The doctrine of frustration



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3. The doctrine of frustration
Introduction: initial and subsequent impossibility.
After the parties have concluded a contract, events beyond their control may occur which frustrate the purpose of their agreement, or render it very difficult or impossible, or as even illegal, to perform. An example of this is where a hall, which has been booked for the performance of a play, is destroyed by fire, after the contract has been concluded, but before the date of performance of the play. Some writers have seen a close resemblance between this type of subsequent impossibility and the subject of common mistake (also referred to as initial impossibility)

Both provide an important opportunity to define the strength of contractual obligation. How absolute are they? Under what circumstances will a part be excused from performing his contractual undertakings or from having to provide a remedy to the other.


In certain circumstances, it may by a fine, almost tenuous, dividing line between these two different branches of contract law, in Amalgamated Investment & Property Co ltd v John walker & sons Ltd [1976) 3 ALL ER 509, for example, the facts were:

The “The defendants owned a commercial property which they advertised for sale as being suitable for occupation or redevelopment. In July 1973 the plaintiffs agreed subject to contract, to buy the property for $ 1,710,000. The defendants knew that the plaintiffs purpose in purchasing the property was to redevelop it and that they would require planning permission to do so. In their enquiries before entering into a binding contract, the plaintiffs asked the defendants whether the property was designated (i.e listed) as a building of special architectural or historic interest. The defendants replied, on 14th1991 August that it was not. This was correct at the time. But in January 1973, unknown to the parties’ officials at the Department of the Environment had included the property in a provisional list of building to be listed as being of architectural or historic interest.

On 25 September, the parties signed the contract of sale on 26 September; the Department of Environment wrote to the defendants and informed them that the property had been included in the statutory list of buildings of special interest. (The list was given legal effect the following day. It transpired that the property had been unconditionally selected for inclusion in the list on 22 August. The value of the building without redevelopment potential was one and a half million pounds less than the contract price! The plaintiffs claimed rescission of the agreement on the basis of common mistake, or alternatively, they sought a declaration that the agreement was void or avoidable and an order rescinding the agreement.

The plaintiffs’ action was unsuccessful and specific performance was ordered against them. The case could not be treated as one of common mistakes as the mistake did not exist at the time the contract was concluded. It was after the contract was made that the property was actually listed.

The alternative argument put forward by the plaintiffs was that the contract was frustrated; that is, they had paid a high price for a property on the basis of its redevelopment potential and subsequently found that this objective was not possible to achieve. This contention was also rejected by the Court of Appeal, as the plaintiffs were assumed to have taken the risk that the building may have been listed at some time after the contract was concluded. They were very unlucky that it was listed at some time after purchase, but this was an inherent risk in the ownership of buildings. In other words it was foreseeable that the obtaining of planning permission, which was crucial to the plaintiff, might be thwarted by the listing of the building.
Development of the doctrine of frustration

The doctrine of frustration is a means of dealing with situations where events occur, after the contract had been concluded, which render the agreement illegal, or impossible to perform, or even commercially sterile. The frustrating event must also not be the fault of either party or foreseeable. Of course, the parties might expressly provide for the consequences of a frustrating event by what is known as a force majeure clause. For example, a building contract might provide for what will happen in the event of a strike. In this way the parties themselves deal with the consequences of future events, which might affect performance, and the doctrine of frustration will not apply. Certain types of agreement, e.g. export sales, shipping, building or engineering contracts, are particularly susceptible to disruption by unforeseen events. But in the absence of express provision by the parties, the doctrine of frustration is a legal recognition of the fact that in some instances it is just to excuse a party from his contractual obligations.


Until a little over a hundred years ago, the law was reluctant to excuse a party his performance of a contract even in cases where superyening events rendered that performance difficult or impossible. The rationale of this rule was that a party could always make express provision for unforeseen events and, if he did not do so, he should be bound by his contractual obligations. This is known as the absolute contracts rule, which was clearly stated in the seventeenth century case of Paradine v Jane (1647). In this case, P brought an action against D for the rent due on a lease. D argued that he had been disposed of the land by force by an alien born, enemy to the king and kingdom [who] had invaded the realm with an hostile army of men, D claimed that due to events beyond his control he had lost the profits form the land and therefore, that he was not liable for the rent. This plea was rejected by the court. D had undertaken an obligation to pay rent under a contract and he was bound to fulfill this despite the supervening events. He could always have expressly covered this contingency in his contract with P
This rigid approach has been mitigated, to some extent, by the gradual development of the doctrine of frustration. However, it must be emphasized that the doctrine operated within strict limits and does not provide an easy means of escape for those who have simply made a bad bargain (see Amalgamated investment & Property Co Ltd John Walker & Sons Ltd (1976) above. The famous case which marks the recognition of the doctrine is Taylor v Caldwell (1863) 3 B & 826. The facts were as follows.

“On 27 May 1861, Taylor entered into a contract with Caldwell which gave T the use of Surrey Gardens and music hall on four separate days later that summer. T was to use the premises for a series of four concerts, and for holding day and night fetes on the days in question, and he was to pay $100 for each day. After the contract was concluded but before the date of the first concert, the music hall was destroyed by fire. The fire was not the fault of either party and it made the performance of the concerts impossible. No express provision had been made by the parties to cover this contingency. T claimed damages for the money he had wasted in advertising the concerts”.


It was held that the defendants were not liable and Ts claim for damages did not succeed. This seems a fair decision, but how did the court circumvent the general rule that in a contract to do a positive thing, a person must perform it or pay damages for failure to do so? Blackburn J stated that this rule applies only where the contract is not subject to any condition, either express or implied.
The judge held that the continued existence of the music hall was essential to the performance of the contract and the parties contracted on this basis. Although there was no express provision to this effect, the court implied one as a matter of construction. If the parties had thought about it when making the contracts, they would have agreed to such a condition. In other word the doctrine of frustration, as established in Taylor v Caldwell, was based on an effort to give effect to the presumed intention of the parties.
The importance of the case is that it established the doctrine of frustration and made deep inroads into the notion of absolute contractual obligations.
Once the doctrine of frustration had been established, its scope had to be determined. Taylor v Caldwell (1863) dealt with the physical destruction of the subject matter of a contract, and its result was unexceptionable. Similarly, where a contract is made to do something which subsequently becomes illegal (e.g. trading with a country against which war is later declared), there is no difficulty in treating the contract as frustrated., But a more common and problematic type of case is where the commercial purpose of a contract is drastically affected by unforeseen events, whilst the performance of the contract remains physically and legally possible. A good example is the famous case of Krell v Henry [1903) 2 KB 740, where the facts were:
“Henry (D) agreed to hire a flat in Pall Mall from Krell (P) for the days of 26 and 27 June. These were the days that the coronation processions of Edward VII were to take place and the windows in the flat afforded good views of the procession route. D agreed in writing, on 20th June, to pay $75 for the exclusive use of the flat on the two days of the procession. The contract made no express reference to the coronation procession or to any other purpose. A deposit of $ 25 was paid by D at the time of contracting and the balance was to be paid the day before the procession s took place. Due to the Kings illness, the processions did not take place on the proposed days. Krell claimed $50 from Henry, who in turn counterclaimed for the return of the $25, which he had already paid under the contract.
The Court of Appeal decided that the contract was frustrated despite the fact that its performance was still physically possible. The doctrine is not strictly limited to cases in which the event causing the impossibility of performance is the destruction or no-existence of something which is the subject matter of the contract or of some condition or state of things expressly specified as a condition of it (per Vaughan Williams LJ at 749) Accordingly, the doctrine was applied in circumstances where some events, which must reasonably be regarded as the basis of the contract, failed to take place. The flat in Pall Mall could still have been used on the days in question, but the true purpose of the contract was frustrated by the postponement of the precessions.
This was a potentially far-reaching and controversial decision. It extended the doctrine to cases where the commercial object or purpose of the contract was frustrated. It raises problems as to what exactly is the foundation for a particular contract.
Although the outcome of Krell v Henry seems fair, the courts have to be careful not to allow a party a convenient means of escape from a contract simply because it turns out to be a bad bargain. Krell v Henry represents perhaps, the furthest development of the doctrine of frustration, and subsequent cases have suggested a rather narrower view.
An interesting contest to Krell v Henry provided by Herne Bay Steamboat Co v Hutton (1903) “The facts were that D agreed to hire the steamboat Cynthia form P for $250, on 28 and 29 June 1902, for the purpose of viewing the naval review and for a days cruise round the fleet. A deposit of $50 was paid in advance. The royal naval review, which was intended as part of the coronation festivities, was subsequently cancelled due to the Kings illness. However, the fleet was still anchored at Spit head on 28 June. D did not use the Cynthia on either of the agreed days and P sued for the balance of the hire charge. It was held that P could recover the $200 form D and that the contract was not discharged on the ground of frustration.”
At first sight it might be difficult to see why the case was decided differently form Krell v Henry. But on closer examination it is possible to distinguish it and to emphasize the limited application of Krell v Henry. It was held by the Court of Appeal in Herne Bay, that the taking place of the royal review was not the foundation of the contract, despite the reference made to this event in the contract. It was still possible to cruise around the fleet and therefore the whole purpose of the contract was not frustrated. It is also significant that the contract was for the hire of a boat- something which is frequently hired for a variety of purpose, whereas in Krell v Henry it was highly unusual for rooms in Pall Mall to be let by the day.
The strict limits of the doctrine of frustration can be further illustrated by Tsakiroglou & Co ltd v Noblee Thorl Gmbh (1962) the facts were as follows:

“The appellants contracted to sell groundnuts to the respondents at a price which included the carriage of the goods from the Sudan to Hamburg. Although no reference was made to this in the contract, it was assumed that shipment of the goods would be via the Suez Canal. The price of the nuts was calculated on this basis. After the contract was made, but therefore its performance, the Suez Canal was closed to commercial traffic due to political events. The alternatives route, via the Cape of Good Hope would have taken the appellant more than twice as long to ship the goods and would have doubled the cost of carriage. The appellants did not make the shipment and claimed that the contract had been frustrated by the closure of the Suez Canal the House of Lords rejected this argument. It was possible to ship the goods albeit at greater expense, and the contract was not discharged. The court refused to imply a term that the goods were to be shipped by the most direct route. The fact that the appellant had made what turned out to be a bad bargain did not by itself lead to the doctrine of frustration being applied.

A court should not re-write the contract for the parties. The appellants were under a contractual obligation to ship the goods to Hamburg by any reasonable route that was available.
It was established that financial hardship alone is no reason for allowing a party to a contract to rely on the doctrine of frustration. A clear statement to this effect was made by the House of the Lords in Davis Contractors ltd v Fare ham UDC.

“Davis Contractors agreed to build 78 housed for a local council, for the sum of $92,425 within an eight-month period. Due to serious shortages of skilled labour and material, the work took 22 months to complete and cost Davis Contractors approximately $ 18,000 more that they had estimated. The contractors argued that the contract with Fare ham council was frustrated due to the long delay, which was the fault of neither party. They attempted to claim a larger sum than the agreed contract price as a fair reward for the services they had performed for the council (i.e. they claimed on a quantum meruit basis.


The House of Lords rejected the argument of Davis Contractor; the contract was not frustrates. The parties had contracted foe a specific number of houses, which had now been built as agreed. There was not change in the basic obligations under the contract. Mere hardship or inconvenience to one of the contracting parties was not enough to frustrate a contract. Given the uncertainty in the supply of material and labour at that time, the contractors could have made some express stipulation about this in the contract, yet they failed to do so. They were not allowed to escape from a bad bargain by simply arguing that the contract was frustrated.
Scope of the doctrine

Leases


It used to be argued that the doctrine of frustration could not apply to leases. This is because a lease is not simply a contract enabling a tenant to make use of the land in question; it creates a legal estate in the land. The argument ran that this legal estate survives despite supervening events, which may prevent the use or enjoyment of the land

This is a rather technical view, which ignores the commercial reality of some leases especially where the lease is short term and the tenant is concerned with the use to the land for a specific purpose rather than in the creation of any legal estate. After some judicial uncertainty on the subject, the leading case is now National carries Ltd v Panalpina (Northern) Ltd (1981). The facts were as follows.

“The appellant s had a 10-year lease of a warehouse form the respondents. After five and a half years of the leas, the local authority closed the only access road to the warehouse for a period of about 18 months. This closure of the road prevented the appellants form using the warehouse for their business. As a result, the appellants stopped their payment of rent to the respondents and claimed that the lease was frustrated.
The House of Lords decided that the closure of the access road was not a sufficiently serious interruption to amount to a frustrating event. (This was in spite of the harm to the appellants business caused by the closure) There was still a further three yeas of the lease remaining when the road was opened again. The appellants were still liable for the rent under the lease. But although the frustration claim in fact failed, the House of Lords held that the doctrine is capable of applying to a lease. Their Lordships could see no reason why, in principle, the doctrine should not apply to all types of contract.
Illegality

The doctrine of frustration will apply in circumstances where the performance of a contract is contrary to some law passed after the contract is made.

This is often described as a case of supervening illegality. In such circumstances the contract is not impossible to perform, nor have the obligations under the contract (necessarily) been radically altered. It is more a question of public policy in ensuring that the law is not broken. For this reason it is not possible for the parties to exclude the operation of the doctrine, in relation to certain types of supervening illegality (such as trading with the enemy) by express agreement.
An obvious example of a contracts frustration die to supervening illegality is where its performance would involve trading with an enemy country at a time of war.
Other examples of supervening illegality are where new licensing regulations are introduced after the parties have contracted, or where restrictions on the import or export of certain goods are subsequently introduced.
Impossibility: destruction of subject matter

Appleby v Myers (1867)where P contracted to erect machinery on Ds premises. When the work was well under way, but before it was completed, an accidental fire destroyed Ds premises and the machinery that had been erected so far. Ps claim to recover damages for the work already done and the cost of materials failed as the destruction of Ds premises discharged both parties form their obligations under the contract.

The court s view was that the contract did not include an absolute undertaking by D that his premises would remain unaltered so as to permit P to complete the work contracted for. D had not assumed the risk of the accidental destruction of the premise.
Cases can occur where the subject matter of the contract is badly damaged by accident, but not totally destroyed. For example, in as far v Blundell [1896} 1 QB 123, a ship with a cargo of dated sank and was refloated after a few days. On arrival, it was found that the cargo was badly affected by the accident. It was held that the cargo owner was not liable to pay freight as the goods, in a commercial sense, had perished. It did not matter that the goods could still be put to some other commercial use, such as distillation into spirit; their nature had changed to such a degree that they could no longer be classified as dates.
Impossibility: sale of goods.

Where a contract involves the sale of goods, we have to look at the particular rules relating to this subject in addition to the common law principles. A contract for the sale of goods may be frustrated for reasons that we have already considered such a supervening illegality. But reference should also be made to the relevant provisions of the Sale of goods Act 1979. Section 7 states that.

“Where there is an agreement to sell specific goods, and subsequently the goods, without any fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreements is avoided.
So if S agrees to sell to B goods which are identified at the time the contacts is made and those goods subsequently perish before the risk passes to B, the contract is frustrated (or avoided)

Impossibility: death or illness.

Most commercial contracts do not require performance by a particular person and no other. Therefore, death or illness does not normally prevent performance of the contract. But where a contract is for some personal service, to be rendered by a party to the contract, the death or incapacity of the party will make performance impossible. Whincup v Hughes (1871) for example, the plaintiffs son was apprenticed to a watchmaker for a six- year period at a premium of $25, but the watchmaker died after just one year. The contract, which was for a skilled and personal service, was obviously frustrated. In Robinson v Davison (1871) a contract was held to be frustrated when a person who had been engaged to play the piano at a concert on a particular day, was unable to do so because of illness. Notcutt v Universal Equipment Co (London) Ltd (1986) a contract of employment was brought to an end, under the doctrine, as a result of the employee’s chronic illness and his inability ever again to perform his contractual obligations.


Impossibility: due to unavailability.

In some circumstances the subject matter of a contract, whilst still in existence, may simply not be available for the purpose that was the contracted for.


In many cases the unavailability of the subject matter will only be temporary. If the contract specifies performance within a particular time, or on a certain date, then the unavailability of the subject matter at the crucial time will frustrate the contract. But it may obvious whether there is a time limit on performance of the contract; In Jackson v Union Marine insurance Co Ltd (1874) LR 10 CP 125 the facts were as follows:

“Jackson’s ship was chartered to go, in January 1872 directly form Liverpool to Newport and there to load a cargo of iron rails to be shipped to San Francisco. Jackson took out insurance on the chartered freight for the voyage. On the way to Newport, on 2 January the ship ran aground in Caernarfon Bay. It took a month to free the ship and a future six months for repairs to be carried out. Meanwhile, the chatterers had chartered another ship as a replacement. Jackson claimed against the defendant insurance company for a total loss of the freight to be earned under the contract, by perils at sea. To succeed with such a claim, it was essential to decide whether the contract between Jackson and the chartered was frustrated, or whether he could have successfully sued the chartered for not loading the goods, in other words, did the chartered have the right to treat the contract with Jackson as discharged.


It was held that a voyage undertaken after the ship had been repaired would have been a very different adventure forms the one, which the parties had contracted for. A condition could be implied that the ship would arrive in Newport in time for the particular voyage. Its failure to do so within a reasonable time put an end to the contract. The long delay for repairs meant that the contract was frustrated.
The court will sometimes have to decide whether a contract covering a lengthy period is frustrated by supervening events, which cover part of the period. Typical examples of this include the effects of a strike on a shipping contract or the requisition of a commercial ship by the government at a time of war. Delay will frustrate a contract if it defeats the commercial venture, but this can be difficult question to decide upon. In such instances the court must look at both the length of the contract and the length of the interference, which causes the unavailability of the subject matter.
It should be noted that the courts are supposed to judge the situation as at the date of the frustrating event and not with the benefit of hindsight. This can lead to odd results. In Tamplin Steamship Co Ltd v Anglo –Mexican petroleum products Co (1916).

“A tanker was chartered from December 1912 for a five-year period. In February 1915, the vessel was requisitioned as a troop ship. The owners of the ship claimed that the contract was frustrated by this supervening event.


The House of the Lords decided that the commercial object of the contract was not frustrated as, at the time of the event in question, it appeared likely that the ship would still be available to fulfill a substantial part of the contract after the war ended. As it turned out, the House of Lords was wrong in its assumption, because the war did not end until 1918. But the case illustrated the difficulty in judging the likely effect on a contract of some event, which causes the temporary unavailability of the subject matter.
Impossibility not just financial hardship

It was stated by Lord Radcliffe in Davis Contractors Ltd v Fare ham UDC [1956] AC 696 at 729: “…[I]t is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.


In the example of Tsakiroglou & Co ltd v Noblee Thorl GmbH (1962)The court refused to imply a term that the goods were to be shipped by the customary and cheapest route.

Tsakiroglou shows the reluctance of the courts to extend the doctrine to cover cases of impracticability or extreme financial hardship. But one case which offeres some, albeit, slender, support for a wider application of the doctrine id Staffordshire Area Health Authority v South Staffordshire Waterworks Co [1978] ALL ER 769. The facts were:


“In 1929, the plaintiff hospital authority entered into a contract with the defendant water company which provided that all times hereafter the hospital was to receive 5,000 galloons of water per day free, and all the additional water it needed at a rate of 7 d (later agreed as 2.9p) per 1,000 gallons. This supply of water was in exchange for the hospital having given up its right to take water from its own nearby well. By 1975m the provision of water to the hospital at the agreed rate was clearly uneconomic; the normal rate charged by the defendant was 45p per 1,000 gallons. The company wrote to the hospital authority on 30 September 1975, giving six months notice of its intention to terminate the 1929 agreement. The company would still supply 5,000 gallons per day without charge, but the excess would be provided at the normal (economic) rates. The hospital refused to accept this notice and argued that the 1929 agreement was expressed as applying at all times hereafter.
The court of Appeal rejected the hospital authority argument, and ruled that the defendant company’s notice was effective. The majority did not rely on the doctrine of frustration, which explains why the case offers only slender authority for a wider interpretation of the doctrine on the grounds of financial hardship. The court simply decided that the contract could be brought to an end by giving reasonable notice. The judge did not think that the hospital should be permitted to go on receiving its water at one-fifteen of the economic rate.
Effects of express provision for frustrating event

The doctrine of frustration has developed as a means of dealing with subsequent, unforeseen events which render performance of a contract impossible, or illegal, or which fundamentally change the nature of the contractual obligations undertaken by the parties. However, the parties may make express provision dealings with certain supervening events and, in so doing, effectively preclude the operation of the doctrine. The original theory behind the doctrine, as explained in Taylor v Caldwell (1863) was that it was based on an effect to the presumed intention o the parties. In other words, it could not operate if the parties had dealt with a particular contingency by express provision.


One obvious exception, as we have seen, is that frustration on the ground that the contract involves trading with an enemy country cannot be excluded by express provision. This is for reasons of public policy and is not exceptionable. But, generally, the parties may make express provision for other types of supervening events, such as strikes, closure of shipping rout, illness, floods, fires and other disaster. Thus the parties can allocate the risk of such events as they see fit. They may, for example, expressly provide for an extension to the period of performance of the contractual obligation. They may further provide that should the interference with the contract continue beyond a specified period, then either party is entitled to terminate the contract. The parties can expressly decide that neither party is entitled to compensation in the event of these contingencies. Such forward planning is particularly useful for those involved in international trade, where the threat of disruption is more likely.
Although the doctrine of frustration is limited to supervening events, which are not expressly provided for in the contract, the court might interpret an express provision in such a way that the doctrine may still operate. In Jackson v Union maritime Insurance Co. Ltd (1874) a contract for the hire of a ship stated that the vessel was to proceed with all possible spread (dangers and accidents of navigation excepted) from Liverpool to Newport, in order to load a cargo of iron for San Francisco. The ship ran aground, not far from Liverpool, and was delayed for eight months. It was held that notwithstanding the express exception of dangers and accidents of navigation, the contract was frustrated. The words of exception appeared to cover the contingency which in fact occurred, but the court found a way of limiting their application because it clearly felt that a voyage undertaken after the repair to the ship would have been a different adventure altogether. Accordingly, the express provisions were given a restrictive interpretation by the court; it would excuse the owner of the ship and protect him from an action for breach of contract, but it would not deprive the charterer of the right to treat his contractual undertakings as discharge.
Frustration does not apply to foreseeable events

The doctrine of frustration does not generally apply to situations where the supervening event was foreseen or foreseeable. If the parties foreseeable that a particular event might occur, which may affect their performance of the contract, it will be assumed that they contracted in accordance with the risk. For example, in Davis Contractors ltd v Far ham UDC [1956] AC 696, the House of Lords rejected the company’s claim that the contract, for the construction of 78 houses within a period of eight months for a fixed price, was frustrated by shortages of labour and materials which increased the cost of the work. The basic obligations under the agreement remained uncharged and financial hardship to one of the parties was not sufficient reason for invoking the doctrine


The Davis Contractors decision can be defended on the basis that the risk of increased costs due to various shortages, was clearly foreseen by the company. It must therefore be assumed that it accepted that risk at the time of contracting.
Frustration cannot be ‘self-induced’

The doctrine of frustration applies only in circumstances where the supervening event is beyond the control of the parties to the contract. It follows that where the alleged frustrating event is caused by the deliberate act or decision of one of the parties, or by his negligence, the doctrine will not apply. Whichever theory lies behind the doctrine- whether it is simply a fair solution imposed by the courts- it is not possible to justify its application to subsequent events, which are self, induced. An example of this rule is provided by Ocean Tramp Tankers Corpn v V/O Sofracht, the Eugenia (1964) where the facts were:

“The Eugenia was let out to the charterers to go from Genoa to the BlackSea to load cargo, and thence to India to unload cargo. Having loaded, the ship proceeded on its route to India, which took it via Suez. In breach of contract, the chatterers allowed the ship to enter a war zone. (The contract contained a war clause, which prohibited the chatterer from sailing the ship into a dangerous zone without the owner’s permission) The ship entered the Suez Canal and was trapped when the canal was closed. The chatterers tried to rely on the detention of the ship as a frustrating event.
The Court of Appeal held that the charterers could not rely on the fact that the ship was trapped in the canal, as this was their own fault, They were in breach of contract by allowing the ship to enter a war zone and therefore, the alleged frustrating event was self-induced.

Similar issues were raised in the House of Lords in Paal Wilson & Co A/S v Partenreederei Hannaj Blumenthal, The Hannah Blumenthal [1983) I ALL ER 34. The case concerned the sale of a ship under a contract which provided that any dispute arising out of the sale was to be settled by arbitration. Disputes arose about the vessel, and the buyers commenced arbitration proceedings. As originally agreed, both parties appointed. In all, there was a period of over seven years delay in the arbitration. The question arose whether the arbitration agreement was frustrated as a result of the long delay which was fault of both parties. The House of Lords held that in such circumstances, the fact that the parties were under a mutual obligation to keep the arbitration process moving meant that neither party could rely on the delay for the other as a ground for claiming frustration of the agreement to arbitrate.


However, if the fault of a party to a contract is merely of a minor nature, he may still be able to rely on the doctrine. It will be a question of degree as to whether the particular fault or default amounts to self-induced frustration. For example, would a contract for some personal performance be frustrated if the person concerned became incapacitated by his own carelessness? - such as a professional acrobat who sustains injury on a private skiing expedition and as a result, is unable to perform his act? This type of problem was acknowledged, without being resolved, in Joseph Constantine Steamship Line Ltd v Imperial smelting Corpn Ltd.

There seems to be no reason, in principle why events brought about by a party’s own negligence should not be regarded as self- induced and thus preclude the application of th doctrine.


It should be noted that, where self-induced frustration is alleged, the onus of proof falls on the party making the allegation. In Joseph Constantine, the owners of a steamship (The kingwood) chartered the vessel to the respondents, to go to Australia and load a cargo there. Before the cargo was loaded, an explosion occurred in the boiler of the ship, preventing the contract form being carried out. The respondents sued the owners for damages and the owners claimed that the explosion frustrated the contract. The respondents argued that the owners of proof rested on the owners to show that the explosion was not their fault. The House of Lords held that the contract was frustrated. The cause of the explosion was not clear, but the respondents had failed to prove that the frustrating event was the owner’s fault. The burden of proof was not on the owners to disprove negligence on their part.
Effects of the doctrine

We must now consider the practical consequences that arise when the parties are discharged under the doctrine. Unless the law provides for a fair distribution of the loss resulting form the supervening event, it may not be satisfactory simply to hold that the contract is frustrated. For example a party may have incurred considerable expenditure in reliance upon the contract before the frustrating event occurred.


It is well settled that frustration automatically brings the contract to an end at the time of the frustrating event.

This is in contrast to discharge by breach of contract where the innocent party can choose whether to treat the contract as repudiated. Moreover, a contract, which is discharged by frustration, is clearly different from one, which is void for mistake. A frustrated contract is valid until the time of the supervening event but is automatically ended thereafter, whereas a contract void on the grounds of mistake is a complete nullity form the beginning. A clear statement about the legal effect of frustration on a contract can be found in Hirhi Mulji v Cheong Yue Steamship Co Ltd [1926] AC, 497, where the facts were:

“The respondent owners of a ship, The Singaporean, agreed by a charter party of November 1916 to hire their vessel to the appellants from 1 March 1917. The appellants agreed to use the ship for 10 months from the date do delivery, Before 1 march 1917, the ship was requisitioned by the government and not released until February 1919.when the ship was requisitioned, the owners, thinking that se would soon be released, asked the appellants if they were still willing to take up the charter (i.e. a little later). The Appellants said that they would do so, but when the ship was finally released (later than expected) in February 1919, they refused to accept it. The owners argued that the appellants could not rely on the doctrine of frustration, despite the supervening event, as they had chosen to affirm the contract.
On appeal from the Supreme Court of Hong Kong, the Privy Council held that the contract was frustrated in 1917. This meant that the obligations under the contract brought to an end immediately and automatically at the time of the frustrating event. The application of the doctrine did not rely upon the election of the parties. So eve where the parties continue to treat the contract as subsisting for a period of time after the supervening event, the court may declare it to be frustrated.
As a consequence of the rule that a contract is valid until the time of the frustrating event, and is determined automatically thereafter, certain other rules were said to follow. The common law position was encapsulated in the slight enigmatic expression that the loss lies where it falls. For example, where money was paid under a contract, which was later frustrated, it was not recoverable. This was because parties remained liable for contractual obligations, which fell due before the supervening event. On the other hand, the parties escaped form performing those obligations, which had not yet fallen due to the time of frustration. The potential for unfairness decisions in Chandler v Webster [1904] 1 KB the facts were;

“The plaintiff contracted to hire a room in Pall Mall from the defendant for the purpose of watching the coronation procession on 26 June 1902. The price for the hire of the room was $141 15s and it was payable immediately. The plaintiff paid $ 100, but before he paid the balance the procession was canceled due to the illness of the king. The plaintiff sought to recover back the money he had paid.

The Court of Appeal held that his claim could not succeed. Moreover, he was liable for the remaining $41 15s as this obligation had fallen due before the frustrating event occurred. Despite receiving no actual benefit whatsoever, the plaintiff was still liable for the hire of the room.
The harsh results of this rule as laid down by Chandler v Webster (1904) were not surpricingly, subjected to considerable criticism, The law Revision Committee suggested that the rule should be changed but, before any implementation to this report took place, Chandler v Webster was overruled by Fibrosa Spolka Akcyjna b Fairbairn Lawson Combe Barbour Ltd [Ltd} AC 32 (the Fribrosa case) The case involved a contract under which the respondents an English company, were to manufacture certain machinery for the appellants, a Polish company, and deliver it to Gdynia. The appellant were to pay $4,800 for the machinery, a third of which (ire $ 1,600) was to be paid with the order. In fact only $1,000 was paid with the order. Subsequently, Germany invaded Poland and occupied Gdynia. At this time, none of the machinery had been delivered. For reasons, which we have considered earlier, the contract was frustrated and the appellants sued for the return of the $1,000.
The Court of Appeal followed the rule in Chandler v Webster and held the money was irrecoverable. But the House of Lords decided that there had been a total failure of consideration and that the appellants were entitled to recover $ 1,000 for the respondents.
The decision in the Fibrosa case was an improvement on the harshness of Chandler v Webster, but was not a complete solution to the problem of money paid under a contract, which was then frustrated. This was freely acknowledged by their Lordships in the course of their judgments (see [1943} AC 32 at 49-50, 54-5 and 71-2). Recovery of money paid depended on there having been a total failure of consideration the performance of a part of the consideration would thus prevent such a claim form succeeding.
Furthermore, the decision in the Fibrosa case made no allowance for the expenses, which were incurred under the contract by the payee. In other words, it was rely a fair solution to both parties it provided for the return of the prepayment, but it did not compensate the recipient for the expenditure that it had incurred whilst partially carrying out the contract. In the Fibrosa case itself, the $ 1,000 was recoverable, but the English company received nothing for the considerable amount of work it had done on the machinery before the frustrating event. The common law did not allow the appointment of the prepaid sum in this situation. To deal with these obvious defects in the law, the law reforms (frustrated Contracts) Act 1943 was enacted soon after the fibrosa case.

The law Reform (frustrated contracts) Act 1943UK

General

The law reforms (frustrated Contracts) Act 1943 was introduced in an attempt to provide for a fair solution between the parties when their contract had been frustrated. It aimed at preventing the unjust enrichment of either party to the contract at eh expense of the other. It deals only with situations where contracts have become impossible of performance or been otherwise frustrated and the parties have consequently been discharged from further performance (s1 (10. It should be noted that the Act does not lay down the general principles under which the doctrine will be invoked and this question is still dealt with under the common law rules that we have considered earlier in this chapter. Also the parties may themselves have made express provision for the frustrating event which has occurred, in which case, under s 2(3) the court is to give effect to the parties intentions and the Act is excluded by their contrary agreement.


LR (FC) 1943 does not apply to all types of contract. Section 2(5) states that the Act is not applicable to the following.

  1. Any charter party, except a time charter party … or to any contract (other than a charter party) for the carriage of goods by sea : or

  2. Any contract of insurance…

  3. Any contract to which section 7 of the sale of goods Act (now 1979) applies, or to any other contract for the sale, or for the sale and delivery, of specific goods, where the contract is frustrated by reason of the fact that the goods have perished.


The main changes introduced by the Act.
All sums paid or payable to any party in pursuance of the contract before the time when the parties were discharge (in this Act referred to as the time of discharge) shall, in the case of sums so payable, cease to be so payable.
In other words this subsection enacts that advance payments made in pursuance of the contract before the supervening event are recoverable.

It also provides that money which is payable under the contract before the frustrating event, but not yet paid, ceases to be payable. Of course, there will be cases where the recipient of the advance payment has incurred expenses before the contract was frustrated. It may well be that the parties agreed on some advance payment for this very reason. If the whole sum is recoverable, on discharge, then this reason, the new provisions are subject to the following important proviso, which is appended as to s 1(2)


Provided that if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in or for the purpose of, the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.

This award of expenses can be made only where an advance sum was either paid or payable before the frustrating event.


A party has incurred expenses in the performance of the contract may be awarded his expenses up to a limit of the sums paid or payable to him under the contract the frustrating event. Such an award will be made where the court considers it just to do so having regard to all the circumstances of the case.- in other words any award is at the discretion of the court.
The more recent case of Gamerco SA v ICM/Fair Warning (Agency) Ltd [1995) 1 WLR 1226 provides a rare judicial discussion of the application of LR (FC) A 1943, s 1(2). “The facts were that, in 1992, the plaintiff concert promoters (p) agreed to promote a pop groups (Ds) concert at a football stadium in Madrid on a specific date, as part of that groups European tour. Shortly before the date of the concert, but after the contract was made by the parties, engineers discovered that the stadium was unsafe and its use was subsequently prohibited by the local authorities. Thus, Ps permit to hold the concert was withdrawn and, as not other suitable venue was available at this time , the concert was cancelled. P had paid $412,500 to D in advance, and both parties had incurred some expenditure in preparing for the concert. The action involves Ps claim to recover the advance payment under s 1(2) of the act, and D s Counterclaim for breach of contract by P for failing to secure the requirement permit for the performance.
The judge, Garland J, in the High court held that the contract was frustrated due to the stadium being unsafe and its use for the contract being banned. Ds counterclaim was unsuccessful, as P was not required to ensure that the permit, once obtained, would remain in force. More significantly, it was decided to allow Ps claim in its entirety, with the judge ordering the repayment of the whole sum paid in advance despite the fact that D had incurred some expenditure in advance of the proposed performance, justice would be done by making no deduction form the ordered repayment under the proviso. It seems that the precise nature of Ds expenses was not very clear and the judge found it impossible to determine an accurate amount.

Presumably it was felt that p expenses were heavier and more calculable than those of the defendant pop group.


Another important innovation introduced by LR (FC) a 1943 is contained in s1 (3) which states
Where any party to the contract has by reason of anything done by any other party thereto in or for the purpose of, the performance of the contract, obtained a valuable benefit (Other than a payment of money to which … [section 1(2) … applies) before the time of discharge, there shall be recoverable form him by the said other party such sum (if any) not exceeding the value of the said benefit to the party obtaining it as the court considers just, having regard to the circumstances of the case and in particular-

  1. The amount of any expenses incurred before the time of discharge by the benefited party in or for the purpose of, the performance of the contract, pursuance of the contract and retained or recoverable by that party under … [section 1 (2) and

  2. The effect in relation to the said benefit of the circumstances giving rise to the frustration of the contract.

20.52 An illustration of the potential usefulness of LR (FC) A 1943, s 1(3) is provided by the old case of cutter v Powell (1975). The second mate of a ship, the Governor party, was promised 30 guineas for the completion of a voyage form Kingston (Jamaica) to Liverpool. The sailor died after seven weeks of the voyage and his widow (the executrix) claimed a proportion of his wages, on a quantum meruit basis, for the work he had done on the voyage before his death. The court rejected the widow claim, the contract stipulated that the voyage had to be completed. This sometimes referred to as the doctrine of strict performance.


It is possible that the outcome of Cutter v Powell would be different today under s 1(3) and that the widow could recover from the defendant for the valuable benefit which he had obtained form the sailors labour. But it is also possible that the Act would have been excluded by the contrary agreement of the parties, as provided for by s 2(3) this might depend on the construction of their agreement. Did they agree for example that there was to be not payment whatsoever unless the entire voyage was completed by the sailor.
The first major case to be decided on the law reform (frustrated contracts) Act 1943 was BP Exploration Co (Libya) Ltd v Hunt The facts were as follows.

“Nelson Hunt had been granted an oil concession in Libya by the government of that country. He entered into an agreement with a larger oil company, BP, to exploit the oil concession, as he lacked the resources to go ahead on his own. BP were to do the exploratory work, which they would finance, and in return they would get a half share of Hunts concession. Thy also had to make certain farm- in payments to Hunt in cash and oil. As soon as the oil field become productive, BP were to receive half of all the oil produced from it, together with reimbursement oil (taken form Hunts share) to meet the cost of the company’s farm-in payments and to cover Hunts share of eh development expenses. Thus BP were to bear the principal risk of failure risk of failure in their combined venture. After much expenditure, a large oil field was discovered, which became productive in 1967. But in 1971 BPs half share in the concession was expropriated by the new Libya n government, following a revolution in that country. The same fate befell Hunts half share in 1973. At the time of the frustrating event, BP had received about one-third of the reimbursement oil to which they were entitled. The company brought a claim under s 1(3) of the act for an award of a just sum.


The claim was allowed by Robert Goff J and he awarded BP a just sum under s 1(3) of the act. The precise calculation of the amount is a complex matter, which will not be elaborate here. Hunts appeals t both the court of Appeal and the House of the Lords were successful, the main judgment on the scope of s 1(3) is that of the trial judge. (In the House of Lords, their lordships dealt with fairly minor, technical values of the oil concession as a result of BPs work. It should be noted, however, that the value of this benefit was substantially reduced by the circumstances giving rise to the frustration of the contract, namely the expropriation of the parties’ interests in the oil field.







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