Discharge of contract - Frustration

Discharge of contract - Frustration

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  • Created by: tmcgrail
  • Created on: 14-12-10 00:51

General Principle

This type of discharge occurs where a contract has been made but before the contract can be completed an event occurs which is not the fault of either party and which is unforeseen, which makes completion of the contract impossible, this is known as a frustrating event. Established as a result of Paradine v Jane (1647):

  • Tenant evicted from his land due to an invading army. The landlord sued for rent.
  • Court held rent had to be paid even though the tenant was no longer in occupation of the land and it was impossible for him to return

Principle: confirmed the common law rule that in the circumstances the contract must continue even though this might be unfair on one of the parties.

Taylor v Caldwell:

  • Owner had contracted to rent out his music hall to a hirer so musicals could be performed. Music hall burned down due to no ones fault.
  • The hirer has spent money on advertising and wanted reimbursement
  • No expenses owed as contract was terminated due to frustration
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Making performance 'radically different'

Impossibility:

  • When it is impossible to complete the contract because for example the subject matter of the contract is destroyed, the contract is therefore frustrated

Subsequent Illegality:

  • Change in the law affects the main purpose for which the contract was made

Denny, Mott & Dickson v James Fraser (1944):

  • Contract made for sale of timber. Before completion, Government banned the sale of such timber
  • Court held contract was frustrated as main purpose for contract was now illegal

Radical change in circumstances:

Krell v Henry (1903):

  • A guest hired a hotel room in order to view Edward VII's coronation procession
  • The Prince became ill and the coronation was postponed. Guest refused to pay
  • Court held contract was frustrated so the guest did not have to pay for the room
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Frustration not accepted by courts

Self-induced Frustration:

Maritime National Fish Ltd v Ocean Trawlers Ltd (1935):

  • Fishing company owned 2 trawlers, contracted to hire a third for commercial fishing
  • Company needed license for fishing vessels, allowed 2, were already allocated to its own trawlers
  • Company claimed frustration of contract as it could no longer use the hired trawler
  • Court held frustration didn't apply, the contract was still valid -the event was within company control

The contract has become less profitable:

Davis Contracters Ltd v Fareham UDC (1956):

  • Builders contracted to build homes for UDC - £94k.. Realised it would cost £115k to complete work
  • Court held claim failed. Contract not radically different to what parties intended.

Event was either 'foreseeable' risk or referred to in the contract:

  • Buyer contracted to buy building for redevelopment for £1.7million
  • Unknown to parties, building became listed by Government and this reduced the value to £200k
  • Court held not a frustrating event as event of listing was foreseeable
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Remedies for Frustration

Common Law approach:

  • Under this approach the contract terminates at the point of frustration - removed from future obligations
  • However still bound by obligations arising before the frustrating event occurred
  • Law developed in Fibrosa Case where the House of Lords decided that if there was a 'total failure of consideration' then money already paid could be recovered

Statutory approach: - Law Reform (Frustrated Contracts) Act 1943

The act was created to deal with consequences of frustrating events, three main areas:

  • Money already paid over (e.g. a deposit) is recoverable, and money already due under the contract is not payable
  • The court can use its discretion to order compensation to be paid for work done and expenses incurred under the contract before the frustrating event (provided there was an obligation to pay money before the frustrating event). The quantification of the amount due is based on the principle of quantum meruit
  • The court may order compensation to be paid for any valuable benefit one party may acquire under the frustrated contract
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