Frustration of Contract: Doctrine and Key Cases

When studying English contract law, understanding the doctrine of frustration of contract is essential for tackling complex problem questions and essays. Historically, the common law imposed an absolute obligation to perform contractual duties, meaning that parties were bound to their agreements regardless of unforeseen circumstances. However, this strict approach often led to unjust outcomes. The doctrine of frustration of contract was developed to mitigate this harshness, providing a legal mechanism to discharge a contract when an unforeseen event renders performance impossible, illegal, or radically different from what was originally contemplated. In this comprehensive guide, we will explore the test for frustration, the key categories of frustrating events, the limitations of the doctrine, and the statutory consequences under the Law Reform (Frustrated Contracts) Act 1943.

What is the Doctrine of Frustration of Contract?

The doctrine of frustration of contract serves as an exception to the general rule of absolute contractual liability. It applies when a supervening event, occurring after the formation of the contract and without the fault of either party, significantly changes the nature of the outstanding contractual rights and obligations.

The modern test for frustration of contract was authoritatively established by Lord Radcliffe in the landmark case of Davis Contractors Ltd v Fareham Urban District Council [1956]. Lord Radcliffe stated that frustration occurs whenever the law recognises that, without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.

In simpler terms, it is not enough that the contract has become more difficult or expensive to perform. The frustrating event must fundamentally alter the nature of the agreement, making it unjust to hold the parties to their original stipulations. When frustration of contract is successfully established, the contract is automatically brought to an end, and both parties are discharged from future obligations.

Key Categories of Frustrating Events

To fully grasp the doctrine of frustration of contract, law students must familiarise themselves with the established categories of frustrating events recognised by the courts. These generally fall into three main areas: impossibility, illegality, and frustration of purpose.

Impossibility of Performance

A contract may be frustrated if performance becomes physically or legally impossible. This is one of the most common grounds for arguing frustration of contract. The classic case illustrating this principle is Taylor v Caldwell (1863). In this case, the claimant hired a music hall for a series of concerts. Before the first concert could take place, the music hall accidentally burned down. The court held that the contract was frustrated because the existence of the music hall was essential to the performance of the contract. The destruction of the subject matter rendered performance impossible.

Impossibility can also arise in contracts for personal services. If a contract requires the personal performance of a specific individual, and that individual dies or becomes incapacitated due to illness, the contract will be frustrated. For example, in Condor v The Barron Knights [1966], a drummer in a pop group fell ill and was medically advised that he could only perform a limited number of nights per week. As the band required a drummer for seven nights a week, the court held that the contract of employment was frustrated due to his incapacity.

Supervening Illegality

Frustration of contract will also occur if a subsequent change in the law or a supervening event makes the performance of the contract illegal. The courts will not compel parties to perform an act that is contrary to the law or public policy.

A prominent example is Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943]. An English company agreed to manufacture and deliver machinery to a Polish company. However, before the machinery could be delivered, World War II broke out, and Germany occupied Poland. Trading with the enemy became illegal under English law. The House of Lords held that the contract was frustrated by supervening illegality, as performance would have violated the Trading with the Enemy Act 1939.

Frustration of Purpose

In rare circumstances, a contract may be frustrated even if performance is still physically possible and legal, provided that the common commercial purpose of the contract has been entirely destroyed by an unforeseen event. This is known as frustration of purpose.

The leading case is Krell v Henry [1903], one of the famous "coronation cases." The defendant hired a flat in Pall Mall for the sole purpose of viewing the coronation procession of King Edward VII. The King fell ill, and the procession was cancelled. Although it was still physically possible for the defendant to occupy the flat, the court held that the contract was frustrated because the entire underlying purpose of the agreement—viewing the procession—had vanished.

However, the courts are extremely cautious in applying this ground. The purpose must be common to both parties and must be completely destroyed. Contrast Krell v Henry with Herne Bay Steamboat Co v Hutton [1903], another coronation case. Here, the defendant hired a steamboat to view the naval review and for a day's cruise around the fleet. When the naval review was cancelled, the court held that the contract was not frustrated. The viewing of the naval review was not the sole foundation of the contract, as the cruise around the fleet could still take place. The commercial purpose was only partially, not completely, destroyed.

Limitations to the Doctrine of Frustration

The courts apply the doctrine of frustration of contract restrictively to prevent it from being used as an escape route for parties who have simply made a bad bargain. Several important limitations restrict the application of the doctrine.

Self-Induced Frustration

A party cannot rely on frustration of contract if the frustrating event was caused by their own act, omission, or fault. This principle is known as self-induced frustration. In Maritime National Fish Ltd v Ocean Trawlers Ltd [1935], the defendants chartered a trawler from the claimants. The defendants operated five trawlers but were only granted three fishing licences by the government. They chose to allocate the licences to their own vessels, leaving the chartered trawler without a licence. They then argued that the charterparty was frustrated. The Privy Council rejected this argument, holding that the frustration was self-induced by the defendants' own election.

Foreseeable Events and Force Majeure Clauses

If an event was foreseen or reasonably foreseeable at the time the contract was formed, it generally cannot frustrate the contract. The parties are expected to have allocated the risk of foreseeable events within the terms of their agreement.

Furthermore, if the contract contains a valid "force majeure" clause that specifically covers the event in question, the doctrine of frustration of contract will not apply. Instead, the courts will give effect to the contractual provision, which typically outlines the consequences of the event, such as an extension of time or a right to terminate. The presence of a comprehensive force majeure clause demonstrates that the parties have already provided for the contingency, leaving no room for the common law doctrine to operate.

Mere Hardship or Bad Bargain

As established in Davis Contractors Ltd v Fareham UDC, the fact that a contract has become more onerous, expensive, or difficult to perform does not amount to frustration of contract. In that case, a building contractor agreed to build houses for a fixed price within eight months. Due to severe shortages of skilled labour and materials, the work took 22 months and cost significantly more than anticipated. The House of Lords held that the contract was not frustrated. The contractor had taken the risk of price fluctuations and labour shortages; the fundamental nature of the obligation had not changed, it had merely become less profitable.

The Consequences of Frustration

Understanding the consequences of frustration of contract is just as important as identifying the frustrating event itself. When a contract is frustrated, it is automatically discharged in futuro (for the future). The contract is not void ab initio (from the beginning), meaning that actions taken before the frustrating event remain legally significant.

The Common Law Position

Historically, the common law rule was that "the loss lies where it falls," as established in Chandler v Webster [1904]. This meant that money paid before the frustrating event could not be recovered, and money payable before the event remained payable. This rule often produced harsh and inequitable results. The House of Lords mitigated this slightly in the Fibrosa case, allowing the recovery of money paid if there was a total failure of consideration. However, this still left gaps, particularly where partial performance had occurred.

The Law Reform (Frustrated Contracts) Act 1943

To address the inadequacies of the common law, Parliament enacted the Law Reform (Frustrated Contracts) Act 1943. This statute provides a more equitable framework for apportioning losses when a contract is frustrated. Law students must be highly familiar with its key provisions:

• Section 1(2) - Money Paid and Payable: This section states that money paid before the frustrating event is recoverable, and money payable before the event ceases to be payable. However, the court has the discretion to allow the payee to retain or recover expenses incurred in the performance of the contract prior to the frustrating event, up to the limit of the money paid or payable.
• Section 1(3) - Valuable Benefits: If one party has obtained a "valuable benefit" (other than money) before the frustrating event due to the other party's performance, the court may order them to pay a "just sum" for that benefit. The court will consider all circumstances, including any expenses incurred by the benefited party and the effect of the frustrating event on the benefit itself (as seen in BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979]).

It is important to note that the 1943 Act does not apply to all contracts; for example, it excludes certain charterparties, contracts for the carriage of goods by sea, and contracts of insurance.

Practical Advice for Law Students

When tackling a problem question on frustration of contract, a structured approach is vital for securing high marks. Here is some practical advice to guide your analysis:

1. Identify the Event: Clearly pinpoint the supervening event that occurred after the contract was formed.
2. Apply the Test: Apply the Davis Contractors test. Has the event rendered performance impossible, illegal, or radically different? Use relevant case law to support your argument.
3. Check for Limitations: Consider whether the doctrine is precluded. Was the event self-induced? Was it foreseeable? Is there a force majeure clause? Is it merely a bad bargain?
4. Determine the Consequences: If the contract is frustrated, apply the Law Reform (Frustrated Contracts) Act 1943 (unless an exception applies). Discuss the recovery of money under Section 1(2) and the valuation of benefits under Section 1(3).
5. Structure Your Answer: Use clear headings and a logical flow. Start by defining frustration of contract, apply the law to the facts, and conclude on the likely outcome and financial consequences.

By mastering the nuances of frustration of contract, you will be well-equipped to handle complex contractual disputes and demonstrate a deep understanding of English contract law principles.

Frequently Asked Questions (FAQs)

What is the difference between frustration of contract and breach of contract?

A breach of contract occurs when one party fails to perform their obligations without a lawful excuse, leading to a claim for damages. Frustration of contract, on the other hand, occurs when an unforeseen, supervening event outside the control of either party makes performance impossible or radically different. Frustration automatically discharges the contract, and neither party is deemed to be in breach.

Can a contract be frustrated if it just becomes too expensive to perform?

No. As established in Davis Contractors Ltd v Fareham UDC, mere hardship, inconvenience, or an increase in the cost of performance does not amount to frustration of contract. The doctrine is strictly applied and is not designed to rescue parties from a bad bargain or normal commercial risks.

Does frustration of contract make the contract void from the beginning?

No, frustration of contract does not render the agreement void ab initio (from the beginning). Instead, it discharges the contract in futuro (for the future). This means the contract was valid up until the frustrating event occurred, and the parties are released from any future obligations from that point onwards.

How does a force majeure clause affect the doctrine of frustration?

If a contract contains a valid and comprehensive force majeure clause that covers the specific event that has occurred, the courts will generally apply the clause rather than the common law doctrine of frustration of contract. The clause represents the parties' agreed allocation of risk for unforeseen events.

Conclusion and Next Steps

Mastering the doctrine of frustration of contract is a crucial milestone for any law student studying English contract law. From understanding the strict test in Davis Contractors to applying the equitable remedies under the Law Reform (Frustrated Contracts) Act 1943, a solid grasp of these principles is essential for academic success.

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