Chapter 17.4 Frustration

A contract is frustrated where for reasons beyond the parties’ control, the contract becomes impossible to perform. The impossibility must arise after the contract has been made.

The test for frustration The circumstances must be such that performance would be radically different from that which was envisaged by the parties when making the contract. (Non haec in foedera veni – it was not this that I promised to do.)’ Davis Contractors v. Fareham UDC [1956] 2 All ER 145

Where the entire benefit of the contract for one party is lost A contract to hire a room from which to view a procession is frustrated where the procession is cancelled. Krell v. Henry [1903] 2 KB 740 If, despite the cancellation of principal reason for the contract, a substantial part of the contract can still be performed, the contract will not be held to be frustrated. Herne Bay Steam Boat Co. v. Hutton [1903] 2 KB 683.

In commercial contracts the fact that events result in substantially increased costs for one party will not frustrate the contract. Tsakiorglou & Co Ltd. v. Noblee Thorl GmbH [1962] AC 93 Sale of peanuts c.i.f. London from the Sudan. Seller’s price based on a voyage via the Suez Canal The Canal was closed and the peanuts would have to have been shipped via the Cape of God Hope. Despite the huge increase in freight costs the contract was not frustrated. The contract could still be performed.

The Legal Consequences of Frustration

At common law Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd [1942] 2 All ER 122 Where the frustration results in a total failure of consideration, a party may recover any money paid or other expenditure in furtherance of the contract; all other losses lie where they fall.

Under the Frustrated Contracts Act 1944 Section 3 provides that where a contract has become frustrated: moneys due cease to be payable; and money already paid shall be recoverable - except where expenditure has been incurred prior to the contract being frustrated, the Court may allow a party to retain or recover the whole or any part of the sums so paid. Similarly where one party has obtained some other valuable benefit the Court is empowered to make orders to fairly adjust matters between the parties.

Section 4 - the application of the Act The contract may make provision for the frustrating event. The Court may, in a proper case, sever any part of the contract that is frustrated and allow the remainder of the contract to go forward. The Act does not apply to any contract: for the carriage of goods by sea; of insurance; or for the sale etc. of specific goods which is frustrated by the destruction of the goods before risk has passed to the buyer. (Section 9 Sale of Goods Act.)