1.4 - Contract Termination - Frustration

Question 1

What is the definition of ‘frustration’ in contract law?

Answer 1

Frustration occurs when…
–> without the fault of EITHER party…
–> the contract becomes either impossible to perform or fundamentally different from what the parties intended.

Question 2

What happens to a contract when frustration occurs?

Answer 2

If a frustration occurs, then the parties are released from all future contractual obligations . Any existing obligations still need to be performed.

Question 3

How do courts determine whether a contract is frustrated?

Answer 3

The courts look at the central purpose of the contract in determining what constitutes frustration.

Question 4

When will frustration occur in a contract?

Answer 4

• Destruction and unavailability of the subject matter
• Impossibility
• Illegality
• Non-occurrence of a central event

Question 5

What happens when frustration occurs due to ‘destruction and unavailability of the subject matter’?

Answer 5

There is no right to recovery of expenses at common law.

Question 6

Explain how frustration can occur due to impossibility.

Answer 6

If it becomes impossible to perform the contract, that is frustration. For example, if somebody becomes unable to work because of illness, a contract can become frustrated.

Question 7

Explain how frustration can occur due to illegality.

Answer 7

If the contract becomes illegal to perform, it is frustrated. For example, if war has been declared and it becomes illegal to trade with the enemy, any contracts made with companies in enemy countries will become frustrated (e.g Russian sanctions and the effect on business deals)

Question 8

What happens if there is non-occurrence of a central event in a contract?

Answer 8

This is a frustration, but it is fairly rare and usually associated with what are referred to as the Coronation cases.

Question 9

What is not frustration?

Answer 9

A contract is NOT frustrated if the situation is:
- not one of destruction of the subject matter of the contract, impossibility or illegality.

Question 10

When may we find it difficult to confirm when frustration occurs?

Answer 10

When a contract becomes more difficult to perform - even if this happens, it may not be frustration. It could be more expensive to perform but not fundamentally different.

Question 11

What is the rule with ‘self-induced frustration’?

Answer 11

Self-induced frustration is not frustration. Frustration cannot be caused by the actions of the parties.

Question 12

What is the rule with alternative methods of performance?

Answer 12

A contract is not frustrated if there is scope in the contract for an alternative method of performance.

Question 13

How do the courts determine what is NOT frustration?

Answer 13

Whether the contract can still be performed is critical.

Question 14

How can one recover losses when frustration occurs?

Answer 14

At common law, it is difficult to recover losses.

If advance payments have been made before the frustration, then they may be recovered. However, if any benefit had been received under the transaction, then no monies paid can be recovered (unjust enrichment).

Question 15

What is the scope of the Law Reform (Frustrated Contracts) Act 1943?

Answer 15

This statute determines how monies will be allocated if a contract has been frustrated.

Question 16

How does the Law Reform Act differ to the common law rule regarding frustration?

Answer 16

Common law rule - requires any money expended to be returned to the parties.

Statute - The Act allows for reasonable expenses to be reimbursed and the parties to recover at the discretion of the courts.

Question 17

What contracts are not governed under the Law Reform Act (Frustration)?

Answer 17

• Contracts for the carriage of goods by sea or charterparties
• Contracts of insurance
• Contracts for the sale of specific goods where the goods have perished

Question 18

Explain the court’s discretion under the Law Reform Act.

Answer 18

The court has a broad discretion under the proviso in s1(2) of the Law Reform (Frustrated Contracts) Act 1943 in deciding whether to recompensate a party who has incurred expenses before the frustrating event.

Question 19

What is the rule behind valuable non-monetary benefits during contracts that are frustrated?

Answer 19

If either party has received a valuable non-monetary benefit from the other, then they may be compensated for that benefit.

The courts will identify and value the benefit and then calculate what is referred to as the just sum of that benefit.

Question 20

What are some key questions to note about frustration?

Answer 20

Is it frustration… or is it simply a more expensive or onerous way of carrying out the contract?

Question 21

What are the key points to note about remedies for a frustrated contract?

Answer 21

It is better the claim under the Law Reform Act than common law. Recovery is easier and usually fairer.

N.B: Be wary of a scenario that involves a contract that is ostensibly frustrated by delays at sea.