Frustration

Frustration occurs where it is established that due to a subsequent change in circumstances, without the fault of either party, the contract has become impossible to perform, or it has been deprived of its commercial purpose.

When the continued performance of a contract becomes impossible as a result of subsequent events, the parties may rely on the doctrine of frustration to relieve themselves from the contractual obligations.

Where a contract is said to be frustrated, the contractual obligations come to an end.

You can download The Law Reform (Frustrated Contracts) Act 1943 here: http://www.legislation.gov.uk/ukpga/1943/40/pdfs/ukpga_19430040_en.pdf

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Frustrating event

According to the Court of Appeal in the case of Edwinton v Tsavliris (The Sea Angle) (2007), the application of the doctrine of frustration requires a range of factors to be considered. These include the terms of the contract, its context, and the parties knowledge, expectations, assumptions and contemplation (in particular as to risk) at the time of contract. The nature of the supervening event also needs to be considered together with the parties reasonable calculations as to the possibilities of future performance in the new circumstances.

There are a number of 'frustrating event' can be taken as examples.

1. Where something central to the performance of the contract no longer exists. A classic example would be the destruction of the subject matter.

In Taylor v Caldwell (1863), there was a contract to hire a music hall at Surrey Gardens was frustrated when the hall was burnt through no fault of either party. Blackburn J held that the destruction of music hall brought the contract to an end (as the performance became impossible) and discharged both parties from any further obligations under the contract. According to Blackburn J, in contracts which the performance depends on the continued existence of some particular thing and both of the parties were knew about it, there is an implied condition that the particular thing should continue to exist. If the particular thing ceased to exist, the parties were discharged from further performance.

2. Where the performance of contract has become impossible.

In Condor v The Baron Knights (1966) A contract between a pop group and its drummer was held frustrated when the drummer became ill and was unable to fulfill the terms of the contract.

In Jackson v Union Marine Insurance Co (1874) A ship was charted in November and was required to proceed with all dispatch to Newport. On her way to Newport, the ship ran aground and was not fully repaired until the following August. The contract was held to be frustrated since the ship was not available for the voyage for which she had been charted.

A contract may be frustrated where the performance of the contract has been interrupted, notwithstanding that it has been effectively performed for a period: 

Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) (1982)

3. Where the performance of the contract has become illegal. 

In Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1942), a contract for the sale of machinery to Gydnia in Poland was frustrated because the port had been occupied by a World War II enemy. It was held to be frustrated dues to illegality because during wartime, trading with the enemy is so contrary to public interest. The public interest in ensuring that no assistance was given to the enemy in time or war outweighed the fact that it remained physically impossible to manufacture and deliver the machines.

However, a contract will be frustrated only if the illegality affects the performance of the contract in a substantial or fundamental way: Denny, Mott & Dickinson v James B Fraser & Co Ltd (1944)

Where the illegality is only temporary or partial, the contract will be frustrated only if the illegality affects the performance of the contract in a substantial or fundamental way.

In Cricklewood Property Investment Trust Ltd v Leighton’s Investment Trust Ltd (1945), a 99-year lease was not frustrated since the object of the lease could still be performed after the temporary war-time restrictions lapsed.

In Gamerco SA v ICM Fair Warning (Agency) Ltd (1995), a stadium which had been booked for a pop concert was closed for reasons of health and safety. It was held that the contract for the hire of the stadium was frustrated.

It was also implicated in Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd (1977) that the listing of a building  as being of architectural and historical interest (thus limiting the possibilities for its development) could frustrate a contract for its sale (though on the facts it did not).

4. Where the purpose of the contract has been 'frustrated'. A common example would be where the contract has been deprived of its commercial purpose.

In Krell v Henry (1903), the defendant hired a flat in Pall Mall from the plaintiff for two days to watch the coronation procession of King Edward VII. After the contract has been concluded, the coronation of King Edward VII was postponed dues to the illness of the King. The Court of Appeal held that the contract was frustrated because the purpose of the contract was to view the coronation, not merely to hire a room. This was supported by the fact that the rooms were hired out by the day, excluding the night, clearly the only purpose of hiring the room was to watch the coronation of the King. Furthermore, the plaintiff had expressly advertised the letting of the rooms for the purpose of watching the coronation.

Similarly in Chandler v Webster (1904), a contract for the hire of the room was held to be frustrated, because the procession (same occasion as Krell v Henry) was cancelled.

In Herne Bay Steamboat Co v Hutton (1903), the defendant hired a ship from the the plaintiff “for the purpose of viewing the naval review and for a day’s cruise around the fleet.” The naval review cancelled dues to the illness of King Edward VII. The contract was held not to be frustrated as it could not be said the common foundation of the contract was to see the naval review. The fleet was still there, thus the tour of the fleet was still possible and this was a significant element in the contract. 

Limitations to the doctrine

1. A contract is not frustrated merely because it become more difficult or expensive to perform. The doctrine of frustration does not entertain bad bargain of contract. 

In Davis Contractors Ltd v Fareham Urban District Council (1956), the plaintiff agreed to build 78 houses for the defendant for £94,000. Subsequently, the work took an extra 14 months and costs £115,000 due to a shortage in skilled labour and certain materials. The plaintiff, in an attempt to recover the losses, argued that the contract has been frustrated. Lord Radcliffe held that a mere hardship or material loss itself would not frustrate the contract because the fundamental nature of the contract still remained.

In CTI Group Inc v Transclear SA (2008), it was held that a contract to sell cement was not frustrated where the contract remained legally and physically possible but where third party suppliers would not sell the necessary cement to the sellers with the result that the sellers could not supply the buyers with the cement. The court indicated that a contract will be frustrated only where there is a complete change between what was undertaken in the contract and the circumstances in which it is called upon to be performed.

2. A contract is not frustrated where there is an express provision in the contract covering the intervening event, i.e. a force majeure clause. 

In commercial area, ‘force majeure’ and similar clauses may circumvent the common law and statutory rules on frustration. 

However, generally a force majeure clause is to be interpreted narrowly by the Court. 

In Metropolitan Water Board v Dick Kerr & Co (1918) where a reference to ‘delays’ was held to refer only to ordinary delays, and not to a delay caused by government decree.

3. A contract would not be frustrated where the frustration is self-induced. This refers to the situation where the impossibility of the performance of the contract was the voluntary action of one party. If the party concerned had a choice open to him, and chose to act so as to make performance impossible, then frustration will be self-induced and the court will refuse to treat the contract as discharged.

In J. Lauritzen AS v Wijsmuller BV (The Super Servant Two) (1990), one of two barges owned by the defendants was sunk. They were therefore unable to fulfill their contract to transport an oil rig belonging to the plaintiff as their other barge (Super Servant One) was already allocated to other contracts. The contract was held not to be frustrated. The defendants had another barge available, but chose not to allocate it to the contract with the plaintiff.

4. A contract would not be frustrated where the impossibility is the fault of either of the parties. 

In Maritime National Fish Ltd v Ocean Trawlers Ltd (1935), the defendants chartered a boat from the plaintiffs, but were not granted sufficient fishing licenses to cover all the boats they wished to operate. The contract was not frustrated because it was the the defendants’ choice as to which boats they used the licenses for.

5. A contract would not be frustrated where the event was foreseeable, by the reason of special knowledge.

In Walton Harvey Ltd v Walker & Homfrays Ltd (1931), the defendants granted to the plaintiff the right to display an advertising sign for seven years on the defendant’s hotel. Before the seven years had elapsed, the local authority compulsorily purchased the hotel and demolished it. The contract was not frustrated as the defendant was aware that the Local Authority was looking to purchase the hotel at the time they entered the contract. It was held that the defendant should have foreseen the fact that this could happen in the life time of the contract and made provision in the contract for such an eventuality. The defendant was therefore liable to pay damages for breach of contract.

In Edwinton v Tsavliris (The Sea Angle) (2007), the court held that the risk of unreasonable detention of a ship carrying crude oil was foreseeable and was provided for a clause incorporated into the charter. The purpose of the charter had been achieved and the consequences of delay were purely financial, thus the contract had not been frustrated.

The effect of frustration on common law

In Hirji Mulji v Cheong Yeong Steamship Co Ltd (1926), the frustrated contract was automatically discharged upon frustration.

In Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1942), the court held that where there was a total failure of consideration, then any money paid or payable would have to be returned.

It shall be noted that the common law rule would only apply in the event of a total failure of consideration, and could itself in any case cause hardship if the other party had expended a considerable amount of money in connection with the contract. 

The enactment of the Law Reform (Frustrated Contracts) Act 1943 seek to remedy these deficiencies.

The Law Reform (Frustrated Contracts) Act 1943

Section 1(1)  of the Act provides that if a contract is frustrated, the parties are discharged from the further performance of the contract.

Section 1(2) of the Act provides that money paid or payable prior to the supervening event is recoverable, even though there was only partial failure of consideration. The party may recover expenses incurred for the purpose of performance of the contract, or entitled to a ‘set-off’, by having regarded all the circumstances in the case.

In Gamerco SA v ICM Fair Warning (Agency) Ltd (1995), the plaintiff agreed to promote a rock concert to be performed by Guns ‘N’ Roses. The contract was frustrated at a time when the P had paid $412,500 to the defendant in advance. Although the defendant had incurred some preparatory expenditure, but the parties were held not entitled to a ‘set-off’, and the plaintiff could recovers their entire $412,500 advance payment. The overall of the justice of the case must be taken into account.

Section 1(3) provides that valuable benefit shall be recoverable, by having regard to 

(a) the amount of any expenses incurred or the performance of the contract (by the benefited party), and 

(b) the circumstances giving rise to the frustration of the contract.

In BP Exploration Co (Libya) Ltd v Hunt (No.2) (1983), Goff J held that the purpose of the Act was the prevention of unjust enrichment rather than the apportionment of losses, ruled that the value of any alleged benefit under section 1(3) must be assessed in the light of the frustration event itself.

Section 2(5) lists the exceptions which the Act does not apply to:

- Charter parties

- Contracts of insurance

- Contracts for the sale of specific goods which have perished (section 7 of SOGA 1979, the goods perish before the risk passed to the buyer)

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