13 Frustration

Contents
Introduction 194

13 1 The basis of the doctrine of 195

frustration
13 2 The nature of a ‘frustrating event’ 196

13 3 Limitations on the doctrine 199

13 4 The effect of frustration 200

Quick quiz 204

Am I ready to move on? 207

pAGE 198 UNIVERsity OF LONDON

Introduction
The doctrine of frustration provides one of the ways by which contractual
obligations end. In contrast to termination for breach, the discharge of the
contract does not occur as a result of the wrongful actions of one of the parties.
Nor does discharge
for frustration depend upon the agreement or action of the parties. Instead, where
a contract is discharged by frustration, this occurs automatically by operation of
law. The courts decide when a contract has been frustrated and, if they decide that
it has, then all future obligations cease. The consequences of this are dealt with by
both common law rules and statute, the Law Reform (Frustrated Contracts) Act
1943.

Core text
¢ McKendrick, Chapter 14 ‘Common mistake and frustration’ – Section 14.8
‘Frustration’ to Section 14.18 ‘Conclusion’.

¢ Poole, Chapter 12 ‘Discharge by frustration: subsequent impossibility’ –

Section 1 ‘The frustration doctrine: discharge for subsequent impossibility’ and
Section 2 ‘The contractual allocation of risk’.

Learning outcomes
This chapter introduces the discharge of contractual obligations as a
result of events occurring after the contract was entered into under the
doctrine of frustration, to enable you to discuss and apply in problem
analysis its key components (and supporting authority) including:
u The role of the doctrine of frustration in the termination of contracts.
u The timing and type of event that will ‘frustrate’ a contract.
u The limits upon the operation of the doctrine of frustration, including the
concept of ‘self-induced frustration’.
u The consequences of frustration under the common law rules.
u The consequences of frustration under the Law Reform (Frustrated Contracts)
Act 1943.
u The limitations of the 1943 Act.
13.1 The basis of the doctrine of frustration

Core text
¢ McKendrick, Chapter 14 ‘Common mistake and frustration’ – Section
14.9 ‘Frustration, force majeure and hardship’.

¢ Poole, Chapter 12 ‘Discharge by frustration: subsequent impossibility’ –

Section 3 ‘The theoretical basis for the doctrine of frustration’.

Essential reading
¢ McKendrick, E. ‘Force majeure and frustration – their relationship and a
comparative assessment’, on the VLE.

If, after entering into a contract, the continued performance of a contract becomes
impossible as a result of subsequent events, the question arises as to whether one
or the other of the parties or neither of them should be responsible for this failure of
performance. A strict ‘freedom of contract’ approach might lead to the answer that
a party who has undertaken to perform obligations has also undertaken the risk
that
performance of them will become impossible. On this view, failure to perform
should therefore be treated in the same way whether that failure is due to a
deliberate action or arises from impossibility caused by some supervening event
after the contract has been formed. In other words, both situations involve a
breach of contract and should be treated as such. This approach, of an absolute
obligation, was the original approach taken by the common law and can be seen
in the decision in Paradine v Jane (1647).

This strict approach was

relaxed in the 19th century
in the case of Taylor v
Caldwell (1863). In this case
a music hall, hired for a
series of concerts, was
destroyed by fire before
the concerts took place.
Blackburn J
held that this destruction
brought the contract to
an end and discharged
both
Figure 13 .1 Surrey music hall parties from any further
obligations under it. The
justification for this approach was that there was an ‘implied condition’ in the contract
that the main subject matter (the music hall) should continue to exist. When the
subject matter ceased to exist, the parties were discharged from further performance.
The effect of the decision was to allow a contract to be discharged but, at the same
time, adherence to freedom of contract was maintained by the use of an implied term.

In the 20th century it has generally been recognised that the suggestion that there
is an implied term covering the frustrating situation is something of a fiction – see,
in particular, the speeches of Lord Reid and Viscount Radcliffe in Davis
Contractors Ltd v
Fareham Urban District Council (1956). The point was made with some humour by Lord
Sands in James Scott & Sons v Del Sol (1922). He suggests an example where the daily
milk delivery to a house is suspended after the escape of a tiger from a travelling circus.
The dairy should not be liable for the suspended delivery but ‘it would hardly
seem reasonable to base that exoneration on the ground that “tiger days
excepted” must
…be written into the milk contract’. The preferred analysis now is that in situations
where, after a contract is entered into, there is an unforeseen change in
circumstances (not attributable to the fault of either party) such that performance of
the contract would become impossible, illegal or something radically different from
what the parties originally intended, justice requires that the courts should treat the
contract as having come to an end. See also National Carriers Ltd v Panalpina
(Northern) Ltd (1981).

That the courts will in some circumstances bring a contract to an end on the basis
of frustration does not mean that the parties’ original agreement will be ignored.
pAGE UNIVERsity OF LONDON
200
First, it is important that the courts determine exactly what obligations were
originally undertaken, in order to decide whether the change in circumstances
has made any of them radically different. This issue will be explored further in
the next section. Secondly, it is quite possible for the parties themselves to
make provision in the contract for what is to happen should the performance of
the agreement become impossible, or radically different, as a result of some
subsequent event for which neither of them is to blame. This is common in
commercial contracts, which frequently use what are known as ‘force majeure’
clauses. Where there is a clause of this type which covers the situation which
has occurred, then the courts will give effect to it. In essence this means the
event was foreseen.

Activity 13.1
Why do you think that both McKendrick and Poole deal with the doctrine of
frustration in chapters which also deal with ‘mistake’?

Further reading
¢ Anson, Chapter 14 ‘Discharge by frustration’.

13.2 The nature of a ‘frustrating event’

Core text
¢ McKendrick, Chapter 14 ‘Common mistake and frustration’ – Section 14.11
‘Impossibility’ to Section 14.14 ‘Express provision’.

¢ Poole, Chapter 12 ‘Discharge by frustration: subsequent impossibility’ –

Section 4 ‘Frustrating events’.

What type of event will be treated as having frustrated a contract? It is impossible

to give a comprehensive list, because it is the effect of the event, rather than the
event itself, which is in the end the determining factor. As Lord Radcliffe stated in
Davis Contractors Ltd v Fareham Urban District Council:

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.

In deciding whether or not a contract has been frustrated, courts apply a ‘multi- factorial
approach’ (see Edwinton v Tsavliris (The Sea Angel) (2007)). What is important is that
there must be a break in identity between what was contemplated and the new
performance; courts will not easily conclude that such a break has occurred (see CTI
Group Inc v Transclear SA (2008)). Factors which courts should take into account
include:

the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations,
assumptions and contemplations, in particular as to risk, as to the time of contract, at any
rate so far as these can be ascribed mutually and objectively, and then the nature of the
supervening event, and the parties’ reasonable and objectively ascertainable calculations
as to the possibilities of future performance in the new circumstances. [per Rix LJ, The Sea
Angel, para.111]

With this general principle in mind, we can now usefully look at examples from
the cases of situations which have, or have not, led to a decision that a contract
is
frustrated. From these some general impression of the characteristics of a frustrating
event can be gained. In all cases, however, it must be that the event has made the
contract impossible, illegal or radically different – it is not enough that the contract
has simply become more difficult or expensive for one party. In Davis Contractors
Ltd v Fareham Urban District Council builders who contracted to erect 78 houses
within eight months for £94,000 were not allowed to rely on frustration when
construction took 22 months and cost the contractors £115,000. Similarly, in
Tsakiroglou & Co v Noblee and Thorl (1962) the closure of the Suez Canal did not
frustrate a contract for the carriage of goods from Port Sudan to Hamburg. The
CONTRACT LAW 13 FRUSTRATION pAGE
contract had not specified the route and 201
 the fact that the alternative route, via the Cape of Good Hope, would take much
longer was not sufficient to frustrate the contract.

Courts have consistently 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. Thus in CTI Group Inc v
Transclear SA (2008) the Court of Appeal concluded 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. In MSC Mediterranean
Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789 the Court of Appeal
recognised that the application of such a test ‘may be arbitrary but it is pragmatic’.

13.2.1 Destruction of subject matter

The most obvious example is where the main subject matter of the contract has
been destroyed, as in Taylor v Caldwell (1863). If something central to the
performance of the contract no longer exists, then it is not surprising that the
courts will find that the parties’ obligations should come to an end. Full
destruction may not be necessary. In Asfar v Blundell (1896), the contamination
of perishable goods, which rendered them
unusable, was held to be equivalent to destruction (see also s.7 Sale of Goods Act 1979).

13.2.2 Personal incapacity

Another clear case of frustration will be where both parties have agreed that the
contract is to be carried out by a particular individual, and that individual dies, or is
too ill to perform (see Condor v Barron Knights (1966)). The court will need to be
satisfied, however, that the contract was not simply for work to be done, but for it
to be done by the particular individual who is unavailable.

Activity 13.2
On Monday Nathalie arranges for her car to be serviced at Phil’s garage on the
following Friday. Jamie, the mechanic who normally carries out services on
Nathalie’s car, is taken ill on Thursday and is unavailable on Friday. Will the contract
be frustrated?

Activity 13.3
On Monday Nathalie arranges to have her hair styled at Phil’s salon on the
following Friday. Jamie, the hairdresser who normally styles Nathalie’s hair, is
taken ill on Thursday and is unavailable on Friday. Will the contract be frustrated?

13.2.3 Non-occurrence of an event

A number of cases concerned with the cancelled coronation of King Edward VII in
1903 illustrate this category. In Krell v Henry (1903) a room overlooking the route
of the coronation procession had been hired for the purpose of watching it. When
the procession was cancelled, the contract for the hire of the room was held to be
frustrated (see also Chandler v Webster (1904)). It has subsequently been implied that
the decision in Krell is perhaps as far as the doctrine of frustration should be pushed
(North Shore Ventures v Anstead Holdings (2011)).

Again, however, it is important to be clear as to the precise obligations under the

contract in order to decide whether a cancellation has this effect. Thus in Herne
Bay Steam Boat Co v Hutton (1904) a boat had been hired to tour the fleet and to
watch the King’s review of it, which was part of the coronation celebrations. The
King’s illness meant that the review was cancelled. In this case, however, the
contract was not frustrated. The tour of the fleet was still possible and this was a
significant element in the contract. The hirer remained obliged to pay for the use
of the boat.
 Figure 13.2 The coronation of King Edward VII

13.2.4 Effects of war

In time of war a government may make trading with companies based in enemy
territory illegal. Contracts with such companies which were made prior to this action
will be frustrated: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd
(1943).
Similarly, the requisitioning of property which had been allocated to a contract
may lead to the frustration of that contract: see Metropolitan Water Board v Dick
Kerr (1918) and FA Tamplin v Anglo-American Petroleum (1916) (although in this
case the
requisitioning of a ship as a troop ship was held not to have frustrated a charter of it,
because the requisitioning was not of sufficient length to defeat the whole purpose of
the contract).

The frustration need not result from direct government action. In Finelvet AG v
Vinava Shipping Co Ltd (1983), the continuing war between Iran and Iraq trapped
certain ships in the Gulf for a lengthy period. Contracts relating to the charter of
these ships were held to be frustrated.

13.2.5 Other government action

Government action not related to war can frustrate a contract. In Gamerco SA v
ICM/ Fair Warning Agency (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 is also implicit in Amalgamated Investment
and Property Co Ltd v John Walker & Sons Ltd (1976) 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).

13.2.6 Other frustrating events

Other types of event which have led to contracts being frustrated include industrial
action (The Nema (1981)) and the accidental running aground of a ship (Jackson v
Union Marine Insurance Co Ltd (1874)). As indicated above, however, the
categories of frustrating event are not closed. It will always be possible to argue
that some novel occurrence has frustrated a contract, provided that it has had the
required effect on the obligations of either or both parties.

Activity 13.4
Aaron has booked tickets to attend an event at Highplace Hall. The event is to
include a tour of the grounds and a meal in the hall, followed by a concert featuring
the famous pianist, Claudio Quays. Is the contract frustrated if the following take
place?
 a. On the day before the event, Highplace Hall suffers a fire and is badly
damaged. The grounds are still open, but the Hall is closed, so that the meal
and concert cannot take place, or

b. On the day before the event Claudio Quays sprains his wrist and is unable
to perform. The concert is cancelled.

Self-assessment questions
1. What is a ‘force majeure clause’?

2. In what circumstances may government action frustrate a contract?

3. What is the distinction between ‘frustration’ and ‘mistake’?

Summary
The doctrine of frustration operates to relieve parties of further obligations under a
contract. It applies when some event which is not the responsibility of either party
has made performance of the contract impossible, or radically different from what
was originally agreed. Examples of events which will lead to frustration include
destruction of the subject matter, the non-occurrence of an event, outbreak of war
and government intervention. The contract will not be frustrated if the
performance is simply made more difficult or expensive, or if a significant part of
the contract survives the frustrating event.

Further reading
¢ Morgan, Chapter 5.

13.3 Limitations on the doctrine

Core text
¢ McKendrick, Chapter 14 ‘Common mistake and frustration’ – Section
14.14 ‘Express provision’ to 14.17 ‘The effects of frustration’.

¢ Poole, Chapter 12 ‘Discharge by frustration: subsequent impossibility’ –

Section 2 ‘The contractual allocation of risk’.

There are two principal limitations on the doctrine of frustration. The first is where
the frustrating event has been foreseen and provided for in the contract; the
second is
where the alleged frustrating event has been ‘self-induced’ by one of the parties,
since, as indicated in the quotation from Lord Radcliffe given in Section 13.2, the
problem must arise ‘without default of either party’.

Part of the essence of the doctrine of frustration is the fact that the event which has
occurred is a surprise. This justifies the conclusion that the risk of the event
occurring has not been allocated by the parties and that the court should therefore
intervene. If, therefore, the parties have clearly foreseen the possibility of a
frustrating event occurring and have made provision for what is to happen in their
contract, there
will be no room for the doctrine of frustration. An argument that a contract for the
development of property was frustrated when there was a ‘crash’ in property
values was unsuccessful as the risk was both foreseen and provided for by a
clause that permitted the renegotiation of minimum prices in such circumstances
(Gold Corp Properties v BDW Trading Ltd (2010)). In Severfield (UK) Ltd v Duro
Felguera UK Ltd (2017) it was said obiter dicta that in modern times the court
should avoid recourse to the doctrine of frustration whenever the parties have
made contractual provision for the event that has occurred. Thus, as noted at the
beginning of this chapter, in the
commercial area ‘force majeure’ and similar clauses may well replace the common
law and statutory rules on frustration.

The courts have tended to narrowly interpret such clauses. In Jackson v Union Marine
Insurance Co Ltd (1874) a charter required a ship to sail ‘with all possible dispatch’ from
 Liverpool to Newport, there to load a cargo for carriage to San Francisco. The ship
ran aground off the coast of Newport, was damaged, and not fully repaired for some
seven months. The charterer in the meantime used another ship to carry the cargo,
on the basis that the contract had been frustrated. The ship owner, however, sued for
breach of contract, on the basis that the charter contained a clause stating ‘damages
and accidents of navigation excepted’. The court held that this clause could not have
been intended to apply in relation to a delay of the length which had occurred. The
contract was frustrated and the clause had no application – see also Metropolitan
Water Board v Dick Kerr (1918).

Another important element in the doctrine of frustration is that the alleged

frustrating event must not be attributable to the fault of either party. If it is, then
the likelihood is that the party at fault will be in breach of contract and the
doctrine of frustration will have no application. The courts have interpreted the
concept of ‘fault’ widely in this context: in fact it may be more accurate to say that
wherever the alleged frustrating event is attributable to the actions of one of the
parties (whether these involved ‘fault’ or not) then the doctrine of frustration will
not apply. In Maritime National Fish v Ocean Trawlers (1935) the defendants
chartered a boat from the plaintiffs, but were then unable to use it as planned
because they were not granted sufficient fishing licences to cover all the boats
they wished to operate. It was held that their contract with the plaintiffs was not
frustrated. It was the defendants’ choice as to which boats they used the licences
for. The ‘frustration’ of the contract with the plaintiffs was therefore ‘self-
induced’ and ineffective to relieve the defendants of liability to the plaintiffs
under the contract.

Activity 13.5
Read the case of J. Lauritzen AS v Wijsmuller BV, The Super Servant Two (1990). Why
is this case seen as extending (rather than simply applying) the principle established
in Maritime National Fish v Ocean Trawlers?
Why do you think the decision has been criticised?
At one time it was thought that there was a further limitation on the doctrine of
frustration, in that it could not apply to leases of land: see Cricklewood Property and
Investment Trust v Leighton’s Investment Trusts Ltd (1945). This limitation was
rejected by the House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd
(1981), though on the facts the contract under consideration in that case was held
not to have been frustrated.

Summary
If the alleged frustrating event has been foreseen and provided for in the contract (e.g.
by a ‘force majeure’ clause) the doctrine of frustration will not apply. Similarly, if the
alleged frustration can be said to ‘self-induced’ (i.e. it is the result of a decision taken
by one of the parties) the contract will not be treated as frustrated. The party which
took the decision will be in breach of contract.

Further reading
¢ Treitel, Chapter 19, paras 19-082 to 19-089.

13.4 The effect of frustration

Core text
¢ McKendrick, Chapter 14 ‘Common mistake and frustration’ – Section 14.17
‘The effects of frustration’.

¢ Poole, Chapter 12 ‘Discharge by frustration: subsequent impossibility’ –

Section 5 ‘The effects of frustration’.

There are two sets of rules relating to the effects of frustration – one under the
common law and the other under the Law Reform (Frustrated Contracts) Act 1943. In
most cases the 1943 Act will apply, but there are some situations where the common
law is still
 applicable. It is easiest to understand the effect of the Act by considering the
common law rules first, and then to look at the way in which the Act has amended
these.

13.4.1Common law
One common law rule which operates even where the Act is also applicable is that a
frustrating event terminates the contract automatically, without any need for action
by either party. This is in contrast to the position following a repudiatory breach of
contract where the innocent party has the option of continuing with the contract or
bringing it to an end (see Chapter 12). It follows that any attempt to affirm the
contract following frustration will be ineffective. This was confirmed in Hirji Mulji v
Cheong Yeong Steamship Co Ltd (1926) and The Super Servant Two (1990).

As to the distribution of losses following frustration, the common law started

from the position that all future obligations were discharged, but that
obligations
incurred prior to the frustrating event survived. Where the loss fell would therefore
depend entirely on what the contract said about when payment was to be made, or
when work was to be done. Thus in Chandler v Webster (1904), which was one of
the ‘coronation’ cases, the full obligation to pay for a room to watch the procession
arose before the cancellation (in contrast to Krell v Henry (1903) where only a deposit
was payable). The hirer of the room was therefore required to make full payment and
the entire loss caused by the frustrating event fell on him. For example:

January February Event March

Deposit Due Instalment 1 Due Instalment 2 Due

The payments in January and February have to be paid but the instalment in March
is no longer due under Chandler v Webster.

The approach taken in Chandler v Webster was, however, modified in Fibrosa

Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1943). £1,000 had been
paid under a contract for the supply of machinery which was frustrated by the
German invasion of Poland in 1939. The House of Lords held that where there has
been a ‘total failure of consideration’ (that is, the party paying the money has
received nothing at all under the contract), then money paid could be recovered. The
purchasers of the machinery were therefore allowed to recover their payment of
£1,000.

Activity 13.6
Sabina makes a contract with Peter for the redecoration of a house which she
owns. The total cost is to be £5,000 and, as provided in the contract, she gives
Peter an initial payment of £1,500. The balance is to be paid on the completion of
the work. The day before Peter starts work, vandals start a fire which totally
destroys Sabina’s house. Peter has spent £500 buying materials for the job. What
would be the position as to the distribution of losses on the redecoration contract
under the common law rules relating to frustration?

Activity 13.7
As in 15.6, but the fire takes place after Peter has done one day’s work. The entire
job was expected to take four weeks to complete.

Activity 13.8
As in 15.6, but the fire takes place on the day before Peter was due to complete
the work.
The inflexibility of the common law rules, even following the slight modification
provided by the Fibrosa case, led to demand for reform. This occurred in the shape of
the Law Reform (Frustrated Contracts) Act 1943.

13.4.2The Law Reform (Frustrated Contracts) Act 1943

There are some contracts to which the 1943 Act does not apply (see s.2(5)).
These include contracts of insurance, some charters of ships (principally
charters for a
 particular voyage) and contracts for the carriage of goods by sea. The exclusion of
the shipping contracts exists because there are special rules under shipping law
which deal with the situation. The most important exclusion from the effects of the
Act is, however, in relation to contracts for the sale of specific goods. In relation to
these contracts the common law rules as to the effects of frustration will apply.

The two main provisions in the 1943 Act are s.1(2), which deals with money paid or
payable prior to the frustrating event, and s.1(3) which deals with benefits conferred
prior to that event. They need to be considered in turn.

Section 1(2): money paid or payable prior to frustration

Section 1(2) provides that where money was paid or payable prior to the
frustrating event, it should be returned (if paid), or should cease to be payable (if
not paid but owing). Unlike the common law, this is not dependent on there being
a total failure of consideration. Not all the money may be recoverable, however.
The section provides that if expenses have been incurred towards the
performance of the contract, some of the money paid or payable may be retained
or recovered, to the extent that a court considers it just in all the circumstances.
The amount concerned cannot exceed the
amount of the expenses incurred, nor can it exceed the amount paid or payable
under the contract (even if the expenses are greater than this).

The discretion given to the court is a broad one, as confirmed by Gamerco SA v

ICM/ Fair Warning Agency (1995). The case concerned the frustration of a
contract to hold a pop concert because of the closure of the specified stadium on
grounds of safety. The plaintiffs sought to recover some $412,500 which had
been paid. Although the defendants could point to expenses which they had
incurred, the judge concluded
that in all the circumstances it was just that the $412,500 should be returned in
full. It does not follow, therefore, that simply because a party has incurred
expenses that it will automatically be allowed to deduct these from sums
returnable under s.1(2). The overall justice of the case must be taken into
account.

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

Section 1(3) deals with the situation where a party has received a benefit other than
money prior to the point at which the contract was frustrated. In that situation the
section allows the party to recover from the other party ‘such sum …as the court
considers just, having regard to all the circumstances of the case.’ In particular the
court should take into account any expenses incurred by the benefited party and ‘the
effect, in relation to the said benefit, of the circumstances giving rise to the frustration
of the contract’.

This final consideration which the court must take into account has been interpreted
in a way which has significantly reduced the scope for recovery for the provision of
benefits. In BP Exploration Co (Libya) Ltd v Hunt (No 2) (1979), Goff J (as he then was),
having 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 s.1(3) must be assessed in the light of the frustrating event itself. Where,
therefore, the frustrating event has had the effect of destroying the benefit, nothing
will be recoverable under s.1(3). This interpretation of the Act has been the subject of
much criticism – though this is mainly focused on the poor drafting of the legislation,
rather than Goff J’s interpretation of it.

Activity 13.9
Sabina contracts with Peter for the redecoration of a house which she owns. The
total cost is to be £5,000 and, as provided in the contract, she gives Peter an initial
payment of £1,500. The balance is to be paid on the completion of the work. The day
before Peter starts work, vandals start a fire which totally destroys Sabina’s house.
Peter has spent £500 buying materials for the job. What would be the position as
to the distribution of losses on the redecoration contract under the Law Reform
(Frustrated Contracts) Act 1943?
Activity 13.10
As in 15.9, but the fire takes place after Peter has done one day’s work. The entire
job was expected to take four weeks to complete.

Activity 13.11
As in 15.9, but the fire takes place on the day before Peter was due to complete
the work.

Self-assessment questions
1. Give an example of ‘self-induced’ frustration of contract.

2. Can the doctrine of frustration be applied to leases of land?

3. What is the ‘object’ of the Law Reform (Frustrated Contracts) Act 1943?

Summary
The common law rules discharge parties from future obligations, but otherwise
leave any losses to lie where they fall. The only exception is the recovery of
money paid where there is total failure of consideration. The Law Reform
(Frustrated Contracts) Act 1943 provides more flexible rules under which money
may be recovered, or payment ordered for benefits which have been acquired.
The object of the Act is the prevention of unjust enrichment; it does not always
operate, therefore, to distribute losses between the parties. The Act has been
much criticised for its unsatisfactory drafting, particularly in relation to s.1(3).

Sample examination question

Bernard is the owner of a mansion called Stately Grange, which contains a
collection of 50 valuable oil paintings. Bernard contracts with Artistic Cleaners Ltd
to have all the paintings cleaned and re-hung, at a cost of £200 per painting. He
pays Artistic Cleaners £2,000 in advance, with the balance of £8,000 to be paid when
all the pictures have been cleaned and re-hung.
There is a stable yard in the grounds of Stately Grange from which Bernard
runs pony-trekking holidays. Christine books a week’s holiday for herself and
her five children for the week 8–15 August. She pays a deposit of £150 with the
balance of
£850 to be paid at the start of the holiday.
Consider the effect of the following events on these contracts.
a. On 6 August Artistic Cleaners Ltd have cleaned and re-hung 40 of the
paintings. Of the remaining 10, five have been cleaned but remain at Artistic
Cleaners’ workshop. The other five are still at the Grange. That evening
Stately Grange is badly damaged by fire and all the paintings in the Grange
are destroyed.

b. The fire means that Christine’s holiday party will not be able to be
accommodated in the Grange, as was planned, but will have to use tents in
the grounds. In addition an outbreak of foot-and-mouth disease on a
neighbouring farm means that riding will be restricted to the Grange’s own
grounds, rather than including tours of the very attractive local
countryside. On learning of this Christine seeks to cancel the holiday and
reclaim her deposit.
 Advice on answering the question
While there is some overlap between the two sections of this problem, the facts and
the issues involved are sufficiently separate for you to deal with each independently.

a. Has the contract with Artistic Cleaners been frustrated? Clearly it cannot be
completed, as five of the pictures concerned have not been cleaned and have
now been destroyed. Full performance is therefore impossible and this suggests
that the contract is frustrated. On the other hand, you might also wish to consider
the possibility that this contract is divisible into a series of separate obligations,
since the price seems to have been calculated at a rate per painting (see, for
example, the discussion of ‘entire obligations’ and ‘substantial performance’ in
Chapter 12). On this basis might it be possible to argue that it is only as regards
the final five paintings that the contract is frustrated, so that Bernard is obliged to
pay for the work that has already been done?

If the contract is frustrated, the 1943 Act will apply. Under s.1(2) Bernard could
reclaim the £2,000 he has paid. Artistic Cleaners would wish to set off their
expenses, but this will only allow them, at a maximum, to retain the £2,000. If
they wish to recover for the work done on the 45 paintings which they have dealt
with the claim will have
to be based in s.1(3). The difficulty is that Appleby v Myers (1867) and BP
Exploration v Hunt (1979) suggest that Bernard has not received any valuable
benefit, other than in relation to the five paintings in Artistic Cleaners’ workshop.
At the contractual rate of
£200 per painting this only entitles Artistic Cleaners to £1,000 as a maximum –
that is, less than the £2,000 they have already received. It seems unlikely,
therefore, that if the contract is frustrated, Artistic Cleaners will be able to do
more than retain the
£2,000 – and even this is at the discretion of the court.

b. Again, the first question is to ask whether the contract for the holiday has
been frustrated? Clearly it has not been rendered impossible. Christine and
her family can still stay at the Grange (albeit camping rather than living in the
house itself) and can still spend the week riding ponies. Do the changes and
restrictions mean that the holiday is ‘radically different’ from what had been
contracted for? This will depend to some extent on what exactly was promised
in the contract, and how important a part of that contract the elements which
have changed were. In the end, however, it is a matter of judgment, which can
be argued either way.

If the contract is frustrated, again the 1943 Act will apply. Christine will be entitled
under s.1(2) to reclaim the £150 she has paid, subject to the deduction of
expenses by Bernard (to the extent considered just by a court). She will not be
liable to pay any of the balance. Section 1(3) does not seem to have any role to
play in this part of the problem.

If the contract has not been frustrated, then Christine’s remedies, if any, will
depend on whether Bernard is in breach of contract and the seriousness of the
breach. See the discussions of breach in Chapter 12 and damages in Chapter
14.

Quick quiz

Question 1
How did Lord Simon, in the case of National Carriers Ltd v Panalpina (Northern)
Ltd (1981), explain when frustration would discharge the obligations of the parties
to a contract?
Choose one answer.
a. Frustration of a contract takes place when there supervenes an event
(without default of either party and for which the contract makes no sufficient
provision) which so significantly changes the nature (not merely the expense
or onerousness) of the outstanding contractual rights and/or obligations
from what the parties could reasonably have contemplated at the time
of its execution that it would be unjust to hold them to the literal sense
of its
 stipulations in the new circumstances; in such a case the law declares both
parties to be discharged from further performance.

b. In contracts in which performance depends on the continued existence

of a given person or thing, a condition is implied that the impossibility
of
performance arising from the perishing of the person or thing shall excuse the
performance. In none of the cases is the promise in words other than positive,
nor is there any express stipulation that the destruction of the person or thing
shall excuse the performance; but that excuse is by law implied, because from
the nature of the contract it is apparent that the parties contracted on the basis
of the continued existence of the particular person or chattel.

c. It is not hardship or inconvenience or material loss itself which calls the

principle of frustration into play. There must be as well such a change in the
significance of the obligation that the thing undertaken would, if performed, be
a different thing from that contracted for.

d. You must look at the actual circumstances of the case in order to see whether
one party to the contract is relieved from its future performance by the conduct
of the other; you must examine what the conduct is so as to see whether it
amounts to a renunciation, to absolute refusal to perform the contract.

e. Don’t know.

Question 2
Rix LJ, in Edwinton Commercial Corporation, Global Tradeways Ltd v Tsavliris
Russ (Worldwide Salvage & Towage) Ltd (The ‘Sea Angel’) (2007) considered the
modern statements of the doctrine of frustration to be found in the words of Lord
Simon in National Carriers Ltd v Panalpina (Northern) Ltd (1981) and Lord
Radcliffe in Davis Contractors Ltd v Fareham UDC (1956) and made certain
observations as to how a
court could consider whether or not a frustrating event has occurred. Which of the
following is not an element in Rix LJ’s considerations in The Sea Angel?
Choose one answer.
a. The concept of justice plays a strong role in the determination of whether or
not a contract has been discharged through frustration.

b. A particular factor, if sufficiently important, in the factual pattern of the contract

can assume such dominance that it can exclude the doctrine of frustration.

c. In particular cases of frustration, one can ascertain one, or perhaps more,

factors which have driven the result in the particular case.

d. The correct approach to determining whether or not a frustrating event has

occurred is a multi-factorial approach considering a range of different
factors in the context of the particular contract.

e. Don’t know.

Question 3
Which of the following events will NOT result in the doctrine of frustration
operating?
Choose one answer.
a. A pop group are on a year’s tour of the US and one month into the tour the
lead singer falls ill. The lead singer is told he can only work a couple of days a
week since his illness. The lead singer is prepared to keep on singing seven
days a week. The band decide to replace the lead singer.

b. A member of the Royal Family decides to get married and so a devoted fan
hires a hotel room with a very good view of the procession route. The member
of the Royal Family falls ill three days before the wedding is due to take place
and the wedding is postponed.
 c. A businessman contracts with a foreign businessman to supply monthly
quantities of oranges for three years. After four months war breaks out between
the two countries and the supplying of oranges to the country of the foreign
businessman becomes illegal.

d. A pending bride places an order with a dressmaker for a wedding dress. Two
days before the wedding is due to take place the bride decides she has fallen
in love with the best man and calls the wedding off. She decides she no
longer wants the dress, which was delivered just as she was calling off the
wedding.

e. Don’t know.

Question 4
This question requires you to apply the law to a particular fact situation in order
to determine the likely outcome of the case. Read the facts given below and then
decide which statement most accurately summarises how a judge should decide
the case.
Arabella arrives in London on Monday and wants to rent a flat from Boris.
Arabella runs her own escort company where she provides company for
gentleman callers of a certain age. Boris suspects that Arabella is actually a
prostitute but he is not sure and so agrees. He says that one of the conditions of
renting the flat is that she works as his escort girl and only his escort girl.
Arabella agrees and she places a
£250 deposit with him and says she will pay the first month’s rent of £1,000 when
she moves in.
She says she will be back on Friday with her belongings to move in. On
Wednesday Arabella is mugged by two young men and she loses all her money.
They also seriously injure her so that she has to go into hospital. She is left with
permanent disabilities such that she will never work again. Hearing this news
Boris is furious because on Tuesday he turned down an offer from Clara to rent
the flat for £3,000 per month as she loved the location. Boris wants to recover the
money he has now lost for the first month’s rent. Arabella says she cannot now
afford to take the flat and is unable, due to the mugging, to be released from
hospital.
Choose one answer.
a. The contract for the lease has been breached by Arabella and she should
now pay £2,750 in addition to losing the £250 deposit.

b. The contract is illegal because Arabella is a prostitute and so is void and

Boris cannot enforce it.

c. The contract to provide exclusive sexual services is enforceable despite

its attempts to restrain trade.

d. The contract for the lease is frustrated and Arabella should be able to
recover the moneys already paid minus any expenses claimed by Boris.

e. Don’t know.

Question 5
With the decision of the court in BP Exploration Co (Libya) Ltd v Hunt (No 2) (1979)
the role of the court under s.1(3) is which of the following?
Choose one answer.
a. To assess whether or not the contract is governed by English law.

b. To assess whether or not the contract has become impossible of performance.

c. To value the benefit which the defendant has obtained at the expense of
the claimant and to award damages to the claimant for that benefit.

d. To value the benefit which the defendant has obtained at the expense of the
claimant and to exercise its discretion in deciding which proportion of that
benefit is recoverable by the claimant.
e. Don’t know.

Answers to these questions can be found on the VLE.

Am I ready to move on?
You are ready to move on to the next chapter if, without referring to the module
guide or textbook, you can answer the following questions:

1. What is the role of the doctrine of frustration in the termination of contracts?

2. What types of event will be regarded as frustrating a contract?

3. What are the limitations on the doctrine of frustration

4. What is meant by ‘self-induced frustration’?

5. What are the consequences of frustration under the common law rules?

6. What are the consequences of frustration under the Law Reform

(Frustrated Contracts) Act 1943?

7. What are the limitations of the 1943 Act?