Discharge of Contracts- Frustration

Frustration

Where one or both parties are prevented from carrying out their contractual obligations because an unforeseen, interving event makes the performance impossible.

Usually occurs between contractual formation and the expected time of performance.

Where such an extent occurs, the contract is said to be frustrated, so the non- performance does not allow for a breach of contract.

Where there is frustration the contract is terminated.

Force Majeure Clause

• In anticipation of frustrating events.

• Excludes liability for delay or non- performance in extraordinary circumstances e.g. COVID 19, war, natural disasters

• Sets out the allocation of loss between parties, in the even that something happens.

If an event is referenced with such a clause, the doctrine of frustration, is not not relevant. It does not apply.

The idea of frustration of contract was introduced by:

Taylor v Caldwell- Burning of the music hall

The elements of frustration

1. A supervening/ intervening act

2. This was at the fault of neither party

3. The event has changed the nature of the outstanding obligations → The contract cannot be performed.

1. Supervening events

a. A destruction of the subject matter (impossible to perform).

Taylor v Caldwell- destruction of an object

Condor v The Baron Knights- a person being unable to perform a contract.

b. Contract becomes illegal to perform

Fibrosa Spolka v Fairbain- Contract between a UK company and a Polish company. Due to it being WW2 this then became illegal due to trading with a Nazi occupies country.

c. Change in circumstances means the purpose of the contract can no longer be achieved

Krell v Henry- The main purpose of the contract would not occur, frustration can be used.

Herne Bay Steamboat Co v Hutton- The main reason of the contract still remained, cannot use frustration

Limitations on frustration

1. Self- induced

2. Contract has become harder/ less profitable

3. The frustrating event was foreseeable

1. Self induced frustration

The frustrating event was in the control of another party.

Maritime National Fish v Ocean Trawler→ The frustration was due to an incorrect allocation of licenses WHICH they were in control of.

2. Contract has become harder/ less profitable to perform

Thames Valley Power v Total Gas & Power→ Alternative route to the Suez Canal

3. Foreseeable risk

If the event is a foreseeable risk, or if it mentioned in the contract, then this cannot be frustration.

Amalgamated Investment and Property v John Walker and Sons

Remedies

The frustarting event ends the contract as the time of the event. Automatic termination.

From the moment of the event all contractual obligations cease to exist.

However, any obligations from the point of contract formation and up to the point of the frustrating event is still enforceable.

→ There is potential unfairness to this so, The Law Reform (Frustrated Contracts) Act 1943, was introduced.

s1(2)

Money paid from one party to another before the discharging event is recoverable and money that was payable prior to the frustrating event ceases to be payable.

If one party to whom money had been paid had already incurred expenses associated with their contract the court may allow them to keep the sums paid.

s1(3)

If a party has received a benefit (other than money) before the frustrating event from the other party, they may have to pay a sum to the other party in respect of that benefit.

s1(4)

When the court is looking at expenses they only include reasonable sums

s1(5)

Insurance payments will not be included