Frustration

Question 1

Frustration intro

Answer 1

Following the formation of a valid contract, frustration occurs when there is an event that is not the fault of either party, but has significant impact on the obligations contained in the contract. English law will consider that such an event results in the frustration of the contract, with the consequence that the parties are relieved from further obligations, and may be able to recover money, or property and compensation for the work done prior to the frustrating event. The situation with which the doctrine of frustration is concerned is where a contract, as a result of some event outside the control of the parties, becomes impossible to perform.

Question 2

Development of frustration cases

Answer 2

Paradine
Taylor v Caldwell
Davis Contractors Ltd

Question 3

Paradine v Jane

Answer 3

contracts were absolute and subsequent events could not justify non-performance. In this case, the defendant has leased the land from the claimant which was not used for the defendant for three years because of the English civil war. The defendant then did not pay the rent for three years and claimant sued. The Kings bench held that the defendant was liable to pay rent even though he had not used the land during the war. If he wanted to be exempt from this rent he should have inserted a clause to that effect

Question 4

Taylor v Caldwell

Answer 4

The Paradine approach however, proved to be too strict and potentially unjust. Therefore, the rule began to be relaxed and the modern doctrine of frustration began to develop and expand. This was seen through the case Taylor v Caldwell. Taylor ran a music hall for a series of concerts. A week before the first show was to take place the hall was destroyed by fire. Taylor sued the hall owner for breach of contract as he was unable to use it for the concerts. The court held that in contracts in which performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the purging of the person or thing shall excuse the performance.

Question 5

Davis contractors Ltd

Answer 5

Claimant contracted to build 78 houses for the defendant for less then £100,000 within 8 months. However, due to a shortage of skilled labour the work ended up taking 22 months and costing over £100,000. The claimant argued the contract had been frustrated by the lack of availability of labour. The house of lords did not uphold this because there was no change in the significance of the obligation caused by an unforeseeable event. Non haec in foedera veni – it was not this that I promised to do. The operation of this approach requires the courts to decide what situations will make performance ‘radically different’

“there must be a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing than that contracted for”.

Question 6

Types of frustrating event

Answer 6

Ilegality
Pointless
Impossibility: destruction of subject matter, incapacity by either party, method on performance impossible, death of either party

Question 7

Illegality

Answer 7

if something happened (new law / policy) which makes things impossible to perform. If you perform it is illegal.

Fibrosa v Fairbairn – case indicates that after a contract is formed, if a change in law makes its performance illegal, the contract will be frustrated. Case concerns a contract between English and polish companies for the purchase of machinery. In sept 1939 Germany invaded Poland and British declared war. Machinery which was due to be shipped to polish port was occupied by Germany. Contract was held to be frustrated because it was illegal to trade with the enemy.

Question 8

Pointless

Answer 8

When something makes the performance of the contract pointless, for example booking accommodation to go and watch the rugby which is then postponed. Therefore pointless to go and stay in the accommodation because there is no rugby match on. This could be frustrated.

Krell v Henry – case indicates that a contract can be frustrated where a subsequent makes its performance pointless, although the contract is still technically possible to perform. Defendant contracted to rent a flat from the claimant for watching the coronation procession of the king. The coronation was postponed at the last moment due to the Kings illness. The defendant no longer wanted the room but the claimant sued for the rent. CoA held, although the contract was capable of physical performance, the contract was frustrated because the viewing of the procession was the foundation of the contract.

Question 9

Destruction of subject matter

Answer 9

This is demonstrated in Taylor v Caldwell itself. If what is destroyed is fundamental to the performance of the obligation, then the doctrine will operate.

Taylor ran a music hall for a series of concerts. A week before the first show was to take place the hall was destroyed by fire. Taylor sued the hall owner for breach of contract as he was unable to use it for the concerts. The court held that in contracts in which performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the purging of the person or thing shall excuse the performance.

Question 10

Incapacity of either party

Answer 10

If a contract envisages performance by a particular individual where no substitute is satisfactory, then the contract will generally be frustrated by the incapacity of the person concerned. This is seen in Condor v Barron Knights Ltd. Here the drummer of a band fell ill. He had agreed by contract to play for the defendants band for 7 nights a week however, the opinion of his doctor was that he would only be fit to work e or 4 nights a week. Court held that his contract of employment was discharged by frustration.

Robinson v Davison - Contract for a piano player to play at a concert. The pianist became ill and unable to perform, and the claimant suffered losses. He sued for breach of contract, but it was held that the contract had become impossible to perform and so was frustrated.

Question 11

Method of performance becomes impossible

Answer 11

Nickoll and Knight v Ashton Edridge & Co, a contract for cotton seed to be shipped from Egypt to England. The contract specified that The Orlando was to carry the cargo. The ship became damaged and had to go in for repairs. As this was a stipulated method of performance, the contract was frustrated as this could not be done.

Question 12

Limitations on frustration

Answer 12

Self-induced frustration
Foreseeable event
More onerous or expensive

Question 13

Self-induced

Answer 13

A contract will not become frustrated by an event which is the fault of one of the parties. This is called self-induced frustration and the contract will not be discharged. An example of the is Maritime National Fish Ltd. The appellants chartered a ship for a year. Both parties were aware that due to the type of ship, it was illegal to use it without a licence. The charters were only granted 3 licences, when they required 5. They used the three for the ships that they already owned. They claimed the contract had been frustrated as the government had refused to grant more licences. However, the Privy Council held that the defendants were not discharged. It was their own election to use the licences with the other boats that had led to them being unable to use the chartered ship

Question 14

Foreseeable event

Answer 14

It is assumed that the contract is made with the knowledge of what could reasonably happen in the future. Davis Contractors, Davis contracted to build 78 houses for Fareham in 8 months, at a price of £94,000. Due to shortages in skilled labour and materials, the work took 22 months and cost a lot more. Davis were paid the agreed price, however they argued that the contract had become frustrated and sought payment based on quantum meruit. HofL held the events were reasonably expected during a contract for building houses and should have been foreseen.

Question 15

More onerous

Answer 15

A contract will not be frustrated simply because its performance has become more onerous or expensive than anticipated. Tsakiroglou & Co Ltd v Noblee Thorl GmbH, Contract to ship peanuts from Sudan to Hamburg in Nov/Dec 1956. On 2 Nov, the Suez Canal was closed to shipping. The defendant argued the contract had been frustrated. The defendant could have transported the peanuts in the contractually agreed time, going around the Cape of Good Hope, but would have taken much more time and cost a lot more. The court held that just because it is more costly or difficult to perform the contract, does not make it frustrated.

Question 16

The common law effect of frustration general

Answer 16

The common law regards the frustrating event as automatically bringing the contract to an end. However, does not render the contract void ab initio. Its effect is to bring the contract to an end prematurely, but all existing obligations at the time of the contract remain unaffected. Therefore, traditionally, the view was that any losses arising from frustration should ‘lie where they fell’

Question 17

Harsh case showing common law view of effect

Answer 17

Chandler v Webster – This case indicates that, traditionally, if payment has already been made under the contract, that will not be recoverable. This considered the hiring o a room to view the coronation, which did not occur due to the Kings illness. Under the terms of the contract, the obligation to pay arose before the frustrating event occurred. In this case it was held that not only could money paid not be recovered, but obligation to pay money due (that had not been in fact paid) before the event was cancelled remained. Because frustration only discharged the contract from the point where the event occurred.

Question 18

Which case softened the common law view

Answer 18

Fibrosa. Contract for machinery worth £4800 and £1000 was paid in advance by the Polish company. Contract was frustrated Fairbairn kept the money paid. Fibrosa wanted this back and sued. House of Lords held that the money could be recovered. It was held there had been a failure of consideration as Fibrosa had not received any part of the machinery. Held that if Fairbairn could keep the money it would be unjust enrichment.

Question 19

Areas of injustice following Fibrosa

Answer 19

Still two areas of potential injustice. First, this only applies where there is a total failure of consideration. If the other party has provided something, no matter how little, recovery will not be possible. Second, it takes no account of the fact that the party who has received the money may well have incurred expenses in relation to the contract, so will end up out of pocket if the entire sum has to be refunded.

Question 20

Case demonstrating the effect of frustration (Not Chandler or Fibrosa)

Answer 20

Furthermore, Appleby v Myers indicates that compensation for frustration is not payable for expenses incurred. Claimant contracted to instal and maintain certain machinery in the defendant factory. Full payment would be made after completion. However, a fire destroyed the factor after installation of the machinery. The claimant sued for compensation. However, the court held that the claimant could recover nothing because payment is only due at completion as the contract stated.

Question 21

Issues with the common law approach

Answer 21

This common law approach, based on relieving from future obligations, led to potential injustices. More fundamentally, the result in a particular case would depend entirely on the timing of obligations under the contract. Clearly unsatisfactory that the same factual situation should give rise to such different results simply on the basis of timing. Seen in Krell compared to Chandler. Former case payment was to be paid in two instalments, latter case the payment was due at the start of the contract. Statutory reform was put in place to remedy this.

Question 22

Statutory view of frustration

Answer 22

Law reform (frustrated contracts) act 1943 deals with the consequences of frustration. The act seeks to regulate:

1.The recovery money paid/payable (s1(2))

2.Compensation payable for expenses incurred (s1(2)).

3.Financial readjustment where a valuable benefit is concerned (s1(3)).

Question 23

Explain s1(2) of the Law Reform (Frustrated Contracts Act).

Answer 23

S1(2) deals with the Chandler v Webster or Fibrosa type of situation. That is where money has been paid or is owed under the contract before the frustrating event takes place. In such a situation the money paid is recoverable and money owed ceases to be payable. The rule now applies even where there is not a total failure of consideration – therefore extending Fibrosa decision. However, limited by a proviso, even where there is total failure of consideration, the other party may have incurred expenses in getting ready to perform. The section provides that if the party to whom sums were paid or payable incurred expenses before the time of frustration court may allow the party to retain or recover the whole of the sums paid or payable, not being an amount in excess of the expenses so incurred.

Two limitations on this attempt to spread the losses of frustration between the parties. First recovery can only take place where there was an obligation to pay some money prior to frustrating event. If money due on completion no scope for recovery of expenses under s1(2). Second, even if some money was paid or payable, it is possible for the expenses to exceed this amount and so will not be fully recoverable.

Question 24

Explain s1(3) LR(FC)A

Answer 24

S1(3) provides that where a party to a contract has obtained a valuable benefit other than money, before the time of discharge, the other party can obtain compensation for having provided this

Question 25

Case for s1(3)

Answer 25

BP Exploration Co v Hunt – case concerned oil concession that had been frustrate by expropriation by the Libyan government. Goff J stated the underlying principle was prevention of unjust enrichment of one party to a frustrated contract at the expense of another. First must identify a valuable benefit and then determination of the just sum to be awarded, the amount which is capped by the valuable benefit. The benefit means the end product of what the plaintiff has provided.

Question 26

Criticism of the Act

Answer 26

The 1943 Act has been subject to strong criticism. McKendrick noted that it suffers from a number of deficiencies and agrees that it was not well thought out or drafted. Campbell provides it is a statute that is so poorly drafted that it has given rise to problems of interpretation out of all proportions to its short length and has brough very limited improvement to the common law.

The point where frustration becomes important is exactly where what has happened was unpredictable. There is therefore little point in suggesting that contractual planning can be made more efficient in this area by adopting fixed rules. Discretion enables a judge to take account of the context of the contract and in deciding where the losses should fall. The problem with the 1943 Act is that it constrains that discretion in the wrong ways.