What happens if one of the parties fail to perform his her obligation under a contract?

There are many reasons why someone may be unable to fulfil contractual obligations. For example, sometimes, an unforeseen event occurs that causes the contract to be incapable of performance. This means the obligations radically change. At other times, there has been a misrepresentation in the contract. In some cases, one of the parties to the contract simply fails to deliver. Where the other party cannot or does not fulfil their promises under the contract, it is important to know your rights. This article will explain what you can do when the other party cannot fulfil the contract. 

Frustration

Frustration of a contract occurs when an unforeseen event makes contract performance impossible. This is not the result of a fault by either party to the contract. As a result of this event, the obligations under the contract become radically different to those initially agreed by the parties.

Generally, frustration only applies when an outside force occurs. This must be the cause of the other party being unable to meet their part of the contract. For example, a natural disaster or a significant delay from an external provider might frustrate the contract. If this happens, neither party has breached the contract. This is because requiring performance of the contracted obligations would be impossible or result in an entirely different outcome. 

Example: A company is constructing a building and the neighbours successfully seek an injunction against the construction. This would effectively stop the company from performing further building work. It would also mean that the company would no longer be able to fulfil obligations. For example, the number of shifts originally agreed to with the workers at the construction site. The company’s contracts with these workers would be thus frustrated as the company could no longer fulfil its obligations due to an unforeseen event outside the company’s control. This event has fundamentally changed the situation which the parties initially contemplated. 

Misrepresentation

Misrepresentation is the giving of false information, or withholding of relevant information, which induces a party to enter a contract. A misrepresentation is by one party, or their agent, to the other party.

The Court may cancel a contract following misrepresentation if the agreement contains a clause that allows for termination on these grounds. In particular, it would need to specify that misrepresentation of certain facts is a fundamental element of the agreement. If the misrepresentation does not become a contractual term (or is not a fundamental aspect of the agreement) the misrepresented party can claim damages.

Misrepresentation is most common in the selling of goods or services. When offering goods or services, the seller makes certain representations about the quality, features and use of the goods or service. 

Under Australian Consumer Law, if the seller makes a false representation about their goods or service inducing a buyer to purchase it, they will be liable for misrepresentation. This is because it may constitute ‘misleading and deceptive conduct’. If the seller misrepresented fraudulently, the seller may be liable to pay damages to the innocent party. They may also be charged with fraud.

Commonly, the supplier of goods and services provides a warranty to consumers when they supply the goods, or the service takes place. This is a representation communicated to the consumer that if their product or services are defective, they will repair, replace, resupply or compensate the consumer. 

Breach

A contract breach occurs when a party to a contract fails to perform their obligations under the contract. This can be either by act or omission. A contract breach also occurs where a representation or warranty turns out to be false. In the event of a breach, if you are the non-breaching party, you may be able to seek damages. Unless the contract expressly states that it will end when a contract breach occurs, the contract will not automatically end. In this case, the contractual obligations will continue to be binding. 

The breach may be a significant breach of an essential element of the contract. In this case, the innocent party will have the right to terminate the contract or keep it going. If the party chooses to terminate, they may be required to provide the other party with a ‘Notice to Remedy a Breach’ before termination.

Several types of breaches may occur. These are outlined in the table below. 

Key Takeaways

If the other party cannot fulfil their obligations under a contract, you have a range of options. If an unforeseen circumstance makes performance impossible, the Court will likely deem it to be ‘frustrated’. This willrelease both parties from their obligations. On the other hand, if the party cannot fulfil the contract because the other party misrepresented important facts, the Court may cancel the contract. Finally, if the other party chooses not to fulfil their obligations, you can seek damages for the loss caused by the breach. 

For more specific legal advice on your situation and available options, get in touch with LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

Are parties in a contractual relationship able to cancel a contract if they mutually agree to do so?

Yes, typically, if all parties agree to end the contract, they can do so in writing or by replacing the old contract with a new one. Suppose the other party is conducting themselves in a way that indicates an unwillingness to be bound by or perform their obligations under the contract, also known as repudiation. In that case, you may choose to accept the repudiation and terminate the contract or continue the performance of the contract. 

If the other party does not fulfil the contract, what remedies are available?

Several remedies are available depending on the situation. For example, if the contract is frustrated, the Court may seek to return the parties to their original position as much as possible. If a seller knowingly made a false claim about a product you purchased, they may be liable to pay you damages and may also be charged with fraud.

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• small business
• contract
• misrepresentation
• contract formation
• contract obligations