Frustration

It is often the case that whilst some risks have been foreseen and catered for in the contract, there may be some unforeseen risks, and this is ‘unplanned for risk’. Should things go wrong, the courts may have to decide which of the contracting parties is to bear the risk, and hence any losses, in question.

Some key cases on mistake and frustration

• Bell v Lever Bros Ltd 1932

• Solle v Butcher 1950.

• Davis Contractors case 1956

A possible definition of frustration is:

A contract is frustrated where after the contract was concluded unforeseen events occur which make performance of the contract impossible, illegal or something radically different from that which was in the contemplation of the parties at the time they entered the contract and neither party must be at fault.

Origins and justification of frustration

• Paradine v Jane 1647

• Taylor v Caldwell 1863

• National Carriers Ltd v Panalpina (Northern) Ltd 1981

Why the courts are reluctant to allow frustration to be a

successful defence

The courts don’t want frustration to be seen as an easy way out of

a bad bargain

made by one of the parties – this can be seen in the

case of Davis Contractors Ltd v Fareham UDC 1956.

Why the courts are reluctant to allow frustration to be a

successful defence

Due to the ability to insert a ‘force majeure’ clause into the contract. With one of these the contract will not be terminated by frustration of contract if the event that happens is in the list in the force majeure clause. Thus, the effect of a force majeure clause is that the contract STILL STANDS – IT IS NOT FRUSTRATED.

Three broad categories of frustration

• impossibility of performance

• illegality of performance

• radically different performance from

that contracted for.

Where performance of the contract is Impossible

A classic case for physical items is Taylor v Caldwell 1863

A case for personal services is Robinson v Davison 1871

Where it would be Illegal to perform the contract

In the case of Fibrosa Spolka Akcyjna v Fairburn Lawson Combe Barbour Ltd 1943 (the Fibrosa case) a contract to sell machinery to the buyers in Poland was frustrated when Poland was occupied by the Germans during World War Two.

Radically different performance

Two contrasting cases are

Krell v Henry 1903 and

Herne Bay Steam Boat Co v Hutton 1903.

Instances when frustration will not apply.

- when the alleged frustrating event is self induced

- when the contract has specifically provided for the alleged frustrating event, and

- when the alleged frustrating event was foreseen by the parties atthe time the contract was made

Lauritzen AS v Wijsmuller BV (The Super Servant Two) 1990.

The courts have not ruled on the degree of fault that amounts to self induced frustration but it is likely that a ‘negligent’ act by the defendant ‘will’ amount to self induced frustration because when someone is negligent and an adverse event happens it cannot be said that the alleged frustrating event was altogether outside the control of either party, nor unforeseen. This case also explores the issue of the defendant having a ‘choice’ in what he does in relation to frustrating the contract.

Where the contract expressly provides for the alleged Frustrating event

If a clause/term in the contract actually expressly makes reference to the alleged frustrating event then the event generally cannot frustrate the contract because it is not an ‘unforeseen’ event. But, see

Metropolitan Water Board v Dick, Kerr and Co 1918

Where the alleged frustrating event was

foreseen by the parties when the contract was made

An event is foreseeable and will prevent the contract being frustrated only where it is one which ‘any person of ordinary intelligence would regard as likely to occur’ when the contract was initially made.

Effects of frustration

Law Reform (Frustrated Contracts) Act 1943.

Chandler v Webster 1904

Fibrosa case 1943

A claim to recover MONEY that was paid or was payable before the frustrating event happened

Section 1(2) states that any sums PAID before the frustrating event are recoverable and any sums that were PAYABLE before the frustrating event are no longer payable. But, this is modified – see

Gamerco SA v ICM/Fair Warning (Agency) Ltd 1995

A claim to recover the value of Goods Supplied or Services

provided before the frustrating event happened

Section 1(3) is quite complicated but means that where one party had conferred a ‘valuable benefit’ on the other party (other than a payment of money that is covered by 1(2)), the one conferring the benefit shall be able to recover a ‘just sum’ which should not exceed the value of the benefit conferred. See

BP v Hunt 1979

Appleby v Myers 1867

In Appleby v Myers 1867 the plaintiffs agreed to erect machinery on the defendant’s premises for £459. When the work was nearly finished there was a fire on the premises that totally destroyed all the work done to date. The plaintiffs brought an action for £419 for work done and materials supplied. It failed. The contract was frustrated and so both parties were excused from their obligations under the contract. As such the defendants did not have to pay for services already rendered.

Sections 2(3) and 2(4)

• Under section 2(3) the Act will not be applied where the parties to the contract have included in the contract a clause detailing what is to happen if a frustrating event occurs.

• Under section 2 (4) if a contract can be broken down into bits and some of the bits have been performed, then these performed bits can be ‘severed’ from the contract and the frustrating event and the Act will only apply to the unsevered bits.