UNIVERSITY OF LUSAKA SCHOOL OF LAW

UNIVERSITY OF LUSAKA SCHOOL OF LAW
UNIT 17 : DISCHARGE BY FRUSTRATION

Structure of Presentation
Introduction Frustrating Events Non-Frustrating Events Consequences of Frustration of Contracts

Introduction A contract may be discharged by frustration if something happens which is not the fault of the parties and was not contemplated by them, and prevents them from performing the contract. Originally, the common law did not take such a lenient view of changes in circumstances and required that the parties to a contract should provide for all eventualities or unforeseen contingencies. If, however, because of the happening of an unforeseen event performance of an obligation became impossible, the party required to perform the impossible obligation would be liable to pay damages for non performance.

Introduction The common law justification for this harsh principle or rule is that a party to a contract can always guard against unforeseen contingencies by express stipulations, if he voluntarily undertakes an absolute and unconditional obligation he cannot complain merely because events turn out to his disadvantage. The rule of absolute contracts was laid down in Paradine v Jane [1647]: Aleyn, 26, the defendant was lessee of land and when sued for arrears of rent he contended that he was not liable to pay as the land in question had been occupied by a German Prince who had invaded the realm with an hostile army of men; therefore preventing the defendant from receiving the profits from the land.

Introduction It was held that the plaintiff was entitled to recover as the defendant had covenanted to pay the rent and if he had wished to be excused he should have inserted a term to that effect in the contract. “Where a party by his own contract creates a duty or charge upon himself, he is bound to make it good, notwithstanding any accidents by inevitable necessity, because he might have provided against it by his contract.”

Introduction Starting with the case of Taylor V. Caldwell [1863], 3B & s. 826, the courts developed the doctrine of frustration as an exception to the rule about absolute contracts laid in Paradine V. Jane discussed above. Under the doctrine of frustration the parties are discharged from their contract if circumstances or events occur which makes it impossible for the parties to perform their obligations under the contract.

Introduction For the doctrine of frustration to occur three requirements must be satisfied; namely: (1) An event has taken place which could not have been foreseen by the parties when they entered into the contract. (2) None of the parties to the contract is in any way responsible for the event. (3) If the contract was to be performed now despite the event, the contract would be fundamentally different from the one originally entered into.

Frustrating Events The doctrine of frustration has been held to apply in the following circumstances: (1) Destruction of the subject matter (2) Personal incapacity to perform a contract of personal service (3) Non-occurrence of an event if it is the sole purpose of the contract (4) Supervening Illegality (5) Government interference

(1) Destruction of the subject matter
A contract may be frustrated by the destruction or non availability of the subject matter of the contract, that is, a thing essential to the performance of the contract or attainment of the fundamental object which the parties had in view. Thus in Taylor v Caldwell, a hall was let to the plaintiff for a series of concerts on specified dates. Before the date of the first concert the hall was accidentally destroyed by fire. The plaintiff sued for damages for failure to let him have the use of the hall as agreed. It was held that the destruction of the subject matter rendered the contract impossible to perform and discharged the defendant from his obligations under the contract.

(2) Personal incapacity to perform a contract of personal service
If the presence of a particular person is necessary for the execution of the contract, illness, insanity or death of that person will discharge a contract of personal service. In Robinson v Davison [1871] LR 6 Ex 269: The defendant contracted to play in a concert on a particular day but fell ill. It was held that the performer’s illness on that particular day was sufficient to frustrate the contract.

Similarly, in Condor v Barron Knights Ltd [1966] 1 WLR 87: The plaintiff aged 16 contracted to perform a drama in a pop group. His duties, when the group had won were to play on every night of the week. He fell ill and his doctor advised him that he should restrict his performances to four nights per week. The group terminated his contract. It was held that a contract of personal service is based on the assumption that the employee’s health will permit him to perform his duties. If that is not so, the contract is discharged by frustration.

However, in long term contracts, the courts are reluctant to find that illness frustrates the contracts. In Storey v Fulham Steel Works [1907] 24TRL 89: The plaintiff was employed by the steel works for five years as manager. After working for two years he became ill and needed time away from work. Six months later he recovered, but during his illness his employment had been terminated. The plaintiff sued for breach of contract and the defendant claimed that the plaintiff’s illness discharged the contract. It was held that the plaintiff’s absence for six months did not go to the root of the five year contract and termination could not be allowed.

(3) Non-occurrence of an event if it is the sole purpose of the contract
Where the parties make a contract on the basis of some forth coming event, and if the event fails to take place, and as a result, the main purpose of the contract cannot be achieved, the doctrine of frustration will apply. Thus in Krell v Henry [1903] 2 KB 740, a room belonging to the plaintiff and overlooking the root of the coronation procession of Edward VII was let for the day of the coronation for the purposed of viewing the procession. However, the coronation was postponed owing to the illness of the King. The owner of the rooms sued for the agreed fee which was payable on the day of coronation. It was held that the contract was made for the sole purpose of viewing the procession, as the event did not occur, the contract was frustrated.

(3) Non-occurrence of an event if it is the sole purpose of the contract
However, in Herne Bay Steamboat Co. v Hutton [1903] 2 KB 683: the court refused to declare the contract to be discharged by frustration. A steam boat was hired for two days to carry passengers, for the purpose of viewing the royal review at Spithead and for a day’s cruise around the fleet. The review was, however, cancelled due to the illness of the king but the steam boat could have taken passengers for a trip around the assembled fleet, which remained at Spithead. It was held that the royal review of the fleet was not the sole occasion of the contract and so the contract was not discharged. The owner of the steam boat was therefore entitled to the agreed hire charge less what he has earned from the normal use of the vessel over the two day period.

(4) Supervening Illegality
Where the performance of the main object of the contracts subsequently becomes illegal, the contracted will be discharged. An example is where there is a change in the law which makes the performance of the contract illegal. In Baily v De Crespigny [1869], LRF 4 QB 180: A landlord covenanted that neither he nor his successors in the title would permit building on paddock which adjourned the land let. The paddock was then compulsorily acquired for a railway, and a station was built. It was held that the landlord was not liable for breach of the covenant because it was impossible for him to secure performance of it.

(4) Supervening Illegality
Similarly, in Denny, Mott and Dickson Ltd v Fraser and Company Ltd [1944] AC 265, in 1929: the two parties made an agreement relating to the sale of timber and the option to purchase or lease a timber yard. Both parties agreed that the sale of timber was frustrated in 1939 by timber control orders. However, in 1941, Denny, Mott and Dickson attempted to exercise their option to purchase the timber yard. The House of Lords held that a contract for the sale of timber was frustrated because the subsequent passage of various control of timber orders rendering performance of the contract, trading in timber, illegal. Lord Macmillan, at p.272, stated: “It is plain that a contract to do what it has become illegal to do cannot be legally enforceable. There cannot be default in not doing what the law forbids to be done.”

(5) Government interference
Government or administrative interference in the activities of one or both of the parties to the contract is a common cause of frustration, more especially in time of war. If the maintenance of the contract in such a case imposes upon the parties a contract that is fundamentally different from that which they made, the contract is discharged. Thus in Metropolitan Water Board v Dick, Kerr and Co. Ltd [1918] AC 119, in July 1914 the appellants contracted to construct a reservoir in six years. The agreement contained a proviso which stated that time should be extended if delays were caused by difficulties, impediments or obstruction howsoever occasioned.

War broke out and in 1916 the Minister of Munitions ordered the respondents to stop work and to disperse and sell the plant. This prohibition was still in force in November The appellants claimed that the order had put an end to the contract. It was held that the provision for extension of time did not cover such a substantial interference with the performance of the work as this, and that the contract was completely discharged. The interruption was likely to be so long that the contract, if resumed, would be radically different from that originally made.

This case should however be contrasted with Tamplin Steamship Co. Ltd v Anglo-Mexican Petroleum Products Co. Ltd [1916] 2AC 397: A tanker was hired or chartered for five years from December 1915, to December 1917, to be used by the charters for the carriage of oil. In February, 1915, the tanker was requisitioned by the Government and used as troop ship. The charters were willing to pay the agreed freight to the owners, but the latter, desirous of receiving the much larger sum paid by the Government, contended that the requisition had frustrated the commercial object of the venture and therefore put an end to the contract. It was held that the commercial objects of the contract was not frustrated since there may have been months during the remaining period during which the ship would be available to fulfil substantial part of the contract, and also the charters were still prepared to pay the agreed price.

Non-Frustrating Events
The common law doctrine of frustration will not apply in the following circumstances: (a) Where parties have expressly provided for in the contract for the event or contingency which has occurred. It is a means by which risk is allocated and loss apportioned between the parties in circumstances which neither party has seen.

(b) Where the contract has become more expensive or difficult or burdensome to perform to one of the parties. In Tsakirolou & Co Ltd V. Noblee and Thorl Gmbh [1962] AC 93: In October 1956 sellers agreed to deliver ground nuts from Port Sudan to buyers in Hamburg, Germany, shipment to take place in November/December On November 2, 1956 the Suez Canal was closed to traffic. The sellers failed to make the shipment and, when sued for damages, claimed that the contract had been frustrated. The House of Lords held that this was not sufficient to discharge the contract for frustration. It had not become impossible to carry out the contract, as shipment could have been made via the Cape of Good Hope, a longer and much more expensive operation.

Similarly, in Davis Contractors Ltd V. Fareham Urban District Council [1956] A.C 696: The plaintiffs contracted to build the defendants 78 council houses within eight months for a fixed price through no fault of the plaintiffs there was scarcity of skilled labour and the work took 22 months to complete at a cost of £115,000. The plaintiff claimed that by reason of the scarcity of labour the contract had been frustrated and that they were entitled to recover a sum in excess of the contract price on the basis of a quantum meruit. It was held that the plaintiff’s claim should fail. Hardship, material loss or inconvenience did not amount to frustration; the obligation must change such that the thing undertaken would, if performed, be a different thing from that contracted for.

Lord RADCLIFFE, at pp728-9, stated: “…. 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 a thing radically different from that which was undertaken by the contract.”

(c) Where one party is responsible for the frustration event. This is also referred to as ‘self induced’ frustration. In Maritine National Fish Ltd V. Ocean Trawlers Ltd [1935] ALL E.R Rep. 86: The appellants entered into a contract for the hire or charter of a trawler for use in Otter trawling from the respondents. They had four other trawlers of their own. They applied to the Canadian Minister of Fisheries for the necessary licences for five trawlers but were granted only three licences. They nominated three of their own trawlers for the licences and argued that the contract for the charter of the fifth trawler had been frustrated since it could not lawfully be used. It was held by the Privy Council that the contract was not frustrated as they appellants had decided quite deliberately not to nominate the respondents’ trawler and were, therefore, responsible for the frustrating event.

The onus of proving that the frustration was self-induced rests upon the party raising the allegation. Thus in Joseph Constantine Steamship Line, Ltd V. Imperial Smelting Corporation, Ltd [1941] 2 ALL E.R 165: The day before chartered ship was due to load her cargo an explosion of such violence occurred in her auxiliary boiler that the performance of the charter-party became impossible. The cause of the explosion could not be definitely ascertained, but only one of three possible reasons would have imputed negligence to the ship-owners. It was held by the House of Lords that, since the characters were unable to prove that the explosion was caused by the fault of the owners, the defence of frustration succeeded and the contract was discharged.

Consequences of Frustration of Contracts
Once a contract is frustrated the common law position is that it abruptly and automatically comes to an end. The contract is not void ab initio, that is from the outset or beginning, but only from the time the frustrating event occurred. Therefore, if before the frustrating event has happened work had been done or money transferred, the common law rule is that losses lie where they fall. It is therefore possible to recover money due or paid before frustrating event unless there is a total failure of consideration.

In, Chandler V. Webster [1905] 1 KB. 493: The defendant agreed to let a room in Pall Mall to the plaintiff for the purpose of viewing the coronation procession in The price was £ s payable immediately. The plaintiff paid £100, but he still owed the balance when the contract was discharged on June owing to the abandonment of the procession because of the King’s illness. The plaintiff sued for the return of his £100 and the defendant’s counter claimed for the unpaid amount of £41.15s. It was held that, not only that the plaintiff had no right to recover the sum of £100, but also that he was liable for the balance of £41.15s. The obligation to pay rent had fallen due before the frustrating event.

Similarly, in Krell V. Henry [1903] 2 K.B 740, it was held that the plaintiff could not recover the agreed rent from the defendant, since it did not fall due until the time of the procession, and before that time had arrived the abandonment of the procession had been announced. The common law rule that loss shall lie where it falls and money paid before frustration cannot be recovered, and money payable at the time of frustration remains payable, was modified in 1942 so that where there is a complete failure of consideration, the contract can be held void ab initio.

Thus in Fibrosa V. Fairbairn [1942] 2 ALL E.R. 122: The plaintiff placed an order for the machinery to be delivered to Poland within three or four months. He paid £100 of the contract price of £4,800 with this order. Shortly afterwards the Second World War broke out and Germany army occupied Poland. The contract therefore was frustrated. The plaintiff sued to recover the £1000, which had been paid. It was held that the deposit was repayable since the plaintiff had received absolutely nothing for it. There had been a total failure of consideration.

Besides the rule laid down in Fibrosa case, the rights and liabilities of parties to a contract discharged by frustration are now regulated by the law reform (Frustrated contracts) Act Cap 73 of the Laws of Zambia. The Law reform (Frustrated contracts) Act is confined to a case where “a contract governed by Zambian law has become impossible of performance or been otherwise frustrated, and the parties thereto have for that reason been from the further performance of the contract”. In other words the said provisions do not apply where a contract is discharged by breach or for any reason other than impossibility or frustration.

The law reform (Frustrated contracts) Act may be said to make two fundamental changes to the law. Firstly, it implies the decision in Fibrosa v Fairbairn by permitting the recovery of money prepaid, even though at the date of frustration there has been no total failure of consideration. Secondly, it allows a party who has done something in the performance of the contract before the frustrating event happens to claim compensation for any benefit conferred upon the other. The Law Reform (Frustrated contracts) Act therefore modifies the common law rule losses lie where they fall, and the doctrine of strict performance.

(a) The right to recover money paid Section 3 (2) provides as follows: All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as “the time of discharge”) shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable. Like the rule laid down in Fibrosa v Fairbairn case, section 3(1) reverse the rule laid down in Chandler v Webster, that any loss arising from the termination of the contract must lie where it had fallen.

The Law Reform (Frustrated contracts) Act, however, permits the person or party to whom advance payment has been made or is due to recover expenses incurred in the course of fulfilling or performing the contract. Thus section 3 (2) proviso reads as follows: Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in or for the purpose of the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, to allow him to retain or, as the case may be, to recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.

(b) The right to recover compensation for partial performance. Under the doctrine of strict performance established at common law in cases such as Cutter v Powell, discussed above, a man who fails to complete in toto his obligation under an entire contract can often recover nothing for what he may have done, even though the non-completion of the obligation is due to an extraneous cause which, through no fault of his own, frustrates the common adventure or even renders further performance altogether impossible.

An example of the injustice or hardship caused by the above stated common law principle is illustrated by the case of Appleby v. Myers [1867] L.R 2 C.P 651. In that case the plaintiffs, in consideration of a promise to pay £459, agreed to erect machinery on the defendant’s premises, and to keep it in order for two years from the date of completion. When the erection was nearly complete an accident al fire entirely destroyed the premises together with all they contained. An action brought by the plaintiff’s to recover £419 for word done and materials supplied failed.

Under the doctrine of frustration the effects of the destruction of the subject matter of the contract was that both parties were excused from the further performance of their obligations. The plaintiffs were not bound to erect new machinery; and also the defendant was not bound to pay for what had been done, since the obligation to pay had not matured at the time when the contract was discharged. The Law reform (Frustrated contracts) Act has attempted to deal with the hardships, discussed above, caused by common law. Thus section 3 (3) of the said Act provides: “where any party to the contract has, by reason of anything done by any other party thereto in, or for the contract, the performance of the contract, obtained valuable benefit (other than a payment of money….) before the time of discharge, there shall be recoverable from him by the said other party such sum (if any) not exceeding the value of the said benefit to the party obtaining it as the court considers just.”

In estimating the amount of the sum to be recovered, the court must consider all the circumstances of the case, in particular any expenses that the benefited party may have incurred in the performance of the contract before the time of discharge, and also whether the circumstances giving raise to the frustration of the contract have affected the value of the benefit.

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UNIVERSITY OF LUSAKA SCHOOL OF LAW

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