Frustrated Contracts

If a contract is made, and for whatever reason it later becomes impossible for one party to perform their obligations, then we need to think about frustration.

(Note that frustration is about subsequent impossibility - if a contract was impossible to perform right from the outset, then the issue is one of mistake and not frustration!)

You should first establish whether or not the particular situation in question has been expressly provided for in the contract.

Such a provision is called a force majeure clause. For example, a contract for the sale of some goods being imported by sea might say: “in the event of the cargo being lost at sea, this is what happens…”.

A force majeure clause is only valid if the provision is full and complete – that is, it has to be specific about what risk is being provided for.

If there isn’t a force majeure clause, then we need to look at the 3 sorts of frustration established in case law:

1. Supervening illegality

• Since the contract was made, a new law has made it illegal to carry it out.

The best example is Avery v Bowden (1856), in which a ship was supposed to pick up some cargo at Odessa. With the outbreak of the Crimean War, the government made it illegal to load cargo at an enemy port, so the ship couldn’t perform its contract without breaking the law. The contract was therefore frustrated.

2. Further performance rendered impossible

Two key reasons:

1. Destruction of the subject matter. For example, I agree to sell you my house, but then my house burns down.
2. The non-availability of a party, due to death, illness, or other exceptional circumstances. For example, you hire a famous band to play at a party, but the lead singer is taken ill and can’t perform.

3. The nature of the contractual obligations becomes significantly different from what was agreed

• The non-occurrence of an event which formed the basis of the contract.

A slightly bizarre example: in 1901, a coronation procession was organised for King Edward VIII, but it had to be cancelled at the last minute because the King was ill. Someone had hired a flat for the day from which to view the procession. He refused to pay the day’s rent, because he said the contract had been frustrated. The court said he was right - the whole point of hiring the room was to watch the procession; if the procession wasn’t going to happen, then there was no benefit to be gained from hiring the room!

• Government intervention of some sort, which makes it unreasonable for the parties to carry on with the contract

There are some points to be careful of here:

• A contract isn’t frustrated just because it’s become more difficult or expensive to perform. That’s a risk that you take when you enter into a contract. We’re looking for some sort of physical impossibility
• The supervening event must be beyond the control of both parties
• The event must be unforeseeable by both parties

The legal effects of frustration

At common law the contract is automatically brought to an end at the time of the frustrating event.

The relevant statute is the Law Reform (Frustrated Contracts) Act 1943. It only applies where there’s no express provision in the contract for what happens if it’s frustrated. The key provisions are:

• If some sort of pre-payment or deposit has been made, the buyer can get that pre-payment back, minus any expenses incurred by the seller.
• If the contract has already been partly performed, it’s a bit more complicated. You have to pay for any benefit you’ve already received. Suppose the contract is for a complete garden makeover and at the time of the frustrating event, the contractor has already installed a swimming pool in your garden. You have to compensate the gardener for the expenses he’s incurred in installing your pool