First Principles of Business Law

6. Risk and Frustration

6.1. Dealing with changed circumstances

There are two distinct situations that need to be considered.

Sometimes, property that has been bought and sold is accidentally destroyed or damaged before payment is made. Who bears the risk of such accidental loss?  The rules of risk are applied in such cases. The general principle is that risk of accidental loss or harm to property falls on whoever was the owner of the property at the time of the loss or harm, unless some other person has, directly or by inference, assumed that risk.

In other cases, although the subject matter of a contract is not destroyed or damaged, the circumstances in which a contract is to be performed might change, making performance either impossible, or very different from what the parties envisaged when contracting. In such cases, the rules of frustration are used to determine whether or not the contract remains enforceable.

In this section we will examine both the rules of risk and frustration, to distinguish when they apply, and what effect they have.