Discharge of a Contract by Frustration

Discharge of a Contract by Frustration

Overview of Contract Discharge

  • A contract is discharged when its obligations come to an end.

  • Common grounds for discharge include:

    • Performance: the usual method for discharging a contract.

    • Breach of Contract: a violation of contract terms.

    • Frustration: a situation causing impossibility to perform the contract, which is the focus of this discussion.

    • Agreement: mutual consent to terminate the contract.

History of Frustration

  • Performance typically discharges a contract; however, what happens when performance is impossible?

  • The case Paradine v Jane (1647) highlighted the issue: a tenant had to pay rent despite being forced off the land due to military action.

  • To address such injustices, the Doctrine of Frustration was developed in the 19th century.

Conditions for Frustration

  • A contract may be deemed frustrated if:

    • An event occurs after the contract is established.

    • The event is outside the control of the parties.

    • The contract does not foresee the event.

  • For frustration to apply, the event must render contract performance:

    • Illegal

    • Impossible

    • Radically different from what was originally intended by the parties.

  • Contrast with Mistake Law: Mistake concerns impossibility that existed before the contract was established.

Effects of Frustration

  • Upon frustration, both parties are relieved of their obligations from the date of the frustrating event onwards, effectively discharging the contract.

Theories of Frustration

  1. Implied Term Theory: It’s understood that the contract performance relies on the ongoing existence of a designated matter, as supported by cases like Taylor v Caldwell (1863).

  2. Contractual Promise (Construction Matter): A party cannot fulfill their obligations if the performance materially differs from what was proposed, endorsed by Lord Radcliffe in cases like Davis Contractors v Fareham UDC (1956).

    • This theory is preferred but raises questions about its importance.

Strict Application of Doctrine

  • To prevent easy evasion of obligations, the doctrine of frustration is not to be invoked lightly, as illustrated by Bingham LJ in J Lauritzen AS v Wijsmuller BV (1989).

Examples of Frustrating Events

  • Supervening Illegality:

    • Denny, Mott & Dickson v James Fraser (1944): Post-contract illegality of timber sales.

  • Government Intervention:

    • Re Shipton Anderson (1915): War-related requisitioning of a pre-war grain contract made performance impossible.

  • Death/Illness of Parties:

    • Robinson v Davison (1871): Illness preventing concert performance.

    • Condor v Baron Knights (1966): Illness affecting a band member’s ability to fulfill engagement obligations.

  • Destruction of Subject Matter:

    • Taylor v Caldwell (1863): Destruction of a concert hall; hence, performance was impossible.

    • Krell v Henry (1903): Failure of coronation event freed a party from room payment obligations.

  • Radical Change or Unavailability:

    • Herne Boat Steamboat v Hutton (1903): Contract not frustrated despite a coronation failure due to multiple purposes in the contract.

Non-Frustrating Events

  • Self-Induced Frustration: A party cannot claim frustration if an event was under their control. For example:

    • Maritime National Fish v Ocean Trawlers (1935): A company could have applied a necessary licence instead of facing contractual penalties.

  • Control of Risk Factors:

    • Examples demonstrating non-frustration due to control over delivery or conditions.

    • J Lauritzen AS v Wijsmuller BV (1989) emphasized the need to utilize available alternative vessels.

Further Limitations and Exclusions to Doctrine

  • Performance Made More Onerous: Costs rising due to changes does not entitle a party to claim frustration as seen in cases like Davis v Fareham UDC (1956).

  • Contractual Provisions: A force majeure clause can limit claims for frustration based on extraordinary circumstances, as in Channel Island Ferries v Sealink (1988).

  • Foreseeable Risks:

    • Contracts known to have risk of change, as in Walton Harvey v Walker (1931), are typically not frustrated.

  • Land Contract Specificity: Rare application of frustration in land contracts, exemplified in National Carriers v Panalpina (1980) where a road closure did not frustrate a lease agreement.

Common Law Effects of Frustration

  • The general principle: "loss lies where it falls"—illustrated by:

    • Chandler v Webster (1904): Obligations remaining enforceable before the frustration.

    • Krell v Henry (1903): Results after failure due to frustration.

    • Fibrosa SA v Fairbairn Lawson (1943): Recovery under total failure of consideration, allowing pre-frustration payments to be returned.

Statutory Approach to Frustration

  • Law Reform (Frustrated Contracts) Act 1943: Clarifies recovery rights for payments made before frustration and distributes equitable handling for incurred expenses.

    • Example: Gamerco v ICM/Fair Warning Agency (1995) showcases court discretion when evaluating fairness.

Modern Case Law Examples

  • Canary Wharf Ltd v European Medicines Agency (2019): Brexit not considered a frustrating event; no significant contract breach despite changes.

  • Bk of New York Mellon International v Cine-UK (2022): COVID restrictions similarly not accepted as grounds for frustration due to explicit risk management in the contract.