Frustration Lecture

In the previous chapter we covered the main ways obligations under a contract may be discharged. This chapter will focus on the doctrine of frustration, which is the final way in which contractual obligations can cease.

What is Frustration?

The doctrine of frustration discharges both parties from their contractual obligations where following the formation of the contract, performance of the contractual obligations become either:

  1. Impossible; or
  2. Radically different

Essentially, what the doctrine of frustration allows for is a remedy in case of a change of circumstances. This does seem contradictory to the law of contract and the contractual freedom the law allows. If the law does not protect a party from a bad bargain, why does frustration protect against an unfortunate one? Before the doctrine of frustration was formed, the case of Paradine v Jane [1647] EWHC KB J5 ruled that irrelevant of changes in circumstances, parties could never be freed from their contractual obligations.

Understanding the justification for the doctrine of frustration is best done with reference to a basic example. If I paid £50,000 for a meet and greet with a famous celebrity, and before the meet and greet, the celebrity died, would it be fair that I would still be forced to pay the £50,000? The doctrine of frustration would intervene at this point. Of course, this is a very basic example and things can be a lot more complicated than that as you will see! The case which established the doctrine of frustration was Taylor v Caldwell(1863) 3 B & S 826

Case in focus: Taylor v Caldwell (1863) 3 B & S 826

In this case, the claimants had hired out the defendant’s concert hall for four days at the price of £100 each day. After the contract was entered into, but before the day of rental began, the hall was destroyed by fire. The claimant could no longer host their concerts, and as a result lost a significant amount of money. The claiming argued that the defendant should account for those losses, whilst the claimant argued that they could not be liable for an accidental destruction of the concert hall.

It was held that the defendants were not liable for the losses. Blackburn J held there was an implied term in the contract that the concert hall would exist at the time of the contract. This implied term formed the basis of the law of frustration until the case of Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696

Case in focus:  Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696

In this case, the Davis agreed with the claimants to build 78 houses over eight months for £92,425. The building actually took twenty-two months, because Davis did not have the required staff or materials. Davis argued the contract was frustrated due to their change in circumstance - it was assumed that they would have a certain amount of staff and materials to work with, when in fact they did not.

It was held that the contract was not frustrated. The obligations of Davis have become more difficult, but not radically different. The importance of this case was the move away from the doctrine of frustration inserting an implied term covering the change of circumstance. Instead, the construction approach was applied. The construction approach requires an assessment of the changes in light of the context of the contract in order to assess whether performance is impossible or radically different. This construction approach has continued to be applied.

An important quality of frustration is that it must be based on an assumption made by both parties. In the example used, both parties have made the assumption that the celebrity will be alive for the meet and greet. Here is a simple example of where only one party makes an assumption:

  • Party A contracts with Party B to sell a car for £5,000
  • Party A has made the contract on the assumption that they can buy the exact car for £4,000 from Party C
  • Party C’s car is then destroyed, and Party A can only find a replacement for £10,000

As only Party A has made an assumption about the car, frustration cannot be relied on. If, however, it was made part of the contract was that Party A would purchase this car from Party C for £4,000 before selling it to Party B, both parties would have made the assumption, and frustration could be relied on.

The test for frustration

There are three main elements when assessing whether frustration applies to a contract:

  1. Has the contract allocated the risk of the particular event occurring
  2. Has there been a radical change in obligations
  3. Was the radical change due to the fault of one of the parties?

Has the contract allocated the risk of the particular event occurring?

Frustration can only operate where the parties have not themselves allocated the risk of loss between themselves in the contract. In other words, where a party has agreed to bear the risk/loss of some sort.

If we think back to the example contract of the meet and greet with a celebrity, if there was a term in the contract that stated ‘in the event of death of the celebrity, the seller will bear the risk and still pay the £50,000’, the risk has been allocated to the seller, and they have accepted the risk by entering into the contract, therefore they could not rely on the doctrine of frustration.

There is no requirement that the allocation of risk has to be exact or definite, just that there is at least some mechanism for dealing with particular changes in circumstances.

Has there been a radical change in obligations?

There are a variety of ways in which the obligations under a contract can change. Previous case law has created distinct categories that provide for different presumptions and rules relating to the application of frustration. Therefore, this chapter will cover them each in turn. They are as follows:

  1. Non-occurrence of an event
  2. Increased expense
  3. Destruction of subject matter
  4. Illegality
  5. Alteration of manner of performance or impossibility by one party
  6. Outbreak of war
  7. Delay or interruption

Non-occurrence of an event

The first of our categories of frustration is where an event fails that at least one of the parties has assumed will occur. The operation of frustration in such circumstances is best understood with reference to two of the most famous cases on frustration, known as the ‘coronation cases’, as they both relate to the coronation of King Edward.

Exam consideration: If you are answering a question on frustration in relation to the non-occurrence of an event, ensure to compare and contrast the two cases discussed below in the cases in focus! They are absolutely paramount

Case in focus Krell v Henry [1903] 2 KB 740

In this case, the defendant formed a contract with the claimant to hire a flat out on Pall Mall from the 26th of June to the 27th of June, the exact date of King Edward VII’s coronation service, which was due to pass through the street. The flat backed on to the street with a balcony, meaning this particular flat would have had an excellent view of the procession. The contract had no express reference to the coronation or the purpose the flat was hired for. The contract was only hired for the daytime, and would not be available overnight. King Edward fell ill, and the coronation procession was cancelled. The claimant attempted to claim the hire price from the defendant, but they refused to pay on the grounds that the contract was frustrated due to the cancellation of the coronation.

It was held that both parties were aware that the coronation procession was the foundation of the contract, and the room had been hired only to view the procession, therefore the contract was frustrated for the non-occurrence of the event. The important factor of the case was that the claimant has advertised the hire of their room specifically for the viewing of the coronation. There was no other value to the room, as it could not be stayed in overnight, it was solely for the viewing of the coronation.

Case in focus: Herne Bay Steam Boat Co v Hutton [1903] 2 KB 683

In this case, as part of the coronation of King Edward (the same one as in Krell v Henry) a naval review was to take place. A contract was formed between the defendant and claimant for the hire of a steamship to take passengers for a day cruise round the fleet, and to view the naval review. As a result of King Edward’s illness, the naval review was cancelled. The defendants then refused to hire the boat, arguing the contract was frustrated due to the non-occurrence of the naval review.

The exact same judges as those in Krell v Henry decided this case was not frustrated. The reasoning behind this was that the happening of the naval review was not the foundation of the contract. When the claimant hired their ship out, they did not hire it out for the sole purpose of somebody viewing the naval review. The happening of the naval review was only the defendants motive for entering the contract; it was not both of the parties’ foundation. The hired boat could still be used to cruise the review and view the moored fleet. The hiring of the ship had nothing in particular to do with the naval review.

These cases can be difficult to reconcile, but hopefully you can spot the key difference. In Krelll v Henry, the coronation was the foundation of both parties entering into the contract, they had both made the assumption that the coronation event would go ahead. However, in Herne Bay, only the defendant was concerned with the naval review, there were no assumptions from the claimant.

In his judgment in Krell v Henry, Vaughan Williams LJ set out a hypothetical example that should hopefully help your understanding further. The example involves a taxi driver taking somebody to a famous horse race on derby day. The taxi driver would charge an increased fare for the journey due to the circumstances. If the race was cancelled, the contract for the taxi ride would not be frustrated. Despite the higher price paid, and the purpose for which the individual booked the taxi not occurring, the taxi has no particular qualifications or specialism for the particular occasion; any other taxi driver would have been the same.

If you consider the above example in light of the coronation cases, the fact the room was hired for the purpose of the coronation procession in Krell v Henry was not enough, but the fact the room was only rented for the day, and had particular characteristics such as a balcony overlooking the procession which most other rooms would not have, made the foundation of the contract, and would therefore be able to be frustrated for non-occurrence of the event.

Exam consideration: In relation to the taxi example, what if the individual had paid £1,000 to take the taxi and be escorted to the VIP area where they had front row seats for the race? It then becomes more comparable to Krell v Henry due to the specialism of the seats for the race.

To recap, the three points from Krell v Henry which identify that the coronation was the foundation of the contract were:

  1. The advertisement of the room expressly advertised a viewing of the coronation, not a regular letting of the room
  2. The use of the room was only during the day, and not the night
  3. The claimant was not in the business of renting his room out regularly, he had only done it on this particular occasion

These factors show that there was a joint assumption by the parties that the event would go ahead, and it was not just one of the parties making the assumption, which is one of the key requirements of frustration.

Increased expense

The courts have tended to rule that an increased expense for one party can never frustrate a contract. The leading case in this area is the already mentioned Davis Contractors Ltd v Fareham Urban District Council. As part of their claim, Davis Contractors cited the extra £17,000 cost they had incurred, which then resulted in them losing money on the contract, whereas they were expecting to make money. The courts justification for not allowing an increased expense to frustrate a contract is that where one party enters a contract under the assumption they can make a profit, just because the assumption is incorrect does not mean the contract can be frustrated. The other party have not made this assumption. This also relates to the idea that the courts will not protect an individual from a bag bargain.

In Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93 it was suggested that an increased expense, no matter how onerous, could never frustrate a contract. Only one judge, Lord Reid, disagreed with this notion. He argued that in the case of extreme increases in expense, the contract should be frustrated. This is an interesting point, but under current English Law a contract can never be frustrated for increases in expense, no matter how extreme. The justification being for this that increased expense is the business of one party alone.

Destruction of subject matter

Similar to the non-occurrence of an event, a contract may be formed with a particular subject matter in mind. This section covers what will happen where the subject matter is destroyed.

We have already covered the key case in relation to destruction of subject matter, Taylor v Caldwell (1863). As you will remember, in this case, a concert hall was hired out and subsequently destroyed in a fire. Generally speaking, where the subject matter of a contract has been destroyed due to no fault of either party, the contract will be frustrated.

Another example of this comes from Appleby v Myers (1867) LR 2 CP 65, where a contract was formed for the defendant to install machinery in the claimant’s factory. The premises and machines were destroyed before completion of the contract, which resulted in frustration of the contract.

In these cases, the parties have both made an assumption that the subject matter will exist at the time of the contract. You ensure that this is the case, and that the destroyed thing is the actual subject matter of the contract.

Exam consideration: Consider the important of the assumption of both parties. A party may enter into a contract for public transport to visit a famous church, but the church is subsequently burnt down - would this be a case for destruction of the subject matter? This would be more similar to the taxi example from Krell v Henry - only one party has made the assumption about the church.

Illegality

Illegality refers to where the parties form a contract, and subsequently, before or during performance, the contract becomes illegal to perform. The general rule is that this will frustrate the contract if the effect on the contract is serious enough. If the effect is minimal and only partial, the doctrine of frustration will not apply.

It is important to remember that the rules of illegality, covered in a previous chapter, will apply where the contract is illegal at the time of formation. Frustration here only applies where the contract becomes illegal following its formation.

The most common example of illegality is where legislation is enacted which renders the contract illegal (Denny, Mott and Dickson v James B. Fraser & Co Ltd [1944] AC 265).

Case in focus: Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32

In this case, Fibrosa, who were based in Poland, created a contract for the purchase of some machinery from Fairbairn, who were based in England. £1,000 of the £4,800 was paid in July 1939. Subsequently, before all of the obligations under the contract were completed, Germany invaded Poland and war was declared. Fairbairn refused to pay the rest of the monies owed, citing the fact that the contract was now illegal as the outbreak of war made it illegal for British companies to trade with Poland. Essentially, Fairbairn argued that the contract had been frustrated due to the outbreak of war.

It was held that the contract was frustrated as a result of the illegality of the contract. As a further point, the courts held that the ‘loss lies where it falls’, meaning Fibrosa could not recover the £1,000 paid.

In some cases, the illegality of the contract is temporary. If the length of time is short enough, the contract may not be frustrated and the parties will simply have to wait out the period of time before continuing the contractual obligations. The courts which consider the length of time the contract will operate for, combined with the length of time of the illegality. In National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, there was a contract which allowed access to a warehouse for ten years, and the council banned access to the warehouse for twenty months. In light of the ten-year term, the twenty months was not a significant enough period of time to amount to illegality.

Exam consideration: Remember, if there is not a given period of time for the illegality it either may be permanent or unknown (such as an outbreak of war). Ensure to identify this and explain how it affects any frustration claims.

Alteration of manner of performance or impossibility by one party

Where an event results in a change in obligations or impossibility for one party, there will not be frustration of the contract. Remember - frustration must be an assumption both parties make, and it must result in impossibility for both parties.

In Blackburn Bobbin Co Ltd v Allen (TW) & Sons Ltd [1918] 1 KB 540, there was an agreement to sell some Finnish timber to a purchaser. Due to the outbreak of war, the seller could no longer obtain the timber from their supplier in Finland. The contract was not frustrated, as this was the seller’s issue alone, the purchaser of the timber was not concerned with where the seller got the timber from.

The important idea to remember that how one party conducts their business is their problem, and they bear the risk of any business decisions they make which result in circumstances such as in Blackburn Bobbin. They took a risk by not already having the Finnish timber before forming a contract with the purchaser. How they conduct their business is their risk alone, and the other party should not be penalised for this.

Outbreak of war

As we have already seen, the outbreak of war can cause various contractual issues. Another good example is the outbreak of war between Britain and Egypt. The result of this outbreak was blockage of the Suez Canal, which resulted in many breached international trade and shipping contracts. Again, these assumptions have only been made by one party, meaning the contracts cannot be frustrated for this reason.

Where both parties have assumed performance will be done in a specific way which is rendered impossible by the outbreak of war, this may amount to frustration. In Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93, a contract was held not to be frustrated due to the Suez Canal blockages. However, it was considered by the judges that if it was vital to the contract that the goods were delivered by the Suez Canal, perhaps due to time being of the essence and other routes taking too long, the contract may have been frustrated.

Delay or interruption

As mentioned concerning temporary illegality, there may be a delay or interruption that is impossible to avoid. The issues with such delays is that the parties cannot be certain how long the delay will last, it could be ten days, which would not frustrate the contract, but it could be ten years, which almost definitely would frustrate the contract.

The famous academic, Chitty, has suggested that in order for a delay to frustrate a contract, the delay ‘must be so abnormal, in its cause, its effects, or its expected duration, so that it falls outside what the parties could reasonably contemplate at the time of contracting’.

The courts will also consider these factors in deciding whether a contract may be frustrated for delay (The “Sea Angel [2007] EWCA Civ 547)

  • How did the delay arise
  • Was the delay foreseeable
  • How does the contract distribute the risk in other similar circumstances

Was the radical change due to the fault of one of the parties?

If one party is at fault for the frustrating event, it is less likely that the contract will be frustrated. The case of The Super Servant Two [1990] 1 Lloyd’s Rep 1 explained that a frustrating event should be uncontrollable and an extraneous change of situation. In other words, the frustrating event should be beyond the control of the parties.

Importantly, if one party is at fault for the frustrating event, although that party may not make a claim for frustration, the innocent party can do so and will be able to claim damages for any loss that resulted from the contract.

Case in focus: The Eugenia, Ocean Tramp Tankers Corporation v V/O Sovfracht [1964] 2 QB 226

This is yet another case involving the Suez Canal closure! It was a contract for the chapter of a ship, and there was a condition that the ship should not be taken into any war zone unless the owner of the ship gave permission. The ship entered the Suez Canal, a war zone, which breached the contractual condition regarding no entry to war zones. It was argued the contract was frustrated due to the blockage of the canal.

The court held that the radical change in obligations was due to the fault of the charterers - the position they were in was due to their own breach of contract.

As well as a breach of contract, a negligent act which results in the frustrating event will amount to fault. This was discussed by the judges in Taylor v Caldwell - if the burning down of the concert hall was a result of some negligence of the owners, the contract would not have been frustrated.

Going even further, DGM Commodities Corporation v Sea Metropolitan SA [2012] EWHC 1984 (Comm) confirmed that ‘fault’ has a very loose definition in this context. There does not need to be an element of breach of contract or negligence, it can just be a positive action from the party or an individual whom the party is responsible for (ie. An employee).

Case in focus: Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524

This is the leading case on fault in the doctrine of frustration. This case involved fishing boats which required licenses from the Minister of Fisheries. The defendant required five licenses for five boats, but was only granted three. One of the boats was the plaintiff’s. The defendant chose to allocate the three licenses to three boats, leaving two boats without a license, one of which was the plaintiffs. The defendant then claimed that the contract for the charter of the boat with the plaintiff was frustrated, as it was impossible for them to use it due to them being unable to acquire a license.

The court held that the defendant was at fault for the impossibility. They had been given a license which they could have allocated to the plaintiff’s boat, but opted not to, therefore being at fault and they were unable to claim for frustration of the contract.

The legal effect of frustration

Effect on the contract

Now we have fully explored the legal issues and operation of the doctrine of frustration, we can move on to its effects. It is important to be able to accurately explain what it means for the outcome of the contract.

The case of Hirji Mulji v Cheong Yue Steamship Co Ltd [1926] AC 497 confirms the effect of frustration is that it brings the contract to an immediate end, whether or not the parties wish this to be the result. In other words, it is void, not voidable (as is the case for repudiatory breaches).

Financial effects

Previously, under the common law, all obligations under the contract ceased in event of frustration. This included both primary obligations of the contract, and secondary obligations in relation to breaches, such as damages. Therefore, the general rule was that the loss lies where it falls. We touched on this slightly in the case of Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd, where Fibrosa were unable to reclaim the £1,000 they had paid under the contract, the loss had fell with them. There are two different circumstances for these purposes:

  1. Where the money is paid in advance
  2. Where the money is paid on completion

Where money had been paid in advance, the advance payments could be recovered if there was a total failure of consideration by the other party. This approach was heavily criticised due to its impact of the other party. Advance payments are usually used as a form of insurance against frustrating events or breaches of contract. Therefore, by the courts allowing the advance payment to be recovered, they were essentially disallowing the purpose of the insurance by way of advance payment.

Where money is paid on completion, there was an unfair effect on the party who have partially completed their obligations. One party could be 95% of the way through a £1,000,000 construction project before an event which frustrates the contract occurs. As the loss lies where it falls, the constructor would be £950,000 out of pocket, whilst the other party has lost nothing. Evidently, this was not satisfactory either. An example of such an occurrence is found in Appleby v Myers (1867) LR 2 CP 651.

As a result of these financial implications of frustration under common law, the Law Reform (Frustrated Contracts) Act 1943 (LRA) was formed. However, the common law position is still important to know, because the LRA will not always apply, and if it does not, the common law position will apply to the contract.

Law Reform (Frustrated Contracts) Act

Section 1(2)

Section 1(2) of the act applies where money has been paid in advance or is payable in advance. It states that money already paid is recoverable, and money that is payable need not be paid. There must be a total failure of consideration in order for this to apply.

You may be thinking that this is an identical position to that of the common law, but there is another important factor which prevents unjust results such as those in the Fibrosa case. The courts have the discretion to allow the other party to retain any advance payment to cover any expenses incurred, so long as the amount of money

  1. Does not exceed the intended advance payments, and is a form of insurance for the contract; or
  2. Does not exceed the actual value or the actual expenses incurred

Essentially, this section prevents advance payments from automatically being forfeited in the event of frustration.

In deciding whether to allow the retention of any advance payments, the court will consider whether the expenses incurred may be recovered in an alternative way. For example, take a contract for the sale of a car has been frustrated, but the party selling the car purchased the car from somebody else one day earlier. In theory, they would have incurred the expense of buying the car. However, it is likely they could recover these expenses simply by selling the car to another buyer, meaning the retention of any advance payment would be unfair and would result in an extra gain.

Section 1(3)

Section 1(3) states that where no advance payment has been made or will be made under the contract, there can be no compensation for expenses incurred in the performance of a frustrated contract. Again, this seems very similar to the position under the common law.

However, if the performance has conferred a valuable benefit on the other party prior to the frustrating event, the court has the discretion to allow a claim for the incurred expense. The amount will be assessed as follows:

  1. It cannot exceed to value of the benefit conferred to the other party;
  2. The court must consider the expenses incurred by the party receiving the benefit
  3. The court must consider the benefit received and how the frustration has affected such benefit.

In Gamerco SA v ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226 a stadium was prepared for a concert, but the contract was subsequently frustrated. It was held that the preparation of the stadium did not confer any tangible benefit to the defendant.

The case of BP Exploration Co (Libya) Ltd v Hunt (No. 2) [1979] 1 WLR 783 saw an application of Section 1(3). Robert Goff J confirmed the correct approach to calculate the amount allowed for expenditure:

  1. Identify and value the benefit to the party receiving the benefit, this becomes the upper limit of award
  2. Within the limit from (a), decide what sum is just with reference to fairness, the effect of frustration, and the expenses incurred by the party receiving the benefit.

Contracts which the LRA does not apply to

The LRA does not apply to certain contracts. In most cases, the common law rules will then apply.

  • Where the contract has made express provision for the consequences of frustration (Section 2(3))
  • Where the contractual obligations have been wholly completed (Section 2(4))
  • Contracts for the carriage of goods by sea (Section 2(5)(a))
  • Contracts for insurance (Section 2(5)(b))
  • Contracts for the sale of specific goods which are frustrated due to the perishing of goods (Section 2(5)(c)

Frustration - Hands on example

The following section will provide you with a problem scenario which involves issues relating to the doctrine of frustration. This will test your understanding and knowledge of what you have learnt and allow you put the law into practice. You should now understand the doctrine of frustration, be able to identify the different presumptions and rules for potential frustrating events, and the limitations to each. The problem scenario will cover a variety of issues, and the answers can be found at the bottom of the page.

In order to identify a problem question relating to frustration, you should look out for situations in which a contract becomes impossible or radically different. Obvious things to look out for are the non-occurrence of events, the subsequent illegality of a contract or the destruction of the subject matter of the contract.

Here is a suggestion approach when tackling a problem scenario relating to the doctrine of frustration that should allow you to answer the question fully and spot all the relevant issues:

  • Has there been an allocation of risk of that particular event between the parties
  • Does the event result in the contract being impossible, or make the obligations radically different
  • Can you apply any of the presumptions to the event
  • Apply to the law of the presumption to the event
  • Is the frustration based on an assumption made by both of the parties?
  • Was either of the parties at fault for the frustrating event?
  • Do you apply the common law allocation of loss or the Law Reform Act 1943 allocation?

Attempt to apply this approach to the problem scenario below; hopefully it should work for you. Remember, if you are struggling, just refer back to the detailed version in this chapter and refresh your knowledge.

Scenario

Sasha is an entrepreneur and is experimenting with a number of different business ideas. She has had some awful luck and there has been a number of events which may leave her in a difficult position as far as her contractual obligations are concerned.

Contract one is with an artisan cheese shop. She has contracted to sell them £10,000 worth of Swedish cheese. There is only one supplier of Swedish Cheese, who is located in Sweden. Unfortunately, before the delivery of the cheese, a war has broken out between Sweden and England. All trading between the countries is to be ceased and is now illegal.

Can Sarah use the doctrine of frustration to release herself from the contract?

Contract two is a contract for the hire of a large wooden market stand in the centre of the towns market. Subsequent to the making of the contract, the owner of the market stand was cleaning it. After taking a break for a cigarette, he accidently dropped the still lit cigarette, resulting in the market stand being destroyed by a fire.

Would the destruction of the stall mean the contract for the rental of the stall is frustrated?

Contract three is made with Joe, who is paying Sasha £3000 for her to build his business a website. Sasha was concerned he may not pay her, so took an advance payment of £1,500. The contract has now been frustrated due to a law which renders the creation of this particular type of website illegal. Joe is now trying to claim his advance payment back. Sasha has spent over fifty hours working on the website, and her usual hourly rate is £20.

Following the frustration of the contract, can Joe claim the advance payment back? If so, will he be entitled to the entire £1,500 or just part of it?

  1. The subsequent illegality of a contract may render a contract frustrated dependent on the length of time the contract would be illegal. In this case, it would be uncertain how long the war will last, therefore it is more likely that frustration would be able to be successfully argued.

However, in this case, the contract between Sasha and the artisan cheese shop is not illegal, only Sasha’s supply contract for the Swedish cheese is illegal. This is similar to the case of Blackburn Bobbin Co Ltd v Allen (TW) & Sons Ltd [1918] 1 KB 540. In that case it was held that the original contract was not frustrated just because of the impossibility of the one party. Only one party, Sasha, had made the assumption that the supply of cheese would be legal. In order for frustration to operate, both parties must make the assumption, which is not the case here. Therefore, the contract would not be frustrated.

  1. The second contractual issue relates to the destruction of the subject matter. In Taylor v Caldwell(1863) 3 B & S 826 it was confirmed that where the subject matter of a contract is destroyed, the contract will be frustrated. However, in this case there is an element of fault. It was the owner of the stalls fault the subject matter was destroyed, due to their negligent act of dropping a lit cigarette on the wooden stand. Where one party is at fault, the contract will not be frustrated (Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524).  Taylor v Caldwell confirms a negligent act will be sufficient to amount to fault.
  1. The Law Reform (Frustrated Contracts) act gives guidance what happens in the event that there has been an advance payment made for a contract that is subsequently frustrated. Section 1(2) of the act rules that an advance payment may be retained, so long as the amount does not exceed the specified advance payment under the contract, and does not exceed the expenditure of the party who has received the payment.

In this case, Sasha’s expenditure can be calculated by multiplying her hourly rate, £20, by the number of hours she spent creating the website. Therefore, Sasha’s expenditure amounts to £1,000. This means Sasha can retain a maximum of £1,000 from the advance payment, meaning Joe will be entitled to a return of the remaining £500


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