Frustration brings the contract to an end automatically and immediately. Both parties are discharged from further performance of the contract. In this respect the effect of frustration is similar to that of termination for breach of contract. One important difference is that frustration occurs automatically whereas termination for breach depends on an election by the innocent party. Another difference is that while termination will give rise to a right to damages, damages are not available on frustration – either at common law or under the 1943 Act (see below).
Originally, the response of the common law to frustration was to let the loss lie where it fell. In other words, the only consequence of frustration was that the parties were discharged from their obligation to perform their remaining obligations: but the courts had no power to adjust the position in which the parties found themselves on discharge.
C agreed to hire a room for viewing the coronation procession of Edward VII. The rental fee of £141 15s was payable immediately. Before the procession was cancelled, C had paid £100 of this sum. C claimed to recover this amount. Held: C could not recover the amount paid and remained liable to pay the balance of £41 15s.
Subsequently, the courts allowed a party to recover money paid under the frustrated contract where there had been a total failure of consideration.
D carried on business manufacturing textile machinery in Leeds. On 12 July 1939, D agreed to supply certain machines to C, a Polish company, at a lump sum price of £4,800. The machines were to be delivered by D to Poland. One third of the price was to be paid on the making of the order, the balance against shipping documents. On 18 July, C paid £1,000 of initial sum due of £1,600. On 1 September, Germany invaded Poland and on 3 September, Great Britain declared war on Germany. On 7 September, C’s agents in England wrote to Ds saying delivery could not take place, and requesting return of £1,000. On 1 May 1940, C issued a writ claiming damages for D’s refusal to deliver the machinery, or alternatively for the return of £1,000. The House of Lords held that C could recover the £1,000 in a claim in quasi-contract on the ground that there had been a total failure of consideration.
Nevertheless, the law was still regarded as unsatisfactory in several important respects.
A agreed to supply and put up various items of machinery at M’s premises. During performance of the contract, M’s premises and A’s work in progress were accidentally destroyed by fire. Held: A was not entitled to recover any payment.
W apprenticed his son to Hughes, a watchmaker and jeweller, for a period of 6 years, paying a premium of £25. Hughes duly instructed W’s son for 12 months, and then died. W brought an action against H’s executrix to recover all or part of the premium. The claim failed.
The position at common law has now been modified by the Law Reform (Frustrated Contracts) Act 1943
‘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:
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, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.’
Broadly, s 1(2) applies where one party has paid or should have paid money under the contract to the other party prior to frustration. The first paragraph of s 1(2) provides that that money is to be repaid or no longer need be paid. The second paragraph contains an important proviso: the party who received payment maybe allowed by the court to retain some or all that payment.
The promoter of a rock concert by Guns N’ Roses had made an advance payment of $412,500 out of a total amount due to the group under the contract of $775,000. The contract was frustrated when the concert had to be cancelled. Both parties had incurred expenses, the promoter, $450,000, and the group, $50,000, all of which were wasted. The promoter made a claim under s 1(2) LR(FC)A. Held: the promoter was entitled to recover the entire amount of the advance payment.
‘Where any party to the contract has, by reason of anything done by any other party thereto in, or for the purpose of, the performance of the contract, obtained a valuable benefit (other than a payment of money to which the last foregoing subsection applies) 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, having regard to all the circumstances of the case and, in particular,-
(a) the amount of any expenses incurred before the time of discharge by the benefited party in, or for the purpose of, the performance of the contract, including any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under the last foregoing subsection, and
(b) the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract.’
As seen, s 1(2) is relevant where one party paid money to the other prior to frustration. S 1(3) applies to a different situation: where one party has obtained a benefit other than money by reason of the other party’s contractual performance prior to frustration.
BP entered into a contract to exploit an oil concession in Libya owned by H. BP agreed to make initial payments in cash and oil to H in return for a half share in the concession and ‘reimbursement oil’ from H. A large oil field was discovered but after four years the contract was frustrated when the Libyan government expropriated the interests of both parties. At this stage, BP had received only one-third of the reimbursement oil due to it in respect of its initial expenditure and claimed the balance. Held: BP was entitled to recover a ‘just sum’ under s 1(3) LR(FC)A amounting to $35m.
A party who has spent money performing the contract prior to frustration may be able to recover some or all of that expenditure under s 1(2) but only if that party received or should have received payment from the other party prior to frustration.
If no such payment was due, the party who has incurred expenditure performing the contract prior to frustration will have to rely on s 1(3): but to do so that party will have to show that the expenditure conferred a benefit on the other party.
Note also the following important provisions of the Act:
‘Where any contract to which this Act applies contains any provision which, upon the true construction of the contract, is intended to have effect in the event of circumstances arising which operate, or would but for the said provision operate, to frustrate the contract, or is intended to have effect whether such circumstances arise or not, the court shall give effect to the said provision and shall only give effect to the foregoing section of this Act to such extent, if any, as appears to the court to be consistent with the said provision.’
‘Where it appears to the court that a part of any contract to which this Act applies can properly be severed from the remainder of the contract, being a part wholly performed before the time of discharge, or so performed except for the payment in respect of that part of the contract of sums which are or can be ascertained under the contract, the court shall treat that part of the contract as if it were a separate contract and had not been frustrated and shall treat the foregoing section of this Act as only applicable to the remainder of that contract.’
‘This Act shall not apply . . .
(c) to any contract to which section 7 of the Sale of Goods Act 1979 (which avoids contracts for the sale of specific goods which perish before the risk has passed to the buyer) applies, or to any other contract for the sale, or for the sale and delivery, of specific goods, where the contract is frustrated by reason of the fact that the goods have perished.’
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