Introduction
Contract frustration represents a legal doctrine that discharges contractual obligations when a supervening event, occurring after the contract's formation, renders its performance impossible, illegal, or fundamentally different from what the parties originally intended. This principle, not a matter of implied terms or party intention, operates by law to address situations where unforeseen events radically alter the foundational basis of the contractual agreement. Essential criteria for contract frustration include a supervening event that is not the fault of either party, a significant change in contractual obligations, and the absence of contractual provisions adequately addressing such an occurrence. In its application, contract frustration serves as a mechanism to release parties from contractual liabilities when the basis of their agreement has been fundamentally undermined by circumstances beyond their control.
The Core Concept of Contract Frustration
At its core, the concept of contract frustration operates as an exception to the principle of pacta sunt servanda—the notion that agreements must be kept. This principle acknowledges that, while contracts should generally be upheld, unforeseen circumstances may occur that fundamentally undermine the assumptions upon which the contract was based. In such instances, it would be inequitable to hold parties to the literal terms of their agreement. The legal doctrine of contract frustration provides the framework for resolving these situations. It functions to terminate contracts prospectively from the time of the frustrating event, releasing parties from future obligations while also managing the consequences of any partial performance. The key is the radical alteration of the contractual obligation due to an external event rather than any fault of the contracting parties themselves.
Key Requirements for Contract Frustration
Several crucial requirements must be met for a contract to be considered frustrated. First, a supervening event must occur after the contract has been formed. This event cannot have been foreseen or contemplated by the parties at the time of contracting. Furthermore, the supervening event must not be attributable to the fault of either party to the contract. The event must be external and beyond the control of the contracting parties, such as a natural disaster or government action. A second requirement involves a fundamental change in the contractual obligations. The supervening event must render the performance of the contract radically different from what was initially intended. Increased difficulty or cost of performance, alone, is insufficient to establish frustration. The performance must be fundamentally altered such that it would be unjust to hold the parties to their original terms. Finally, the contract must be silent on the event. If the contract contains a clause that addresses the consequences of such a supervening event (a force majeure clause, for instance) that clause will typically govern and the doctrine of frustration will not apply.
Landmark Case: Taylor v Caldwell (1863)
The case of Taylor v Caldwell (1863) 3 B & S 826 is foundational to the modern doctrine of contract frustration. In this case, a music hall, hired for a series of concerts, was destroyed by fire before the first concert was to take place. The court held that the contract was frustrated because the continued existence of the music hall was essential to the performance of the contract. Justice Blackburn stated 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." This established a vital precedent: when a thing essential to the contract’s performance perishes through no fault of either party, the contract is discharged due to frustration. This decision moved away from the absolute contracts position, recognizing that supervening events can excuse contractual performance when fundamental assumptions are undermined.
The Impact of Illegality
Contract frustration also applies when a contract becomes illegal to perform due to changes in the law. A prime example is Metropolitan Water Board v Dick Kerr and Co [1916] AC 119, where the government, during wartime, ordered the contractor to stop work and sell their plant which made it illegal to continue performing the contract. The House of Lords held that the contract had been frustrated by the government's actions since its continuation would have resulted in illegality. This case demonstrates that changes in legislation that render a contractual obligation illegal to perform can lead to the discharge of a contract under the doctrine of frustration. The courts recognize that they should not compel parties to engage in illegal behavior.
Self-Induced Frustration: The Super Servant Two (1990)
The doctrine of frustration will not apply if the frustrating event is deemed to be self-induced. In J Lauritzen AS v Wijsmuller BV (The Super Servant II) [1990] 1 Lloyd’s Rep 1, the defendant contracted to carry a drilling rig using either Super Servant I or II. The defendant chose Super Servant II for the task and allocated Super Servant I to another contract. Subsequently, Super Servant II sank, leading the defendant to claim frustration. However, the court held that the contract was not frustrated because the defendant, through their choice of using Super Servant II, had induced the frustrating event. This ruling highlights that the frustrating event must arise from circumstances outside the control of the party seeking to rely on frustration. The fault of a party cannot be the basis for the contract's termination.
Frustration and Purpose: Krell v Henry (1903) and Herne Bay Steam Boat Co v Hutton (1903)
The Coronation Cases, Krell v Henry [1903] 2 KB 740 and Herne Bay Steam Boat Co v Hutton [1903] 2 KB 683, illustrate the application of frustration concerning the contract's purpose. In Krell v Henry, a flat was hired for the specific purpose of viewing the coronation procession of King Edward VII. When the procession was canceled, the contract was deemed frustrated. In contrast, Herne Bay Steam Boat involved a ship hired for the purpose of viewing a naval review and taking a cruise. When the naval review was canceled, the contract was not deemed frustrated because the tour of the fleet could still take place; thus, a portion of the contractual purpose could still be fulfilled. These cases distinguish between contracts that have a sole purpose frustrated and those where one of multiple purposes is frustrated; the cancellation of an event may not frustrate a contract if its objective is not solely dependent on that event.
The Consequences of Frustration
When a contract is frustrated, both parties are released from their future contractual obligations. However, the doctrine’s effect on pre-frustration obligations and payments is governed by the Law Reform (Frustrated Contracts) Act 1943. The Act allows the recovery of money paid before the frustrating event (subject to deductions for expenses incurred by the other party) and provides for compensation of benefits conferred before the frustration. Notably, section 1(3) states that the value of the benefit is assessed on the outcome, not the service. In BP v Hunt [1979] 1 WLR 783, the court highlighted that the just sum is based on the benefit conferred, not necessarily the cost of service and is always capped by the value of the benefit to the defendant at the time of the frustrating event. This legislation addresses issues of unjust enrichment that might arise from the common law application of contract frustration.
Leases and Frustration: National Carriers Ltd v Panalpina (Northern) Ltd (1981)
While historically there was some doubt, it is now established that leases can also be subject to the doctrine of frustration. The case of National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 confirmed this position. This case concerned the lease of a warehouse where the only access road was closed for 20 months. The court determined that leases could be frustrated but concluded that the interruption, which was only a portion of the total 10-year lease term was not sufficiently serious as to frustrate the contract. While leases are considered contractual obligations that can be subject to frustration, the threshold for finding frustration of a lease is high, requiring a substantial deprivation of the use and benefit of the leasehold property.
The ‘Radical Difference’ Test: Davis Contractors Ltd v Fareham UDC (1956)
The courts have adopted a ‘radical difference’ test when assessing whether a contract has been frustrated. The test originated from Davis Contractors Ltd v Fareham UDC [1956] AC 696, where a contract for building houses was delayed by a labor shortage. The House of Lords held that although the delay made performance more onerous, the contract was not frustrated because the delay did not fundamentally change the nature of the contracted obligation. Lord Radcliffe stated that “frustration occurs whenever the law recognises 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.” This establishes that the change in obligation must be fundamental, not merely an increase in burden or cost.
Conclusion
The doctrine of contract frustration is a critical aspect of contract law, providing a mechanism to address exceptional circumstances where contractual performance becomes impossible, illegal, or radically different due to supervening events beyond the control of contracting parties. It ensures fairness by releasing parties from obligations when the foundational basis of their agreement is fundamentally undermined. From the initial establishment of the doctrine in Taylor v Caldwell, through the refinement in the Coronation Cases (Krell v Henry and Herne Bay Steam Boat Co v Hutton), to the application of the 'radical difference' test (Davis Contractors Ltd v Fareham UDC), the doctrine remains a crucial safeguard against the rigid application of contractual obligations in the face of unforeseen events. Moreover, the Law Reform (Frustrated Contracts) Act 1943 mitigates the harsh effects of frustration by facilitating the recovery of payments and adjustment of benefits to avoid unjust enrichment. This complex body of law continues to offer a solution for situations in which unforeseen circumstances render contractual performance far beyond the original intentions of the parties.
