewood Property & Investment Trust Ltd. v. Leighton's Investment Trust Ltd. Frustration of contract, said their Lordships, is the premature termination of an agreement

… owing to the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the agreement, and as entirely beyond what was contemplated by the parties when they entered into the agreement.

In Canada, the Ontario Court of Appeal quoted with approval Lord Radcliffe’s definition of frustration in Capital Quality Homes Ltd. v. Colwyn Construction Ltd. The Court commented as follows:

The legal effect of the frustration of a contract does not depend upon the intention of the parties, or their opinions or even knowledge as to the event that has brought about the frustration, but upon its occurrence in such circumstances as to show it to be inconsistent with the further prosecution of the adventure. On the contrary, it seems that when the event occurs, the meaning of the contract must be taken to be, not what the parties did intend (for they had neither thought nor intention regarding it) but that which the parties as fair and reasonable men, would presumably have agreed upon if, having such possibility in view, they had made express provision as to their several rights and liabilities in the event of its occurrence…

The supervening event must be something beyond the control of the parties and must result in a significant change in
the original obligation assumed by them. The theory of the implied term has been replaced by the more realistic view that the Court imposes upon the parties the just and reasonable solution that the new situation demands.

In 2000, the doctrine was considered in KBK No. 138 Ventures Ltd. v. Canada Safeway Ltd. In that case, KBK agreed to purchase land from Safeway in order to construct a mixed residential and commercial building. After the contract was entered into, but before construction, the municipality amended its zoning bylaws which prevented the proposed building from being constructed. The British Columbia Court of Appeal applied the law of frustration. The six-part test was characterized as follows:

In order to find that the contract at issue has been frustrated the following criteria would have to be satisfied. The event in question must have occurred after the formation of the contract and cannot be self-induced. The contract must, as a result, be totally different from what the parties had intended. This difference must take into account the distinction between complete fruitlessness and mere inconvenience. The disruption must be permanent, not temporary or transient. The change must totally affect the nature, meaning, purpose, effect and consequence of the contract so far as concerns either or both parties. Finally, the act or event that brought about such radical change must not have been foreseeable.

The Decision

Judge Arnot, having set out the law, found that the installation of concrete piles was a fundamental element in the contract between Pacific and the Ens. It was critical to the overall success of the project in both the short and long term.

The contract was frustrated when it was discovered that the intended foundation could not be constructed due to the high ground water. The change was not reasonably foreseeable by either party, affected the fundamental nature of the contract, and was permanent. The contract as a result would be totally different from what the parties intended. The difference was much more than mere inconvenience. It was beyond the control of both parties, and resulted in a significant change in the original obligation assumed by them.

The Damages

Saskatchewan’s Frustrated Contracts Act gives the courts discretion to determine what amount of restitution is appropriate in the circumstances. Judge Arnot allocated 65% of the loss to Pacific and 35% to the homeowners. Pacific had to bear the greater share of the damages because, said the judge, it is in the business of constructing sunrooms, and had more experience than the homeowners. The Ens relied on the contractor’s experience to some degree, although not entirely, as Mr. Ens had “firmly fixed definite opinions on some of the construction issues”.

The Court also took into account that the corporation might be able to further mitigate its losses by using more parts salvaged from the left-overs, and it will be able to write off this loss over the course of time.

In the end, Pacific had to pay the Ens a total of $176.22. There was no order as to costs.

Saskatchewan Provincial Court

D.M. Arnot, Prov. J.

Saskatchewan Provincial Court
   D.M. Arnot, Prov. J.
   May 30, 2008