Introduction
The doctrine of frustration in contract law addresses situations where unforeseen circumstances render a contractual obligation fundamentally different from what the parties initially intended. This legal principle allows for the termination of a contract when events occur that significantly alter the nature of the obligations, making performance impossible or radically different. Key requirements for establishing frustration include the occurrence of an unforeseen event, lack of fault by either party, and a significant change in the nature of contractual obligations. The decision in Davis Contractors Ltd v Fareham UDC [1956] AC 696 is a leading case that clarified the boundaries of the doctrine. This ruling established that increased difficulty or onerous performance is insufficient to frustrate a contract and a genuine change in the very nature of the contractual obligation is required. The House of Lords specifically moved away from using implied terms to determine frustration, and established a construction approach. This case serves as a significant precedent in understanding the limits of the doctrine of frustration and its application in cases where contracts become more difficult to perform.
The Factual Background of Davis Contractors v Fareham UDC
Davis Contractors Ltd v Fareham UDC involved a contract between Davis Contractors (C), a building contractor, and Fareham Urban District Council (D), a local authority. C agreed to construct 78 houses for D at a fixed price, with an estimated completion period of eight months. The project encountered unforeseen difficulties due to shortages of labor and materials. These shortages caused significant delays and increased the cost of the project, ultimately extending the completion time to 22 months. C subsequently argued that the contract had been frustrated by these unforeseen delays and sought additional payment on a quantum meruit basis, claiming that the original contract was no longer binding. The core issue was whether the increased difficulty of performing the contract due to delays and cost increases amounted to frustration. The contractors claim of frustration due to delay was based on the fact they had to work harder for the same price because of the shortages. The Council believed the contract should be carried out based on the agreed terms. This case offered a detailed analysis on the true nature of contractual obligations and the legal definition of frustration.
The House of Lords Decision: Rejecting Frustration
The House of Lords rejected C's claim that the contract had been frustrated. The court held that while the delays and increased costs made the performance of the contract more onerous, they did not alter the fundamental nature of the obligation. The core of the contract remained the construction of the houses, and the changes in circumstances did not transform this obligation into something radically different. Lord Reid's judgment emphasizes that frustration occurs when a situation emerges that is ‘fundamentally different’, requiring a consideration of the ‘true construction of the terms’ in light of the surrounding circumstances. He asserted that frustration is not about determining what the parties would have agreed to do if they had anticipated the supervening event but about whether the contract can apply to the new circumstances. Lord Radcliffe stated frustration occurs whenever the law identifies that, without either party being in default, the contractual obligation has become incapable of performance, due to the changed circumstances making it radically different from the original intent. The court established the concept of ‘radical difference’ which is a vital aspect in frustration analysis. This establishes the necessity for an actual change in the contractual obligations rather than just a change in the difficulty of the performance.
Lord Reid’s and Lord Radcliffe’s Judgements on Frustration
Lord Reid rejected the implied term theory as the theoretical basis for frustration. He stated that this would require consideration of hypothetical intentions of reasonable men in the parties' positions when an event occurs. He noted that this is not sufficient and that the true analysis of frustration is the ‘true construction of the terms’ when looking at the nature of the contract and surrounding circumstances. He stated that if the contract is wide enough to apply to the new situation, then frustration does not apply. In his judgment, Lord Reid stated that a delay could cause a contract to be frustrated if it was sufficiently different from what was originally contemplated; however, that was not the situation in the instant case as the delays did not arise from a new and unforeseen factor but simply an increase in the onerous nature of the work. Lord Radcliffe held that if a ‘reasonable person’ would have considered the contract ended if they had anticipated the supervening event, it is likely that the court will also agree. However, he stated the court is responsible for deciding on the issue, not the ‘reasonable person.’ He further stated that the new circumstances would make the contractual performance so different as to be radically different from what the parties originally intended. Lord Radcliffe specifically stated that frustration will not be applied when the cause of delay was foreseeable. He also made the point that the contractor should have taken into account the risk of delay when entering into the contract, and therefore, using frustration as an escape route was a ‘misuse of legal terms’ to get out of a bad bargain. These two judgments together form the basis for how the doctrine of frustration is applied in English law. They also clarify the concept of frustration by introducing a construction approach, where the court looks at the contract and the facts to determine if the event is sufficiently different from what was anticipated.
Key Principles Emerging from Davis Contractors v Fareham UDC
Several key principles were reaffirmed by Davis Contractors v Fareham UDC. Firstly, the court clarified that mere hardship or increased cost does not constitute frustration. A contract must become fundamentally different from what was originally intended, not just more difficult or expensive to perform. Secondly, the court emphasized that frustration operates by operation of law, not based on the implied intentions of the parties and the 'radical difference' test requires the court to construe the contractual terms in light of the circumstances surrounding the contract's creation and examine the new circumstances. The decision also highlighted that if the delay and difficulties were reasonably foreseeable, then the contract will not be frustrated. This is because, parties are expected to make provisions for risks when entering a contract. Therefore, if the contractors anticipated possible delays when tendering, they should have factored the risk into the contract. The judgement also criticised the use of the implied term theory as a basis for frustration. The decision instead offered an objective test based on contractual interpretation. These principles establish clear parameters for applying the doctrine of frustration, underscoring that it is an exception and not a general escape route from bad bargains. The judgment has been applied many times since and is an important case to use when analysing contract frustration cases.
Application and Implications of Davis Contractors in Contract Law
The ruling in Davis Contractors v Fareham UDC has had a considerable impact on subsequent contract law jurisprudence. It has been frequently cited in cases involving claims of frustration due to various unforeseen events. For instance, the judgement was followed in The Eugenia, Ocean Tramp Tankers Corporation v V/O Sovfracht [1964] 2 QB 226, where the court established that a ship being trapped in the Suez Canal was not sufficient to frustrate the contract. This was based on the fact that the event was foreseeable and the obligation to make the journey was still possible, although more difficult. Davis Contractors provided a basis for cases involving commercial transactions that have become more difficult or less profitable due to unforeseen economic challenges or delays. For example, in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, it was held that a lease contract was not frustrated when the only access road to the leased premises was closed for 20 months, as it was not a fundamentally different event. The principles of Davis Contractors have also been applied to cases where there are performance delays due to unforeseen events. This clarifies that delays do not frustrate contracts unless they render the obligations fundamentally different and therefore impossible to perform. These cases all demonstrate the application of the principles set out in the case, reinforcing the idea that frustration should only be used in exceptional circumstances.
Conclusion
Davis Contractors Ltd v Fareham UDC serves as a critical authority in contract law, specifically relating to the doctrine of frustration. The case redefined the nature of frustration, moving away from a hypothetical implied term approach towards a construction-based analysis. The judgment established that increased difficulty and cost are insufficient to frustrate a contract and that there must be a radical difference in the nature of the obligation that is being undertaken. The decision emphasizes the importance of parties taking reasonable risk into account when entering a contract. The 'radical difference' test established in this case remains the cornerstone for evaluating frustration claims. The principles established in this case continue to be a major reference point in contract law and have shaped subsequent rulings. The clarity given by the House of Lords provides essential guidance for courts in the application of the doctrine of frustration in current and future cases of contractual disputes. The case highlights that frustration is to be used in exceptional circumstances when the contractual obligation cannot be performed due to a fundamental change in the nature of the agreed terms.
