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(p. 340) 14. Frustration 

(p. 340) 14. Frustration
Chapter:
(p. 340) 14. Frustration
Author(s):

Janet O’Sullivan

DOI:
10.1093/he/9780198853176.003.0014
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date: 06 May 2021

Summary

This chapter covers the doctrine of frustration, applicable where performance of a contract becomes impossible or ‘radically different’ after it was made. Frustration is exceptionally rare, because it only applies where the parties have not made provision for, and thus allocated the risk of, the changed circumstances in their contract. The chapter explores the theoretical basis for the doctrine (giving examples of potential frustrating events), the issue of ‘self-induced frustration’, and the remedies following frustration in the Law Reform (Frustrated Contracts) Act 1943.

14.1 This chapter seeks to explain what attitude the law takes when matters change, often unexpectedly, after the contract has been concluded. In such a situation, one party may attempt to invoke the doctrine of frustration to argue that the contract should be brought to an end because of the change in circumstances. As in the case of common mistake, English law is very reluctant to let a person escape from a contract where the other person is not in breach and not otherwise at fault. As Bingham LJ explained in J Lauritzen AS v Wijsmuller BV (The Super Servant Two) (1990): ‘Since the effect of frustration is to kill the contract and discharge the parties from further liability under it, the doctrine is not to be lightly invoked, must be kept within very narrow limits and ought not to be extended.’

14.2 Indeed, at one stage of its development, English law never allowed contracting parties to escape from a contract by reason of a change of circumstances after the time of contracting (Paradine v Jane (1646)).

14.3 This attitude was not unfair where only one party had made an assumption that subsequent events showed to be false. Often this is the case. For example, I may agree to sell a top-of-the-range television to you for £500 because I believe that I can get hold of one for £250 from my friend who works on a market stall. However, shortly afterwards my friend’s market stall and all his televisions are destroyed in a heavy storm, and I have to buy one from someone else for £700. This is not your concern, so I should not be able to escape the bargain. The risk should be placed firmly on me.

14.4 Imagine, however, that both of us make an assumption that subsequent events prove to be false. For example, I contract with you to do some renovations to my house: both of (p. 341) us implicitly assume that the house will still be in existence when the time comes for the work to be done. If the house is struck by lightning the day after the contract is signed (but before you are due to start work), there seems a stronger case here for saying that we should not be bound by the contract, that it should be discharged. In other words, the risk should not be placed on either of us.

14.5 Accordingly, the doctrine of frustration was developed, to allow a contract to be brought to an end where the parties both make an important assumption when contracting that is later shown to be incorrect. As was discussed in the last chapter, this doctrine deals with similar situations to common mistake. The key difference is that for common mistake to apply, the parties must be mistaken as to some feature at the time of contracting, whereas for frustration to apply, the parties’ joint assumption must be shown to be false by events occurring after the contract has been entered into. It was suggested in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd (2002) that this distinction should make us slightly less reluctant to invoke the doctrine of frustration than common mistake.

The current test for frustration

14.6 The currently favoured test for ascertaining whether the contract is frustrated is that laid down by the House of Lords in Davis Contractors Ltd v Fareham UDC (1956):

[F]rustration 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 … 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.

One very important rider needs to be added to this test, namely that frustration can only operate where the contract does not deal properly or at all with what will happen on the occurrence of the alleged frustrating event (for example, see Joseph Constantine SS Line Ltd v Imperial Smelting Corpn Ltd (1942) and Great Peace).

14.7 Therefore, the test has three elements: (1) the contract must not allocate the risk of the event occurring, (2) performance of the obligation would be radically difference from that which was undertaken, and (3) the occurrence of the event must not be due to the default of either party. The first stage requires some explanation. If the contract resolves what should happen on the occurrence of such an event, either by an express term or an implied term, then that is generally the end of the matter: the contract itself dictates what happens and there is no room for the doctrine of frustration to operate. Accordingly, if the contract itself contains a mechanism (even a rudimentary or fairly incomplete one) for dealing with certain changes in circumstances, the contract will be taken to (p. 342) contemplate such changes and not be frustrated by reason of them (see, for example, Ogilvy & Mather Ltd v Silverado Blue Ltd (2007)).

14.8 This explains in part why frustration cases are increasingly rare. Commercial contracting parties almost invariably make provision in their contract for what is to happen in the event of unexpected eventualities, thereby ousting the rules of frustration. The most common method for doing so is the force majeure clause, which provides a comprehensive list of events and problems, and provides a contractual regime for dealing with them (maybe a right of cancellation, suspension, changes in price, etc.). This has a number of advantages for the parties: it provides certainty about what the impact of the specified events will be, it enables the parties to allocate the risk of events which would not count as frustrating events at common law and also to make provision for a more flexible remedial regime than that which applies on frustration. Some commentators even suggest that we do not need a doctrine of frustration, that parties should be required to look after themselves by inserting a force majeure clause if they want protection from unexpected events (see the discussion of the relevant viewpoints in Morgan (2015)). Overall, the moral is, we must carefully construe the terms of the contract first when faced with a situation where frustration is potentially applicable and only if the contract does not make provision for the event can we go on and consider frustration. (One exception is in those cases of supervening illegality where public policy insists on frustration, even if the parties have made provision in their contract, but this is very much the exception that proves the rule (see para 14.36).)

14.9 As in the case of common mistake (see throughout Chapter 13), there is debate as to whether it is necessary or appropriate to have an independent doctrine of frustration that automatically brings the contract to an end in certain circumstances. The alternative approach (the ‘construction approach’ or ‘implied terms approach’) argues that the consequences of a change of circumstances after the contract is made can always be determined by construing and interpreting the terms of the contract in the ordinary way, implying terms where appropriate. It suggests that there is no need, and indeed no room, for an independent doctrine to govern such situations. While this approach is currently wholly out of favour (see, for example, its treatment by the House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd (1981), the Court of Appeal in Great Peace, and the high court in Canary Wharf (BP4) v European Medicines Agency (2019) discussed at para 14.28 onwards), it is suggested that it may provide a better way of explaining the cases. The ‘radical difference’ test often fails to capture the essence of the court’s reasoning. However, we will explore the cases by reference to this test, but consider throughout whether it is satisfactory.

14.10 Two modern Court of Appeal cases provide guidance on how the test works and its inter-relationship with the allocation of risk by the contract. In the first, The Sea Angel (2007), a salvage firm called Tsavliris chartered from Global a ship called the Sea Angel in order to assist Tsavliris in salvage operations concerning an oil tanker that had run aground near Karachi, causing a major pollution incident. The charter was to last for 20 days from 25 August to 15 September 2003. Having done its salvage work, (p. 343) Tsavliris gave notice to Global on 9 September that it would redeliver the Sea Angel at the redelivery port in the charter agreement, expecting that the ship would be able to leave the port of Karachi that day. However, in fact the Karachi port authority refused to issue the necessary certificate allowing the ship to leave, a certificate stating that all port charges had been paid: it was using this as a bargaining chip in its demand for compensation for the oil pollution damage. It became clear by 13 October that a commercial solution between Tsavliris and the port authority was not going to be possible, and following litigation by Tsavliris, the port authority was forced to release the vessel on 26 December. In response to Global’s claim for payment for the hire of the vessel in respect of the period after 15 September until eventual redelivery, Tsavliris claimed that it was not liable to pay past 13 October because the contract was frustrated on this date, it being clear that there would be a delay of at least three months in releasing the vessel, which was far longer than the charter period of 20 days. The Court of Appeal rejected this argument.

14.11 Rix LJ helpfully explained how he thought that the ‘radical difference’ test should be applied in practice, and how important in applying it the allocation of risk by the contract was:

In my judgment, the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at 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. Since the subject matter of the doctrine of frustration is contract, and contracts are about the allocation of risk, and since the allocation and assumption of risk is not simply a matter of express or implied provision but may also depend on less easily defined matters such as ‘the contemplation of the parties’, the application of the doctrine can often be a difficult one. In such circumstances, the test of ‘radically different’ is important: it tells us that the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.

14.12 It was therefore too simplistic just to compare the anticipated delay with the length of the contract. When a ship is chartered for a specific period, the risk that something will happen to delay it being returned is generally on the charterer, because it agrees to pay hire until redelivering the vessel. Therefore, the court held, it would require something very serious to require the owner (Global) to share this risk by denying it its right to hire charges for the period from 13 October until redelivery. Such a factor was not present here, principally because the port was merely refusing to let the ship leave until the dispute over its release could be resolved, the problem only occurred at the tail-end of the charter after Tsavliris had carried out the salvage operation, and there was a foreseeable risk of a vessel being detained in the midst of a serious pollution incident.

(p. 344) 14.13 The second relevant Court of Appeal decision is Graves v Graves (2008) (noted by Capper (2008)). In Graves, an ex-husband allowed his wife (who lived with their children) to rent one of his properties. She had few resources and therefore both parties wanted to be sure that she was entitled to housing benefit, because this was intended to finance 90 per cent of her rent payments. She asked the council whether she was entitled, and they responded in the affirmative, so—having told her ex-husband of the result of her enquiry—she entered into the lease, paying a £ 12,000 deposit in the process. However, it turned out that the council’s advice was incorrect. She could not pay the rent and so her ex-husband sought possession. In response, she claimed that the lease was void for mistake or alternatively frustration, and sought the return of the deposit that she had paid.

14.14 The Court of Appeal held that both parties contracted on the basis that Mrs Graves was entitled to the housing benefit and that this would be used to provide 90 per cent of the rent. Without this assumption, neither party would have contemplated entering the contract. Mrs Graves did not promise, whether expressly or impliedly, that she was entitled to the housing benefit: she had effectively made a joint enquiry to the council on behalf of both of them and simply relayed what the council had said. In these circumstances, the contract did not place the risk of the council’s advice being wrong upon her. Instead, the court found that there was an implied condition that if the housing benefit was not payable, the tenancy would come to an end, so that when the council informed Mrs Graves that she was not entitled to the benefit, the tenancy came to an end. The term was so obvious as to go without saying, and could therefore be implied on orthodox implied term principles (see paras 7.81–7.92). Accordingly, there was no room for any doctrines of frustration or mistake to operate.

14.15 One might feel that the decision was a little favourable to Mrs Graves—ordinarily if you promise to pay for something, it is your problem if it turns out you cannot, so the risk should be on you. However, putting this to one side, there is a more important point here. Graves shows how easily the courts can use orthodox implied terms principles to deal with frustration cases if they want to, without the need to resort to an independent doctrine of frustration.

The ‘radical difference’ test

14.16 While we should be wary of splitting the cases into rigid categories, because each case turns on the construction of the particular contract, such categories are at least useful as a starting point.

Frustration of common purpose

14.17 The situations that cause most difficulty are where an event fails to occur that at least one party assumed would occur, which renders performance of the contract pointless, for (p. 345) one or both parties. We shall start with two cases that are famously difficult to explain or reconcile. While they have sometimes been criticised and are borderline cases, it is submitted that they may both be correctly decided and at the very least tell us a lot about how the doctrine of frustration should operate.

14.18 The first case is Krell v Henry (1903). The defendant agreed to hire from the claimant a flat in Pall Mall for 26–27 June, when King Edward VII’s coronation procession was scheduled to take place and pass along Pall Mall. The flat would offer a particularly good view of the procession. The contract contained no express reference to the coronation procession, or to any other purpose for which the flat was taken. However, it did say that the defendant was only to have the use of the room during the day, and not during the night. A deposit was paid when the contract was entered into. As a result of the King’s serious illness, the procession was postponed, so the defendant declined to pay the balance of the agreed rent. The Court of Appeal held that the taking place of the procession on the days originally fixed along the proclaimed route was regarded by both contracting parties as the foundation of the contract, so the contract was frustrated and the defendant did not have to pay the balance.

14.19 Two passages from the judgment of Vaughan Williams LJ are particularly crucial to understanding the court’s reasoning. First, he explained why he had come to the decision that the contract was frustrated:

[T]he plaintiff exhibited on his premises, third floor, 56A, Pall Mall, an announcement to the effect that windows to view the Royal coronation procession were to be let, and that the defendant was induced by that announcement to apply to the housekeeper on the premises, who said that the owner was willing to let the suite of rooms for the purpose of seeing the Royal procession for both days, but not nights, of June 26 and 27. In my judgment the use of the rooms was let and taken for the purpose of seeing the Royal procession. It was not a demise of the rooms, or even an agreement to let and take the rooms. It is a licence to use rooms for a particular purpose and none other. And in my judgment the taking place of those processions on the days proclaimed along the proclaimed route, which passed 56A, Pall Mall, was regarded by both contracting parties as the foundation of the contract.

14.20 Secondly, he distinguished the situation in Krell from a hypothetical example, discussed in the course of argument, where frustration would not apply:

[I]f a cabman was engaged to take some one to Epsom on Derby Day at a suitable enhanced price for such a journey, say £10, both parties to the contract would [not] be discharged in the contingency of the race at Epsom for some reason becoming impossible … for I do not think that in the cab case the happening of the race would be the foundation of the contract. No doubt the purpose of the engager would be to go to see the Derby, and the price would be proportionately high; but the cab had no special qualifications for the purpose which led to the selection of the cab for this particular occasion. Any other cab would have done as well … Whereas in the case of the (p. 346) coronation, there is not merely the purpose of the hirer to see the coronation procession, but it is the coronation procession and the relative position of the rooms which is the basis of the contract as much for the lessor as the hirer …

14.21 Many have had difficulty in understanding the decision in Krell and how the case can be distinguished from Herne Bay Steam Boat Co v Hutton (1903) (see para 14.25). Some judges have even criticised it (for example, in Larringa & Co Ltd v Societé Franco-Américaine des Phosphates de Medulla, Paris (1929) and Maritime National Fish Ltd v Ocean Trawlers Ltd (1935)). Nonetheless, while the result in Krell was certainly an exceptional one the decision is surely correct and the court’s reasoning illuminating. Let us begin with the previous cab example. In the example, the person hiring the cab hired it for the purpose of going to the Derby. He assumed that the Derby would take place. So the first thing the example shows is that it is not enough that one party entered into the contract for the purpose of seeing the Derby: the fact that one party makes an assumption which subsequent events show to be incorrect (in the cab example that the Derby would take place) is not enough to frustrate the contract. The starting point is that if a bargain turns out badly for you, this is your bad luck: the risk is on you. The motives and expectations of the person who takes the cab are not the business of the other party. There needs to be a good reason to be able to shift the risk, to get out of the bargain.

14.22 The second point about the cab example is that the cabman knows that the passenger wants the cab to go and see the Derby (he charges a high price for this very reason). He knows that the other party is assuming that the race will go ahead. So the second lesson to be drawn is that even if one party makes an assumption that is subsequently shown to be incorrect and the other party knows of this assumption at the time of contracting, this is still not enough to bring the contract to an end.

14.23 So what extra ingredient was there on the facts of Krell, not present in the cab example, that led the Court of Appeal to discharge the contract for frustration? In Krell, the defendant’s motive for contracting was to see the procession and the plaintiff knew this. However, the cab example shows that something more is needed. Why could the claimant in Krell not say that the defendant’s motives were not his business? The answer is that the fact pattern was exceptionally unusual. First, the claimant advertised that he was selling a view of the royal procession, rather than simply letting the room. Secondly, he only offered the use of the room in the day, not during the night. Thirdly, he was not in business hiring out his room regularly—unusually, and unlike the cabman in the Epsom Derby example, he only contracted because of the coronation procession. Therefore, crucially and highly unusually, we can say that both parties assumed that the procession would go ahead and neither would have made the contract otherwise; there was a joint assumption as to this important matter. Their common purpose was frustrated.

14.24 What is noticeable about Krell is how little use the later ‘radical difference’ test is in explaining the decision or helping to decide what result should be reached. The court simply asked whether both parties had contracted on the assumption that the procession (p. 347) would take place; whether this was important to both parties or just the concern of one. This reasoning looks extremely similar to asking whether a term should be implied, and seems governed by analogous rules (see paras 7.81–7.92). We look at the assumptions and expectations shared by the parties. A similar approach is taken to implied terms, where we look at what assumptions the parties shared that they specifically failed to advert to and put expressly into the contract.

14.25 Krell is invariably contrasted with Herne Bay Steam Boat Co v Hutton (1903), another case resulting from Edward VII’s illness. A Royal naval review was due to take place at Spithead on 28 June. The claimants and the defendant agreed in writing that the claimants’ steamship Cynthia should be ‘at the disposal’ of the defendant on 28 June to take passengers from Herne Bay ‘for the purpose of viewing the naval review and for a day’s cruise round the fleet; also on 29 June for similar purposes: price £250 payable, £50 down, balance before ship leaves Herne Bay.’ On signing the agreement the defendant paid the £50 deposit. On 25 June the review was cancelled, whereupon the claimants contacted the defendant, stating that the ship was ready to start and requesting payment of the balance. Receiving no reply, the claimants used the ship for their own purposes on 28 and 29 June. During these two days the fleet remained anchored at Spithead. The claimants sought to recover the balance less the profits made by their use of the ship during the two days, and the defendant pleaded frustration. The Court of Appeal, composed of exactly the same judges as in Krell, held that the contract was not frustrated. The court took the view that the reference in the agreement to the purpose of the hire only expressed Hutton’s motive for entering into the contract. Therefore, as in the cab example, Hutton’s purpose was to see the review: he assumed that the review would take place. Moreover, the defendant knew that this was Hutton’s assumption, because it was mentioned in the agreement itself. However, this is not enough in itself, as we saw from the cab example in Krell. As in the cab example, there is nothing to make it the defendant’s business as well: it does not care about whether the review takes place. So, in contrast to Krell, the assumption made here is not a joint one: the defendant was in business hiring out a boat, and did not care what Hutton used it for. Romer LJ explained the core reasoning as follows:

[I]t is a contract for the hiring of a ship by the defendant for a certain voyage, though having, no doubt, a special object, namely, to see the naval review and the fleet; but it appears to me that the object was a matter with which the defendant, as hirer of the ship, was alone concerned, and not the plaintiffs, the owners of the ship … The ship (as a ship) had nothing particular to do with the review or the fleet except as a convenient carrier of passengers to see it: any other ship suitable for carrying passengers would have done equally as well. Just as in the case of the hire of a cab or other vehicle, although the object of the hirer might be stated, that statement would not make the object any the less a matter for the hirer alone, and would not directly affect the person who was letting out the vehicle for hire.

14.26 Having examined and contrasted these two cases, we can see that in order for the contract to be frustrated, we must ask whether the contract was based on an assumption (p. 348) made by both parties. It is not enough that one party’s motives or assumptions are disappointed, or even that the other knows of the former’s motives; the assumption must be a joint one. Krell v Henry is a specific, and possibly unique, example of a contract being frustrated, not because it had become impossible or more difficult or onerous to perform, merely because the parties’ joint or common purpose was dashed, such that the contract lost its point.

14.27 Before exploring those other fact patterns that might more readily trigger a plea of frustration, there is a one topical issue that neatly raises the question of frustration of common purpose, namely the effect of Brexit. Following the referendum result in 2016 and the triggering of Article 50 in 2017, it is clear that any deal by which the United Kingdom eventually leaves the European Union has the potential to impact significantly on commercial contracts. As MacMillan (2016) points out, ‘the comparatively sudden development of even the prospect of Brexit’ suggests that existing commercial contracts are unlikely to include provisions dealing with that eventuality: ‘While force majeure clauses often provide against the possibility of insurrection, Brexit presupposes a legal rather than a violent revolution.’ This in turn means that, at least for those contracts entered into before the referendum was mooted, many parties are likely to invoke the doctrine of frustration. One such case has already been litigated, Canary Wharf (BP4) T1 Ltd v European Medicines Agency (2019), although it does not deal with the impact of Brexit on general commercial transactions (so MacMillan’s warning may yet be proved correct). Instead it involves the impact of Brexit on a lease of commercial premises.

14.28 In Canary Wharf, CW was the landlord of commercial office premises in London’s docklands, which it leased on a 25 year lease to EMA, an agency of the European Union. Following the triggering of Article 50, the EU passed a regulation in 2018 relocating the EMA to Amsterdam. EMA indicated that it regarded the lease as frustrated, so CW sought a declaration that the lease was not frustrated by Brexit. At that point it was not clear what form Brexit would take, no-deal or on the terms of a withdrawal agreement, so the judge Marcus Smith J explored several possible versions, concluding that Brexit, of whatever form, would not frustrate the lease. He applied the ‘radical difference’ test and Rix LJ’s multi-factorial approach from the Sea Angel, expressing reservations about the argument that frustration cases can be explained on the basis of implied terms or by construing the contract. As to the implied terms approach, he found difficulty imaging how a test based on the parties intentions at the time of contracting could operate, when ex hypothesi something entirely unanticipated has occurred subsequently (though see para 14.8). As to the construction approach more generally, he noted that some of the matters Rix LJ regarded as relevant ‘might very well arise out of the previous negotiations of the parties and their declarations of subjective intent, matters which are not to be taken into account when interpreting a contract’ and noted that construction ‘has its limits when faced with extreme and unforeseeable supervision events’.

14.29 On the application of the ‘radically different’ test to the facts, one of EMA’s arguments was that, as in Krell, Brexit caused a frustration of the parties’ common purpose. (p. 349) Unsurprisingly, Marcus Smith J disagreed. Assessed at the time of contracting, there was no such common purpose:

[244] … This is not a case like Krell v. Henry where the parties had a common purpose going beyond their agreement, which was thwarted. The parties approached the Agreements as counterparties, and they bargained hard – if amicably – to get what they wanted.

[245] … Outside the terms of the Lease, the parties’ purposes were not common, but divergent. The EMA was focussed on bespoke premises, with the greatest flexibility as to term, and the lowest rent. CW was focussed on long-term cash flow, at the highest rate, and was prepared to allow the EMA its say in the building’s configuration, provided that this was not adverse to CW’s interests. There was no common view or expectation between the parties that the risk of the consequences of the EMA abandoning its headquarters should be differently visited according to the reason for the EMA’s departure.

Let us now turn to other types of situation in which a contract might be held to be frustrated.

Destruction of subject matter of the contract

14.30 One of the most extreme cases is where the subject matter of the contract does not exist. Generally, the parties both assume that the subject matter of the contract will continue to exist. So, for example, in Taylor v Caldwell (1863), the defendant agreed to hire out some premises to the claimant for staging a performance, but the premises burnt down the day before the performance was to take place. The claimant argued that the defendant was in breach of contract in failing to supply the premises and claimed damages, but Blackburn J held that the parties contracted on the basis that the premises would continue to exist, so the contract was frustrated. Similarly, in Appleby v Myers (1867), the claimant agreed to erect machinery on the defendant’s premises, but the premises and machines were destroyed by fire before the work was completed. It was held that the contract was frustrated.

However, it is still ultimately a matter of construction of the contract as to whether it places the risk of destruction on one party. In Bunge SA v Kyla Shipping Co Ltd (2012), a chartered ship was damaged severely while chartered through no fault of the owner or charterer. It was held that the owner was promising that it would supply a seaworthy vessel and that, as it was insured for the cost of repair, the contract placed the risk on the owner of the ship being damaged in a way that he could repair at the cost of the insurers. Therefore, contrary to the owner’s argument, the contract was not frustrated.

Increased expense

14.31 It is clear that, if the contract has just become more expensive to perform for one party, this does not frustrate the contract. For example, in Davis Contractors Ltd v Fareham UDC (1956), Davis agreed to build 78 houses for £94,000, the work to be completed (p. 350) within eight months. In fact, the work took 22 months and cost £17,000 more than anticipated. Davis (cheekily) claimed that the contract was frustrated (and that accordingly, they were entitled to a reasonable sum for the work that they had done). The House of Lords held that the fact that performance of the contract had proved more onerous than Davis had anticipated was insufficient to frustrate the contract. This can be easily explained using the same reasoning. One party enters into a contract because he thinks he can make a profit; if it turns out to be more expensive than he thought, his assumption is proved incorrect. However, his assumptions and reasons for entering into the contract are not the business of the other party; the other party makes no such assumptions.

14.32 The courts generally assert that increased expense will never frustrate a contract: Tsakiroglou & Co Ltd v Noblee Thorl GmbH (1962) (except for Lord Reid, who reserved his position in respect of extreme increases in expense). Beatson (1996) argues that this absolute bar is unjustified; he argues that while a clear, certain rule is important, we should not single out situations of increased expense for special treatment by laying down an absolute rule, when we do not do this in other contexts. However, one argument for the absolute bar is that stated earlier: increased expense is the business of one party alone. As stated in the context of mistake by Toulson J at first instance in Great Peace, ‘it cannot properly be the function of the law to relieve a party from such a bargain if it turns out to have been not merely bad, but very bad.’

14.33 In Tandrin Aviation Holdings v Aero Toy Store LLC (2010) the defendant attempted to argue that the ‘credit crisis’ of 2007–8 (which it described as an ‘unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets’) triggered the force majeure clause in a contract for the sale of a jet aircraft. (Notice that frustration was not strictly in issue, but the judge recognised that the construction of the force majeure clause presented an analogous issue.) The judge unhesitatingly rejected the defendant’s argument, pointing out that it is ‘well established under English law that a change in economic/market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed, is not regarded as being a force majeure event. Thus a failure of performance due to the provision of insufficient financial resources has been held not to amount to force majeure.’ Nor would it amount to a frustrating event in the absence of the clause. (The defendant was also unsuccessful in its attempt to argue that a provision for forfeiture of its deposit on default amounted to a penalty clause, on which see further Chapter 17.)

Forced alteration of manner of performance/impossibility of performance by the defendant

14.34 If a subsequent event merely prevents one party performing in the manner that she had originally envisaged, this does not frustrate the contract: generally, it is her business how she performs the contract and not that of the other party. So in Blackburn Bobbin Co Ltd v Allen (TW) & Sons Ltd (1918), the seller agreed to supply Finnish timber to the purchaser. The outbreak of war cut off its source of supply from Finland, so when the (p. 351) purchaser sought damages for breach of contract, the seller claimed that the contract had been frustrated. It was held that the contract was not frustrated: the seller might have regarded the source of supply as important, but it was not the concern of the purchaser. As Pickford LJ commented:

Why should a purchaser of goods, not specific goods, be deemed to concern himself with the way in which the seller is going to fulfil his contract by providing the goods he has agreed to sell? The sellers in this case agreed to deliver the timber free on rail at Hull, and it was no concern of the buyers as to how the sellers intended to get the timber there.

14.35 Taking this a stage further, the fact that the defendant’s supplier chooses not to supply to the defendant, rendering it impossible for the defendant to perform its contractual obligations, does not frustrate the contract, as the Court of Appeal confirmed in CTI Group Inc v Transclear SA (2008). In CTI Group, the defendant seller had contracted to sell some cement to the claimant as part of the claimant’s attempt to import it into Mexico in breach of a cartel operated by a local company, Cemex. The defendant knew that this was the claimant’s goal, but when it came to try to provide the cement, it found that Cemex had ‘got to’ its intended supplier and the supplier was no longer willing to provide the cement. The defendant did not have a binding contract with the supplier and therefore could not insist on performance from it, so claimed that the contract with the claimant had become impossible of performance and was frustrated. The court rejected this argument. It is the defendant’s business how he goes about performing his obligations, and the risk that he cannot do so, as matters turn out, is a risk that he must bear, not the other party to the contract.

Illegality

14.36 If the contract becomes illegal to perform, this may frustrate the contract if it has a serious enough effect on the contract: parties normally both assume that the majority of the contract can be lawfully performed. Whether the effect is serious enough will normally depend on how long the legal restriction applies for compared with the term of the contract (for example, see Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd (1945)). As mentioned in para 14.8, illegality is the one area where the parties’ agreement to allocate risk will not be effective to save the contract. This is because, as Beatson J said in Islamic Republic of Iran Shipping Lines v. Steamship Mutual Underwriting Association (Bermuda) (2010), quoting Treitel (now 2018, then an earlier edition) it is:

well recognised that when considering supervening illegality, the court is concerned not only with allocating or distributing the loss caused by the supervening event and ‘reaching a solution which may do justice between the contracting parties’. The court ‘is also concerned with the public interest that the law is observed’.

14.37 Returning to the Canary Wharf case (para 14.28), a further argument offered by EMA was that Brexit operated as a form of supervening illegality, but this was also rejected by Marcus Smith J. Brexit did not cause it to be illegal for EMA to hold property outside the (p. 352) UK, pay rent, or sub-let the property according to the terms of the lease. Even if it did, this was a matter of supervening EU law, not a matter that the English law of frustration would have regard to.

The outbreak of war

14.38 The outbreak of war often affects the performance of the contract; whether it will frustrate it depends on the nature of the effect it has on the contract. If it just affects the way in which one party intended to perform the contract, generally this will not be the business of the other party: he will not have made any assumptions about how the contract must be performed. Therefore, the contract will not be frustrated. Good examples are found in the context of the war between Britain and Egypt in 1956 following Egypt’s nationalisation of the Suez Canal. This led to the blockage of the canal, with consequent delays for many charter and international sale contracts. In Tsakiroglou & Co Ltd v Noblee Thorl GmbH (1962), Viscount Simonds commented that ‘[t]here is no evidence that the buyers attached any importance to the route. They were content that the nuts should be shipped at any date in November or December.’ This is very similar to the reasoning in the Epsom Derby example discussed in Krell v Henry—only one party’s assumptions are affected by the supervening event.

14.39 However, if both parties assumed that performance would occur in a particular way, and it now cannot because of the war, this may frustrate the contract, because both parties have made the assumption. So if the assumption is an important enough one, this will frustrate the contract. In Tsakiroglou it was suggested that if it had been important to the buyers that the nuts were shipped via the Suez Canal, for example because the ‘nuts would deteriorate as the result of a longer voyage and a double crossing of the Equator’ then the result might have been different. Similarly, if both parties agreed that a particular ship would be supplied, but it is requisitioned by a government, this will frustrate the contract, depending on how long it is requisitioned for (compare Bank Line Ltd v Arthur Capel Ltd (1919) with FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd (1916)), because both parties assume that the ship will be available for at least a certain amount of the contract term. Notice that, in such a case, it might be more natural for the court to interpret the agreement to the effect that it was subject to an implied condition that the ship continued to be available.

Delay or temporary interruption

14.40 As indicated in para 14.11, the question of whether an event, such as the requisition of a ship, frustrates the contract depends in part on the length of the interruption compared with the length of the contract. Of course, this poses a problem for contracting parties, because it is impossible to know in advance (without the benefit of hindsight) how long the interruption will last, yet they need some way of calculating when they can safely assume that the contract is frustrated and walk away. Chitty (2018) says: ‘To frustrate a contract, the delay must be so abnormal, in its cause, its effects, or its expected (p. 353) duration, so that it falls outside what the parties could reasonably contemplate at the time of contracting.’

14.41 This highlights that the length of the delay is, as the Court of Appeal emphasised in The Sea Angel (see paras 14.10–14.12), only one factor to take into account. In determining whether the parties should be made to share the risk of the delay, one must also take into account factors like the circumstances in which it arose, how foreseeable it was, and how the contract distributes the risk of these sorts of events occurring.

Contracts for personal services

14.42 Contracts for the provision of personal services, such as contracts of employment, may be frustrated if one party is unable to perform through death, illness, or incapacity. Even a contract with a builder to carry out work on a house has been held to constitute a contract for personal services where a family knew him, had built up a relationship of trust with him, and were obtaining his services for substantially less than the market rate (Atwal v Rochester (2010)).

14.43 Both parties generally must expect that the party in question may be occasionally ill or incapacitated, but they assume that he will be able to perform a certain amount of the contract. Therefore, the court looks at matters such as how long he is unable to perform for, how long the contract was for, and the terms of the contract (Marshall v Harland & Wolff Ltd (1972)). The court will also take a close look at whether the illness or incapacity really does make the contract impossible to perform, or whether it is possible for someone acting on the person’s behalf to continue performance of it. In Blankley v Central Manchester & Manchester Children’s University Hospitals NHS Trust (2015), the Court of Appeal held that a ‘no win no fee’ agreement between a client and solicitor survived the client’s incapacity because the court had appointed someone to act for the client. This avoided the unattractive conclusion that the solicitors were deprived of part of their fee for getting a good settlement of the litigation for the client just because the client had to have someone acting on her behalf for the latter part of the case.

The relevance of foreseeability

14.44 The fact that parties have foreseen the event in question normally precludes frustration. Usually, if the event is foreseeable but the parties do not expressly state what should happen if the event occurs, the inference will be that it was only the business of one party, that the contract has placed the risk on that party. I might contract to buy some beans from you, and we both know that it is a real possibility that civil war might break out in the country where the beans are grown, driving prices up. If we do not expressly say in the contract what should happen in that event, the inference may well be that if war breaks out it is your problem, not mine, so the contract should continue to bind you. Similarly, in The Sea Angel (paras 14.10–14.12), the foreseeability of the ship being detained was an important factor in determining whether the contract was frustrated.

(p. 354) 14.45 However, this will not always be the case. For example, in Tatem v Gamboa (1939), a ship was chartered during the Spanish Civil War, in order to evacuate the civilian population from north Spain. The ship was chartered for 30 days and the hire rate was three times the normal rate. The ship was seized by a Nationalist ship just under halfway through the charter and was not released until well after the charter had ended. It was held that even on the assumption that the parties had foreseen that this might happen, the contract was still frustrated. The reason for this is that both parties contracted on the basis that the ship would be available to evacuate the civilians. So if both parties contract on the basis that an event will not occur, and this assumption is crucial to both parties, then the contract will be frustrated, even if the event was foreseeable. The situation in The Sea Angel fell on the other side of the line, not least because the port authority in that case was doing something less serious to the ship (detaining it until the dispute could be resolved) and the problem did not prevent the charterer carrying out his salvage operation because it had already been completed.

14.46 Of course, it is important to be clear about what is meant by ‘foreseeable’ here. In the tortious sense of the word, virtually anything could be deemed to be foreseeable (for example, the King being ill on his coronation day satisfies the Wagon Mound test of foreseeability), but we are concerned here with contract, not tort. The issue which the courts have to consider is whether or not one party or the other has assumed the risk of the occurrence of the event. As Treitel (2015) puts it: ‘Foreseeability will support the inference of risk-assumption only where the supervening event is one which any person of ordinary intelligence would regard as likely to occur.’ This approach was approved by the Court of Appeal in The Sea Angel.

Self-induced frustration

14.47 Where you have brought things on yourself, the case for relief is less strong. So if it was your act that caused the event which you allege frustrates the contract, you (though not the other party) will often be prevented from claiming that the contract was frustrated. This is generally described as ‘self-induced frustration’, but the phrase is something of a misnomer, because a party whose own act or election is involved cannot plead frustration. As Bingham LJ asserted in The Super Servant Two (1990):

The essence of frustration is that it should not be due to the act or election of the party seeking to rely on it … A frustrating event must be some outside event or extraneous change of situation.

For example, in Melli Bank plc v Holbug Limited (2013), an Iranian bank claimed fees for a particular credit facility that it provided for a customer. The customer claimed that the fees were not due because the contract was frustrated, since the bank’s assets were frozen as part of the sanctions against Iran. However, she could have applied for a licence from the Treasury to allow her facility to continue to operate, so the court rejected the (p. 355) customer’s frustration defence on the basis that it was within her power to make the contract capable of performance, and gave summary judgment for the bank. Similarly, as we have seen (at para 14.37) Marcus Smith J in the Canary Wharf case rejected EMA’s submission based on supervening illegality, but went on to say that if he was wrong in that, he would regard the frustration of the lease as self-induced, since ‘the European Union could have done more than simply baldly ordering the relocation of the EMA (by way of the 2018 Regulation) and focusing only on the progress of the establishment of the EMA’s new headquarters in Amsterdam’. In other words, it could have included in the Regulation provisions dealing with EMA’s departure from London.

14.48 The two most interesting cases in this area are Maritime National Fish Ltd v Ocean Trawlers Ltd (1935) and The Super Servant Two (1990). In the former, Maritime National Fish Ltd (MNF) chartered a trawler fitted with an otter trawl from Ocean Trawlers Ltd (OT), both parties being aware at the time of contracting that a licence was required to use an otter trawl. MNF was operating five trawlers, three of its own, the one it had chartered from OT and one that it had chartered from someone else. It applied for licences but was informed that only three would be granted, and was asked to choose three of the trawlers to obtain licences for. MNF chose not to nominate the trawler chartered from OT, and then claimed that the contract with OT was frustrated because it could not legally fish with the trawler. The Privy Council held that the contract was not frustrated because the inability of MNF to legally fish with the trawler had come about because of MNF’s decision not to nominate the trawler chartered from OT.

This seems fair: MNF could have legally used both of the trawlers that it chartered, and it was only MNF’s decision that prevented this. The merits are less straightforward in the next case.

14.49 In The Super Servant Two, the defendants contracted to transport the claimants’ drilling rig using one of their two barges, the Super Servant One and the Super Servant Two. The defendants had also entered into two similar contracts with other parties. They intended to use the Super Servant One for these other two contracts and the Super Servant Two for the contract with the claimants. Unfortunately, before the time came to transport the claimants’ rig, the Super Servant Two sank. The defendants refused to use the Super Servant One for the job, so the claimants sued for breach of contract, in response to which the defendants claimed that the sinking of the Super Servant Two discharged the contract because of a force majeure clause, or failing that, frustrated the contract. On the trial of four preliminary issues of law, the Court of Appeal, applying Maritime National Fish Ltd, held that the contract would not be frustrated. The defendants could have still performed the contract despite the sinking of the Super Servant Two: they simply chose not to. So it was the defendants’ choice not to use the Super Servant One to transport the claimants’ rig that made them unable to perform the contract.

14.50 The correctness of this decision is hotly debated. The problem is that the defendants had overstretched themselves: as a result of events after the time of contracting they were unable to perform all of the three contracts that they had entered into. As McKendrick (1990) notes, the decision puts people such as the defendant in a very difficult position: they are not allowed to get out of any of the contracts (unless the contracts provide that they can do so) so they have to choose which of the contracts to breach. Indeed, Beatson, Burrows, and Cartwright (2016) argue that the decision is wrong. Most importantly, ‘it is likely to lead to practical difficulties’, by which they seem to mean that it is overly harsh on a defendant. An alternative point of view is that the other party to the contract should not lose out (by the defendant being able to invoke the doctrine of frustration) just because the defendant has overstretched himself by entering into more contracts than he should have. This is the defendant’s business alone, so we should say that the contract normally places the risk on the defendant in such circumstances. Moreover, a defendant can protect himself by inserting a force majeure clause to remove its liability in such circumstances. Indeed, in The Super Servant Two itself, the defendant had inserted such a clause and it was accepted that it could be invoked providing that the sinking of the Super Servant Two occurred without any negligence on the defendant’s part.

14.51 So far we have been dealing with acts where the defendant is aware of the consequences of his act: for example, the defendants in The Super Servant Two knew that by choosing not to use The Super Servant One for the contract with the claimants, they would be unable to perform the contract. What if the act was inadvertent? Think again about the example about renovation of my house from para 14.4, but let us change the facts slightly. Imagine that the day before you are due to start work, the house burns down as a result of my negligence: should this prevent me claiming frustration? The Super Servant Two says ‘[a] frustrating event must take place without blame or fault on the side of the party seeking to rely on it’, but the standard of fault necessary to prevent frustration is not completely clear. However, while the matter is not free from doubt and was left open by the House of Lords in Joseph Constantine Steamship Line Ltd v Imperial Smelting Corpn Ltd (1942), the better view is that negligence is sufficient to prevent frustration.

14.52 One final comment can be made on the relevance of fault to frustration. If the principal focus is on how radical the change of obligation is (as the current test suggests), it is difficult to see why fault should be relevant. Fault has no impact on how radical the change of obligation is. In contrast, fault can be relevant to whether, and what sort of, a term should be implied. Nonetheless, as we have seen in the Canary Wharf case, the ‘radical difference’ test is generally favoured by the courts as the explanation of frustration.

What are the effects of frustration?

14.53 We must begin by examining the effects of frustration at common law. As we shall see, the common law was in some respects unfair to one party or the other, and so a statutory scheme was put in place—the Law Reform (Frustrated Contracts) Act 1943 (‘the Act’)— to redress some of the more undesirable effects of the common law in this area.

(p. 357) Common law

14.54 Under the common law rules, the frustration of a contract had four main effects:

  • On frustration the contract was brought to an end automatically.

  • The parties were released from obligations that would have fallen due after the occurrence of the frustrating event. This requires further explanation. Imagine I contracted to pay you 12 monthly instalments of £100, the first to be paid on 1 January, in return for your supplying me with bananas, but the contract was frustrated on 20 February. The third instalment would have only fallen due on 1 March, but the frustration of the contract before this date means that I am released from paying this (and the later) instalments.

  • The parties were not released from obligations that should have been performed before the frustrating event occurred. So in our example, if I had not paid the second instalment which fell due on 1 February, I would still have to pay this instalment even though the contract was later frustrated. As we shall see, in respect of obligations to pay money (as in the example), the Act changes this common law rule.

  • At common law you could only recover the value of the benefit that you had transferred if the other party had performed none of his obligations, that is, if there was a ‘total failure of basis’ (see para 18.9). So in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1943), the appellant, a Polish company, had paid £1,000 under a contract for the supply of machinery. The respondent did considerable work under the contract but the contract was frustrated when Germany occupied Poland. It was held that the respondent’s obligations under the contract were to deliver the goods, which he had not done, so there was a total failure of basis and the money could be recovered.

14.55 The common law position was unfair in at least two respects. For one thing, a party could not recover the value of the benefit that he had transferred where the other party had performed some of his contractual obligations. In addition, where one party could recover the value of the benefit that he had transferred, no account was taken of the fact that the other party might have incurred expenditure in preparing to perform the contract. For example, in Fibrosa, no account was taken of the time, effort, and money expended by the respondent in making the machinery. The Act was passed to alleviate these problems.

The Law Reform (Frustrated Contracts) Act 1943

14.56 The Act applies to contracts governed by English law that have ‘become impossible of performance or been otherwise frustrated’ (s 1(1)). If the contract makes provision for what should happen in the situation that has occurred, the Act cannot operate in a manner inconsistent with this (s 2(3)). Section 1(2) of the Act deals with obligations to pay money, while s 1(3) deals with other obligations.

(p. 358) 14.57 Section 1(2) provides as follows:

All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as ‘the time of discharge’) shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable:

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.

It deals with situations where you either have paid or owe money to the other party. If you have paid money to the other party before the frustrating event occurred, you can get the money back, subject to an allowance for the expenses that the other party has incurred in or for the purpose of performing his side of the deal. If you owe money under an obligation that fell due before the time of discharge, you do not have to pay it. However, the other party can recover a sum in respect of the expenses that he has incurred (up to the amount that you owed).

14.58 The key issue here is how much the other party should get in respect of the expenses that he has incurred. One thing is clear: the onus of proof is on the recipient to demonstrate that he should be allowed to recover or retain some of the money because of the expenses that he has incurred. The courts have held that they have a broad discretion to decide on an appropriate figure. In Gamerco SA v ICM/Fair Warning (Agency) Ltd (1995), the claimant, a Spanish concert promoter, contracted with the first defendants, the agency organising the European tour of Guns ‘N’ Roses, a rock group, and the second defendants, the corporate persona of the group, to promote their concert in Madrid. The venue was declared unsafe by the local authority, frustrating the contracts. The claimant sued for the $412,500 that it had paid the second defendants, but the second defendants had spent $50,000 in relation to performing their side of the contract. Garland J held that all of the $412,500 could be recovered. The court, he said, had a broad discretion to do what was just in all the circumstances, and on the facts it was just for the claimant to recover all of the money that it had paid over. (Garland J was distinctly unimpressed with the defendant’s evidence, which may explain his decision!)

14.59 Turning to the performance of obligations other than the payment of money, each party is still obliged to perform those obligations which fell due before the occurrence of the frustrating event. So for example, if I was obliged to deliver some goods to you on 14 July but failed to do so, and the contract was frustrated on 18 July, this would not release me from my obligation to deliver the goods. So by failing to do so, I am still in breach of contract.

(p. 359) 14.60 If I have performed obligations other than the payment of money to the other party (for example, by providing services or supplying goods), I may be able to recover money in respect of this performance under s 1(3) of the Act, which reads:

Where any party to the contract has, by reason of anything done by the 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 the last foregoing subsection applies) before the time of discharge there shall be recoverable from 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 all the circumstances of the case and, in particular,

  1. (a) 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, including any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under the last foregoing subsection, and

  2. (b) the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract.

So where I have conferred a ‘valuable benefit’ on the other party (other than by paying money), I can recover such sum as is ‘just’ in all the circumstances. To work out the just sum, we must first value the benefit received by the other party. This is the maximum figure that the court could allow me to recover. In order to arrive at the ‘just sum’, this figure may need to be reduced to take account of factors such as those listed in paras (a) and (b), one of which is the amount that the other party has spent in performing or preparing to perform his side of the contract.

14.61 Accordingly, the first issue is how we should value the benefit that I have conferred. The first difficulty we encounter here is to identify the benefit in question. This is a problem in relation to the provision of services. If I build some machinery for you, is the benefit in question the machinery that I have built or the services that I have provided? In other words, is the value of the benefit the value of the machines to you or the amount that I have spent in providing my services? It was held by Goff J in BP Exploration Co (Libya) Ltd v Hunt (No 2) (1979) that generally we should look at the value of the end-product of the services, not the services themselves. Goff J recognised an exception to this rule in situations where there is no end-product, for example where I just contract to offer you advice. In such situations, we must place a value on the services themselves. He also emphasised that it is the value to the other party that counts, so if you contract with me to have your wall painted a horrible colour, this painted wall has value to you, even if it would not to the average person.

14.62 The principal problem that has arisen under s 1(3) is where the factors in limbs (a) and (b) fit in. These factors require us to take into account the effect of the frustrating event on the benefit that I have conferred and the expenses that the other party has incurred in relation to performing his side of the deal. It appears from the wording of the section that they should be taken into account in working out the just sum, not in the valuation (p. 360) of the benefit. Imagine I start work on building an extension to your house; I get halfway through, so the house has risen in value by £10,000, when the house burns down through no fault of either of us. From the wording of s 1(3), you would think that we would say that the value of the benefit I conferred on you was £10,000. Then we would take into account the effect of the frustrating event (the house burning down) and any expenses incurred by the other party, when working out whether this figure should be reduced to reach the ‘just sum’ that I can recover. This seems fair: it allows the court some flexibility in taking account of the house burning down. It does not have to award £10,000: it can award any figure between £10,000 and £0.

14.63 However, Goff J complicated matters in Hunt by holding the contrary: that we take into account limbs (a) and (b) of s 1(3) at the earlier stage of valuing the benefit, rather than at the stage of working out whether this figure needs to be reduced to reach the ‘just sum’. In other words, we value the benefit not at the time that the benefit was received, but after the frustrating event has occurred. So in our example, we would have to take account of the effect of the house burning down on the benefit when valuing the benefit received; that is, we would value my work after the house has burnt down. This would mean that the value of the benefit would be £0, so I would recover nothing. There are two problems with this interpretation. First, the wording of s 1(3) suggests that the factors mentioned in limbs (a) and (b) are to be taken into account when determining the just sum, not the value of the benefit (Virgo (2017)). Second, this interpretation also allows the court greater flexibility, as the example illustrates, in deciding what effect the frustrating event should have on the sum that the claimant can recover. It seems unfair, and contrary to the intention of the Act, that I should automatically receive nothing for my work in the example.

14.64 Having calculated the value of the benefit, how do we work out what sum it would be just to award the claimant? Goff J suggested in Hunt that the guiding principle here must be the need to prevent ‘the unjust enrichment of the defendant at the [claimant]’s expense’. While the Court of Appeal in Hunt declined to interfere with the way that Goff J had worked out the just sum, they made a thinly veiled criticism of Goff J for reading words into the Act that were not there. They also suggested that the trial judge had a very broad discretion in deciding what was ‘just’. If the arguments in para 14.63 are correct, we should take into account limbs (a) and (b) in working out what sum it would be just to award. These factors are not exhaustive (s 1(3) just requires regard to be had to these two factors ‘in particular’). It would seem fair to look at the conduct of the parties; however, this factor was held to be irrelevant by Goff J. It is submitted that the matter might require reconsideration: for example, if one party had an opportunity to reduce the loss he would suffer but did not take it, it is suggested that this should be taken into account (Virgo (2017)).

14.65 It should be noted that not all work done by one party in performing or preparing to perform the contract will fall under s 1(3), because of the requirement in the section that the work confer a valuable benefit on the other party. For example, if I contract to build you a factory and I have to buy particular tools and machinery to do so, but the contract is (p. 361) frustrated before I begin building. Despite the fact that I have spent money to put myself in a position to start work, I cannot recover in respect of this under s 1(3) because I have not conferred a valuable benefit upon you.

14.66 By way of conclusion, we have seen that there are problems in deciding how much the other party should get in respect of the expenses he has incurred, and problems in working out how to value benefits other than the payment of money. These difficulties stem at least in part from the difficulty of working out what the rationale behind the Act is: what is its purpose? Its purpose may be to apportion the loss suffered by the parties. This would suggest that we look at the loss incurred by the parties and determine how much it is fair to expect each party to bear. However, the Act does not achieve this aim perfectly: for example, not all work done falls within the scope of s 1(3) (see para 14.60). Alternatively, the purpose of the Act may be to prevent the unjust enrichment of the other party, as suggested by Goff J in Hunt. Yet this interpretation too is strained. There is a need for clearer legislation that provides more guidance to judges as to how it should be interpreted. The issue is what rationale should underpin such legislation. There are a number of advantages in basing it on loss apportionment, as McKendrick (1990) argues: neither party is at fault so why should one party be left worse off as a result of circumstances beyond their control? Inevitably, though, there are a number of problems with this concept as well (Virgo (2017)). Perhaps we must accept that there is unlikely to be a perfect solution to the remedial implications of a frustrated contract!

Overview

  1. 1 Issues of frustration arise where circumstances change after the contract has been entered into, which show that an assumption held by both parties at the time of contracting no longer applies. As in the case of common mistake, English law is very reluctant to let a party escape from a bargain where there has not been any wrongdoing by the other party. So the doctrine of frustration is a narrow one.

  2. 2 The currently favoured test requires three conditions to be fulfilled in order for a change of circumstances after the time of contracting to frustrate the contract:

    • the event must make performance of the contract ‘radically different’ from the performance that was contracted for;

    • the contract must not deal with what should happen on the occurrence of such an event; and

    • the event in question must not have been caused by either party: they must not have brought it on themselves.

  3. 3 It is arguable that the ‘radically different’ test is not particularly helpful in explaining the case law. It seems that what lies at the heart of the cases is the issue of whether the parties made a joint assumption when contracting that has turned out to be incorrect, or whether it was only one party who made the assumption. Only in the former case will the contract be frustrated.

  4. (p. 362) 4 Frustration only applies when an event occurs for which the parties have not allocated the risk in their contract. Commonly, a contract will expressly provide what is to happen when something unlikely occurs, for example by means of a force majeure clause, or else it is possible to imply a term allocating the risk to one party or the other. In such cases, there is no room for the doctrine of frustration, which is why in practice cases of frustration are very rare.

  5. 5 Where a contracting party has brought things on herself, the case for relief is not strong. So if it was the contracting party’s act that caused the event which she now alleges has frustrated the contract, she will often be prevented from successfully claiming that the contract has been frustrated. If a contracting party’s act is deliberate, this will certainly prevent frustration. If the act was merely negligent, the answer is less clear, but it appears that in an appropriate case this may also prevent frustration.

  6. 6 Frustration automatically brings a contract to an end. The parties are released from obligations that would have fallen due after the frustrating event occurred but are still bound by those obligations that fell due before the date of frustration (although this latter proposition is qualified by the Law Reform (Frustrated Contracts) Act 1943 in the case of the obligation to pay money).

  7. 7 A contracting party can recover sums paid before the date of frustration, subject to a possible deduction for the expenses incurred by the other party in performing or preparing to perform the contract (s 1(2) of the 1943 Act). If she owed money to the other party under an obligation that fell due before the date of frustration, this money is no longer payable, but the other party may be able to recover a sum to reflect the expenses he has incurred in performing or preparing to perform the contract (s 1(2)).

  8. 8 If the contracting party has conferred a ‘valuable benefit’ on the other party before the date of frustration (other than by paying him money), she can recover such sum as is ‘just’, having regard to all the circumstances, particularly those factors mentioned in s 1(3)(a) and (b) of the Act (s 1(3)). The court has a broad discretion to decide what sum is ‘just’.

Further Reading

Beatson ‘Increased Expense and Frustration’ Chapter 6 in Consensus Ad Idem (1996)Find this resource:

Capper ‘More Muddle on Mistake’ [2008] LMCLQ 264Find this resource:

Morgan Great Debates in Contract (2015) pp 128–39Find this resource:

Smith ‘Contracts— Mistake, Frustration and Implied Terms’ (1994) 110 LQR 400Find this resource:

Self-Test Questions

  1. 1 When will a contract be discharged for frustration?

  2. 2 Do you think that the ‘radical difference’ test is a helpful way of explaining the cases? What are the advantages and disadvantages of instead explaining the cases using the rules of interpretation and/or implied terms?

  3. (p. 363) 3 Was The Super Servant Two (1990) correctly decided?

  4. 4 How do you work out whether you can recover under s 1(3) of the Law Reform (Frustrated Contracts) Act in respect of the services that you have provided before the contract was frustrated?

  5. 5 Hotdog contracts with Ivor to hire him his reception suite and to provide the catering for 200 guests for the wedding of Ivor’s daughter Judy to Keith, which is to be held on the afternoon of 1 May. Ivor makes a pre-payment of £2,000 and agrees to pay the balance of £5,000 on the morning of the wedding. On 25 April, by which time Hotdog has made the wedding cake and procured supplies of champagne but has not prepared any of the food for the reception, Keith is very seriously injured in a road accident and admitted to hospital, where he lies in a coma. Ivor telephones this news to Hotdog on the same day and tells him that the wedding is off. Hotdog replies: ‘That’s your business: you are paying me to put on a reception and so far as I’m concerned the show goes on.’ Hotdog prepares the food and makes all the other arrangements for the reception, but no guests come. (a) Is Ivor entitled to the return of the £2,000, or any other sum? (b) Is Hotdog entitled to claim the £5,000, or any other sum?

 

For hints on how to answer question 5, please see the guidance on the online resources.