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One would have to know as to when the contract would be Discharged by means of frustration. One has to note from the outset that a contract would be discharged by means of law automatically when the frustrating event had occurred. However this is a remedy that needs to be pleaded by the Defendant expressly to be entitled to this “defense”. It is important to understand the effect of either frustration or serious breach which brings a contract to an end. As the case of Hulji Mulji v Cheong Yue Steam Ship would dictate that in the event that one were to successfully plead frustration, the said person would be said to be discharged of their existing remedies.

One would have to understand that when the contract is terminated by frustration or by any other means, the remedy is different from rescission.

Termination occurs during the running of a contract and the contract just stops so that rights and liabilities in the future no longer apply. Accrued rights and liabilities (those that have already fallen due before the terminating event) are perfectly enforceable.

This is to be contrasted with rescission where the contract is treated as if it had never been. It is a pre-requisite of rescission that it must be possible to go back to the situation before the contract was made. It is logically impossible to sue for breach of a contract that is successfully rescinded. Rescission is the remedy available when something has gone wrong during the negotiations for the contract, such as misrepresentation or misleading conduct, unconscionable dealing, undue influence, duress or mistake.

Termination is the remedy available where either the contract has been frustrated or one party has committed a breach which is so serious that it justifies the other party putting an end to the contract by terminating it.

The doctrine of frustration which is effectively a court order that the contract is no longer binding on either party (the contract just stops in its tracks) is very rarely considered by the courts. The usual way in which the doctrine is raised is where some disaster has overtaken the contract and one party then fails to perform. The other party then complains that the first party is in breach. The answer to this may be that failure to perform is not a breach because the contract has been frustrated as a result of the disaster. In short, frustration, if successfully argued, is an excuse for failure to perform.

This had been a radical change from the time of Paradine v Jane where in which that there cannot be any excuse for the non performance of the contract no matter what happens. This is because the courts have taken the view that one function of contract is to allocate risk and that, if something does go badly wrong; then this is just a risk which the contract ought to have contemplated. As the case of Paradine v Jane would which reflect the idea that contract promises should be kept, whatever the circumstances. In other words, at the very moment that one party finds it very hard to perform, the other party wants an assurance of performance, or at least damages in lieu, because this is what contract is all about. People are paid to take the risk of difficult performance. The law nevertheless did allow some softening of this absolute principle and developed a doctrine of frustration.

The development of the doctrine of frustration

The birth of the Doctrine is said to be the case of Taylor v Caldwell, a case involving the hire of a hall. Before the day on which the hirer was to use the hall, it burnt down. It was held that the contract was frustrated due to the fire rendering the Hall being no longer in existence. The argument was said to be the implied term theory where there is an implied term that the subject matter of the contract must be in existence at the time of the performance of the contract (or even acceptance see, Financing Ltd v Stimson)

Frustration cases since then have involved a number of different types of frustrating event. The key question is always: is this an event which excuses the parties from further performance or is it an event which is the type of risk which the contract expressly or impliedly contemplated? If the latter then the contract is not frustrated and, if a party does not perform, he or she is in breach.

The theoretical basis for frustration
One has to understand the difficulties involved when the courts were to develop a new law as there is a need for a rationale for any remedy available. The courts over the years have had a great deal of difficulty in deciding what is the proper theoretical basis for the court intervening in the contract and declaring it to be frustrated. The theories have varied and there have been fashions over the years. Listed would be the theories currently in used.

Implied term
The first theory was that declaring a contract to be frustrated was simply another aspect of the court’s ability to imply a term into the contract. If an officious bystander had asked the parties just before they committed themselves to the contract: "What is the result if such and such happens?" the parties would have dismissed the bystander, testily, with an "Of course our contract would be at an end." This was the basis for the decision in

Taylor v Caldwell
The judgment of Blackburn J on is centred on an implied term analysis. He concludes that the existence of the subject-matter of the contract is an implied basis for the continuing of the contract. This is very true on the basis that the performance of the contract revolves around the availability of renting out the Music Hall to the plaintiff and in the event that the Hall is no longer in existence, then the contract could not be performed at all.

This has some parallels with the mistake cases. The difference between frustration and mistake is when the disaster struck. If before formation, then it is a mistake case; if after, then a frustration case.

However, the issue of implied terms always creates problems as it may be very difficult to arrive at a clear conclusion as to what the alleged implied term should be. The parties must be very clear as to the terms of the contract or the subject matter of the contract. If for instance, there are 2 music halls that were owned by the Defendant in Taylor v Caldwell, would there be frustration on the facts?

As a matter of construction
The construction theory is based on construing the obligations in the contract and limiting them to normal circumstances and not to extraordinary circumstances. The situation here is not very different from implying a term. However, the method here is not implying a term but to construe the express terms.

This approach is described by Mason J in his judgment in the Codelfa case, the leading High Court case (Australian) on frustration. He refers to Lord Reid’s approach in

Davis Contractors v Fareham UDC
Lord Reid rejected the implied term theory and instead it is said that the parties never agreed to carry out their obligations in the type of circumstances which have eventuated. This is a matter of construing the principal obligations of the contract. The same idea is reflected in the words of Lord Wright in

Denny Mott and Dickson Ltd v James B Fraser & Co Ltd

It is appropriate at this stage to return to

Codelfa Construction Pty Ltd v State Rail Authority of NSW
On the facts of the said case, the building of the eastern suburbs railway in Sydney was overtaken by disaster when residents obtained an injunction which prevented work being done at night. Codelfa, the contractor, had quoted on the basis of being able to work a three 8-hour shift day. It attempted unsuccessfully to argue that an implied term should meet the new circumstances whereby Codelfa obviously could not finish on time and there were extra costs incurred as a result of the new arrangements. The High Court was however prepared to order that the contract had been frustrated. The result was that the contract came to an end once the injunction was granted. In fact Codelfa finished the work. This work had to be paid for on the basis of a fair and reasonable remuneration, that is, on the basis of restitution, because there was no longer any contract to determine how much Codelfa should be paid for the work.

In the course of discussion about the proper basis for the operation of the doctrine of frustration, Mason J made it clear that the court’s task is to compare performance of the contract under the new conditions with the performance contemplated by the contract before the changed circumstances. If performance is radically different, then the contract is frustrated. In this case, this was so even though there was a clause - cl 8(2)(c) - which appeared to cover the events which arose. But Mason J said that it was not intended to cover such a radically disruptive event - a court injunction - which prevented the basic system of work from being employed.

As a matter of justice and reasonableness
Another way of showing the theory of construction. It is said that the court will intervene and declare the contract to be frustrated when it would be quite unreasonable to expect the parties, or one of them, to perform under the changed circumstances. The key to this is found in an extract from Lord Radcliffe’s judgment in Davis Contractors v Fareham UDC "It was not this that I promised to do."

Just completing the examination of the Codelfa case, note that Mason J examined the question whether an arbitration clause survives the termination of the contract because of a frustrating event. There are certain matters provided for in the contract which do survive the termination of the contract.

Some examples
Davis Contractors v Fareham UDC the contract was to build 78 houses for a fixed price in 8 months. Because of labour shortages and bad weather the time it took to build the houses was 22 months (work took an extra fourteen months). Davis argued that the contract had been frustrated by the delay and therefore they were entitled to payment on the basis of quantum meruit i.e. a fair price for the work done, rather than the agreed contract price.

It was held by the House of Lords however, that the contract had not been frustrated (one should also realize that under the topic of mistake, the Courts would also consider whether the contract could be void for mistake if the contract entered into were “radically different” than that bargained for – as per Great Peace).

It was held by Lord Radcliffe that:-

“..It is not hardship or inconvenience or material loss itself which calls the principle of frustration into play.”

Krell v Henr y
This is a case that lays down the proposition that in the event that the purpose of which the contract had been entered into is no longer in existence, the contract could be said to have been frustrated.

On the facts of this case, H agreed to hire a flat in Pall Mall from K for 26 and 27 June 1902. On these the coronation processions of Edward VII were to take place and the windows in the flat afforded good views of the procession route. The contract contained no express reference to the coronation processions, or to any other purpose for which the flat was taken. A deposit was paid when the contract was entered into. Due to the King’s illness, the processions did not take place on the proposed days.

K claimed £ 50 from H, who in turn  counterclaimed for the return of the £ 25 which he had already paid under the contract.  This was held to be a frustrating event. On the face of it this was just a contract to hire a room. The defendant got what he bargained for. Yet he was successful in arguing frustration with the result that he did not have to pay the balance supposedly owing under the contract.

In Krell v Henry one might ask: who should take the risk of the coronation being cancelled - the landlord or the person hiring the room? The answer is not self-evident but it would not be harsh to suggest that the person hiring the room should take the risk (with the consequence that a court would say that the contract had not been frustrated).

Why should it be said that the contract was frustrated in the sense that the King was ill and the Coronation is cancelled? Shouldn’t the hirer take the risk that the coronation could be cancelled? Or even delayed?

One may resort to the judgment of Vaughan Williams LJ to consider the practical analysis of his lordship towards the case. It was stated that;

“I think that it cannot reasonably be supposed to have been in the contemplation of the contracting parties, when the contract was made, that the coronation would not be held on the proclaimed days, or the processions not take place on those days along the proclaimed route; and I think that the words imposing on the defendant the obligation to accept and pay for the use of the rooms for the named days, although general and unconditional, were not used with reference to the possibility of the particular contingency which afterwards occurred. (...)”

One would also have to note that the room had been advertised as available for rent for the sole purpose of viewing the royal procession. This could be said to have made explicit that it would only be available during the day for that purpose.

This is an important factor as Vaughan Williams LJ did indicate that the courts would not easily invoke the doctrine. In the event that somebody were to hire a taxi that he was to view a particular event, and it was found out that the event had been cancelled, the contract of hire cannot be said to have been cancelled due to the fact that the event had been cancelled.

It is submitted that individual cases should be judged by it’s own circumstances. In each case the crucial question that needs to be asked is by having regard to all the circumstances, what was the foundation of the contract? Secondly, was the performance of the contract prevented? Thirdly, was the event which prevented the performance of the contract of such a character that it cannot reasonably be said to have been in the contemplation of the parties at the date of the contract? If all these questions are answered in the affirmative, then It could be argued that the contract is discharged via frustration.

On the facts, it is both parties should be discharged from further performance of the contract. The coronation procession was the foundation of this contract, and that the non-happening of it prevented the performance of the contract; and, secondly, I think that the non-happening of the procession, to use the words of Sir James Hannen in Baily v. De Crespigny, was an event "of such a character that it cannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made, and that they are not to be held bound by general words which, though large enough to include, were not used with reference to the possibility of the particular contingency which afterwards happened."

However, by the case should be contrasted, with the case of Herne Bay Steam Boat Co v Hutton .

Here, the defendant agreed to hire the steamship “Cynthia” from the claimants for £ 250 on 28 and 29 June "for the purpose of viewing the naval review and for a day's cruise round the fleet”. The royal naval review, which was intended as a part of the coronation festivities, was subsequently cancelled due to the King’s illness. However, the fleet remained anchored at Spithead. The defendant did not use the ship, the claimant sued for the agreed sum.

The purpose was to see the Naval Review and also take party round the fleet and the Isle of Wight on the next day. A trip to Spithead to se the fleet and then to the Isle of Wight was still possible although the King would not be there.

Here, Vaughan Williams LJ said that "I see nothing to differentiate this contract from a contract by which some person engaged a cab to take him on each of three days to Epson to see the race and for some reason…the races are prohibited. In such a case it could not be said that he would be relieved of his bargain. So in the present case it is sufficient to say that the happening of the Naval Review was not the foundation of this contract.

Hence it was stated that the contract was not frustrated.

Stirling LJ
“It is said that, by reason of the reference in the contract to the "naval review," the existence of the review formed the basis of the contract, and that as the review failed to take place the parties became discharged from the further performance of the contract, in accordance with the doctrine of Taylor v. Caldwell.

I am unable to arrive at that conclusion. It seems to me that the reference in the contract to the naval review is easily explained; it was inserted in order to define more exactly the nature of the voyage, and I am unable to treat it as being such a reference as to constitute the naval review the foundation of the contract so as to entitle either party to the benefit of the doctrine in Taylor v. Caldwell. I come to this conclusion the more readily because the object of the voyage is not limited to the naval review, but also extends to a cruise round the fleet. The fleet was there, and passengers might have been found willing to go round it. It is true that in the event which happened the object of the voyage became limited, but, in my opinion, that was the risk of the defendant whose venture the taking the passengers was.”

Hence one has to note that the difference between Krell and Herne is a fine line to be drawn. It revolves around the issue of whether the subject matter of hirer was of any use in the event that the purpose was not achieved.

National Carriers Ltd v Panalpina (Northern) Ltd
The importance of this case lies on the proposition that it has rather change the law as to whether the doctrine of frustration was to apply to landed matters. This case re-examined the question of the possibility that leases could be frustrated. Land is something that actually exists forevermore.

This case seems to have changed the proposition laid down in the case of Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust

There was a ninety nine year lease was granted for the lessee to build number of shops for the benefit of the lessors. The Wartime restrictions made it impossible to build the shops and the lessees claimed that the contract was therefore frustrated.

The House of Lords was divided on the question of principle as to whether a lease could be frustrated at all. Viscount Simon and Lord Wright thought it could. Lord Russell and Lord Goddard disagreed. Lord Porter reserved his opinion.

On the facts they held unanimously that even if the doctrine of frustration could apply to a lease, it did not apply here because the restrictions were only temporary and were not for a significant period in relation to the whole term of a lease.

The decision is based on the fact that it appeared that frustration could not be applied to leases. This is because a lease creates not just a contract but legal estate in the land. This legal estate survives even if events prevent the tenant from making any use of the premises.

The National Carriers case involves a commercial lease of a warehouse. The only access to the warehouse was cut off by a local authority order which closed the street because of the unsafe state of a building in the street. The lease was for 10 years. The street would be closed for about 18 months. The tenants argued that the lease was frustrated.

Why should the doctrine of frustration not apply to real estate (the traditional position)? In this case, the tenant had the premises the subject of the lease agreement. The argument is that even though the building on the land was to cease to exist, and if the contract concerns the lease of the land, the interests in the land were to continue to exist. However, this is a somewhat unrealistic view of the commercial realities.

Here the House of Lords said that the doctrine of frustration could indeed apply to a lease but stressed that such cases would be rare. On the facts of this case they came to the conclusion that the lease was not frustrated because the tenant’s deprivation was relatively small (the lease still had three years to run after the interruption came to an end) compared with the term of the lease (18 months in 10 years).

Hence the case of National Carriers seems to suggest that there is a possibility that the doctrine were to apply to landed matters as long as the deprivation were to last for a long time, (one could also refer to the case of Readon Smith Lines v Hansen Tangen)

Gamerco SA v ICM/Fairwarning (Agency) Ltd
The facts of the case revolves around Guns N' Roses were to perform a concert at a stadium outside Barcelona. However, the health and safety authority declared the stadium unsuitable and the concert could not be carried on. It was held that the contract was frustrated. This was due to the fact that the performance of the contract had become impossible due to the extraneous factors that had taken place.

Bank Line Ltd v Arthur Capel & Co
Here, the appellants chartered the steamship “Quito” to the respondents for twelve months from the time it was delivered. The charterers had the option to cancel in case of late delivery or if the government should commandeer the ship during the charter period. The steamer was not delivered on time and was then commandeered by the government before she could be delivered.

She was then sold by the appellants and the respondents sued for non-delivery having never exercised their options to cancel.

The House of Lords held that the contract had been frustrated. The frustrating event was due to the impracticability of the contract. Impracticability is where a change of circumstances which means that the burden on one of the parties is very different to what was originally envisaged when entering into the contract but performance has not actually become impossible. Here, the Clauses were not intended to place the ship owners indefinitely at the charterers’ mercy, that is to be obliged to them to deliver no matter how long the delay. They merely gave the charters the option to cancel the contract without the necessity of proving frustration.

Jackson v Union Marine Insurance Co Ltd
The plaintiffs chartered a ship which ran aground before she could be loaded. It was eight months before she was ready for use again. Meanwhile they chartered another ship. It was found by the courts that there is an implied term of the contract that the ship should arrive at the port in time for completion of the contract within a reasonable time, so that the contract was frustrated by such a long delay. However, the obiter decision of this case should be considered where it was stated that where a charter runs for a given time, unavailability of the ship must take up a disproportionate amount of the total contract period in order to frustrate the contract.

Blackburn Bobbin Co Ltd v T.W.Allen & Sons Ltd
Allen & Sons agreed to sell a quantity of Finnish timber to Blackburn Bobbin and deliver it to Hull by rail. The outbreak of war cut off their supply of timber from Finland and there was no alternative source.

The Court of Appeal held there was no frustration.

It was held by Pickford LJ that:-

“…To dissolve the contract the matter relied upon must be something which both parties had in their minds when they entered into the contract, such for instance as the existence of the music hall in Taylor v Caldwell, or the continuance of the vessel in readiness to perform the contract, as in Jackson v Union Marine Insurance Co.

…To free the defendants from liability it would have been necessary to show that both parties had contemplated that the timber would be shipped from Finland. As this was not the case the defendants bore the risk. As far as the courts were concerned, it was not the business of the buyer to concern himself with how the supplier would obtain the goods.”

The point that needs to be noted on the facts is that there is a need to show that there is need that there is an express provision as to the source of the timber. In the event that the source were not disclosed then the courts would not allow the contract to be frustrated due to the failure of the particular source when the there are alternative remedy available i.e. timber from other countries (merely a warranty as opposed to a condition)

One has to also note that when the issue of an express stipulation, the crucial point that needs to be questioned is whether there are alternatives available when one is considering the issue of frustration (refer frustration of Purpose – Krell v Henry; Herne Bay Steamboat v Hutton).

It is now accepted that the fact that performance of the contract will cost more than was originally anticipated is not of itself enough to frustrate the contract. The Suez cases, which deal with shipping contracts affected by the closure of the Suez canal, demonstrate that point.

Impracticability: the Suez Canal cases
The Eugenia ,
The facts of this case suggest that a charter party provided for a voyage from Genoa via the Black Sea to India. However, the contract did not expressly provide, but it was assumed by both parties, that the voyage would be made through the Suez Canal. The charterers claimed that the contract was frustrated by the closure of the canal.

Held: the contract was not frustrated. It would have been possible not to enter the canal and to complete the voyage by going round the Cape of Good Hope. Lord Denning looked at the length of voyage: 138 days instead of 108 days and said it was not disproportionate.

The fact that the court examined the proportionality suggests that a high degree of impracticability could frustrate a contract. Otherwise the court could simply have said that since performance was not impossible the contract must stand. Hence, at the end of the day, the ultimate question still boils down as to whether the performance of the contract was radically different from that of bargained and a mere hardship or impracticability would not be sufficient to frustrate a contract (as per L. Radcliffe). However, what amounts to impracticality is a question of fact that the courts did not lay down any hard and fast rules. Therefore, there is a need to question the circumstances of the case taking into account the subject matter of the contract and the intention of parties bearing in mind that the frustration is always used as a defense when one is bringing a course of action for a breach of terms.

Tsakiroglou & Co Ltd v Noblee Thorl GmbH
Here, the appellants agreed to sell the respondents groundnuts to be shipped from the Sudan to Hamburg during November or December 1956. On the 2nd November, the Suez Canal was closed and remained so for the next five months. The price was clearly calculated on the basis of shipment via Suez, but there was no express contract term to this effect. The appellants refused to perform the contract claiming frustration by closure of the canal.

House of Lords held that there was no frustration on the facts since it would still be possible to ship the nuts to Hamburg round the Cape of Good Hope. The journey would not be fundamentally different from that via the canal, merely more expensive.

It was held in Obiter that if the goods had been perishable or if a definite delivery date had been fixed, the contract might possibly have been frustrated by the necessity for the longer Cape route.

Sale of Goods Act 1979
s 7 Goods perishing before sale but after agreement to sell.
Where there is an agreement to sell specific goods and subsequently the goods, without any fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is avoided.

Circumstances where there could not be any frustration
Self induced frustration
Frustration can only apply where neither party is at fault. Therefore where one party has chosen to take a particular course of action and this makes performance of the contract impossible, that party cannot then rely on the doctrine of frustration to escape his or her obligations under the contract

This is always argued that this is one of the limitations of the doctrine of frustration as that a person cannot argue frustration if he or she has caused the frustrating event. It may be possible to escape this rule if the person who has apparently caused the event can argue that it was not his or her fault. The rule about self-induced frustration is discussed in a rather odd setting in

FC Shepherd & Co Ltd v Jerrom
This case is rather odd due to the way the argument was put. The contract in question was a contract of apprenticeship. The apprentice was convicted of an offence which had nothing to do with his work. He was sentenced to a term in Borstal which is a type of prison for young offenders. When he got out he asked to resume his training but his employer refused. The apprentice then brought an action for unfair dismissal. The employer hence argued that the contract had been frustrated by the sentence to Borstal and that therefore he had not been dismissed. The apprentice argued that frustration could not work because it was self-induced frustration.

The usual way in which self-induced frustration arises as an argument is illustrated by the Joseph Constantine case. In that case a ship exploded. The owners argued that the contract of chartering had been frustrated. The charterers argued that the explosion was caused by the negligence of the owners and that therefore the contract had not been frustrated. In fact it was not clear what caused the explosion. It was held that the onus of proving self-induced frustration rests on the person alleging fault and that in this case the charterer must prove that the explosion was caused by default on the part of the owner. This the charterer could not do and so the argument that the frustration was self-induced failed.

Of course, the present case does not really raise the issue of self-induced frustration and, indeed, Lawton LJ said as such. What the apprentice was trying to argue here was that the contract was not frustrated so much as it was subjected to a default by himself which would then require some response by the employer viz a viz dismissal.

In other words this case was about breach. This, at least, so it was argued, prevented the employer from arguing frustration because breach and frustration are mutually incompatible. Alternatively, frustration could not be argued because the event which was the basis for frustration was self-induced. It is said in the cases that frustration can only work if the event in question happened without fault on either side. This is turning around the self-induced frustration argument. In the end, these arguments did not work. The court resorted to basic statements of principle such as a person cannot take advantage of his own wrong.

There are still unresolved questions relating to self-induced frustration: what degree of fault is required to attract the rule? Is negligent conduct enough? For example, it was never suggested in the Codelfa case that that was a case of self-induced frustration. But why not? The contractor caused the event which was held to be a frustrating event by making sufficient noise to constitute a legal nuisance (a tort). This merely illustrates that the concept of self-induced frustration has not been fully worked out.

However, the leading authority would still seem to be the case of

Maritime National Fish Ltd v Ocean Trawlers Ltd
Here, Ocean Trawlers were the owners of five fishing trawlers which were chartered for the purpose of fishing by Maritime National Fish Ltd. All five boats could only be used for fishing with 'otter trawls' The charter for one of the boats came up for renewal after a new law had been passed which meant that boats with otter trawls could only be used for fishing with a licence from the Minster of Fisheries. Maritime National Fish Ltd, applied for five licences but was only granted three. They themselves chose which of the five boats should be given licences, this did not include the St Cuthbert. They then claimed that the charter contract for the St Cuthbert had been frustrated.

The Lords held that, as Maritime had themselves chosen which boats should have the licences the frustrating event was self-induced and could not frustrate the contract. They were still liable for payment under the charter agreement.

The appellants when they renewed the charter in 1932 were well informed of the legislation, and when they renewed the charter at a reduced rate and inserted no protecting clause in this regard, must be deemed to have taken the risk that a licence would not be granted. They also thought that if there was frustration of the adventure, it resulted from the deliberate act of the appellants in selecting the three trawlers for which they desired licences to be issued (as per Lord Wright)

Effect of frustration
At the common law Frustration terminates contracts as to the future. It does not make them void ab initio as in common law mistake. The contract automatically ceases to exist from the moment of the frustrating event.

If it is established that there has been a frustrating event, then the contract stops from that moment on. That means that all obligations up to the moment of frustration are enforceable and that all obligations relating to performance after that moment are no longer binding. Some contract terms survive frustration, as in the Codelfa case where Mason J held that an arbitration clause survived. Other types of terms which would survive would be an exclusion clause and a clause imposing a duty of confidentiality.

If the contractor is permitted to do further work after the frustrating event, then, unless a fresh agreement is made, the contractor is not doing work pursuant to the contract. Nevertheless, the contractor must be paid a fair remuneration for any work done, on the basis of quantum meruit or restitution. This may be more or less than the contract rate. This is in fact what happened in the Codelfa.

In the event that payment was yet to be due before the frustrating event took place, one there would be hardship caused the payment would now cease to be payable. At the converse if money is paid in advance and then the contract is frustrated before the person who has paid the money gets any return for it this would then also cause hardship. These problems are illustrated by the case of

Cutter v Powell
Here, a seaman died before finishing the voyage. The employer had now obtained the benefit of his services, but his widow could recover nothing because it was an entire obligation payable by a lump sum on arrival in England.

The case of Chandler v Webster 1904 however established the principle that payments made or due before the date of frustration were not repayable because the contract was only discharged after the frustrating event and accrued rights were not affected. This was overturned by Fibrosa.

Fibrosa SA v Fairbairn Lawson Combe Barber Ltd
In this case a Polish company ordered a machine from an English company. The Polish company was obliged to pay £1600 up front when it sent in its order. It paid £1000 of this. The English company started work on making the machine. Then war broke out and the contract was frustrated. The Polish company claimed its £1000 back. The English company said that it had already done a considerable amount of work on the machine.

The House of Lords applied a restitutionary principle (which also dealt as an issue of quasi contract) which dictates that if there has been what is called a total failure of consideration, then any money paid in advance can be recovered. The expression "total failure of consideration" has nothing to do with the doctrine of consideration. It does not mean that there is no consideration so that no contract has been formed. What it means is that one party has got nothing under the contract. In that circumstance, if he or she has already paid money up front, the money can be recovered.

This was also the circumstances discussed by Lord Atkin in Bell v Lever Bros. The principle only applies if the party has got nothing under the contract. The failure must be total. If the party has got something under the contract, however small, then the principle does not work and any money paid up front cannot be recovered, even if it far exceeds the value of what has been received.

So, in this case, the Polish company had received nothing for its money and it could therefore recover the £1000. But this was not a satisfactory result for the English company because it had performed work. Maybe it could find another buyer for the machine but this would depend whether it was a one-off machine or one which was readily saleable.

So the overall results of the common law principles which apply if a contract is frustrated are sometimes not very satisfactory. It is always possible for the parties to specify in the contract what should be paid if the contract is terminated but often the parties do not enter into a commercial relationship with a view to it failing and so they do not provide for such events.

It is because the common law consequences of frustration can be unfair that legislation has been passed in some jurisdictions to attempt to allow adjustments to be made.

There was hardship caused for Fairbairn but yet the remedy was just for only one party. Hence there was a need to have other remedies available to cushion the harshness of the common law.

The harshness was somewhat cushioned by the Law Reform (Frustrated Contracts) Act.

Law Reform (Frustrated Contracts) Act 1943
s 1 Adjustment of rights and liabilities of parties to frustrated contracts.
(1)      Where a contract governed by English law has become impossible of performance or been otherwise frustrated, and the parties thereto have for that reason been discharged from the further performance of the contract, the following provisions of this section shall, subject to the provisions of section two of this Act, have effect in relation thereto.

(2) All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as "the time of discharge") shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable:

Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in, or for the purpose of, the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.

In brief, S1(2) deals with a situation where the contract had provided for advance payment of all or part of the contract price. Hence money actually paid can be recovered, and money payable but not paid at the time of the frustrating event need not be paid. One has to note also the proviso available i.e. that in the event the party to whom the sums were so paid had incurred expenses in the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, to allow him to retain or recover the whole or any part of the sums which are not in excess of the expenses so incurred

Therefore where the other party has incurred expenses, the court may decide to allow him to retain up to but no more than the amount of expenses incurred as long as that is no more than the total contract price. And need not prove a total failure of consideration before being able to claim.

(3) Where any party to the contract has, by reason of anything done by any other party thereto in, or for the purpose of, the performance of the contract, obtained a valuable benefit (other than a payment of money to which the last foregoing subsection applies) before the time of discharge, there shall be recoverable from him by the said other party such sum (if any), not exceeding the value of the said benefit to the party obtaining it, as the court considers just, having regard to all the circumstances of the case and, in particular,--

(a) the amount of any expenses incurred before the time of discharge by the benefited party in, or for the purpose of, the performance of the contract, including any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under the last foregoing subsection, and

(b)      the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract.

S 1(3) deals contrary with S 1(2) i.e. Where one party to the contract has obtained a valuable benefit from the other which is not money e.g. goods or services, the court may award the other party the value of that benefit minus any expenses incurred by the party with the benefit.

One has to note that The Act repeatedly refers to what the court considers to be just under the circumstances. Therefore, this would ultimate give the courts a discretion when dealing with the award one should note the case of

Gamerco SA v ICM/Fairwarning(agency) Ltd
Here the promoters had paid the group $ 412.500 but still owed them money under the contract. Both parties had incurred wasted expenditure i.e. the pop group approximately $50,000 and the promoters $450.000. It shall also be noted that neither party was left with any residual benefit or advantage on the facts.

Here Garland J looked at three methods by which court could exercise its discretion
i)       allow the payee to retain all expenses incurred as a statutory recognition of the defense of change of position
ii)      equal division of the losses caused by the frustrating event and
iii)     do what the court considered just under all the circumstances of the case

The judge considered number three as what he considered to be just under the circumstances of this particular case. He allowed Gamerco to recover the advance payment. The court did not exercise its discretion to offset Fair Warning’s losses against the advance payment for two reasons.

a)       Fair Warning provided no evidence of their expenditure, their accounts were chaotic
b)       they didn’t even appear in court

One would also need to note the case of

BP Exploration v Hunt (No. 2) where it was held by Robert Goff J that the underlying principle of this Act is the prevention of unjust enrichment of either party at the expense of the other. It was further held that the valuable benefit was not the value of the services themselves but the end product of the services,

It had always been argued that this interpretation would cause hardship to a party where the alleged valuable benefit has been destroyed. This construction has been criticised by Treitel, but support for the end product construction and has found Commonwealth support in the case of Parsons Bros. ltd. v Shea .

It appears that Goff Js interpretation accords closely with the structure of S 1(3), which draws a distinction between the Ps performance and the D's benefit, and so it cannot be said that that the D's benefit is the value of P's performance

Haycroft & Waksman too criticise the findings of Goff J and submit that the real purpose of the act is to provide a mechanism for apportioning the losses caused by the frustration between the innocent parties and as such the identification of the benefit should be the services.

The second step in S 1(3) claim is that the assessment of a just sum must not be more than a valuable benefit i.e. it acts as a ceiling price on the just sum. It is said that when in deciding what amounts to a just sum, contractual allocation of risk will always be a relevant factor that warrants consideration. This on its own does not provide adequate guidelines for a proper quantification. Hence it is submitted that there is no proper guideline to fine the “just sum”. The CoA seemed to have nailed the problem harder by Lawton L.J. stating that the appellate court is not allowed to interfere with the assessment of the just sum by the trial judge unless it is so plainly wrong that it cannot be just."

 

Prepared by Adrian Choong Ewe Lim