What kind of situation constitutes frustration of a contract?

Frustration of a contract occurs when unforeseen circumstances arise that make it impossible for one or both parties to fulfill the contract's obligations, or when an unexpected event fundamentally changes the nature of the contractual agreement, rendering it pointless or impossible to perform.

In this context, the critical aspect of frustration is that it arises from events outside the control of the parties involved. These situations typically include acts of nature, changes in law, or other events that were not anticipated at the time the contract was formed. As a result, the original purpose of the contract cannot be achieved due to these circumstances, allowing the parties to be released from their obligations without penalty.

The other choices highlight misunderstandings of the concept of frustration. Simply changing one's mind about a contract does not constitute frustration; it refers to a unilateral decision that does not arise from an external circumstance. Mutual agreement to end the contract is an entirely different process known as termination or rescission. Lastly, a contract involving illegal activities is void from the outset, which does not encapsulate the notion of frustration but rather indicates illegality in the contract's formation. Thus, the correct choice is one that reflects unforeseen circumstances that alter the contract's viability, clearly aligning with the definition of frustration.