Frustrated contracts

A contract may be discharged by frustration. A contract may be frustrated where there exists a change in circumstances, after the contract was made, which is not the fault of either of the parties, which renders the contract either impossible to perform or deprives the contract of its commercial purpose. Where a contract is found to be frustrated, each party is released from future obligations under the contract and neither party may sue for breach. The allocation of loss is decided by the Law Reform (Frustrated Contracts) Act 1943.

Examples:

Destruction of the subject matter:

Taylor v Caldwell 3 B & S 826 (Case summary)

Personal incapacity:

Condor v Baron Knights [1966] 1 WLR 87 (case summary)

Where the contract becomes illegal to perform:

Fibrosa Spolka v Fairbairn [1943] AC 32 (case summary)

Where a contract can not be performed in the specified manner:

Nicholl and Knight v Ashton, Eldridge & Co [1901] 2 KB 126 (case summary)

The contract is deprived of its commercial purpose:

Krell v Henry [1903] 2 KB 740 (case summary)

However, the contract must be deprived of the whole commercial purpose to amount to frustration:

Herne Bay Steam Boat v Hutton [1903] 2 KB 683 (case summary)

No frustration

A contract will not be frustrated where:

It is more difficult or expensive to perform
Impossibility of performance is the fault of either of the parties
Where there is a force majeure clause
Where the frustrating event could be foreseen

1. A contract will not be frustrated merely because it becomes more difficult or expensive to perform:

Davis Contractors v Fareham UDC [1956] AC 696 (Case summary)

Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93 (case summary)

2. A contract will not be frustrated if the impossibility is the fault of either of the parties:

Maritime National Fish v Ocean Trawlers [1935] AC 524 (case summary)

3. Where there exists a force majeure clause this will apply rather than the law of frustration. The clause must actually cover the event which occurred:

Jackson v The Union Marine Insurance Co Ltd (1874) LR 10 CP 125 (case summary)

4. Frustration will also not exist where the frustrating event should have been foreseen:

Walton Harvey Ltd v Walker & Homfrays Ltd [1931] 1 Ch 274 (case summary)

Peter Cassidy Seed Co Ltd v Osuustukkuk-Auppa Ltd [1957] 1 WLR 273 (case summary)

Affect of frustration

Where a contract is found to be frustrated, both parties are released from their obligations under the contract and neither party may sue for breach.

The allocation of loss is decided by the Law Reform (Frustrated Contracts) Act 1943. This provides:

s.1(2) All money payable under the contract ceases to be payable and any money already paid may be recovered. Where expenses have been incurred this may be deducted from the amounts payable or paid. This is at the discretion of the court and is subject to what is just and equitable in the circumstances of the case. There is no provision allowing expenses to be recovered which exceed the amounts paid or payable.

S. 1(3) - Where a valuable benefit has been conferred this must be paid for.