Contract Frustration: Definition, Tests, and Leading Cases

Introduction

Contract frustration releases parties from future obligations when, after the contract is formed, an external event makes performance impossible, unlawful, or radically different from what was agreed. It operates by law, not by the parties’ choice, and is distinct from any “implied term” theory.

For frustration to arise, the event must not be due to either party’s fault, it must occur after formation, and it must not be dealt with by the contract (for example, in a force majeure clause). If frustration is found, the contract ends from the date of the event and the Law Reform (Frustrated Contracts) Act 1943 governs money paid and benefits conferred before that point.

What You’ll Learn

• What frustration means and the “radically different” test from Davis Contractors v Fareham UDC
• Types of frustrating events: destruction of subject matter, change in law, and failure of a sole purpose
• Limits on the doctrine: self‑induced events, foreseeability, mere hardship, and risk allocation clauses
• The legal effect of frustration and how the 1943 Act adjusts payments and benefits
• Leading cases: Taylor v Caldwell, Krell v Henry, Herne Bay, The Super Servant Two, National Carriers v Panalpina, BP v Hunt, and more
• Practical steps for drafting, contract management, and dispute strategy

Core Concepts

The legal test: when is performance “radically different”?

The modern approach comes from Davis Contractors Ltd v Fareham UDC [1956] AC 696. A contract is frustrated if, without default by either party, the circumstances in which performance is called for render it a thing “radically different” from what was agreed.

Key points:

• The event must occur after the contract is made.
• It must be unexpected in the sense that the contract did not deal with it.
• It must not be caused by either party.
• More expense, delay, or difficulty is usually not enough. The change must alter the nature of the obligation, not just the burden.

Types of situation:

• Destruction of the subject matter (Taylor v Caldwell).
• Government intervention or legal change making performance unlawful (Metropolitan Water Board v Dick, Kerr & Co).
• Failure of a sole fundamental purpose shared by both parties (Krell v Henry), but not where only a part of the purpose is affected (Herne Bay).

Time and delay:

• Consider the duration and effect of the delay relative to the overall contract. A short interruption in a long contract is unlikely to qualify, particularly if the contract contains extension or suspension mechanisms.

Limits: when frustration will not apply

Frustration is narrow. Courts will not allow it to be used as an escape from a bad bargain.

Common barriers:

• Self‑induced events: where the party seeking frustration could have performed by a different contractual option or created the risk through their own choices (The Super Servant Two).
• Foreseen or contemplated risks that the contract allocates: a force majeure or extension‑of‑time clause will usually govern and exclude frustration.
• Mere hardship: increased cost or reduced profitability is generally insufficient (Davis Contractors; Tsakiroglou v Noblee Thorl on the Suez Canal closure).
• Alternatives still available: if performance remains possible by another route or method within the contract’s scheme, frustration is unlikely (The Eugenia).

Leases:

• Leases can in principle be frustrated but the bar is high; partial loss of use over a long term rarely qualifies (National Carriers v Panalpina).

Effect of frustration and money claims

Effect on the contract:

• Discharge operates from the frustrating event. Future obligations fall away. Rights that have already accrued remain enforceable.

Money and benefits under the Law Reform (Frustrated Contracts) Act 1943:

• Section 1(2): Money paid before the event is recoverable. Money due but not paid ceases to be payable. The court may allow the payee to retain or recover an amount for expenses, up to the amount paid or payable.
• Section 1(3): Where a party has obtained a valuable benefit (other than money) before discharge, the court can award a “just sum” reflecting the value of that benefit at the time of frustration, not simply cost. BP v Hunt illustrates this benefit‑based approach, with recovery capped by the value received.

Deposits:

• A deposit is “money paid” and is prima facie recoverable, subject to the court’s discretion on expenses.

Frustration versus force majeure

• Force majeure is contractual. If the contract contains a clause dealing with supervening events, that clause will usually set the rules, including notice, mitigation, and consequences. Frustration then has no role.
• Frustration applies only where the contract is silent or the clause does not cover the event, and the legal test is met.

Key Examples or Case Studies

Taylor v Caldwell (1863) 3 B & S 826

• Facts: A music hall hired for concerts burned down before the events.
• Decision: Contract discharged; the hall’s continued existence was essential.
• Key point: Destruction of an essential thing without fault frustrates the contract.

Metropolitan Water Board v Dick, Kerr & Co [1916] AC 119

• Facts: A reservoir construction contract was halted by a wartime government order requiring work to stop and plant to be sold.
• Decision: Frustration applied; the order fundamentally changed the performance contemplated.
• Key point: Government intervention and legal restrictions can trigger frustration when they substantially alter or bar performance.

Krell v Henry [1903] 2 KB 740 and Herne Bay Steam Boat Co v Hutton [1903] 2 KB 683

• Krell v Henry: A flat was hired to view the coronation procession; cancellation meant the sole purpose failed. Frustration found.
• Herne Bay: A boat was hired to view a naval review and for a cruise; cancellation of the review did not wipe out the entire purpose, as the cruise remained. No frustration.
• Key point: Frustration based on purpose requires failure of a sole or central purpose shared by both parties.

Davis Contractors Ltd v Fareham UDC [1956] AC 696

• Facts: Labour shortages delayed house building and increased costs.
• Decision: No frustration; the obligation remained essentially the same, though more onerous.
• Key point: The test is qualitative. Hardship or expense alone is insufficient.

J Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyd’s Rep 1

• Facts: Carrier promised to use vessel A or B; chose B, which then sank. Claimed frustration.
• Decision: No frustration; inability was self‑induced because the carrier had allocated the only other vessel elsewhere.
• Key point: A party cannot rely on frustration if the impossibility results from their own choices.

National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675

• Facts: Access road to a warehouse was closed for 20 months of a 10‑year lease.
• Decision: Leases can be frustrated in principle, but not on these facts.
• Key point: High threshold in the lease context; temporary loss in a long term is unlikely to suffice.

BP Prospecting Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783

• Facts: Expropriation frustrated an oil contract. Dispute concerned the value of benefits.
• Decision: “Just sum” under s 1(3) is based on the value to the defendant at the date of frustration.
• Key point: The 1943 Act focuses on benefit received, not the cost expended.

Practical Applications

Drafting better contracts

• Include a precise force majeure clause listing relevant events (e.g., pandemic restrictions, sanctions, export bans, destruction of key assets, change of law).
• Specify clear consequences: suspension, time extensions, termination rights, and payment adjustments.
• Add notice and evidence requirements, and a duty to take reasonable steps to avoid or reduce the effects.
• Consider “alternative performance” provisions, so the method can change without discharging the bargain.
• Address deposits and prepayments explicitly, including whether they are refundable and any expense recovery.
• Review “hell or high water” and take‑or‑pay clauses carefully; these allocate risk and can block a frustration argument.

Managing a live contract when events occur

• Check the contract first: does a force majeure or change‑in‑law clause apply? If so, follow the clause to the letter.
• Record everything: dates, orders, closures, shortages, supplier correspondence, and costs.
• Give prompt notice to the counterparty and keep communication open about workarounds.
• Explore alternatives within the contract’s framework: substitute materials, different routes, or revised timelines.
• Mitigate loss and avoid choices that could later be seen as self‑inducing impossibility.
• Review insurance, permits, and any government guidance affecting legality of performance.
• If frustration is likely, stop short of conduct that could waive the argument (e.g., continuing as normal while claiming the contract is discharged).

Analysing a dispute

• Apply the Davis test: is performance now a different thing altogether?
• Identify whether a sole shared purpose failed completely (Krell) or only in part (Herne Bay).
• Examine allocation of risk: does the contract already deal with this event?
• Consider duration and proportionality: how does the interruption compare with the contract term?
• If discharge is established, quantify recovery under s 1(2) and s 1(3) of the 1943 Act, with BP v Hunt in mind.

Context notes

• Pandemic‑era cases show that government shutdowns can support frustration, but many disputes turned on force majeure wording rather than the common law.
• Supply chain shocks, price spikes, and shipping delays seldom qualify without more; look for a legal prohibition or a failure of a shared purpose.

Summary Checklist

• Event arises after formation and is not caused by either party
• Contract does not already allocate the risk (force majeure/change‑of‑law clause)
• Performance now impossible, unlawful, or a different thing altogether
• Any common purpose has failed completely, not just partly
• No reasonable contractual alternative remains
• Impact assessed against overall duration (especially for leases)
• Decide whether to rely on force majeure, variation, or frustration
• If frustrated: future obligations end; accrued rights remain
• Calculate adjustments under the 1943 Act:
  • s 1(2) for money paid/payable and expenses
  • s 1(3) for valuable benefits (use BP v Hunt approach)
• Keep records, give notice, and mitigate at all times

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