A contract may be frustrated when the occurrence of an event, after entering into the contract, renders it physically or commercially impossible to perform or transforms the obligation to perform such that it radically differs from the obligation originally undertaken to be fulfilled at the time of entering into the contract.
Common Law History
Earlier, supervening events were not permitted as valid grounds for non-performance of an obligation under a contract, on the basis that the parties could have provided for such eventualities in their contract. A classic example of this rule of “absolute” contracts is set out in Paradine v. Jane (1647). In this case, a lessee, who was sued for arrears of rent, pleaded that he had been evicted from and kept out of possession of the leased land by an alien enemy, an event was beyond his control. Such eviction had deprived him of profits derived from business conducted on the leased land, which profits he had expected to appropriate towards payment of the rent to the lessor. He was nevertheless held liable to pay the rent on the following ground:
“where the law creates a duty or charge and the party is disabled to perform it and hath no remedy over, there the law will excuse him… but when the party of his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract. ”
Therefore, it was held that a party must perform the contract irrespective of the hardships it may encounter, since the contract would have provided for those hardships had the party had foreseen them.
Subsequently, in Taylor v. Caldwell (1863), the defendants had agreed to permit the plaintiffs to use a music hall for concerts on four specified nights. After the contract was executed, but before the first night on which the plaintiffs were to utilize the music hall, the music hall was destroyed by fire. Blackburn J., held that:
“as subject to an implied condition that the parties shall be excused in case, before the breach, performance becomes impossible from the perishing of the thing, without default of the contractor… the principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance. In none of these cases is the promise other than positive, nor is there any express stipulation that the destruction of the person or thing shall excuse the performance; but that excuse is by law implied. ”
The Test for Frustration
Lauritzen AS v Wijsmuller BV, Bringham L.J (1990) sets out five propositions which describe the doctrine of frustration of a contract, as follows:
- The doctrine of frustration of a contract has evolved to mitigate the insistence of common law on the literal performance of absolute promises.
- Frustration operates to terminate the contract and discharge the parties from further liability under it. Therefore, it cannot be lightly invoked, but must be kept within very narrow limits and ought not to be extended.
- Frustration forthwith brings a contract to an end.
- The essence of frustration is that it should not be due to the act or election of the party seeking to rely on it.
- The frustrating event must take place without blame or fault on the side of the party seeking to rely on it.
The Implied term test and its shortcomings
As stated above, the implied term test was originally adopted in Taylor v. Caldwell (1963). Consequently, the doctrine of frustration was first introduced into English law and thereafter frequently applied in later judgments. However, it also became subject to considerable criticism and was finally laid to rest in National Carriers Ltd v Panalpina (Northern) Ltd (1980), where it was observed that implied term test was artificial since there could be a genuine common intention between the parties of the contract to terminate the contract upon the occurrence of the event. Therefore, it was decided that the meaning of a contract must be taken to be not what the parties intended, but that which the parties, in their fair and reasonable opinion, would presumably have agreed upon if they had foreseen the occurrence of an event and consequently expressly set out their several rights and liabilities on the occurrence of such event.
The Radical change in the obligation
The radical change finds its place by the reasoning that if the words of the contractual promise were to be enforced after happening of any unforeseeable event, would performance involve a radical change from the obligation initially undertaken? If yes, a radical change is said to have occurred. The radical change test has been expressly upheld and applied in subsequent cases by the House of Lords to determine whether a contract has been frustrated.
Scope of Frustration
As stated above, the doctrine of frustration cannot be lightly invoked as it kills the contract and discharges the parties from further liability under it. Parties cannot resort to it solely to escape from an onerous obligation which they have by their consent agreed to fulfil. It has been observed that the parties usually make provisions in their contract for the impact which various possible catastrophic events may have on their contractual obligations. Therefore, when such event which is foreseen and occurs, the contract is not frustrated (Joseph Constantine S.S Line Ltd v. Imperial Smelting Corp Ltd (1942) A.C 154, 163.)
Types of Frustration
As upheld from time to time, since frustration depends on the construction of the “obligation” in a particular contract taking into account unique facts and circumstances, reported decisions can only be applied as rough guides for the application of the doctrine.
Instances of an explosion, disabling or seizure of a ship and requisitioning of the subject-matter of the contract by the government has been treated as frustration by the courts. On the other hand, a mere inconvenience, hardship, or financial loss during performance of the contract, or delay within the commercial risk undertaking of the parties, has been held insufficient to frustrate particular contracts.
The following are the common types of frustrating events:
- Subsequent legal changes
- Changes affecting employment
- Supervening illegality
- War-time restrictions
One of the most common grounds for frustration is delay. It is often difficult to decide whether a contract has been frustrated by an event or change in circumstances which causes an unexpected delay in its performance. To frustrate a contract, the delay must be abnormal in its cause, effects, or expected duration, so that it falls outside of what the parties could reasonably have contemplated at the time of contracting. The fact that the delay was caused by “a new and unforeseeable factor or event” is relevant.
Limits of Frustration
As mentioned above, a provision in a contract setting out the effect of specified events or circumstances will typically preclude the application of the doctrine of frustration. Therefore, the impact of a force majeure clause or a hardship clause may prevail over the doctrine of frustration since the contract, on its proper construction, will be held to have provided for the event which has occurred. However, the inference that a foreseen event is not a frustrating event is only prima facie and can be excluded by evidence of contrary intention [Edwinton Commercial Corp v. Tsavliris Russ Ltd. EWCA Civ 547, (2007) 2 Lloyd’s Rep 517 at (103)]
Frustration does not rescind the contract ab initio; however, it brings the contract to an end forthwith, in the sense that it releases both the parties from any further performance of the contract (b.p. exploration Co. Ltd v. Hunt (1983) 2 A.C. 352). In fibrosa spolka akcyjna v Fairbairn Lawson Combe Barbour Ltd. English sellers agreed to sell specific machinery to polish buyers and to deliver its CIF in Gdynia, Poland. The contract was made in July 1939, and in that month an amount of 1,000 pounds was paid towards the price. However, before the sellers were able to complete the manufacture of the machines, the contract was frustrated when the German army occupied Gdynia. The buyers sued to recover the 1,000 pounds they had paid on the signing of the agreement. It was observed that they were entitled to recover the money because there had been a total failure of consideration i.e. the condition on which the 1000 pounds were paid had failed to materialize. However, in Appleby v. Myers (1867) L.R. 2 C.P. 651, where the frustrating event destroyed the completed work of a service provider and payment was due only on the completion of the work, the service provider was held not entitled to bring a restitution claim to recover payment in respect of the work which he had done prior to the frustration of the contract.
Frustration brings the contract to an end from the date the event occurs, subject to fulfilment. It releases both the parties from any further performance of the contract. However, the parties may be able to claim restitution for the loss suffered in performing the obligations.