Frustration

The situation with which the doctrine of frustration is concerned is where a contract, as a result of some event outside the control of the parties, becomes impossible to perform at least in the way orignally intended.

The courts took the line that obligations were not discharged by a 'frustrating' event, and that a party who failed to perform as a result of such an event would still be in breach of contract.

Case: Paradine v Jane

Jane owed rent under a lease to Paradine, Jane contended that he had been forced off the land for three years during the term of the lease by an invading army and that he should not therefore be liable to pay rent.

It was held that there was still a contractual duty to pay rent. The court's view was that liability for an intervening even should be covered by express provision for them in the contract.

The claimant hired out a music hall in Surrey for the purpose of holding four grand concerts. The claimant went to great expense and effort in organising the concerts. However, a week before the first concert was due to take place the music hall was destroyed by an accidental fire. The claimant sought to bring an action for breach of contract for failing to provide the hall and claiming damages for the expenses incurred.

Held: The claimant's action for breach of contract failed. The contract had been frustrated as the fire meant the contract was impossible to perform

There are three main classes of situation in which a contract might become frustrated:

1) impossibility

2) illegality

3) change in circumstance

There are a number of events that can lead to a situation in which it is impossible to perform a contract:

1) The subject matter is destroyed - Taylor v Caldwell

2) The subject matter of the contract becomes unavailable - Jackson v Union Marine Insurance Co Ltd

3) A person required for the performance of the contract becomes unavailable through illness - Robinson v Davidson

4) A person required for the performance of the contract becomes unavailable for other good reason - Morgan v Manser

5) There is unavoidable excessive delay - Pioneer Shipping Ltd v BTP Tioxide Ltd

A contract may also become frustrated if there is a change in the law that makes the contract illegal to perform in the way it was anticipated in the contract. The courts do expect parties to be contractually bound to do something illegal.

Case: Denny, Mott & Dickinson Ltd v James B. Fraser & Co Ltd

A contract for the sale and purchase of timber contained an option topurchase a timber yard. By a wartime control order, trading under the agreementbecame illegal. One party wanted to exercise the option. It was held that theorder had frustrated the contract so the option could not be exercised.

Contracts may be frustrated where there is an event that destroys the central purpose of the contract such that all its commercial purpose is destroyed.

Case: Krell v Henry

Henry hired a room from Krell for two days in order to view the coronation procession of Edward VII, but the contract itself made no reference to that intended use. The King's illness caused a postponement of the procession. The defendant refused to pay for the room. It was held that the contract was frustrated. Henry was excused from paying the rent of the room. The holding of the procession on the dates planned was regarded as the foundation of the contract.

Case: Herne Bay Steamboat Co v Hutton

The defendant hired a boat to sail around the Solent to see the new King's inspection of the fleet that was gathered in port and to see the fleet itself, wgich was seldom gathered in one place. The inspectiion was postponed. The court held that the contract was not frustrated. Although one purpose had been destroyed, the defendant was still able to use the boat and see the fleet. The court considered that there was still some commercial value in the contract.

There are some sitatuon in which the doctrine of frustration does not apply:

• Where there exists a force majeure clause this will apply rather than the law of frustration. This clause must actually cover the event that occured. Case: Metropolitan Water Board v ****, Kerr & Co; Jackson v The Union Marine Insurance Co Ltd.
• Self induced frustration - a contract will not be frustrated if the impossibility is the fault of either party. Case: Maritime National Fish Ltd v Ocean Trawlers Ltd; The Eugenia
• Foreseeable events/allocation of risk - it is not entirely clear whether a contract will be frustrated where the specific event in question was foreseen by the parties or ought to have been foreseen. Case: Walton Harvey Ltd v Walker & Homfrays; Amalgamated Investment Property Ltd v John Walker & Sons Ltd

It automatically beings the contract to an end from the date of frustration irrespective of the intention or wishes of the parties. Case: Hirji Mulji v Cheong Yue Steamship Co Ltd.

At common law the rights and liabilities of the parties were defined by reference to the date of frustration. The loss lay where it fell. Case: Krell v Henry; Chandler v Webster.

However, the Fibrosa case where a party who had already paid money in advance should recover that money where the other party has not performed any of its obligations. 

But still, the position under common law was considered unsatisfactory and was amended by the Law Reform (Frustrated Contracts) Act 1943.

The Act deals with three areas:

(1) recovery of money paid in advance,

(2) recovery of work already completed,

(3) recovery for a benefit gained through partial performance.

This provision confirms the Fibrosa principle that money already paid is recoverable and that money due under the contract ceases to be payable. (Section 1(2))

Under Section 1(2) the court also has discretion to reward a party who has already carried out work under or in preparation for the contract. However, this is discretionary and therefore does not automatically guarantee that all actual expenses will be recoverable. Case: Gamerco SA v ICM/Fair Warning Agency.

Case: the plaintiffs were claiming the repayment of $412,500 paid in connection with a pop concert, which could not take place because the government had, on safety grounds, closed the stadium at which it was to be held. The defendants wished to retain an amount to cover their expenses. On the facts, there were considerable difficulties in calculating the defendants expenses, but the judge estimated at $50,000.

Held: the court confirmed that the use of a broad discretion, rather than any other particular formula (for example, sharing losses equally) was the correct approach to the application of the proviso under s1(2). In all circumstances, and taking acccount of the plaintiffs loss, the judge concluded that justice woud be done if the money paid by the plaintiffs was returned without deduction.

Under section 1(3), a party which has conferred a benefit on the other party can recover such money in payment as a court considers just providing that it does not exceed the value of that benefit. Case: BP Exploration v Hunt.

The case concerned oil concessions that has been frustrated by expropriation by the Libyian government.

A contract is frustrated when an event beyond the control of either party makes continued performance impossible or radically different from what was agreed. It is not enough that the contract is more difficult or expensive.

Types of frustrating events include: destruction of the subject matter, personal incapacity,government action, non-occurence of an event, effects of war.

If a decision of the party unable to perform has contributed to the frustration, it may be regarded as self-induced, and the doctrine of frustration will not apply.

The parties may have provided for the circumstances that have occured by contractual terms. If so, the doctrine of frustration will not generally apply.

At common law the effect of frustration is to terminate the contract and absolve the parties from all future obligations, but:

• obligations that had arisen prior to the frustrating event subsist, except that if there is a total failure of consideration, money can be recovered;
• there can be no compensation for work done prior to the frustrating event for which the paynmore was not due til after the event.

The Law Reform (Frustrated Contracts) Act 1943 provides that:

• money paid prior to a frustrating event can be recovered, subject to the deduction of expense (as approved by the court);
• compensation (to the extent considered just by the court) can be provided for the benefits from the contractual performance which survive the frustrating event.

The 1943 Act does not apply to all contracts.