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Chapter 15: Frustration

AN EXCUSE FOR NON-PERFORMANCE


WHEN IS A CONTRACT FRUSTRATED?
The modern doctrine
Doctrinal basis of the test for frustration
Illustrations of when a contract may be frustrated
WHEN SHOULD A CONTRACT BE FRUSTRATED?
LIMITS ON THE DOCTRINE
Express provision in the contract
Foreseen events
Fault and self-induced frustration
THE CONSEQUENCES OF FRUSTRATION
General effect of frustration
The consequences of frustration under the common law
Inequities in the common law position
The statutory response to the consequences of frustration
UNIDROIT Principles of International Commercial Contracts
Contracts can be disrupted by events
AN EXCUSE FOR NON-PERFORMANCE outside the control of the parties. If the
contract is still on foot, then the party
who can no longer perform may have to
pay damages. If the contract is set
The performance of a contract will sometimes be disrupted by aside, then the performing party may
events outside the control of the parties. have incurred cost and be
disadvantaged.
 For example, a ship transporting goods may be delayed by a hurricane.
 The hall in which a concert is planned may burn down. Sometimes, parties include express
terms in the Contract to deal with
 The government might prohibit the import of the goods that are the disruptive events.
subject of the contract.
Sometimes, even without express
terms, it may be possible to conclude
What are the consequences of these sorts of disruptions to the anticipated that the parties may have foreseen the
course of contract performance? Which party is to bear the risk of the possibility of disruptive events and
allocated risks accordingly.
disruptive event?
Other times, the disruptive events may
If the contract is found still to be on foot, then the party who be of such catastrophic proportions that
the parties could not have anticipated it
can no longer perform may be required to pay damages to the when Contracting.

other party, as compensation for not performing. Doctrine of frustration deal with these
cases by providing an excuse for non-
performance – by acting as a “gap
If the contract is set aside, then a party who has incurred costs filler”.
in anticipation of performance may be disadvantaged.
Frustration discharges a Contract where
events occurring after the Contract was
In some such cases, the parties might themselves have included made renders the performance of the
an express term in their contract dealing with the Contract “radically different” from what
was Contracted to.
consequences of disruptive events.

In the absence of an express term, it may be possible to


conclude that parties have foreseen the possibility of the
disruptive event and allocated the risk to the party affected.

In other cases, the disruptive event might be of such


catastrophic proportions that it goes well beyond what the
parties could have anticipated at the time of making their
contract.
The doctrine of frustration provides an excuse for non-performance in these
sorts of cases. It is, in this sense, a "gap filler".

Frustration discharges a contract where, without fault of the


party seeking discharge, events occurring after the contract was
made to render performance of the contract "radically different
from that which was undertaken by the contract".
WHEN IS A CONTRACT FRUSTRATED?
THE MODERN DOCTRINE
Courts have taken the view that the doctrine of
frustration should be kept within narrow limits and
that a contract should be frustrated only in exceptional
circumstances.
The modern test for determining when a contract is
frustrated was expressed by Lord Radcliffe in Davis
Contractors Ltd v Fareham UDC - and approved by the
High Court of Australia in Codelfa Construction Pty Ltd v
State Rail Authority of New South Wales - as follows:
THE TEST FOR FRUSTRATION: 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. Non haec in foedera veni -it was not this that I promised
to do.

The process is one of construction.

As Lord Reid explained in Davis Contractors Ltd v Fareham UDC, the task
of the court is to determine:

WHAT THE COURTS HAVE TO DETERMINE: on the true


construction of the terms which are in the contract read in light
of the nature of the contract and of the relevant surrounding
circumstances, ... [and] whether the contract which they did
make is ... wide enough to apply to the new situation ...

It is necessary to compare the contract agreed by the parties,


interpreted in the light of the surrounding circumstances with
the situation produced by the disruptive event.
If the performance contemplated by the contract and the
state of affairs produced by the event that disrupts this
contemplated performance are "radically" or
"fundamentally" different, the contract will be
frustrated.
DOCTRINAL BASIS OF THE TEST FOR FRUSTRATION
The modern test for frustration is based on the
construction of the contract. There are different ways of
understanding this process.
1. On one view, the doctrine of frustration is a response to a "gap" in the
parties' contract. The doctrine applies where the events that have
occurred to disrupt performance go beyond the contemplated scope of
the contract. This “gap” in the parties’ agreement is then “filled” by the
courts finding that the contract is frustrated.
2. On another view, the doctrine of frustration is merely a result of the
ordinary process of interpretation whereby the court gives effect to both
the parties' explicit and implicit allocations of risk under the contract.
The problem with this view is that it is difficult to see how the parties
could, even implicitly, have allocated the risk of an unforeseen and
catastrophic disruptive event.

Over its lifetime, a number of different analyses of the doctrinal basis of


frustration have been suggested. These include seeing frustration as based on
the:
 removal of the foundation of the contract,
 a total failure of consideration and
 an implied term.

Courts have stated on a number of occasions that the various theories of


frustration produce similar results and that cases decided under the earlier
theories were not wrongly decided. Accordingly, the earlier cases on frustration
remain valid examples of frustrating events, even though they may have been
explained on a different basis from that which would now be preferred.
ILLUSTRATIONS OF WHEN A CONTRACT MAY BE
FRUSTRATED
In general terms, frustration encompasses cases in
which performance becomes literally impossible or
where future performance has been rendered
commercially unfeasible.
These events are generally NOT sufficient to frustrate a
contract such as:
 hardship,
 inconvenience or
 material loss
A contract will NOT be frustrated merely because one
party has made a bad bargain or because the results
that one party had expected or hoped for do not
eventuate. These risks are inherent in contracting.
In Finlayson v Finlayson the parties were husband and wife. They entered into a
contract for the sale of a property from the wife's parents. The expectation was
that the property would be the matrimonial home. Before the settlement of the
contract the parties separated.

The parties commenced legal action, with the parents effectively seeking a
declaration that they remained owners of the property. One of the arguments
made by the parents was that the contract for the sale of land was frustrated by
the breakdown of the marriage, with the result that the couple or, more
pertinently, the husband had no interest in the property.

The Full Court of the Family Court held that the contract was not frustrated;
"the contract ... was simply one for the sale and purchase of real estate at an
agreed 'market price' determined by an 'independent valuer'”.

Some of the categories of event that have been held by the


courts to frustrate a contract an discussed in the following
sections. Whether or not a particular contract is frustrated will depend on the
circumstances of the case. These categories are merely illustrative.
 Illegality
 Delay
 Destruction of subject matter
 Disappearance of the basis of the contract
 State of affairs essential to performance
 Death or incapacity of a party
 Contracts involving land
Illegality
A contract may be frustrated where performance becomes
illegal.

Illegality may frustrate a contract in time of war due to a


prohibition against dealing with the enemy.

Illegality may also frustrate a contract where, after the contract


was made, the law changes to prohibit performance.
Delay
A contract may be frustrated by events that cause, or
are likely to cause, an inordinate delay in the
performance of the contract.
The delay must be such as to seriously affect the
intended performance of the contract; mere delay is
not sufficient.
The question of whether or not a contract has been frustrated
by delay is considered at the time when the event that gave
rise to the delay occurred.

Accordingly, a contract may be treated as frustrated at the time


a delay begins, on the basis that a long delay seems probable.
Courts have taken the view that, particularly in a commercial
contract, parties should not be required to wait and see how
long the delay proves to be in fact before concluding that the
contract is frustrated.
An example is Bank Line Ltd v Arthur Capel and Co, which involved a contract
under which the shipowner agreed to let, and the charterer agreed to hire a
steamship for a period of 12-months.

In May 1915, before the ship had been delivered to the charterers, the ship was
requisitioned by the British Government to assist in the war effort. The ship was
released or 2 September 1915.

The House of Lords accepted that the charter had been frustrated by, and from
the date of, the requisition. The important factor in reaching this conclusion
was the probable length of the delay. The House of Lords pointed out that at
the time the ship was: requisitioned the parties could not know when, if ever,
the ship might be returned.

In assessing whether or not a contract is frustrated by delay, it


may be relevant to compare the probable length of the delay
with the remaining length of the contract.
For this reason long-term contracts may be less easily frustrated than
short-term contracts.

In National Carriers Ltd v Panalpina (Northern) Ltd, the lessee was denied
access to a leased property for a period of 20 months out of a term of 10
years, with nearly three years left to run on the lease. The House of Lords
considered that this delay was not sufficient to frustrate the contract.
Destruction of subject matter
A contract is likely to be frustrated where the subject
matter of the contract is destroyed.
In Taylor v Caldwell the parties had entered into a contract for the use of a
music hall for the purpose of giving a series of concerts and night fetes.
After the contract was made, but before any concert was to be given, the
hall was destroyed by fire.

The plaintiffs lost money paid by them in preparing for the concerts,
including in printing advertisements of and in advertising the concerts. The
plaintiffs sought to recover this expenditure, alleging that the defendants
had breached the contract.

The court held that the contract was frustrated. Accordingly, the owners
of the hall were not liable for breach of contract for failing to make the
hall available. The court considered this conclusion was justified because
the parties contracted on the basis of the continued existence of the hall
and the existence of this subject matter was essential to the contract.

Applying a similar principle, the Sale of Goods Acts


provide that an agreement to sell specific goods is
avoided where the goods perish before the risk passes
to the buyer.
Disappearance of the basis of the contract
A contract may be frustrated where the event in
question destroys the very basis or foundation of the
contract.
In Krell v Henry, the parties had entered into a contract for the hire of
rooms on Pall Mall on two dates. These were dates on which the
coronation procession of King Edward VII would take place and pass along
Pall Mall. The coronation was postponed due to the King's illness. The
party hiring the rooms declined to pay the hire for them.

The English Court of Appeal held that the contract was frustrated and
thus no hire was owing. Having regard to the surrounding circumstances,
the court considered that the procession was "regarded by both
contracting parties as the foundation of the contract".

A modern example is Brisbane CC v Group Projects Pty Ltd. Group


Projects owned land zoned as "future urban" which they wished to
develop as a residential subdivision. The Brisbane City Council agreed to
make the necessary application to have the land zoned as residential in
consideration of Group Projects carrying out certain works if rezoning was
approved, such as the construction of roads, footpaths, drains and other
things appropriate for a residential subdivision. Much of this work was to
be carried out on sites other than the land in question. The rezoning was
approved.

Subsequently the land was resumed by the Crown for development as a


school. Group Projects therefore no longer owned the land and could not
proceed with the proposed subdivision. The council contended that
Group Project’s obligations remained in place.

The High Court found that the contract had been frustrated. This was not
a case where performance was rendered impossible. The bulk of the
work was to be done off the land in question and was therefore not
affected by the resumption by the Crown. However, the acquisition of
the land had "wholly destroyed Group Projects" purpose in undertaking
any obligations at all'.

The principle should not be taken too far. While in these two
illustrations the contract were frustrated when an intervening
event destroyed the very foundation of the contract, the same
result will not apply merely because the contract cannot be
performed as expected.
Scanlan's New Neon Ltd v Tooheys Ltd concerned contracts for the hire of
neon advertising signs. The signs could not be illuminated at night due to
war-time security orders.

The High Court held that the contracts were not frustrated. The parties
no doubt expected that the signs would be illuminated. However, the
lessees promised to pay the rent in absolute terms and the lessors did
not warrant that the signs could be illuminated.
Latham CJ noted that:

When a man agrees to buy a pair of boots for himself,


both parties expect that he will be able to wear them. If
he has an accident, so that he can no longer wear boots,
he nevertheless still has to pay for them.

If a man buys or hires a motor car, both parties know that


he expects to be able to drive it. The stoppage of the sale
of petrol, which would make it impossible for him to drive
it, does not excuse him from his obligation to pay the
purchase money or the hire for the agreed period.
State of affairs essential to performance
A contract may be frustrated by the disappearance of a
state of affairs necessary to enable the contract to be
performed in the manner contemplated by the parties.
In Codelfa Construction Pty Ltd v State Rail Authority of New South
Wales, the State Rail Authority of New South Wales (SRA) entered into a
contract with Codelfa for the construction of certain parts of a railway. The
common understanding of the parties in making the contract was that in
order to complete the work within the time specified in the contract,
Codelfa would work three shifts per day.

Codelfa and the SRA had received and acted upon erroneous legal advise
that the contract work could not be impeded by the grant of an
injunction to restrain nuisance. In fact, local residents obtained an
injunction restraining Codelfa from performing work on the construction
site at night and on Sundays.

Codelfa claimed from the SRA a amount additional to the price payable
under the contract in respect of the additional cost that were incurred by
it and the profit it did not earn by reason of the change in working
methods which it was constrained to adopt.

The High Court refused to imply a term into the contract that would give
Codelfa the requested relief. The Court instead found that the contract
was frustrated. The Court considered that the granting of the injunction
made the situation in which performance was to occur fundamentally
different from the situation contemplated by the parties as revealed by
the construction of the contract in the light of the surrounding
circumstances. The injunction meant that the contractor could not do the
work according to the schedule contemplated by the parties.

A change in the state of affairs affecting performance may not


frustrate the contract where there is an alternative method of
performance which, although more onerous, is not radically
different from that contemplated under the contract.
An example is Tsakiroglou and Co Ltd v Noblee Thor! GmbH, which
involved a contract for the sale of goods to be shipped from the Port of
Sudan to Hamburg. The goods were to have been shipped via the Suez
Canal. When the Canal was closed, the alternative route was around the
Cape of Good Hope. This route took more than twice as long and was,
accordingly, more expensive.

Nonetheless, the court held that the contract was not frustrated. In the
circumstances of the case, an alternative to the usual route was
available. The greater cost of that route was not a ground for frustration.

The distinction between an event that renders performance


radically different, and so frustrates the contract, and an event
that merely makes performance more onerous will sometimes
be a fine one.
As in all frustration cases, the issue must depend on the court's
assessment of the facts of the particular case.
Death or incapacity of a party
A contract may be frustrated by the death or permanent
incapacity of a party whose existence is essential to
performance of the contract.
An example of such a contract is an employment contract that relies on
the personal skills of the employee. Employment contracts often contain,
or are affected by, provisions specifically dealing with issues of illness and
incapacity, which may exclude the application of the doctrine of
frustration.
Contracts involving land
The doctrine of frustration applies to contracts for the sale of
land, but its application is restricted.
The reasons for the restriction relate to the special nature of contracts involving
land.
 In particular, the general common law rule is that the risk
of loss passes to the purchaser of land as soon as the
contract is made. Under this rule, if buildings on the land are
damaged or destroyed, the purchaser bears the loss and the contract is
not frustrated.
 A contract for the sale of land might be frustrated by
catastrophic events affecting the land itself.
o For example, in Wong Lai Ying v Chinachem Investment Co Ltd a
contract for the sale of flats in a tower block was frustrated by a
landslip that significantly delayed the building of the tower block.
o In McRoss Developments Pty Ltd v Caltex Petroleum Pty Ltd a
contract was frustrated by compulsory acquisition of the land by
the government.
o In National Carriers Ltd v Panalpina (Northern) Ltd the House of
Lords considered that there was no good reason why the
doctrine of frustration should not apply to a lease. The position
in Australia is, however, uncertain.
o In Firth v Halloran Knox CJ and Gavan Duffy J endorsed the
decision of the Full Court of the Supreme Court of New South
Wales that the doctrine of frustration does not apply to a lease.
o In The Progressive Mailing House Pty Ltd v Tabali Pty Ltd the High
Court held that the general principles of contract law apply to
leases but expressly reserved decision on the application of the
doctrine of frustration.
o More recently, some lower courts have been prepared to accept
that the doctrine of frustration applies to a contract for a lease.

Assuming that the doctrine of frustration does apply to leases, it may be


suggested that, as with contracts for the sale of land, cases of frustration will be
"extremely rare". For example, it has been suggested that a lease might be
frustrated if "some vast convulsion of nature swallowed up the property
altogether, or buried it in the depths of the sea".
WHEN SHOULD A CONTRACT BE
FRUSTRATED?
The modern test for frustration is based on the construction of the contract. In
what circumstances should a court find that disruptive events have caused the
performance of the contract to be sufficiently different from that contemplated
under the contract that the contract should be frustrated? The cases we have
discussed illustrate that a contract will be frustrated only in exceptional
circumstances. For a contract to be frustrated, the circumstances in which
performance is called for must be radically or fundamentally different from those
undertaken by the parties at the time of making their contract. Is this high
standard for what amounts to a frustrating event appropriate?

Those drawing on relational contract theory might suggest a more flexible


approach to determining when a contract is frustrated.

Macneil has argued that the rules regulating changes to a contractual


relationship should take into account the broad social norms relevant to
that relationship.

Hillman, influenced by the work of Macneil, proposes that in the


application of a doctrine such as frustration courts should be guided by
"fairness norms". These norms include balancing the equities between the
parties, avoiding harm to parties, rewarding a party who has behaved
reasonably and ensuring parties benefit from the contract roughly
according to the contract allocation.

Trebilcock criticises the relational approach as failing to provide any


determinative principles for guiding courts.

Posner and Rosenfield apply an economic analysis to argue that discharge


of a contract for frustration should be allowed when the promisee (ie, the
party seeking performance) is the superior risk bearer. In assessing which
party is the superior risk bearer, Posner and Rosenfield identify as relevant
factors which party can estimate the probability of loss, which party can
best estimate the magnitude of the loss and which party is better placed to
reduce the transaction costs of insurance. Trebilcock criticises this
approach as uncertain, noting that, when applied to the facts of many
cases, the criteria often point in different directions.

Applying an economic analysis, Triantis suggests that while contracting


parties will not be able to foresee all of the risks that might disrupt
performance of their contract, this does not mean that the risk of
unforeseen events has not been allocated by the parties at the time of
making their contract. At least parties entering into a commercial contract
are likely to be aware of the risk of disruptive events in a more general
sense. Triantis explains that risks that cannot be specifically foreseen may
be "priced and allocated as part of the package of a more broadly framed
risk".

For example, consider a party who agrees to transport a shipment


of goods for a fixed fee. The risk of a nuclear accident in the
Middle East that causes a dramatic decrease in the production of
oil and a consequent increase in its price might not be foreseen. As
a result, this risk cannot be allocated explicitly in the contract.
However, the broader risk of a large increase in the price of oil for
any reason can be. Therefore, there is no gap to be filled by the
doctrine of [frustration]: the risk of nuclear accident, although
unforeseen, is allocated implicitly.

Trebilcock agrees, arguing that in commercial contracts the parties'


failure in their contract to specify a response to a particular risk will
usually indicate an intention to assign that general category of risk to the
party affected. Accordingly, Trebilcock supports an "austere" rule which
restricts frustration to "exceptional cases of outlandish risks". Only these
sorts o risks are unlikely to have been foreseen and allocated by the
parties either specifically or in, general sense.
LIMITS ON THE DOCTRINE
There are three important limitations on the doctrine
of frustration.
1. First, the risk of the frustrating event must not
have been provided for by the parties in their
contract.
2. Secondly the event must not have been
foreseeable by the parties at the time of making
their contract
3. Thirdly, the frustrating event must have occurred
without fault by the party seeking to rely on
frustration.
EXPRESS PROVISION IN THE CONTRACT
Ways of providing expressly for disruptive events
THE FIRST LIMITATION on the doctrine of frustration is
that a contract will not be frustrated where the parties
have expressly provided in their contract for the
consequences of the particular event that has occurred.
Clearly, the occurrence of an event provided for in the contract will not make
performance radically different from that contemplated by the parties when
making their contract.

There are a number of different ways a contract may allocate


the risk of disruptive events. For example:
 the parties may provide that one of them bears the risk
of the event occurring or
 the parties may agree that the risk be shared between
them.

In commercial contract contemplated to last over a long period


of time, parties may include a broad catch-all provision known
as a force majeure clause.
A force majeure clause will list a large range of categories of otherwise
potentially frustrating events, ranging from lightning strikes earthquakes
and floods to acts of war and terrorism. Should one of the events occur,
fore majeure clauses frequently suspend performance by providing that
the contract is not to come to an end unless the event has continued for
a specified period of time and/or is incapable of remedy by one of the
parties within a specified time. The clause will also commonly specify the
consequences for the parties of suspension or termination of the
contract.
When does a clause in a contract exclude frustration?
Whether or not a clause in a contract excludes the
doctrine of frustration is a matter of construction.
The fact that a clause specifies the consequences of a
broad class of potentially disruptive events does not
necessarily prevent the contract from being frustrated
by an event apparently within that class.
Courts may take the view that the event that has occurred was
of a different character from that which could have been
contemplated by the parties when making their contract. In such
a case the court may consider that the clause should be construed narrowly so as
not to apply to the event and that the contract should instead be treated as
frustrated.

This possible interpretation of a clause is illustrated in the decision in Codelfa


Construction Pty Ltd v State Rail Authority of New South Wales.

As already discussed, in Codelfa Construction Pty Ltd v State Rail Authority of


New South Wales the contract was found to be frustrated after the grant of an
injunction prevented work being carried out in the manner contemplated by the
parties.

The contract contained clauses dealing with the possibility of a major restriction
of working hours and of measures being taken to reduce noise and pollution.
The court considered that these provisions did not bar the contract from being
frustrated. The provisions were "quite consistent with the contemplated
method of work being an essential element of the contract". In other words, it
seems that the provisions only operated in the context of the work proceeding
as contemplated by the parties.

In some cases the fact that the parties have expressly


provided for the consequences of certain disruptive
events may support the conclusion that the parties
intended the risk of events that are not specified to be
borne by the party affected.
For example, in Meriton Apartments Pty Ltd v Mclaurin & Tait (Developments)
Pty Ltd, the parties had entered into a contract for a group of properties in
Sydney. The purchaser proposed to redevelop the properties and the contract
was subject to the relevant council approving the development application.
Such approval was given. The property then became the subject of "green
bans", embargos imposed by certain trade unions that opposed the proposed
development of the land.

The High Court held that the imposing of the green bans did not frustrate the
contract. Although the imposition of the bans reduced the value of the land and
prevented the use of the land for the purpose for which the purchaser bought it,
the Court considered that this was not enough to frustrate the contract. The
availability of the land for the purchaser's proposed purpose was not a term of
the contract. Moreover, the Court considered that the term relating to council
approval was significant. The Court accepted the view of the trial judge that the
assignment of this one risk affecting the development to the vendor left all
other risks to be borne by the purchaser.
FORESEEN EVENTS
THE SECOND LIMITATION on the doctrine of frustration
is that the purported frustrating event must not be one
that the parties could "reasonably be thought to have
foreseen".
Where an event could reasonably have been foreseen, it may be
presumed that the parties have, at least implicitly, allocated the risk of
the event occurring to the party affected.

If the parties had wanted a different result, then they could have
included provisions to this effect in their contract.

In Davis Contractors Ltd v Fareham UDC, a builder agreed to build 78 houses for
a fixed price, with the work to be completed in eight months. Because of bad
weather and a shortage of labour and materials, the work took 22 months to
complete. The builder claimed that the contract had been frustrated and further
claimed £17,000 as reasonable remuneration for the work that had been done.
The House of Lords held that the contract had not been frustrated. One reason
was that the cause of delay should have been foreseen by the parties - "the
possibility of enough labour and materials not being available was before their
eyes and could have been the subject of special contractual stipulation".

Despite the fact that foresight is commonly expressed as a limitation on the


doctrine of frustration, the concept is not entirely straightforward.

We might ask whether or not there is some threshold level of probability


at which the event in question must reasonably have been foreseen to
preclude the event from frustrating the contract. For example, an event
might have been contemplated but then dismissed by the parties as
improbable.

We might also ask whether or not there should be some threshold level
of particularity with which the event must have reasonably been
foreseen. For example, the parties might have foreseen the risk of a
particular event in a general sense, but the effect of the event, when it
occurs, might go well beyond what the parties contemplated.

FAULT AND SELF-INDUCED FRUSTRATION


THE THIRD LIMITATION on frustration is that the
frustrating event must arise without blame or fault by
the party seeking to rely on the contract being
frustrated. The rationale for qualifying the doctrine of frustration in this
way is that a party should not be able to rely on an event as discharging him
from performance of a contract which he has had the means and opportunity of
preventing.
The meaning of "fault"
The "fault" that will preclude a party from relying on a contract being frustrated
has not been precisely defined.

It is established that a party cannot rely on an event as frustrating a


contract which was caused by that party's own breach of contract.

Also, a party may not be able to rely on an event that was caused by the
deliberate act of that party as frustrating a contract, even though the act
was not a breach of the contract. For example, an employer, but not an
employee, may be able successfully to claim that an employment contract
is frustrated where the employee is imprisoned for a criminal offence.

In some circumstances, negligence may amount to fault, disqualifying a party


from relying on frustration. For example, a shipper may not be able to rely on the
sinking of the ship as frustrating a contract for the carriage of goods where the
ship is lost as a result of the carelessness of the shipper.

The degree to which negligence should be relevant in assessing whether


a contract has been frustrated has not been settled, particularly in
relation to contracts for personal performance.

It is established that a contract for personal services may be frustrated


where the employee becomes ill or dies.

It is not certain what the result should be if this incapacity is caused by


some want of care on the part of the employee.

Thus, as Lord Simon explained in Joseph Constantine Steamship Line Ltd


v Imperial Smelting Corp Ltd:

Some day it may have to be finally determined whether a prima


donna is excused by complete loss of voice from an executory
contract to sing if it is proved that her condition was caused by
her carelessness in not changing her wet clothes after being out
in the rain.

The innocent party


Fault by one party in producing a frustrating event does
not preclude the other innocent party from relying on
frustration. This means that an innocent party may rely on an event as
frustrating a contract in a case where the event was produced by the fault of the
other party and thus where the other party would not be able to rely on the
event as frustrating the contract.

The onus of proof is on the party alleging that the frustration


was induced by the other party's fault.
THE CONSEQUENCES OF FRUSTRATION
GENERAL EFFECT OF FRUSTRATION
Once a contract is frustrated, the contract is brought to an end
automatically and there is no requirement for either of the
parties to elect to terminate.

Frustration discharges the parties from most future obligations


under the contract. Thus, a party will not be liable for failing to perform
those of his obligations falling due after the frustrating event. The
qualification on this principle is that terms regulating the
parties' future relationship may survive frustration of the
contract if intended to do so by the parties. An example of a term
likely to be intended to survive frustration is an arbitration clause, requiring the
parties to submit disputes under the contract to arbitration.

At common law, rights and liabilities which have


unconditionally accrued prior to the time of the frustrating
event will remain in place. This approach produces somewhat
unsatisfactory results and legislation has been enacted in some Australian
jurisdictions to deal with the issue. Nonetheless, it remains necessary to
understand the common law rules. Not all contracts are covered by the
legislation. Moreover, the common law rules produce the situation that the
legislation is designed to address.

THE CONSEQUENCES OF FRUSTRATION UNDER THE


COMMON LAW
For the purpose of analysing the common law rules regulating
the parties' rights and liabilities under a frustrated contract, it is
useful to distinguish between:
 claims for the recovery of money paid, or due to be paid, prior
to the frustrating event and
 claims for payment for work done prior to the frustrating
event.
Money payable under the contract
A party (the paying party) may sometimes make, or have been required to make
payment to the other party under the contract before its completion. From the
perspective of a party providing goods or services, a requirement for pre-
payment makes good sense, reducing the risk of non-payment due to insolvency.
If the contract is frustrated, then the paying party may want to recover any
payments made or if the payment has not yet been made, to be discharged from
the obligation to pay.

At common law the rights of the parties in relation to payments


made, or due, before the contract was frustrated depend on
whether or not there has been a total failure of consideration.

A paying party will be entitled to restitution (ie, repayment) of


money he has paid under a frustrated contract where the
consideration for that payment has totally failed. "Consideration"
under this doctrine has a broader meaning than that in regard to contract
formation. In contract formation, consideration usually takes the form of a
promise given as the price of a counter-promise. Under the doctrine of total
failure of consideration consideration refers to performance of the promise. In
other words, a party will be entitled to recover a payment made under a contract
that later becomes frustrated where he has not received any of the performance
which the money was paid to secure. In such circumstances, a party will also be
released from the obligation to pay any money that has fallen due.

The operation of the principle of total failure of consideration is illustrated by


the decision in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd.
That case involved a contract made in 1939 between the sellers, an English
company, and the purchasers, a Polish company, for the sale of machinery at a
price of £4800. In accordance with the contract, the purchasers made an initial
payment to the sellers of £1000. Later that year, Germany invaded Poland and
Britain declared war on Germany.

The contract was found to be frustrated.

The issue then was what should happen to the £1000 paid to the sellers. The
purchasers requested the return of the money. The sellers sought to retain the
money on the basis that they had done considerable work in manufacturing
the machinery.

The House of Lords held that the purchasers could recover their £1000 because
there had been a total failure of the consideration supporting the payment.
Although the seller had incurred expenses in preparing to perform the
contract, the consideration in this case was the delivery of the machinery,
which had not taken place.

The Fibrosa case illustrates that the mere fact that a party has
incurred expenses in preparing to perform a contract does not
prevent there being a total failure of consideration.
At common law, if no actual performance has been
rendered, then money paid towards the performance
contracted for cannot be kept to cover expenses.
Moreover, for there to be a common law right to
restitution of money paid under a frustrated contract
on the basis of failure of consideration, the failure must
be total, not partial.
The common law does not allow apportionment of
contractual payments to reflect a partial performance
of the contract. This means that a party who has received part of the
performance bargained for under a contract will not be entitled to recover a
payment made in respect of that performance, even though the performance,
being only partial, does not equal the value of the payment which has been
made.
Payment for work done
The converse of the situation just discussed is where a party has performed work
under a contract prior to its being frustrated for which he has not yet been paid.
After the contract is frustrated, the party who has performed is likely to want to
claim payment for the work done. If the contract provides a right to payment for
the portion of the work which has been done, then the performing party will be
able to seek payment in accordance with the contract. This is because rights
which accrue before a contract is frustrated remain effective.

A party who has fully performed his obligations before the


contract was frustrated is likely to have a contractual right to
payment.

There may not be a contractual right to payment for only


partial performance of a contract.

A performing party who has partially performed a contract, but


who has no contractual right to payment for that work, may
not be entitled to a claim in restitution for a reasonable
remuneration for the work done, known as a recovery on a
quantum meruit.
The leading authority on this point is Cutter v Powell. That case concerned
a contract whereby a sailor (Cutter) was employed to act as second mate
on a ship sailing from Jamaica to Liverpool. The letter of engagement
provided that he would be paid "the sum of thirty guineas, provided he
proceeds, continues and does his duty as second mate in the said ship
from hence to the port of Liverpool". The lump sum payment envisaged by
the letter was considerably higher than normally paid for the voyage.
Cutter died approximately threequarters of the way through the journey.
Cutter was not entitled to payment under the contract unless the whole of
his duties were performed and the court held that no claim could be made
on a quantum meruit. The principle for which the case is usually cited as
authority, that restitution for work done under an entire contract will not
be available if the contract is frustrated before the performance is
complete, might be given a more limited application on the facts of the
case. As discussed in Chapter 10, the case might better be seen as one in
which restitution was not available because the contract placed on Cutter
the risk of performance not being completed.

Work done after a contract is frustrated


The position in relation to work done before a contract is frustrated may be
contrasted with the position in relation to work done after the contract was
frustrated.

A party may succeed in a claim in restitution for reasonable


remuneration for work done after the contract was discharged
by frustration.
INEQUITIES IN THE COMMON LAW POSITION
The common law approach to frustration is largely to leave the
losses caused by the frustration of the contract with the party
on whom they fall. As just discussed, there are a number of consequences
that may result from this approach.

Frustration of a contract may mean that a party who has paid money
under the contract and received very little of the promised performance
in return will not be entitled to recover that payment.

Alternatively, a party who has partially performed a contract may not be


entitled to any payment for that performance.

Moreover, a party who has incurred expenses in preparing to perform


the contract may have no right to recover even part of those expenses.

The justification for this approach is that contracting parties are generally entitled
to act in their own interests and thus there is no reason to require them to
apportion losses arising from frustration. Nonetheless, there are many
commentators who are critical of the common law approach to the consequences
of frustration. They argue that a fairer response would be for losses to be shared
equitably between the parties. This approach is advocated on the ground that both
parties are innocent with regards to a frustrating event in the sense that neither
could have foreseen the event that occurred, and neither was at fault in causing it.

THE STATUTORY RESPONSE TO THE CONSEQUENCES OF


FRUSTRATION
New South Wales, South Australia and Victoria have passed legislation that is
aimed at ameliorating at least some of the harsh consequences of frustration at
common law. The legislation does not seek to define when a contract is frustrated,
leaving common law principles in that regard in place. Once a contract is
frustrated, the legislation seeks to distribute some of the cost of frustration
between the parties. The significant provisions are outlined briefly at [15.140]-
[15.150].

Contracts not covered


All three Acts dealing with the consequences of frustration exclude a number of
different types of contracts from their operation, in particular contracts for the
carriage of goods by sea, certain types of charter party and insurance contracts.
The parties may also themselves exclude the operation of the Acts.
New South Wales
The Frustrated Contracts Act 1978 (NSW) seeks to apportion the losses caused by
frustration between the parties through detailed provisions aimed at establishing a
complete code for adjusting the parties' rights. There are four main situations
contemplated by the Act. First, the Act requires the return of money paid before
the contract was frustrated. Secondly, where expenses have been incurred for the
purpose of performance of the contract which is not rendered, the Act provides for
the loss relating to those expenses to be shared between the parties. Thirdly,
where a party has performed his obligations under the contract, the Act provides
for compensation to be paid. Fourthly, where only partial performance has been
rendered, the Act sets out complex provisions for valuing the compensation to be
paid for that performance. The amount payable depends on the extent to which
the acts performed were beneficial to the other party. The court may disregard the
detailed adjustment provisions where their application would be "manifestly
inadequate or inappropriate", would cause "manifest injustice" or would be
"excessively difficult or expensive".

South Australia
The Frustrated Contracts Act 1988 (SA) seeks to apportion the losses caused
frustration between the parties. It does this through the following guiding
principle: "When contract is frustrated, there will be an adjustment between the
parties so that no party unfairly advantaged or disadvantaged in the consequences
of frustration."

The Act provides guidelines for how the adjustment between the parties is to be
made. Nonetheless, the Act gives a discretion to the court to proceed on a "more
equitable basis".

Victoria
The provisions dealing with frustrated contracts in the Australian Consumer Law
and Fair Trading Act 2012 (Vic), Pt 3.2, do not seek to apportion or share the
losses caused by frustration between the parties. Instead, the provisions adjust
the parties' rights in three main respects.

First, the provisions provide for the recovery of sums paid before a
contract was frustrated and, similarly, the release of the obligation to
pay sums payable before a contract was frustrated.

Secondly, in cases where money has been paid or was payable under the
contract (and only in these cases), the provisions provide for a party who
has incurred expenses for the purpose of performing the contract to
recover remuneration for those expenses out of the sum payable where
the court "considers it just to do so having regard to all the
circumstances of the case".

Thirdly, the provisions provide for a party who has obtained a valuable
benefit before the contract is frustrated to pay for that benefit as the
court considers just.
UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL
CONTRACTS
A different approach to events disrupting performance of a contract is found in the
UNIDROIT Principles of International Commercial Contracts 2010 (UPICC). 142 The
UPICC distinguishes between events that prevent performance and events that
make performce more onerous. Article 7.1. 7 deals with "Force Majeure". It
provides:

Non-performance by a party is excused if that party proves that the non-


performance was due to an impediment beyond its control and that it
could not reasonably be expected to have taken the impediment into
account at the time of the conclusion of the contract or to have avoided
or overcome it or its consequences.

The principles do not make any provision for the consequences of a force majeure
event. A different approach applies to cases of "hardship". Under Art 6.2.2:

There is hardship where the occurrence of events fundamentally alters


the equilibrium of the contract either because the cost of a party's
performance has increased or because the value of the performance a
party received has diminished, and

(a) the events occur or become known to the disadvantaged


party after the conclusion of the contract;

(b) the events could not reasonably have been taken into account
by the disadvantaged party at the time of the conclusion of the
contract;

(c) the events are beyond the control of the disadvantaged party;
and

(d) the risk of the events was not assumed by the disadvantaged
party.

Under Art 6.2.3, in a case of hardship the disadvantaged party is entitled to


request renegotiation of the contract. If, within a reasonable time, the parties fail
to reach agreement on the renegotiations, either party may resort to the court. A
court may, where reasonable, terminate or adapt the contract.

It seems possible that the concept of hardship in the UPICC would not extend
beyond the events recognised under the common law as frustrating a contract.
Article 6.2.2 requires a fundamental alteration of the equilibrium of the contract,
which suggests the fact that performance has merely become more onerous may
not be sufficient. The UPICC does differ from the common law in imposing a duty
to renegotiate where the expected performance of the contract is affected by
hardship and in allowing the court to adapt the contract in order to restore its
"equilibrium".