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TRANSCRIPT
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CQUniversity Division of Higher Education School of Business and Law
LAWS11062 Contract Law B Topic 8 Frustration Term 2, 2014 Anthony Marinac
© CQUniversity 2014
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Table of Contents
1.0 Introduction ...................................................................................... 3
1.1 Objectives ....................................................................................... 4
1.2 Prescribed Readings ...................................................................... 4
1.3 Key Terms ...................................................................................... 5
2.0 Frustration ........................................................................................ 5
2.1 Conditions for a frustrating event ................................................. 5
2.2 Classes of frustration .................................................................... 7
2.3 Review questions ........................................................................ 13
3.0 Circumstances which are not Frustration ....................................... 15
3.1 Inconvenience ............................................................................. 15
3.2 Contractual provisions ................................................................ 17
3.3 Delay and interruption ................................................................ 17
3.4 Self-induced frustration .............................................................. 19
3.5 Review questions ......................................................................... 21
4.0 Effects of Frustration ...................................................................... 22
4.1 Common law doctrine ................................................................. 23
4.2 Statutory provisions .................................................................... 25
4.3 Review questions ........................................................................ 26
5.0 Review ............................................................................................. 27
6.0 Tutorial Problems .......................................................................... 28
7.0 Debrief ............................................................................................. 29
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Topic 8 Frustration
1.0 Introduction
No doubt by now many of you have come to realize that
frustration is very nearly the normal condition of a student of
contract law!
This week we look at the termination of contracts by
frustration. How does a contract become frustrated? What are
the implications when this happens? Who should bear any
losses caused by the frustrating event?
In short, a frustrating event is an unforeseen event outside the
control of the parties which fundamentally changes the
environment in which the contract was supposed to operate. A
frustrating event might have the effect of making it impossible
to carry out obligations under the contract; or the frustrating
event might allow those obligations to continue, but devoid
them of any real meaning or benefit.
In these circumstances, there is no moral opprobrium attached
to the party which fails to deliver upon their contractual
obligations. They are not simply failing to perform their
obligations; rather, they have been caught up in the
circumstances of frustration and their performance or non-
performance no longer has any sensible meaning. In these
circumstances, the overall purpose of the law will be to do the
best possible justice for both parties.
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1.1 Objectives
After studying Topic 8 you should be able to demonstrate:
An understanding of the specific meaning of frustration
within contract law, and the reasons why frustrating can
terminate a contract;
An understanding of the different categories of frustration;
The ability to differentiate between true frustration and
circumstances which appear similar to frustration, but
which do not have the same legal effect; and
The remedies and outcomes which may be applied by
courts to deal with frustrated contracts.
1.2 Prescribed Readings
Lindy Willmott, Sharon Christensen, Des Butler and Bill
Dixon, Contract Law (Australia Oxford University Press,
4th ed, 2013) ch. 22.
Bank Line Ltd v Arthur Capel & Co [1919] AC 435
Baltic Shipping Co v Dillon (1993) 176 CLR 344
Codelfa Constructions v State Rail Authority of NSW
(1982) 149 CLR 337
Cooper & Sons v Nielsen & Maxwell [1919] VLR 66
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe
Barbour [1943] AC 32
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Joseph Constantine Steamship Line Ltd v Imperial
Smelting Corp Ltd [1942] AC 154
Krell v Henry [1903] 2 KB 740
Morgan v Manser [1948] 1 KB 184
Taylor v Caldwell (1863) 122 ER 309
1.3 Key Terms
Frustration: Circumstances beyond the control of either
party, which make it impossible to perform contractual
obligations, or which render the obligations radically different
from those envisaged when the contract was made.
In futuro: From that point forward.
Restitution: An equitable remedy, usually involving the
payment of money, which seeks to restore parties to the
position they would have been in but for the frustrating event.
Supervening illegality: Describes the situation where
conduct is not unlawful at the time the contract is made, but
becomes unlawful after the contract is made, and therefore
makes the completion of the contract unlawful.
Total failure of consideration: Describes the circumstance
in which one party is completely unable to deliver on any part
of their obligations under the contract.
2.0 Frustration
2.1 Conditions for a frustrating event
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The first, and perhaps most difficult concept to get one’s head
around, is the question of what sort of event is actually
considered to frustrate a contract. The usual test for frustration
was stated for Australia in the case Codelfa Constructions v
State Rail Authority of NSW (1982) 149 CLR 337, although this
case essentially quoted from earlier caselaw in the United
Kingdom. In Codelfa, Codelfa had contracted with the New
South Wales State Rail Authority to undertake excavation work
and to complete the work by certain date. Both parties
understood that completing the work by that date would
require Codelfa to have its workers on site for three shifts per
day, six days per week. In other words, work would have to
proceed around the clock.
Once work was underway, an injunction was issued preventing
Codelfa from continuing to work around the clock. In the
course of their negotiations, both parties had obtained legal
advice that such an injunction could not be obtained. As a
result, an external event occurred which would prevent Codelfa
from completing its obligations under the contract, through no
fault of its own. The test applied by the court was as follows:
Frustration occurs whenever the law recognizes that without
the fault 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.
In the case of Codelfa, a due date which was perfectly
reasonable in circumstances where the company could work 24
hours a day was incapable of being performed once the work
day was reduced to 16 hours a day.
Let’s unpack this definition of frustration.
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First, we note that the frustrating event must occur without the
fault of either party. We will return to this point further below,
so at this stage let’s just take it as a general rule that the
frustrating event must not be caused by either of the parties.
Second, we note that the contractual obligation must be
incapable of being performed. This is conceptually similar to
the concept of force majeure, which we came across in
Contracts A. The interesting thing is, though, that the test
relates to the effect of the frustrating incident. The law does not
automatically regard certain types of event as being frustrating;
rather, the law looks to the effect. Did the event – whatever it
might have been - have the effect of making the contractual
obligation incapable of being performed?
Third, and finally, we come to the reason why the obligation
must be incapable of being performed: it must be incapable of
being performed because the circumstances have changed, and
the effect of this change of circumstances would make the
obligation a thing radically different from that which had been
contemplated when the contract was originally made.
All of this will make some more sense if we look at a few
examples.
2.2 Classes of frustration
Initially, I was somewhat concerned about how to describe this
sub-topic. After all, I have just said that we identify frustration
from its effects. It is not possible to look at a specific event and
just assume, from the nature of the event, that it will frustrate
any related contract.
Having said that, it is definitely the case that there are some
categories of event which have commonly occurred in
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frustration cases. Learning about these makes the concept of
frustration more clear – however please, please do not fall into
the trap of believing that these events are automatically
frustrating, or that an event has to fall into one of these
categories to count as frustrating. It’s just not like that.
2.2.1 Destruction of the subject matter of the contract
This is possibly the easiest form of frustration to understand.
In Taylor v Caldwell (1863) 122 ER 309, Caldwell owned a
music hall, which was leased to Taylor for a series of days.
Taylor proposed to hold concerts and fetes in the music hall
during those days. However after the formation of the contract,
but before the day came for the concerts to begin, the music hall
burnt down. The fire was accidental, and was in no way the
responsibility of Caldwell (or indeed of Taylor). The fire, of
course, made it impossible for the music hall to be let, and
certainly impossible for any concerts to be held. Taylor sued for
damages, to recover the money which had been spent preparing
for the concerts. However the court found that the contract had
been frustrated – the music hall simply no longer existed.
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2.2.2 Death or incapacitation of a party
In Morgan v Manser [1948] 1 KB 184, Manser was a “variety
artiste” and Morgan was his agent. They signed a fairly typical
management contract, under which Morgan was to use his best
efforts to secure work for Manser, and Manser in turn was to
make himself available for such work, and pay Morgan a share
of the proceeds. Unfortunately, Manser was soon called up, or
conscripted, for compulsory military service in the UK Army
during the Second World War. As a result, of course, he was
unable to fulfil his contractual obligations to Morgan.
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It wasn’t Manser!
(Picture believed public domain)
When Morgan sued, the court found that the contract had been
terminated by frustration. Manser was not responsible for the
war, nor for the policy of conscription, nor for his own calling-
up. Those events made it effectively impossible for him to meet
his obligations under the contract (impossible, at any rate,
without going absent from his military service). As a result,
neither party should be held to the bargain after the time of
frustration.
Note, however, that in many cases the mere death of a party
may not be enough to frustrate the contract, particularly if the
contract obliges the deceased person to pay money. Those
debts may simply fall upon the deceased person’s estate.
2.2.3 Failure of the basis of the contract
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Here we come to the famous “coronation cases”. If the whole
purpose of the contract rests upon some event or underlying
premise, and that premise fails through no fault of either party,
then that may frustrate the contract. The classic case is Krell v
Henry [1903] 2 KB 740.
In this case, Henry hired a flat from Krell, because Krell’s flat
had a balcony from which Henry would be able to clearly see
the coronation parade of King Edward VII. Both parties well
and truly knew that the only reason for the contract was to view
the coronation.
However, King Edward became ill on the day of the coronation,
and the coronation parade was cancelled. Krell tried to insist
upon Henry paying the hiring fee anyway: after all, Krell was
still prepared to provide the flat and balcony, just as the
contract required.
The court, however, found that the whole contract had been
based upon the existence of the coronation parade, which had
not occurred. Under those circumstances, the basis for the
contract no longer existed, so the contract had been frustrated.
www.nam.ac.uk
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Scene from the coronation procession of Edward VII
2.2.4 Delay
Delay is an interesting example, because whether or not an
event which causes a delay to delivery will frustrate the contract
depends very much upon the facts in the actual dispute. The
mere imposition of an external event causing a delay will not
necessarily frustrate the contract. The question will remain
whether the delay makes the obligation a thing radically
different from that which had originally been contemplated.
We will consider the question delay in more detail below, when
we consider circumstances which are not frustration.
2.2.5 Impossibility
Sometimes is may be that due to events which occur after
contract formation, and which are the fault of neither party, it
may be impossible to complete a contract in the manner which
is prescribed in the contract itself.
For instance, let us imagine a situation in which a contract for
the carriage of goods between Brisbane and Sydney stipulated
that the goods must be carried via the Pacific Highway, and
must arrive before a certain date. Now let us imagine that
during this time, the Pacific Highway was closed to traffic due
to a natural disaster such as a flood. It might still be possible to
get the goods to Sydney on time, but it would be necessary to
use another route, for instance, the New England Highway.
The parties could, of course, simply amend their contract to
allow the goods to travel by the New England Highway.
However if one party refused to amend the contract, the
contract would become frustrated – the circumstances would
make it impossible to complete.
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2.2.6 Illegality
A final form of frustration, very similar to impossibility, it that
arising from what is known as supervening illegality. This is a
situation where conduct is not illegal at the time of the
contract’s formation, but becomes illegal after the contract’s
formation.
For instance, let us imagine that we operated an import/export
business in 1997, shortly after the disastrous Port Arthur
massacre. At this time, we ordered a quantity of semi-
automatic rifles from an overseas supplier, for on-sale to a
chain of commercial gun shops. Very quickly after Port Arthur,
however, the laws in Australia regarding gun ownership were
changed; so let us imagine that before the rifles were imported
into Australia, the law changed to make the sale of semi-
automatic rifles unlawful, except for military or police use.
Can you see how this would frustrate the contract? Through
neither party’s fault, a contract which had been perfectly legal
at the time of signing became illegal before the contract was
completed. In this situation, the contract would be frustrated.
Having considered these examples, does the doctrine now make
more sense? All of these examples would meet the test set out
in Codelfa. They all arise without the fault of either party; they
prevent the contract from being completed; and they do so by
radically changing what would be meant by performance of the
contract.
2.3 Review questions
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Question 1
Which of the following is not one of the elements of frustration?
a) The event must make contractual obligations capable of
being performed;
b) The event must be frustrating in the opinion of a
reasonable person in the circumstances of the parties;
c) The event must occur without the fault of either party;
d) The event must make the obligation radically different
from what had been initially contemplated by the parties.
Answer: (b)
Question 2
Which of the following would not constitute frustration?
a) The death of a party before they had completed the
payment of their mortgage;
b) The death of a motivational speaker who had a contract to
speak at a public engagement;
c) The imprisonment of a party due to a criminal offence not
related to the contract;
d) The internment of a party after Australia declares war on
that party’s nation of origin.
Answer: (a)
Question 3
What is the difference between a contract which is vitiated by
illegality and a contract which is frustrated by supervening
illegality?
a) There is no effective difference because both contracts are
void;
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b) The parties are aware of illegality in the case of vitiation,
but they are not aware of the illegality in the case of
frustration;
c) An illegal contract contains provisions setting out
responsibility for the unlawful conduct, while a frustrated
contract does not;
d) The unlawful conduct is unlawful at the time of formation
for a vitiated contract, but it is lawful at the time of
formation for a frustrated contract.
Answer: (d)
3.0 Circumstances which are not
Frustration
As you can imagine, if you are the party who is relieved of their
contractual liabilities by frustration, then a finding of
frustration is very desirable. As a result, parties have often
argued before the courts that contracts were frustrated, where
in fact they failed to meet the test set out in Codelfa. Again, it is
possible to categorise some of these common circumstances
which are claimed to be, and yet which are not, frustration.
3.1 Inconvenience
Let’s start with a situation where completion of the contract is
not made radically different, but rather far less convenient.
Convenient, here, is used as a fairly broad term. It may mean
that completion of the contract is less profitable; it may mean
that completion of the contract will be more time-consuming or
will involve a delay; it may simply mean that another, less
convenient method will need to be employed. In any event, the
doctrine of frustration will not come to the rescue in such a
case.
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A great example here is Cooper & Sons v Nielsen & Maxwell
[1919] VLR 66. In this case, there was a contract for the
delivery of steel bars to the dockside in Melbourne, by a British
company. The British company intended to source the steel
bars from a foundry in Germany. As you can probably guess
from the date of the case, the British company found that they
were no longer able to source the bars from Germany, because
the First World War commenced, and trade with Germany was
forbidden.
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At first glance, this looks like it ought to be frustration, doesn’t
it? After all, the trade with Germany had been lawful when the
contract was signed, but then subsequently became unlawful
due to the war. However, the contract did not stipulate that the
steel must come from Germany. This was certainly understood
to be the expectation, but it was not absolutely necessary. So,
the supplier could have met their contractual obligation by
sourcing the steel from somewhere else – the United States, for
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instance. The contract was not frustrated: it was just a lot more
inconvenient.
3.2 Contractual provisions
Naturally, sometimes contractual risks are foreseeable. Many
events which might be frustrating might also constitute force
majeure events, such as acts of war or severe natural disasters.
Often, contracts will include a force majeure provision in which
the parties will agree what should happen in the event of some
such event.
In other cases, specific provisions might be put in place to
manage known risks. Perhaps the most obvious example of this
is that when a customer makes a contract with a hire car
company, the contract usually includes provisions for insurance
of the vehicle, including insurance against conduct which is not
the fault of the customer (such as the vehicle being stolen, or
being damaged in a collision caused by a third party). Such
provisions establish the rights and liabilities of each party in
these specific circumstances.
Where the parties to a contract appear to have made provision
for an event, those contractual provisions will be given effect,
even if the event would otherwise frustrate the contract. In
other words, the doctrine of frustration will only come to the
rescue of a contract if the contract itself is insufficient to resolve
the obligations of the parties.
3.3 Delay and interruption
OK, let’s return to this question of delay. The mere intervention
of some delaying circumstance will not be enough, on its own,
to frustrate the contract. If that were the case, then the doctrine
of frustration would find constant employment … even a minor
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delaying event might be held to be frustrating, and this would
likely have extremely unjust effects. For a delay to frustrate a
contract, the delay must meet the tests set out in Codelfa. Any
delay short of that may well constitute a breach of the contract
– thus requiring damages. It may even give a party the right to
rescind the contract. But it will not call into account the
doctrine of frustration. Let’s consider an example, called Bank
Line Ltd v Arthur Capel & Co [1919] AC 435. See that date
again? The First World War was an absolute boon, it seems, for
the doctrine of frustration.
In this case, Bank Line agreed to lease a brand new steamer
(boat) for Arthur Capel, for a period of twelve months.
However before the boat was delivered, it was requisitioned by
the government, for the duration of the war. At that point, it
would seem fairly clear that the contract had been frustrated.
However a few months later, Bank Line received an offer from a
third party, which wished to purchase the steamer outright, if it
could be released from the government’s service. Bank Line
then made an arrangement with the government, which agreed
to release the steamer if a replacement could be provided. This
went ahead, and the steamer was sold.
Of course, Capel was unimpressed, because the steamer had not
been detained for the duration of the war; in fact, it had been
detained for just a mere few months. They sued, and Bank Line
responded that the contract had been previously ended by
frustration.
The court found that the contract had indeed been ended by
frustration, because at the time of the frustrating event, it had
not been possible to predict how long the steamer would be
unavailable; all that was known for sure was that the delay was
likely to be extensive, as it was to last for the entire duration of
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the war – more than likely, the delay would have been longer
even than the period of the lease. Had the likely delay been
less, then the event would not have been frustrating. Of course,
from the moment the contract was frustrated, the contractual
obligations were at an end. This did not change merely because
different circumstances prevailed a few months later.
To summarise: if the delay will have the effect of radically
altering the nature of the contract, the delay is likely to frustrate
the contract. If, on the other hand, the delay merely generates a
shorter-term inconvenience, then the delay will not frustrate
the contract. The court will be required to find, as a finding of
fact, which of these is the case in any specific dispute.
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3.4 Self-induced frustration
The Codelfa test for frustration states that the frustrating event
must not be due to the default of either party. This makes a
great deal of sense. After all, if a party could absolve
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themselves of their contractual liabilities by causing the
contract to be frustrated, there would be no end of frustrating
events!
As a result, a self-induced frustrating event will not be sufficient
to frustrate a contract. This, of course, leads to the obvious
question of what constitutes self-induced frustration. In
particular, is it required that the act should be deliberately
undertaken in order to cause the contract to be frustrated? Or
would it be enough that one party could have prevented the
frustrating event, but failed to do so? What about an accident
which occurs due to negligence or want of care?
These questions were considered in Joseph Constantine
Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC
154. In this case, just prior to the time the contract was to
commence, an explosion in the ship’s boiler room rendered the
ship unsuitable to carry out the contract. On its face, this seems
pretty clearly to be a frustrating event. However the Smelting
Corporation argued that the Steamship Line had been “in
default” when the explosion occurred; in other words, they
argued that the frustrating event was caused by the steamship’s
failure to prevent an explosion in the boiler room. If their
argument was successful, then the contract would not have
been frustrated; rather, the Steamship Line would have
breached the contract.
The court found that on the facts in this particular case, the
steamship line could not be held to have induced the frustrating
event. Viscount Simon LC put it this way:
Suppose that a vessel, while on the high seas, disappears
completely during a storm. Can it be that the defence of frustration
of the adventure depends upon the owner's ability to prove that all
his servants on board were navigating the ship with adequate skill
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and that there was no "default" which brought about the
catastrophe? Suppose that a vessel in convoy is torpedoed by the
enemy and sinks immediately with all hands. Does the application
of the doctrine require that the owners should affirmatively prove
that those on board were keeping a good look-out, were obscuring
lights, were steering as directed, and so forth? There is no reported
case which requires us so to hold. The doctrine upon which the
defence of frustration depends is nowhere so stated as to place this
onus of proof on the party relying on it.
As a result, it seems clear that “default” implies genuine
responsibility, in a moral and practical sense rather than merely
in a technical sense.
3.5 Review questions
Question 4
If a contract is frustrated by delay, from what point is the
contract regarded as having been frustrated?
a) From the time at which the contract was made;
b) From the commencement of the period of delay;
c) From the conclusion of the period of delay;
d) From the point at which the delay is sufficiently long that
it radically alters the nature of the parties’ obligations.
Answer: (b)
Question 5
What is meant by a “self-induced” frustrating event?
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a) An event which a party has deliberately undertaken in
order to frustrate the contract;
b) An event in which a party’s serious neglect or lack of care
has resulted in the frustrating event;
c) An event which the party might have foreseen and
prevented, but did not;
d) An event which the parties had both foreseen as an
unlikely possibility.
Answer: (a) & (b)
Question 6
What is the relationship between frustration and
inconvenience?
a) Mere inconvenience is not sufficient to result in
frustration;
b) Substantial inconvenience not caused by the fault of either
party may result in frustration;
c) An objective test is applied to determine whether
inconvenience reaches a sufficient threshold to result in
frustration;
d) The parties must agree before inconvenience can be
regarded as frustration.
Answer: (a)
4.0 Effects of Frustration
So, what happens to the contract once a frustrating event has
taken place? We know, from the general topic of this lecture,
that frustration is one of those events which is taken to
discharge a contract. However, this doesn’t get us very far. In
a frustrated contract, the parties are not going to be satisfied;
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their contract has not resulted in success. Who should bear the
losses when a contract is frustrated?
4.1 Common law doctrine
To answer this question under the common law (which is the
relevant law for Queensland), we must first ask whether there
has been a total failure of consideration. In other words, has
one party been completely unable to deliver on any part of their
obligations under the contract?
For instance, let us say that I have paid $1000 for an item of
jewellery, and the seller quite simply never supplies the
jewellery. In that case there has been a total failure of
consideration.
On the other hand, let us say that I have paid $1000 for four
watches. The seller supplied two watches immediately, but was
then unable to supply the other two. In that case there has been
a partial failure of consideration.
Once we have worked out, in any particular case, whether the
failure of consideration has been partial or total, we can
determine which of the common law rules applies.
4.1.1 Total failure of consideration: restitution
Where there has been a total failure of consideration, then any
party which has paid an amount of money in return for that
consideration will be able to obtain the return of that money.
This is an action in restitution, essentially intended to prevent
the other party from being unjustly enriched as a result of the
frustrating event.
An example of this is Fibrosa Spolka Akcyjna v Fairbairn
Lawson Combe Barbour [1943] AC 32. Please don’t ask me to
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pronounce that! In this case, there was a contract for the
supply of machinery to the Fibrosa company which was in
Poland. The company paid £1000 as a deposit, but then Poland
was invaded by Nazi Germany, and the contract was frustrated.
No equipment was ever delivered, so the court held (and it
seems quite clear) that there was a total failure of
consideration. In this event, Fibrosa obtained a refund of their
£1000.
4.1.2 Partial failure of consideration
Where there has only been a partial failure of consideration,
quite a different doctrine applies. The law holds that the
contract has been made void in futuro. In other words, the
contract becomes void from the moment of the frustrating
event. The result is that the losses and gains are said to lie
where they fall. Thus, if one party has paid the entire amount
they were required to pay under the contract, but the other
party has only completed a small amount of their obligation at
the time the contract is frustrated, the second party will have a
substantial windfall gain: they will be released from the rest of
their obligations by the frustrating event.
A good example of this is a case called Baltic Shipping Co v
Dillon (1993) 176 CLR 344, which we shall meet again in
coming weeks. In this case, Mrs Dillon departed on a 14 day
cruise, but the cruise ship sank on the tenth day. This
particular case was ultimately resolved on the question of
breach, as it was not held to have been a frustrated contract.
However let us imagine, for a moment, that it had been held to
have been frustrated by the ship’s sinking. In this
circumstance, Mrs Dillon would have been entitled to …
nothing. Not a penny. Not a sausage. The reason for this
would have been that there was not a total failure of
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consideration. After all, the cruise line had provided ten of the
fourteen days’ cruise they had been contracted to provide.
If you are reeling just now at the potential injustice of this
outcome, then you are certainly not alone. It is well understood
that the doctrine of frustration has the potential to cause
substantial injustice. However the alternative is just as
difficult. Since the frustrating even was not (by definition)
caused by the default of either party, then how would the court
go about apportioning the costs and benefits of the frustrating
event? Coming up with a sensible rule would be, at the very
least, extremely difficult.
4.2 Statutory provisions
Three Australian jurisdictions – New South Wales, Victoria,
and South Australia – have attempted to grapple with the
potential injustice of the doctrine of frustration, by
implementing legislation which deals with frustrated contracts
(although not all – certain classes of contract are excluded from
the operation of the Acts).
In each Act, the underlying principle is that each party should
receive a just share of the costs and the benefits of the
frustrated contract. So, if a party has paid money but has not
received fair value in terms of goods or services, they should be
refunded their money, less whatever costs have been reasonably
incurred by the other party. In other words, neither side ought
to have a windfall gain or loss.
Sounds hunky-dory, right?
Once you begin to look at the detail of each legislative scheme,
the schemes begin to break down a little. The schemes rely on
terribly complicated formulas to try to apportion costs and
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benefits; and then on top of these complicated processes of
valuation, the statutes provide the court with a general
discretion to amend the outcome of the statutory process, if (in
the opinion of the court) the statutory process would produce
an unjust outcome. In other words there is a system, but it
operates essentially at the discretion of the judicial officer
hearing the case.
While these legislative schemes represent a commendable effort
to improve on the (patently unfair) common law rule, it can be
questioned whether they are successful, or indeed whether they
provide any real guidance at all. It is little surprise that other
jurisdictions have not followed suit.
4.3 Review questions
Question 7
Which of the following jurisdictions have statutory provisions
to manage the frustration of contracts?
a) New South Wales
b) South Australia
c) Victoria
d) Queensland
Answer: (a), (b) & (c)
Question 8
If a contract is frustrated and there is only a partial failure of
consideration, what is the outcome?
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a) The contract is voidable at the election of the party which
did not cause the frustrating event;
b) The contract is void ab initio, and both parties will be
returned to the position they were in at the start of the
contract;
c) The contract is void in futuro, and the losses will lie where
they fall;
d) The contract is void in futuro, and the parties will be
restored to the position they were in at the start of the
contract.
Answer: (c)
5.0 Review
The world is a strange and uncontrollable place. More often
than we would like to admit, we’re not in full control of our
environment: whether this be the natural environment, our
social environment, our legal environment, or our commercial
environment. The result of this is that from time to time it will
be impossible to fulfil contractual provisions: not because
either party has done anything wrong, but because the
circumstances have changed to the point where, try as they
might, the parties will not be able to deliver up on their
promises. In these circumstances, it would hardly be fair to
punish either party. After all, neither party has deliberately
refused or failed to deliver upon their obligations.
The doctrine of frustration comes to the rescue. Where there is
a frustrating event: that is, an event which neither party has
caused, which makes it impossible to complete contractual
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obligations or makes those obligations radically different from
what they were first considered to be, the law asks one key
question: has there been a total failure of consideration?
If there has been a total failure of consideration, the law will
apply the doctrine of restitution to restore both parties to their
initial positions as best this can be done. If, however, there is
only a partial failure of consideration the contract is void from
the time of the frustrating event and the losses, sadly, must fall
where they lie.
The challenge of frustration comes in the task of recognizing a
frustrating event. As we have seen, there are a range of events
which may appear to be frustrating at first glance, but which the
law holds not to be frustrating. The key to understanding
frustration is becoming able to differentiate between these
situations.
6.0 Tutorial Problems
Problem 8
Cecile and the Torch Relay
Please watch the short animated video at the following link, and
then consider the questions below.
https://www.youtube.com/watch?v=hRXZLz4ixGo
Was the ability to observe the torch relay a part of the contract?
Assume it was disclosed to the reservations clerk, but never
reduced to writing.
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Are the “terms and conditions” relied on by the hotel, part of
the contract? How might you expect them to have been
incorporated?
Was the change of the torch relay route a frustrating event?
If yes, was the failure of consideration total or partial?
Based on the answer above, what will be the outcome?
[45 Minutes]
7.0 Debrief
After completing this topic you should recognize:
That a contract is frustrated when, through no fault of the
parties, the contractual obligations cannot be completed or
they take on a radically different character from that which
was anticipated when the parties form the contract;
That the classes of frustration are not closed, but some
common ones include:
o Where the subject matter of the contract is destroyed;
o Where one of the parties dies or becomes
incapacitated and this death or incapacitation
prevents the completion of contractual obligations by
the person, and by their estate or agents;
o Where some underpinning basis of the contract fails
to materialize;
o Where there is a delay so significant that the
obligations under the contract becomes impossible;
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o Where the completion of the contractual obligations
is made quite literally impossible as a matter of
practice; and
o Where the contractual obligations are lawful at the
time of contract formation but become unlawful as a
result of changes to the law, so that completion of the
contract would involve the commission of an offence.
That there are a range of circumstances which may at first
glance appear to be frustrating, but which do not meet the
definition described above:
o Where circumstances make completion of the
contractual obligations unprofitable or inconvenient
but not actually impossible;
o Where the provisions of the contract have anticipated
and provided for the frustrating event;
o Where there is a delay which does not have the effect
of radically changing the nature of the contractual
obligations; and
o Where one of the parties is the cause of the
frustrating event.
That if a contract is frustrated and there is a total failure of
consideration, the courts will apply the doctrine of
restitution to restore the parties to their positions but for
the frustrating event;
That if a contract is frustrated and there is only a partial
failure of consideration, the contract will be void in futuro
and the losses will fall where they lie; and
Several Australian jurisdictions have now implemented
statutory schemes to manage frustrated contracts but it is
doubtful whether the statutory schemes have really
clarified the law at all.