As a general rule, if performance of a contract becomes more difficult or even impossible the party who fails to perform is liable in damages (Paradine v Jane (1647) Aleyn 26). An exception to this is the doctrine of frustration. This allows the contract to be automatically discharged when a frustrating event occurs so that the parties are no longer bound to perform their obligations.

Frustrating event

A frustrating event is an event which:

• Occurs after the contract has been formed;
• Is so fundamental as to be regarded by the law both as striking at the root of the contract and as entirely beyond what was contemplated by the parties when they entered the contract;
• Is not due to the fault of either party; and
• Renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract.

Examples of frustrating events include:

• Destruction of the subject matter of the contract (Taylor v Caldwell (1863) 3 B&S 826).
• Unavailability of the subject matter (Re Shipton, Anderson & Co [1915] 3 KB 676; Bank Line Ltd v Arthur Capel & Co [1919] AC 435).
• Personal incapacity in a personal services contract or unavailability of an employee in an employment contract (see Condor v The Barron Knights [1966] 1 WLR 87 and Hare v Murphy Bros [1974] I.C.R. 603).
• Supervening illegality of performance: a subsequent change in the law or circumstances can make performance illegal for example when war breaks out an export contract will be discharged, see Denny Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] A.C. 265; andibrosa v Fairbairn [1943] AC 32).
• Contractual performance imposing a burden on one party which is radically different from that contemplated at the time of contracting, without rendering performance actually impossible (Tsakiroglou v Noblee Thorl [1962] AC 93).

Frustration not available

A contract is not discharged by frustration where:

• The parties have made express provision for the consequences of the particular event which has occurred (Jackson v Union Marine Insurance Co Ltd (1874)) (for example, where the parties have included a force majeure  provision in their agreement which covers the situation.
• The event is brought about through one of the parties’ own conduct (Joseph Constantine SS Line v Imperial Smelting [1942] AC 154) but note that it is for the party trying to avoid the legal consequences of frustration to show that the event happen as a result of the negligence or default of the other party).
• An alternative method of performance is possible (The Furness Bridge [1977] 2 Lloyd’s Rep 367).
• The contract is merely more expensive to perform (Tsakiroglou & Co Ltd v Noblee and Thorl GmbH [1962] A.C. 93).

Consequences of frustration

When a frustrating event occurs the contract is automatically discharged and the parties are excused from their future obligations. Because no one party is at fault, neither party may claim damages for the other’s non-performance. The rule is that the “loss lies where it falls” so no claim can be made for the value of a partially completed contract (Appleby v Myers (1867) LR 2 CP 651). If a party incurred obligations before the time of frustration, it remains bound to perform them.

Law Reform (Frustrated Contracts) Act 1943 (1943 Act)

The ability of a party to recover money paid under a contract before the occurrence of the frustrating event depends on the applicability of the Law Reform (Frustrated Contracts) Act 1943 (1943 Act). This statute applies to many commercial contracts with the exception of contracts which have excluded its effect and certain shipping contracts, insurance contracts and contracts for specific goods which have perished.

The 1943 Act provides that money paid before the frustrating event can be recovered and that money due before the frustrating event, but not in fact paid, ceases to be payable (section 1(2)). A party who has incurred expenses is permitted, if the court thinks fit, to retain an amount up to the value of the expenses out of any money he has been paid by the other party before frustration; or where money was due and payable at the time of frustration, recover a sum not exceeding that amount for expenses (section 1(2)). The court may require a party who has gained a valuable benefit under the contract before the frustrating event occurred, to pay a “just” sum for it. This is so whether or not anything was paid or payable before the frustrating event (section 1(3)).

Recovery under common law

If the contract is one to which the 1943 Act does not apply, then the parties must rely on the common law rules. These provide that money paid before the frustrating event is recoverable only if there is a total failure of consideration (Chandler v Webster [1904] 1 KB 493). If failure of consideration is only partial, money is not recoverable. Any expenditure incurred in performing the contract is not recoverable.

For more information contact David Vaughan-Birch.