Topic: Define frustration

Define frustration, Illustrate how a contract can be frustrated., Explain the effects of frustration in a contract.

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Preferred language style: English (U.K.)

Seminar 8

Frustration

Reading: Taylor, Chapter 10 p. 262 – 289

Learning objectives:
At the end of this session you will be able to:
• Define frustration.
• Illustrate how a contract can be frustrated.
• Explain the effects of frustration in a contract.

You must prepare a word processed answer of 400 words to scenario 1.
The answer must be typed using Verdana, font size 11 and double
spaced.
In the session you will be required to read and assess other students
work using the marking criteria on page 33. This should enable you to
recognise what standard you will be expected to achieve in the final
examination.

Scenarios

Assume all contracts are valid and enforceable

1. In January Mr Smith sees an advertisement inviting members of the public to:

‘Enjoy a luxury boat trip from Putney to Mortlake with Goseasons on
the day of the Boat Race’

At great expense, he buys tickets for himself and his secretary. At
the same time he agrees to hire a yacht from the company for the month
of July for £1,000 to take his four children on a cruising holiday.
The company have only one suitable yacht for hire and that has only
three bunks. The company agreed to put up an extra bunk in one of the
cabins and Mr Smith pays £100 in advance.

In April the yacht is completely destroyed by fire. Goseasons refuse
to return Mr Smith’s deposit and demand a further £50 saying it has
cost them £150 to install the extra bunk. Furthermore, the boat race
is cancelled when the Cambridge crew go down with gastro-enteritis. Mr
Smith asks Goseasons to refund the cost of his ticket. Goseasons
refuse.

Advise Mr Smith.
2. Bill owns 60 acres of woodland in North Yorkshire. He obtains
planning permission to develop 4 separate areas into self-contained
holiday villages with ten log cabins and a communal recreation centre
in each. Bill agrees that Bob the Builder should develop the site and
they agree that for each of the four areas to be developed Bob is to
be paid £50,000 deposit and £200,000 on completion. Bob has completed
two of the areas and is half way through the third one when the
building is ordered to cease as a rare butterfly has been found in the
woodland. Bill refuses to pay Bob for the work he has done on the
third site and is asking for his £50,000 deposit back.

Bill, anticipating that the development would be finished by the
holiday season has accepted bookings. He has contacted Mr and Mrs
Jones to say that their holiday can no longer go ahead because of the
problems they have experienced. Mr and Mrs Jones have paid £2,000
deposit and don’t see why they cannot be accommodated in one of the
other cabins, as they were all to be the same. Bill informs them all
that the other cabins are fully booked for that week.

Advise Bob and the Jones

Lecture note

UNIT 6 : DISCHARGE OF CONTRACT BY FRUSTRATION

Lectures 13 and 14 Outlines

Learning objectives

As a result of studying this unit you should be able to explain and analyse:

• The development of the Doctrine of frustration from the case of
Taylor v Caldwell and why the courts thought it necessary to control
its development in the case of Davis Contractors v Fareham UDC;
• In the light of the Davis case, how a so called frustrating event
will be viewed by the courts;
• How the Law Reform (Frustrated Contracts) Act 1943 operates as a
means of regulating and apportioning loss between the contracting
parties where there has been a “frustrating event.”

Essential Reading

You should read the section on frustration from one of the recommended
texts and the lecture notes prior to the lectures. You should also
read the case relevant cases as explained in the introduction to
teaching materials.

INTRODUCTION

A contract will be discharged by frustration where, after the contract
has been entered into, an event occurs which renders further
performance of the contract, impossible, illegal, or something
radically different from what was contemplated by the parties when
they made the contract.

The frustratory event will automatically discharge both parties from
performance of their future obligations under the contract.
Obligations which have already been performed or have fallen due will
be governed by the Law Reform (Frustrated Contract) Act 1943.

DEVELOPMENT OF THE LAW

Originally, supervening events that were beyond the control of either
party, had no effect on the obligations of either party under the
contract. Contractual obligations were absolute.

Paradine v Jane (1647) Aleyn 26.

Taylor v Caldwell (1863) 3 B & S 826

From this point on, the doctrine of frustration began to develop and
thus expand. Ultimately the judicial approach to frustrated contracts
began to change.
Davis Contractors Ltd v Fareham UDC [1956] 2 All ER

Globe Master Management Ltd v Boulus–Gad Ltd [2002] All ER (D) 39

In the judgements in the Davis case, it was stated that the mere fact
that the contract had become more expensive to perform was not
sufficient grounds for declaring the contract frustrated. The
contractual obligation had not altered to any radical extent because
of this increased cost. This approach was followed in subsequent
cases.

Tsakiroglou v Noblee Thorn [1962] AC 93

The Eugenia [1964] 2 QB 226

Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724

National Carriers v Panalpina [1981] AC 675

It should be noted that the ‘test’ is a question of law, not fact,
even though the facts of a given case play a critical part in the
courts’ deliberations.

EXAMPLES OF HOW THE DOCTRINE OF FRUSTRATION HAS BEEN SUCCESSFULLY PLEADED

Impossibility of Performance

An example of this is the Taylor case.

Robinson v Davison (1871) LR 6 Ex 269

Unavailability of the subject matter of the contract

Here the subject matter is not destroyed but ceases to be available
for the purposes of the contract. The longer the period of
unavailability, the greater the chance of a finding of frustration.

Condor v The Barron Knights Ltd (1966) 1 WLR 87

Gamerco SA v ICM/Fair Warning Agency [1995] 1WLR 1226

Jackson v Union Marine Insurance Co. Ltd (1874) LR 10 CP 125

Boulas Gad Tourism and Hotels Ltd v Uniground Shipping Co Ltd LTL 21/2/02

Non-occurrence of a specified event central to the contract

In cases such as this, the non-occurrence of an event specified in the
contract, and upon which the contract is based, will render the
contract pointless.

In cases under this heading the courts have made a distinction where
the specified event is the object of the contract and those where it
is merely the motive for entering into the contract in the first
place.

Krell v Henry (1903) 2 KB 740

Herne Bay Steamboat Co v Hutton [1903] 2 KB 683

These two cases illustrated this distinction. They are two of the
so-called Coronation cases.

Delay

Delay in performance of the contract by some supervening event may
also frustrate a contract.

AG v Vinava Shipping [1983] 2 All ER 658

Nema [1981] 2 All ER 1030

Metropolitan Water Board v Dick Kerr & Co [1918] AC 119
This case brings together frustration caused by delay and illegality
arising from the War:

Finelvet AG v Vinava Shipping Co Ltd [1983] 2 All ER 658

Frustration of the commercial purpose of the contract

Davis v Fareham UDC and also the so-called Suez Canal cases which
applied the radical change in the obligation test outlined in the
Davis case.

Tsakioroglou & Co Ltd v Noblee Thorn GmbH [1982] AC 93

The Eugenia [1964] 1 All ER 161

Amalgamated Properties Ltd v John Walker [1976] 3 All ER 509.

In this case the court refused to accept an argument that the contract
had been frustrated. The court held that the main purpose of the
contract had been fulfilled, i.e. they had contracted to buy a
building and that is precisely what happened. The fact that
retrospectively it was a bad bargain was not sufficient grounds for
allowing the claimant’s plea that the contract was frustrated.

Supervening Illegality

Denny Mott & Dickson Ltd v James B Fraser & Co Ltd [1944]

Tatem v Gamboa [1939] 1 KB 132

THE DOCTRINE OF FRUSTRATION WILL NOT APPLY IF THE FRUSTRATING EVENT
WAS SELF-INDUCED

Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 324

J Lauritzen AS v Wijsmuller [1990] 1 Lloyds Reports
Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd [1942] AC 154

Shepherd & Co Ltd v Jerrom [1986] 3 WLR 801

Paal Wilson v Blumenthal [1983] AC 854

FORCE MAJEURE

THE LEGAL EFFECTS OF FRUSTRATION AND REMEDIES

The common law position is a harsh one, the loss lying where it fell.
A contract came to an end automatically at the time of frustration
regardless of the wishes of the parties. From the point of frustration
thereof, the parties are released from all future contractual
obligations BUT any obligations that had already arisen had to be
performed.

Chandler v Webster [1904] KB 493.

The unsatisfactory nature of the common law led to the passing of the
Law Reform (Frustrated Contracts) Act 1943.

THE LAW REFORM (FRUSTRATED CONTRACTS) ACT 1943

Recovery of Money – Section 1 (2)

The efforts of this section are:

• Monies paid are recoverable;
• Monies owed cease to be payable;

Gamerco SA V ICM Fair Warning (Agency) Ltd [1995] 1 WLR 1226

Valuable Benefit Provision – Section 1(3)

This provides for financial re-adjustment where such a benefit
accrues. The act does not define what is meant by “Valuable Benefits.”

If one party has received benefit before the frustrating event, the
court may award the other party a sum of money even if no money was
due before frustration. However, the court must take into account the
effect frustration had on the benefit and also money recovered under
S.1(2) must be taken into account under S.1(3)).

The only case to come before the courts under this Act involved this
particular section.

BP Exploration Co (Libya) Ltd v Hunt (No.2) 1 WLR 783

NOTE: The Section only allows recovery where a valuable benefit has
been obtained “before the time of discharge” – i.e. prior to the
frustrating event.

But what is the position if a valuable benefit has been so obtained
but this benefit itself is destroyed by the frustration event. The
above case does not answer this point.

Appleby v Myers 1867 LR 2 CP 651

This is an old case which pre-dated the act but emphasises this problem.

Contracts falling outside the Act

i) See Section 2(3) – contracting out – by use of force majeure clause;

ii) Section 2(4) – provision relating to several contracts that have
been wholly performed prior to the frustrating event;

iii) Section 2(5)(a) and 2(5)(b) – exclude from the provisions of the Act:

Charter party
Carriage of goods by sea
Contracts of insurance

The reason for their exclusion is that these contracts themselves by
their very nature are largely concerned with apportionment of risk.

iv) Section 2(5)(c) – excludes contracts falling within S.7 Sale of
Goods Act 1979. S.7 itself contains its own provision in respect of
frustration.