The doctrine of frustration

The principle of freedom to contract is a founding principle upon which the world of commercial contracts operates. This strictly means that the parties to a contract are free to agree on their own rights and obligations to be included in their agreement.

Problems can occur however, when the bargain struck is no longer possible to achieve, or, in other words, where one party is prevented from, or unable to, carryout his/her obligations under the contract due to a supervening event beyond their control. As a result, a doctrine has accordingly emerged in the law of contract to provide for situations where such an eventuality occurs.

Under the doctrine of frustration, a promisor is relieved of any liability under a contractual agreement in the event of a breach of contract where a party to the agreement is prevented from, or unable to, perform his/her obligations under the agreement, due to some event which occurs, which was outside of their sphere of control. In such circumstances, the law deems it unfair to compel the injured party to comply with the terms of the agreement. Hence, the law relieves this person from their obligations by regarding the contract as frustrated for all purposes.

This essay first explores the development of the doctrine of frustration before providing the circumstances which qualify the doctrine of frustration. The work shall also proceed to explain the implications of a decision that a contract has been frustrated. Finally, the Conclusion summarizes the information pertaining to the doctrine of frustration and considering the information in light of Lord Simon’s dictum outlined above.

Development of the Doctrine

The doctrine of frustration in contract law was initially defined by two points, namely: (i) the doctrine was to be only permitted where it was raised as a defence to a primary assumption on which the agreement was reached; and (ii) the parties were entitled to insert provisions as a contingency measure to provide for the occurrence of the same.

In a notable case from the seventh century [1] , it is apparent that events which were outside the control of either party had no effect on the parties’ obligations to each other. This position was not regarded as satisfactory, however, and the courts soon addressed this by implying terms into a contract by finding that conditions ought to be implied into a contract where:

“from the nature of the contract it is apparent that the parties contracted on the basis of the continued existence of the particular person or chattel" [2] .

The position which hitherto applied in Paradine v. Jane (1647) Aleya 26 was distinguished on the premise that that principle applied only to circumstances involving positive contracts, in which performance was guaranteed. The doctrine steadily began to grow due to the courts’ willingness to imply terms into a contract. However, this position was not deemed satisfactory by some members of the judiciary. In particular, in the case of Davis Contractors Ltd v. Fareham UDC [1956] 2 All ER 145, Lord Radcliffe and Lord Reid expressed their disapproval with the manner in which terms were being implied into contracts. Lord Radcliffe in particular stated, inter alia, that:

“There is something of a logical difficulty in seeing how the parties could even impliedly have provided for something which ex hypothesi, they neither expected not foresaw."

It was accordingly felt by their Lordships that there ought to be another basis for the doctrine of frustration. In this regard, it was stated (by Lord Radcliffe) that:

“.. it would be simpler to say at the outset that frustration occurs whenever the law recognizes 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 s thing radically different from that which was undertaken by the contract." [3] 

Evidently, this position provided a more objective approach to that hitherto taken, as it included considerations other than those of the parties’ sole intentions: see Shirlaw v. Southern Foundries (1926) Ltd [1939] 2 KB 206.

The law in this area was extended further by the case of Liverpool City Council v. Irwin [1976] 2 All ER 39, in which it was subsequently found that in circumstances in which the courts regarded it as necessary to imply a term into a contract, resulting in a contract becoming frustrated, it shall do so only by law. The doctrine accordingly became a question of law for the courts to determine, as opposed to one of fact.

Further developments came in National Carriers Ltd v. Panalpina (Northern) Ltd [1981] AC 675, where the courts devised a ‘modern test’ for assessing whether or not the doctrine of frustration ought to apply [4] . In accordance with this test, the courts adopt an approach whereby they seek to interpret the contract in light of the surrounding circumstances. This approach is aimed at discerning the parties’ true intentions when entering the contract. The rationale is that the court shall then be better placed to conduct an assessment of contract in order to conclude whether or not the supervening events had changed.

It ought to also be mentioned here that it is not the change in circumstances so much that invokes the doctrine of frustration, but it is the ‘radical’ change in the obligations, as found in the form of the terms of the contract, which instigates the application of the doctrine.

The position was consummately summed up by Lord Radcliffe in the case of Davis Contractors, where it was said that:

“…..it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for."

Also helpful in understanding this test are the comments by Lord Simon, who stated as follows:

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and / or obligations from what the parties could reasonably have contemplated at the time of its execution that is would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such a case the law declares both parties to be discharged from further performances." [5] 

Application of the Doctrine

The application of the doctrine of frustration can arise in a variety of situations. The body of case law on the subject, however, illustrates that there are typical situations in which the doctrine arises. Most commonly, the doctrine arises in situations in which there is an inability to perform the contract due to the subject-matters destruction or unavailability: see Taylor v. Caldwell (1863) 3 B & S 826.

In circumstances which adversely affect the availability of the subject-matter required to perform the contract, the period of its unavailability is of paramount importance in assessing whether or not the doctrine of frustration is applicable. For instance, a lengthy period would result in the doctrine applying, whereas a short period is unlikely to result in the doctrine becoming applicable. However, it ought to be mentioned that in the case of Conder v. The Baron Knights Ltd [1966] 1 WLR 87, the court found that frustration had occurred despite there being no actual breach of contract, and therefore no incidence of unavailability. The facts of the case were that a musician was contracted to perform seven days a week, but feel ill, and contrary to professional advice, he continued to perform seven days a week. The court found that due to his precarious state of health, his health could have deteriorated at any time, which would have necessitated the acquisition of another musician.

A further example of the approach the court shall take when considering the effect of a delay in the ability to perform a contract due to a supervening event, can be observed in The Evia [1983] 1 AC 736 [6] .

Furthermore, if there is a non-occurrence of an event, which is integral to the contract, and this renders the contract pointless, then the court is likely to find that a frustration has occurred. In order for this to be satisfied, however, it is essential that a distinction is drawn between the incident directed to the object of the contract and the motive for entering the contract: see Krell v. Henry [1903] 2 KB 740 [7] . Furthermore, if a party is under an obligation to perform specified tasks in accordance with the terms of the contract, and they are unable, or it becomes impossible, to do so, the contract is deemed to be frustrated. Albeit, it ought to be mentioned that under this requirement, only a failure to comply with a obligatory expression in the form of a term is going to amount to a frustration, as opposed to a mere intimation that a performance is expected.

In Tsakiroglou & Co. Ltd v. Noblee Thorl GmbH [1962] AC 93 [8] , it was held that the freight contracts were not frustrated as the specific manner of the performance of the contract, specifically pertaining to the route to be taken by ships through the Suez Canal, which had been closed, had not been expressly stipulated in the contract.

Further, the House of Lords found, in National Carriers Ltd Panalpina (Northern) Ltd [1981] AC 675 that frustration can also apply in the case of leases of land, albeit it was noted that this is a rare occurrence. It was specifically mentioned that this is only likely to occur, however, where the parties had expressed a specific intention to lease the land for a specified purpose, which later becomes impossible to achieve due to an event which is outside the control of the parties. In this regard, Lord Wilberforce articulated this as follows:

“A man may desire possession and use of land or buildings for, and only for, some purpose in view and mutually contemplated…. In such a case the lease, or the conferring of an estate, is a subsidiary means to an end, not an aim or end of itself."

Issues Affecting the Operation of the Doctrine

There are a variety of issues which can prevent the doctrine of frustration from occurring. Firstly, where one party is found to have been negligent, the doctrine shall not apply. However, negligence per se does not strictly prevent frustration from occurring, as it is for the person claiming frustration to provide proof of the same.

In addition, if it is found that the incident which is supposed to have been outside of the control of the parties was, in fact, a consequence of the actions of a party, the doctrine cannot apply: see Maritime National Fish Ltd v. Ocean Trawlers Ltd [1935] AC 524 [9] .

Finally, in circumstances in which the event giving rise to the frustration is anticipated and provided for by inserting a force majeure clause into a contractual agreement, frustration shall not apply. This is the case, however, only if the said clause adequately covers all eventualities, if the supervening event should occur: see Jackson v. Union Marine insurance Co. Ltd (1874) LR 10 CP 125.

Conclusion

Having considered the rules pertaining to the doctrine of frustration, Lord Simon’s obiter dictum in British Movietonews Ltd. v. London and District Cinemas [10] is correct only in so far as the requirements for the doctrine of frustration do not apply in the case at hand. As noted above, if the ‘test’ is satisfied, and the rules of frustration apply, the implication for the contract is that it is terminated forthwith, thereby relieving the parties of their former contractual obligations.

In the case where frustration is found, the injured party does not benefit from having the option to select whether or not to opt for a breach of contract or otherwise (see Hirji Mulji v. Cheong Yue Steamship Co. [1926] AC 497). The decision is arbitrary and automatic in that frustration renders a contract terminated forthwith.

At common law, the situation regarding the law pertaining to frustration is somewhat in a state of flux. In Chandler v. Webster [1904] 1 KB 493, the court relieved the parties form all future contractual obligations from the date when the supervening event first arose. However, this decision was overruled by the House of Lords in Fibrosa Spoika Akcyjna v. Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, who shifted the burden of the onus of the frustration from the appellant, to the respondent, by finding that there had been a total failure of consideration and allowing the appellant’s claim.

The passing of the Law Reform (Frustrated Contracts) Act 1943 has, however, gone some way to addressing the unsatisfactory state of the law. However, it ought to be noted that the Act only applies to the consequences of a frustration, once found, and deals specifically with the following: the recovery of money paid or payable under the agreement; compensation payable for expenses incurred in performing the contract; and, financial readjustment where a party has received a valuable benefit despite not having made any payment [11] .

Finally, Lord Simon’s comments are correct that unanticipated events alone do not ‘affect the bargain which they have made…’ [12] and, as Lord Radcliffe rightly pointed out in the Davis case, ‘it is not hardship, or inconvenience or material loss itself which calls the principle of frustration into play’, but it can categorically be said that once a contract is found to have been frustrated, the bargain between the parties is at an end.