Frustration

Question 1

What is frustration?

Answer 1

• Frustration occurs if after formation, performance is:
  · Impossible, illegal or radically different from expected
  -> Often through NO fault of either party
• Similar to ‘common mistake’
• Consequences of frustration: both parties are discharged from any unperformed obligations -> cannot apply to part of contract + contract cannot be temporarily frustrated (argued but rejected in Bank of New York Mellon v Cine-UK Ltd (2021) - covid case)
• Frustration can be pleaded by:
  · By B who is sued by A for breach of contract
  · By B, suing for payment (Davis Contractors Ltd v Fareham UDC (1956))
• The dilemma:
  i) on the one hand, the idea of sanctity of contract means that, given the parties entered the contract voluntarily, they will still be bound if the contract turns out to be a really bad deal for one party
  ii) on the other hand, events can happen which make the performance very different from what was expected

Question 2

How did frustration originate?

Answer 2

• Previously, no frustration doctrine as court not bothered about contract that could not be fulfilled due to matters outside their control (Paradine v Jane (1647) -> D still had to pay rent despite being driven out by army)
• Doctrine of frustration began to develop (Taylor v Caldwell (1863) - A contract is terminated if performance becomes physically impossible when the subject matter is destroyed, music hall destroyed by fire)

NOW, frustration has a greater focus on the construction of the obligation, rather than implied obligations (Davis Contractors Ltd v Fareham UDC (1956) -> mere difficulties or increased burdens do not constitute frustration + need for parties to anticipate and address potential contract risks, rather than relying on frustration as a relief

Question 3

When does frustration come into effect?

Answer 3

1) Supervening impossibility:
i) if the subject matter is destroyed (Taylor v Caldwell (1863))
-> Only if subject matter was fundamental to contract’s performance
-> Not necessarily completely destroyed (e.g Asfar v Blundell [1896])

ii) death/illness of a party
-> Death (e.g Hall v Wright (1859))
-> Illness (e.g Condor v The Barron Knights [1966])

iii) temporary impossibility
-> e.g Pioneer Shipping Ltd v BTP Tioxide Ltd (1982) - strikes frustrated contract

iv) the subject matter is unavailable (Bank Line Ltd v A Capel & Co Ltd (1919)) even if unavailability is only temporary (Jackson v Union Marine Insurance Co (1874))

2) Supervening illegality:
-> if the purpose of the contract becomes illegal after formation of the contract that is frustration
-> often occurs because government has made activity illegal (e.g Fibrosa Spolka Akcyjna v Fairbairn (1943))

3) Frustration of the commercial purpose of the venture:
-> if the commercial purpose of the contract no longer exists, may be frustrated (e.g Krell v Henry (1903)) - however, contrasted with (Herne Bay Steamboat Co v Hutton (1903))
-> mere commercial inconvenience will not frustrate the contract (Davis Contractors Ltd v Fareham UDC (1956))
-> obligations taking longer/more expensive not necessarily enough to frustrate (Tsakiroglou v Noblee Thorl GmbH (1962))
–> difficult to frustrate contract for this

4) Event unforeseen/unforeseeable:
-> Here, force majeure or hardship clauses are used -> these exclude the parties from liability if there is an event beyond the control of both parties (e.g Great Elephant Corp v Trafigura Beheer BV (2013))

-> Why have force majeure clauses?
* Certainty
* Allocation of risk
* Contract may continue if parties wish it to

• Limitation of force majeure clauses: if the clause not full and complete, frustration can still apply

5) Self-induced frustration = NO frustration
-> If one party could have controlled the situation, then there is no frustration and breach of contract can be claimed
-> So if the frustration is self-induced, then the contract cannot be frustrated (e.g The Eugenia (1964))

Question 4

What are the effects of frustration?

Answer 4

-> Parties are automatically discharged from obligations under contract (Hirji Mulji v Cheung Yue Steamship Co (1926))
-> Obligations under contract before frustration MUST still be performed (if not, damages for breach of contract available)

• The Law Reform (Frustrated Contracts) Act 1943
  -> Aim: give courts discretion to award losses caused by frustration by making financial adjustments between parties
  ->To prevent unjust enrichment, e.g:
  · Where someone receives property or money and gives nothing
  · Where someone receives a benefit without paying for it