Frustration and Force Majeure Flashcards
Define the doctrine of Fustration
Frustration in contract law refers to a situation where an unforeseen event occurs after the formation of a contract, rendering its performance impossible, illegal or fundamentally different from what the parties originally intended.
Essentially, the doctrine of frustration allows for a remedy for breach where neither party is at fault/due to unforeseeable circumstances
‘Frustration occurs whenever the law recognizes that without default of either party’
Explain the overall effect of frustration on the contract
Under the doctrine of frustration, a promisor is relieved of any liability under a contractual agreement in the event of a breach of contract where a party to the agreement is prevented from, or unable to, perform his/her obligations under the agreement, due to some event which occurs, which was outside of their sphere of control.
The doctrine of frustration discharges both parties from their contractual obligations where following the formation of the contract, performance of the contractual obligations become -
Impossible or
Radically different (very challenging etc)
Thus the effect of frustration is that;
- The contract comes to an immediate end
- Both parties are released from all future obligations under the contract and
- Neither party is in breach of contract
Explain the origins of frustration and why its rarely accepted by the courts
The law is very slow to allow the doctrine of frustration to excuse parties for non-performance. This dates back to Paradine v Jane (1647) which required complete performance of obligations even in the event of it being radically different or impossible to fulfil.
In Taylor v Caldwell (1863) the court provided that occasionally there’s an exception for allowing a party to be excused from a contract for non-performance but its very limited - This is seen as the exception to the general rule in Paradine v Jane (1647)
Often parties have things like force majeure clauses/provisions in the contract meaning that is not unforeseen. There is also strict circumstances which are viewed as frustrating events and strict criteria to allow for non-performance.
State the main criteria that comes under ‘frustrating events’
Previous case law has created distinct categories that provide for different presumptions and rules relating to the application of frustration.
They are as follows:
- Non-occurrence of an event
- Destruction of subject matter
- Illegality
- Alteration of manner of performance or impossibility by one party
- Outbreak of war or unavailability of a specific person
- Increased expense/time/inconvenience
- Delay or interruption
Explain the idea of frustration due to Non-occurrence of an event and the key case law
The first of our categories of frustration is where an event fails that at least one of the parties has assumed will occur. The operation of frustration in such circumstances is best understood with reference to two of the most famous cases of frustration, known as the ‘coronation cases’, as they both relate to the coronation of King Edward.
Krell v Henry [1901)
The three points from Krell v Henry which identify that the coronation was the foundation of the contract were:
- The advertisement of the room expressly advertised a viewing of the coronation, not a regular letting of the room
- The use of the room was only during the day, and not the night
- The claimant was not in the business of renting his room out regularly, he had only done it on this particular occasion
These factors show that there was a joint assumption by the parties that the event would go ahead, and it was not just one of the parties making the assumption, which is one of the key requirements of frustration.
Explain the idea of frustration due to Illegality
Illegality refers to where the parties form a contract, and subsequently, before or during performance, the contract becomes illegal to perform. The general rule is that this will frustrate the contract if the effect on the contract is serious enough.
If the effect is minimal and only partial, the doctrine of frustration will not apply.
Key case:
Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd [1943]
It was held that the contract was frustrated as a result of the illegality of the contract. As a further point, the courts held that the ‘loss lies where it falls’, meaning Fibrosa could not recover the £1,000 paid.
Explain the idea of frustration due to Alteration of manner of performance or impossibility by one party
Where an event results in a change in obligations or impossibility for one party, there will not be frustration of the contract. Remember - frustration must be an assumption both parties make, and it must result in impossibility for both parties.
In Blackburn Bobbin Co Ltd v Allen (TW) & Sons Ltd [1918] 1 KB 540, there was an agreement to sell some Finnish timber to a purchaser. Due to the outbreak of war, the seller could no longer obtain the timber from their supplier in Finland. The contract was not frustrated, as this was the seller’s issue alone, the purchaser of the timber was not concerned with where the seller got the timber from.
The important idea to remember that how one party conducts their business is their problem, and they bear the risk of any business decisions they make which result in circumstances such as in Blackburn Bobbin. They took a risk by not already having the Finnish timber before forming a contract with the purchaser. How they conduct their business is their risk alone, and the other party should not be penalised for this.
Explain the idea of outbreak of War and how it relates to frustration
The outbreak of war can cause various contractual issues however its KEY to not assume that War always amounts to frustration of a contract as majority of the time it does not.
This is because if an assumption has to be made by both parties that the contractual obligation or performance can’t take place.
the outbreak of war between Britain and Egypt. The result of this outbreak was blockage of the Suez Canal, which resulted in many breached international trade and shipping contracts. Again, these assumptions have only been made by one party, meaning the contracts cannot be frustrated for this reason.
In Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] a contract was held not to be frustrated due to the Suez Canal blockages. However, it was considered by the judges that if it was vital to the contract that the goods were delivered by the Suez Canal, perhaps due to time being of the essence and other routes taking too long, the contract may have been frustrated.
Explain the idea of frustration due to Unavailability of a specific person
One of the events that can render a contract frustrated is where a person vital for performance of the contract is not available
Morgan v Manser (1948) - Unavailability of a specific person due to unforeseen and impossible circumstances
Condor v Barron Knights Limited (1966) - Unavailability of a specific person
Explain frustration in relation to Increased expense/time/difficulty in contract frustration
Generally courts are reluctant to allow an increased expense or longer journey as an excuse to allow parties to get out of a contract and not perform.
The courts have tended to rule that an increased expense for one party can never frustrate a contract - Davis Contractors Ltd v Fareham Urban District Council.
The courts justification for not allowing an increased expense to frustrate a contract is that where one party enters a contract under the assumption they can make a profit, just because the assumption is incorrect does not mean the contract can be frustrated. The other party have not made this assumption. This also relates to the idea that the courts will not protect an individual from a bag bargain.
Similarly just because an obligation becomes longer to perform than expected this doesn’t amount to frustration as it can still be fulfilled.
Unless specified in contract a specific route then just because there’s an assumption of a specific route being used then you cannot clam frustration because it certainly possible to still perform the contract - the goods were not perishable so taking longer to perform this does not equal a frustration. Longer journary did not effect quality of the goods it was simply longer and more difficult but not radically different to what was agreed
Explain frustration in relation to delay/interuption
Delay in itself isn’t a category providing for frustration and is more likely to result in breach of contract then frustration. A delay in the performance of a contract will usually only bring about a claim for breach of contract, not a frustrating event.
However theres a few factors which may be relevant in determining if delay amounting to a frustrating event:
- Wether the contract provides for what should be the consequences of the delay
- The likely length of the delay
- Is the contract likely to be resumed after a delay
The courts will also consider these factors in deciding whether a contract may be frustrated for delay - The “Sea Angel [2007]
- How did the delay arise
- Was the delay foreseeable
- How does the contract distribute the risk in other similar circumstances
Chitty, has suggested that in order for a delay to frustrate a contract, the delay ‘must be so abnormal, in its cause, its effects, or its expected duration, so that it falls outside what the parties could reasonably contemplate at the time of contracting’.
Explain all of the main limitations to the application of frustration
- Self-Induced frustration:
What if the radical change due to the fault of one of the parties?.
Importantly, if one party is at fault for the frustrating event, although that party may not make a claim for frustration, the innocent party can do so and will be able to claim damages for any loss that resulted from the contract because it is just a breach.
If one party alleges that the other party has caused the frustrating event then it seems that the burden of proving fault is on the party alleging it - Constantine Steamship Line Ltd v Imperial Smelting Corporation Ltd [1942]
If it’s a foreseeable event that could have been taken into account when entering into a contract i.e. road closures in contract of supply of goods - frustration cannot be claimed as its exactly the type of occurrence which should have been planned for.
A foresen event generally excludes the availability/operation of the doctrine. In other words, the frustrating event should be beyond the control of the parties. If one party is at fault for the frustrating event, it is less likely that the contract will be frustrated - The Super Servant Two [1990] 1 Lloyd’s Rep 1
So the overarching rule is that if one party is at fault for the frustration then they will be unable to claim dustration and will have to claim breach in order to be awarded damages etc.
Can frustration ever apply to a lease of land?
The case that established the principle that frustration can apply to a lease of land is National Carriers Ltd. v. Panalpina (Northern) Ltd1. Although a lease is more than a simple contract because it creates an interest in land, this does not preclude the possibility of the doctrine applying to leasehold agreements
When deciding if a lease has been frustrated, the court considers several factors:
- Terms of the contract: The specific terms and provisions of the lease.
- Context and matrix: The overall context in which the lease was made.
- Parties’ knowledge and expectations
- What the parties knew and expected at the time of entering into the lease.
- Nature of the supervening event: The unexpected and unforeseen event that occurred.
- Reasonable calculations: The parties’ objectively ascertainable calculations regarding future performance in the new circumstances
Therefore, proving frustration is challenging, especially in the case of leases, and it rarely leads to termination.
So Frustration can apply in principle to leases and contracts for the sale of land, but does so very rarely.
In Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] - the European Medicines Agency (EMA) was unsuccessful in arguing that Brexit frustrated its lease in Canary Wharf because the EMA could still perform its obligations under the lease and it could assign or sublet the lease to a third party.
Therefore In order to frustrate a lease or a contract for the sale of land, the intervening event must render performance impossible or only possible in a very different way
Explain the financial effect of frustration of a contract
The common law position:
Previously, under the common law, all obligations under the contract ceased in event of frustration. This included both primary obligations of the contract, and secondary obligations in relation to breaches, such as damages. Therefore, the general rule was that the loss lies where it falls.
Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd, where Fibrosa were unable to reclaim the £1,000 they had paid under the contract, the loss had fell with them. There are two different circumstances for these purposes:
- Where the money is paid in advance (the advance payments could be recovered if there was a total failure of consideration by the other party)
- Where the money is paid on completion (where money is paid on completion, there was an unfair effect on the party who have partially completed their obligations)
As a result of these financial implications of frustration under common law, the Law Reform (Frustrated Contracts) Act 1943 (LRA) was formed
The Act provides a different approach to that of the common law at the time which did not permit a party in a frustrated contract to recover the money that had been paid ahead of a contract becoming impossible to perform. It amends previous common law rules on the complete or partial return of prepayments, where a contract is deemed to be frustrated.
Key sections:
Section 1(2) which provides that sums of money paid before the contract was discharged shall be recoverable from the claimant.
It states that money already paid before FE is recoverable, and money that is payable before FE need not be paid. There must be a total failure of consideration in order for this to apply.
The courts have the wide discretion to allow the other party to retain any advance payment to cover any expenses incurred/claim sums paid, so long as the amount of money is reasonable in relation to the criteria however its up to the wide discretion of the courts
AND
Section 2(3) states that If the performance has conferred a valuable benefit on the other party prior to the frustrating event, the court has the discretion to allow a claim for the incurred expense. Therefore, if one party may have obtained a benefit before the frustrating event discharges the contract then the court may order a just sum to be paid by the recipient for that benefit.
Explain what a Force Majeure clause is and its purpose
A “force majeure” clause is a contract provision that relieves the parties from performing their contractual obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.
Force majeure clauses essentially Excludes Frustration as an option or being required as it regulates and provides for circumstances where a party cannot perform its obligations due to events beyond its control, might be so broad that it impliedly excludes the doctrine of frustration so that the contract does not just end due to breach.
However they must cover the exact situation that has happened (the specific event/issue) and thus cannot be too vague or wide. A force majeure clause that is too remote, unreasonable etc may be considered to be unreasonable and declared void, providing no effective protection to a party in practice and leaving it exposed to a claim for damages.
Force Majeure clause are exemption clauses and thus are subject to the same rules, common law and statutory rules as regular exemption clauses including the UCTA 1977 and the reasonableness test. If it does not pass the reasonableness test or isn’t properly or adequately constructed or incorporated into the contract then it will not be valid or enforceable.
