Serving as a vital reprieve in times of crisis
Frustration arises where a supervening event renders the performance of a contract so different from what the parties had intended as to render the contract fundamentally or radically different from what had been agreed. In this way, it can serve as a vital reprieve in times of crisis. The leading authority on the doctrine of frustration in Australia is that of Justice Mason in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 (356–360).
Frustration does not, however, apply where a party adopted the risk of that supervening event under the contract. The rationale of this principle is that the occurrence of something contemplated under the contract cannot fundamentally alter what was agreed.
This was the critical stumbling block in Cao v ISPT Pty Ltd [2024] NSWCA 188, where, in the context of COVID-19 lockdowns, the court held that the lease allocated the risk of business interruption to the tenant, which barred them from the benefit of the doctrine of frustration.
Cao v ISPT Pty Ltd [2024] NSWCA 188
Doctrine of frustration—allocation of risk for supervening events
In this case, the Court of Appeal of New South Wales considered whether the imposition of public health orders frustrated a lease and enabled the guarantor of the tenant's obligations to avoid liability for amounts outstanding under the lease.
The case affirms that the doctrine of frustration does not apply if the supervening event was a risk for which a party has assumed responsibility under the contract.
The appellants executed a commercial lease as guarantors for Beijing Roast Duck Sydney (the Tenant) to operate a large restaurant in premises owned by the respondents, ISPT Pty Ltd and AWPF Management Pty Ltd, in a Sydney CBD shopping centre. The Tenant's restaurant closed on 23 March 2020 after COVID-19 public health orders came into effect. The restaurant never reopened, and the Tenant went into liquidation in May 2021.
The respondents made a claim against the appellants in the Supreme Court for the outstanding arrears of rent owing under the lease. The appellants argued that they did not have to pay the arrears because the lease was frustrated from 23 March 2020 onwards due to the public health orders.
Justice Nixon at first instance rejected the appellants' argument and ordered them to pay the respondents $4,231,033.06 in arrears.
On appeal, the appellants raised the following grounds of appeal:
- the primary judge erred in finding that the lease was not frustrated by the restrictions imposed by the Public Health Orders from 26 March 2020 to 2 June 2021;
- the primary judge erred in failing to find that compliance with the Public Health Orders would have demanded a 'radical transformation in the business' operated in the premises, or would have rendered the Tenant's business unviable; and
- the primary judge erred in finding that the Lockdown Restrictions did not have the result that special condition 4 of the lease (which required the Tenant to open the premises for business during specified hours) was incapable of performance, or that performance would have contravened the law, and that it did not lead to the lease being frustrated.
Justice Kirk (Justices Griffiths and Meagher agreeing) dismissed the appeal.
Justice Kirk found that the primary judge was correct to find that frustration was not made out, for the following reasons:
- The risk of the supervening event, being a disruption to the Tenant's business due to external events, was one the Tenant had explicitly assumed responsibility for under various provisions of the lease. The allocation of this risk to the Tenant in the contract prevented the court from applying the doctrine of frustration when the risk eventuated.
- The appellants did not establish that complying with the Public Health Orders would have rendered the lease a fundamentally or radically different business from what had been contemplated, nor that it would have rendered the business unviable for the remainder of the term of the lease.
Although the commercial business of the appellants was certainly disrupted by the Public Health Orders, the restrictions never prevented the restaurant from operating altogether, such as by opening for a limited number of patrons or providing takeaway services. Justice Kirk also found that in arguing that the contract was frustrated by the governmental Public Health Orders, the appellants had failed to consider that the Tenant's business was eligible for government schemes introduced to assist businesses during the pandemic, including the JobKeeper scheme.
The court found that assessing the issue of frustration is a 'practical matter' that should not be approached in a 'one-sided fashion'. Overall, the appellants' evidence did not establish that the Public Health Orders would have rendered the Tenant's business unviable for any significant part of the lease.
Grounds 3 (Special condition 4)
Justice Kirk further found that the primary judge was correct to reject the appellants' argument that the lease was frustrated in relation to special condition 4:
- Special condition 4 of the lease required the Tenant to keep its business open during certain trading hours, regardless of any legal restrictions. The appellants argued that the imposition of the pandemic restrictions meant that they could not legally do so, and as a result the lease was frustrated.
- The court found that the appellants had not established that the Public Health Orders prevented the Tenant from opening the premises for business during the identified trading hours, as the Tenant could have engaged in takeaway sales.
- In any case, there would be no breach of special condition 4 because no reasonable businessperson would have understood the condition to require the Tenant to carry out their business unlawfully or to allow the landlord to claim liquidated damages in circumstances where the Tenant was prohibited from opening the premises by law.
- Although special condition 4 was considered to be paramount over the other terms of the lease, when read in conjunction with other provisions in the lease, the proper construction of the lease was that there was no intention to require unlawful activity. The lease was not frustrated by this special condition.