Frustration

Frustration notes

Where a contract frustrated, the contract will be terminated automatically. When frustration has
been determined by courts all future obligations are discharged. The consequences of frustration are
dealt both common law rules and rules under the Law Reform (Frustrated Contracts) Act 1943.

Frustration occurs where after a contract is formed and an unforeseen event occurs which is
beyond the parties control making performance of the contract impossible.

The question arises as to which party should be held liable for the failure.

Original approach taken at common law regarding who should be liable for failure.

Originally the law took a strict ‘freedom of contract’ approach which was that the party who has the
duty to preform an obligation also has the duty to undertake risk that performance of their
obligation will be impossible. The view was where a failure has occurred deliberately or some other
even beyond the parties’ control, both situations should be treated as if a breach has occurred.

Paradine v Jane [1647]- where the issue was whether the lessee was liable to pay rent for the
property he has lost because the kings’ enemy has invaded the land and the lessee wasn’t able to
enjoy it. It was held that the lessee was liable to pay rent even if an accident has occurred.

This approach was changed in the 19th century in the case of

Taylor v Caldwell- where a music hall was burnt down by a fire before the concerts took place.

It was held by Justice Blackburn in Taylor that both parties were discharged of any obligations of the
contract because there was an implied term in the contract that the subject matter should exist,
when the subject matter was destroyed both parties were discharged of any obligations under the
contract.

This approach has been criticised by many judges including Lord Reid and Viscount Radcliff in Davis
contractors v Fareham. As well as Lord Sand in James Scott v Del Sol.

The preferred principle today is where an unforeseen event has occurred and made performance of
obligations impossible, the contract will come to an end.

National Carriers Ltd v Panalpina Ltd (1981)- where the defendant had leased a property for 10
years but were unbale to access leased property for 20 months due to closer of the only road that
could be used to reach the property. They did not pay the rent for those 20 months and claimant
sued. It was held that the contract was not frustrated because the subject matter wasn’t destroyed
and a mere 20 months in a 10-year lease was not significant enough to end the contract.

Firstly, the courts have to determine the original obligations that needed to be performed. And
then they have to figure out if the change in circumstances have made the obligations any different
to perform.

In some circumstances the parties add a clause into the contract as to what would happen if the
performance of the obligation is impossible or has changed due to occurrence of an unforeseen
event. This is known as the ‘force majeure’ clause

Nature of frustrating events.

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The effect of the event is what determines whether a contract is going to be frustrated or not and
not the event itself.

Lord Radcliffe stated in Davis Contractors Ltd v Fareham Council (1956)- “frustration occurs
whenever the law recognises that without default of either party a contractual obligation has
become incapable of being performed because the circumstances in which performance is called for
would render it a thing radically different from that which was undertaken by the contract…It was
not this that I promised to do”.

The courts use a ‘multi-factorial approach’ when determining whether a contract has been
frustrated.

Edwinton v Tsavliris (The Sea Angel)- where Tsavliris chartered the sea angel for a salvage operation
for 20 days from 25th august to 15th December. Authorities refused to grant the sea angel certificate
and it wasn’t able to return till 1st January. The defendant hadn’t paid any rent for the sea angel from
18th December. It was held that the contract wasn’t frustrated because the contract had been
performed and there had been no changes to establish frustration.

Lord justice Rix provided factors which needed to be determined to establish whether the contract
was frustrated.

i) The terms of the contract.

ii) Context of the contract
iii) Knowledge, expectation or assumptions of both parties at the time of the contract
iv) Nature of the unforeseen event
v) And the parties assumptions as to performance of obligations after the unforeseen
event.

Contract will not be frustrated where it has become expensive or difficult for one party. It will only
be frustrated where the performance of an obligation has become illegal, different or impossible.

Davis Contractors Ltd v Fareham council- contract was not frustrated where a contract to build 78 in
eight months for 94,000 pounds took 22 months to complete and costed the contractors 115,000
pounds.

Tsakiroglou v Noblee [1962]- a contract was not frustrated where goods weren’t able to be
transported due closure of Suze canal however, there was another route which was longer but this
didn’t amount to frustration.

CTI Group Inc v Transclear [2008]- a contract was frustrated because a third party refused to sell
cement to the buyer even thought the contract could legally and physically be performed if it
weren’t for the third party.

Different events.

1. Destruction of the subject matter.

Where the subject matter has been destroyed, according to an implied term the parties are
discharged from any obligations under the contract- Justice Blackburn in Taylor.

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Taylor v Caldwell- where a music hall was burnt down by a fire before the concerts took place. It was
held that an implied term is imposed where if the subject matter had been destroyed the parties are
discharged from any obligation.

Asfar v Blundell (1896)- where perishable goods had been contaminated the contract was frustrated
as the contamination was considered to be destruction of the subject matter.

2. Personal Incapacity

This is where both parties of the contract require that performance of an act must be done by a
specific person and if the person has passes away or is ill the contract will be frustrated.

Condor v Barron Knights- where the claimant agreed to perform for the defendants band for 7 nights
per week for 5 years but due to a mental breakdown his doctor said that he should not perform for
more than 4 night per week. The band dismissed him, and he brought a claim for unfair dismissal.
His claim was rejected, and contract was held to be frustrated due to his illness.

3. Non-occurrence of an event.

This has occurred where the King Edwards coronation was cancelled, and many actions were
brought to court due to non-occurrence of the event.

Krell v Henry (1903)- where the defendant booked a room to watch the coronation and paid the
deposit due to the coronation being cancelled, he refused to pay the rest of the amount. The
contract was held to be frustrated and didn’t have to pay the remainder of the money.

Herne Bay Steam Boat Co v Hutton (1904)- where a boat was hired to tour the fleet and watch the
kings review. Due to the cancellation of the coronation the review was cancelled. Contract was not
frustrated because they could still tour the fleet which was the significant element of the contract.

4. Effects of war

The government may make trading with enemy countries illegal. Any contract requiring trade with
companies in those countries will be frustrated.

Fibrosa SA v Fairbairn Lawson Combe Barbour- where a contract required an English company to
transport goods through sea across Gdynia to Poland. Due to breakout of war between Poland and
Germany the UK declared war on Germany. As Gdynia was occupied by Germany the English
company couldn’t send the goods. The contract was frustrated, and the polish company was also
able to get their deposit back which they made to the English company.

5. Other government actions.

Gamerco SA v Fair Warning Agency (1995)- a contract for hire of a stadium was frustrated because it
was closed due to health and safety issues.

Amalgamated Investment ltd v John Walker ltd (1976)- where a contract for sale was frustrated
because it was of historical interest.

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6. Other frustrating events.

- Industrial actions- Pioneer shipping v BTP limited (The Nema)- where it was held that
frustration of a contract is “not to be invoked to relieve contracting parties of normal
consequences of an imprudent commercial bargain”.

Limitations on the doctrine of frustration.

1. Where the parties had foreseen the frustrating event and added it to the contract as a
condition (as to what would happen if the event would occur) the contract won’t be
frustrated. The event that has occurred has to be a surprise to the parties.

Gold Properties v BDW Trading Ltd- where a contract for the sale of property wasn’t frustrated
because of a decrease in value of the property because the parties had foreseen the event and
added a clause in the contract for renegotiation of price.

Severfield Ltd v Duro Felguera Ltd (2017)- by obiter dicta it was stated that where the parties have
added clauses in the contract for an event that has occurred, both common law and statutory rules
of frustration won’t apply. These include ‘force majeure’

Courts will however take a narrow approach in interpreting such clauses.

Jackson v Union Marine Insurance Co Ltd (1874)- where a ship was chartered to ship cargo ran
aground and was severely damaged. It took 7 months to repair the ship and in the meantime the
charterer used another ship. The claimant sued for breach on the basis of a clause in the contract
‘damages and accidents of navigation expected’. It was held that the clause did not apply to delay of
7 months and the contract was frustrated.

2. Where the event has been induced by a party ‘self-induced frustration’

According to Lord Radcliff’s statement the event must occur “without default of either
parties”. That is to say that the event must not have occurred because of the party’s fault.
If either party is at fault the contract will be breached instead of frustrated.
A fault in this context means- where the event has occurred by a party’s action, it does not
matter whether the actions were deliberate or an accident.

Maritime National Fish v Ocean Trawlers (1935)- where the defendants chartered a boat from the
claimant but weren’t able to use it for fishing because they didn’t have sufficient licences. Contract
was not frustrated as it was the defendants choice as to what boat

Effects of Frustration

i) Effects in Common Law

ii) Effects under Law Reform (Frustrated Contracts) Act 1943

In most cases rules under the act will apply but, in some cases, common law rules may also apply.

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1. Common Law

Where a frustrating event has occurred, the contract will be terminated automatically. Parties done
have to bring an action to court. The contract will be void and not voidable.

Hirji Mulji v Cheong Yeong Steamship ltd (1926)- where the contract to charter a ship for 10 months
was frustrated due to it being taken by the government for almost 2 years. It was held the clause to
take any issue to an arbitration in Hong Kong was also not valid because of frustration.

Originally the obligations under the contract were discharged. The obligation that arose before the
contract was made weren’t discharged. So, any obligation to pay money before the event occurred
was not discharged.

Chandler v Webster- where the obligation to pay money for the hotel room booked for the kings
coronation was not discharged due to cancellation of the event because the obligation to pay
occurred before the cancellation.

This original obligation was modified in

Fibrosa Spolka v Fairbairn Lawson combe Barbour- where 1000 pounds were paid under a contract
but due to a breakout of war the company wasn’t able to receive their goods. It was held that
contract was frustrated but the money taken before the breakout of war is to be returned.

The new rule is that where there is ‘total failure of consideration’ any money paid before the event
has to be returned.

2. The Law Reform (Frustrated Contracts) Act 1943.

The inflexibility in the common law rules lead to the Law Reform (frustrated contracts) Act 1943.

There are two main provisions of the 1943 Act

i) Section 1(2) of the Law Reform (Frustrated contracts) Act 1943.

This section deals with money paid before the event and money payable after the event
has occurred.
ii) Section 1(3) of the Law Reform (frustrated Contract) Act 1943.
This section deals with the benefits that have been given before the event.

Sections 1(2)- Money paid and payable prior to the event.

Under this section where money has been paid before the event it should be returned and where
money is still payable, the obligation to pay the money will be discharged and there is no need for
total failure of consideration.

However, where a party has incurred expenses due to performance of the contract the money paid
or payable will be kept or recovered. Expense should not be greater than the amount paid or
payable and the money kept or recovered will not be greater than the expenses incurred.

Gamerco SA v ICM (1995)- where a contract to rent a stadium for a concert was frustrated due to it
being closed because of health and safety concerns. Even though the defendant was able to point
out expenses they weren’t deducted from the money that was paid by the claimant.

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Section 1(3)- compensation for a ‘valuable benefit’

This section deals with benefits the parties have given to each other before the frustrating event
occurred, other than money.

This section allows the parties to recover a ‘sum that the courts consider just, having regard to all
circumstances of the case’. The courts must consider the expenses the party getting the benefit have
incurred because of the benefit and the effect on the benefit because of the frustrating event (may
have been destroyed because of the event).

Interpretation of section 1(3) has reduced the scope of recovery as seen in-

In BP Exploration ltd v Hunt (no 2) Justice Goff held that the act prevents the unjust enrichment the
party who got the benefit rather than dividing losses. He held that under section 1(3) the value of
the benefit must be assed after the event has occurred and where the event has destroyed the
benefit no money will be recoverable for the given benefit.

As compared to the common law rules the act has provided more flexible rules to recover money
and ensure the party getting the benefit hasn’t been enriched unjustly.

Under s2(5) the act will not apply to contracts of insurance, charters of ship for a certain type of
voyage.

For sale of specific goods only the common law rules will apply.