Law Reform (Frustrated Contracts) Act 1943: Fair Allocation ...

Introduction

When a contract is discharged by frustration, the common law rule that the loss lies where it falls can lead to severe hardship. The Law Reform (Frustrated Contracts) Act 1943 steps in to soften that outcome. It gives the courts power to order repayment of money, recognise non-cash benefits, and award a just sum that reflects fairness rather than rigid doctrine. This guide sets out the Act’s structure, explains how the courts apply it, and highlights leading cases.

What You’ll Learn

• The purpose of the 1943 Act and why Parliament moved away from Chandler v Webster
• How sections 1(2) and 1(3) operate in practice
• The court’s discretion when deciding a “just sum”
• Key decisions: Fibrosa, BP v Hunt, and Gamerco
• Practical steps for advising clients on frustrated contracts

Core Concepts

Statutory Break with Chandler v Webster

Before 1943, a party who had paid money in advance could rarely recover it once frustration struck. Section 1 replaces that rule with a more balanced approach:

• Advance payments can be reclaimed.
• The payee may retain an amount for expenses, subject to court approval.

Section 1(2): Pre-Payments and Expenses

1. Recovery of sums paid – Money paid before the frustrating event is prima facie refundable.
2. Discretion to allow set-off for expenses – The court may permit the recipient to keep up to the amount of those expenses if it considers that fair.
3. Future sums no longer due – Any payment that was due after frustration stops being payable.

Section 1(3): Non-Monetary Benefits

Where one party gains a benefit other than money—materials, services, or partial performance—the court can order payment of a just sum to the provider. Two stages guide the assessment:

1. Identify the benefit – Measured objectively, often by market value or saved expenditure.
2. Fix a just sum – Adjusted for risk allocation, partial performance, and any existing payments.

Limits and Exclusions

• Certain contracts (e.g., insurance, some charter-parties) fall outside the Act: s 2(5).
• Parties may draft clauses to oust or modify the Act, but clear wording is needed: s 2(3).
• The doctrine of frustration itself remains narrow; the Act only applies once frustration is established.

Key Examples or Case Studies

1. Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32
   The House of Lords allowed recovery of a £1,000 advance for machinery undeliverable due to war. Although decided just before the Act, the case spurred reform and illustrates the move towards restitution.

2. BP Prospecting Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783
   Oil concessions were expropriated by Libya. Robert Goff J valued BP’s benefit under s 1(3) by looking at the end result of its performance, not its costs. The court then calculated a just sum reflecting that value.

3. Gamerco SA v ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226
   A Guns N’ Roses concert was cancelled when the venue became unsafe. Under s 1(2), the promoter recovered its US$412,500 advance. The court declined to allow the defendant to set off expenses because that would be unfair in the circumstances.

Practical Applications

• Check whether the contract contains a clause that displaces the 1943 Act.
• Gather evidence of all expenses and benefits up to the moment of frustration—these figures drive the court’s discretion.
• Advise clients that partial performance may still attract payment if it yielded a tangible benefit.
• Remind parties that the Act does not apply where performance is merely harder or costlier; genuine frustration is still required.

Summary Checklist

• Confirm frustration has occurred under strict common law tests
• Identify sums paid before the frustrating event
• Quantify expenses incurred in attempted performance
• Assess any non-monetary benefits conferred
• Apply sections 1(2) and 1(3) to propose a fair division
• Review the contract for clauses that limit or exclude the Act

Quick Reference