BetterLawNotes-5 (2)

CONTRACT LAW

The principal issue is whether the contract between Leo and Penny is frustrated by the requirement that she carry out jury-service. The answer ought to discuss when, as a general principle, a contract will be frustrated and whether this particular contract is frustrated or not. Good answers will indicate what the consequences would be if the contract is not frustrated. Good answers will also set out the consequences of frustration, both at common law and under the LR(FC)A 1943.

While it seems likely that a court would hold the contract to have been frustrated, it is not clear precisely when frustration will be held to have occurred. Good answers will note that frustration occurs by operation of law and not necessarily at the time that the parties themselves would have considered the contract as at an end. The candidates here are: (i) on 1st May when Penny is notified of jury service; (ii) on 1st June when she is sworn in as a jury member on the fraud trial; or (iii) on 1st July when Leo speaks to Penny. Arguably, the most likely date is 1st June since it was at this point that successful completion of the contract in practice became impossible. Good answers will point out that the precise date of frustration is important as it may affect the sums due under the LR(FC)A.

Assuming that the contract between Leo and Penny is frustrated, then both are discharged from their unaccrued primary obligations: ie, neither has the obligation, or the right, to continue to perform the contract (Taylor v Caldwell).

The LR(FC)A enables the court to adjust the positions of the parties from what the common law would otherwise dictate. Firstly, under s 1(2), Leo would have a prima facie right to recover the £10,000 advance payment made to Penny. However, the effect of the proviso in that sub-section is that Penny can retain such sum, if any, not exceeding £10,000 that the court thinks is just to reflect expenditure incurred by Penny in performing the contract up to the time that the contract was frustrated. It is here that the precise date of frustration is relevant.

In addition, Penny can claim a sum under s 1(3) on the ground that Leo obtained a valuable benefit before the time of discharge in the shape of the work which Penny carried out on the car. S 1(3) directs that in determining what would be a just sum for Leo to pay for that benefit, the court shall take into account the amount retained or recovered under s 1(2).

Assuming the contract was frustrated on 1st June, Penny had at that stage spent £4,000 on parts, all of which were fitted to the car. It would seem fair that under s 1(2) Penny is allowed to retain £4,000 out of the £10,000.

As for the sum due under s 1(3), the benefit which Leo obtained was a half-restored car. Given that he originally agreed to pay Penny £30,000 for the entire job, and that he pays Skye £15,000 to complete it, it might be said that £15,000 represents the value of the benefit which Leo obtained from Penny. From this the £4,000 which Penny retains under s 1(2) ought to be deducted. This leaves £11,000 due to Penny under s 1(3).

If this sum is netted off against the balance of the up-front payment which Leo can recover under s 1(2) (ie £6,000), that leaves a sum of £5,000 due from Leo to Penny.

Leo will have ended up paying a total of £30,000 for the restoration – £15,000 to Penny and £15,000 to Skye. This means that Penny has received £15,000 in all from Leo, of which £6,000 was spent on parts for the car. In effect, Penny gets £9,000 to cover her labour.

But this is just one view of what would be the just sums under ss 1(2) and 1(3) – there is no single right answer.

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