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CHAPTER 15

FRUSTRATION

CONTENTS
15.1 Introduction 905
15.2 Frustrating events 914
15.3 Limitations on the doctrine 927
15.4 Effects of frustration: common law 937
15.5 Effects of frustration: Law Reform (Frustrated Contracts)
Act 1943 941
15.6 Relief in cases of hardship under the international contract
law instruments 961
15.7 Additional reading 964

15.1 INTRODUCTION

In this chapter we will be considering the doctrine of frustration. This concerns the
situation where, following formation of a contract, an event occurs that renders
further performance impossible, illegal or radically different from that which was
originally envisaged. If such an event occurs, the parties will be partially or wholly
relieved from further obligations and may be able to recover money and goods
transferred under the contract.
There are clear links between the doctrine of frustration and the doctrine of
common mistake. They both involve ‘impossibility’: common mistake concerning
‘initial impossibility’ (impossibility that arises prior to the formation of the con-
tract) and frustration concerning ‘subsequent impossibility’ (impossibility that
arises after formation of the contract). A significant difference between the two
doctrines is that while common mistake renders the contract void ab initio (from the
beginning), frustration merely discharges the parties from their future obligations.
TEXT, CASES AND MATERIALS ON CONTRACT LAW

In this respect, there are many similarities between the doctrine of frustration and
the topics of performance and breach, to be dealt with in Chapter 16.
This chapter is divided into six sections. First, we will consider the nature of the
doctrine, examining the underlying basis of frustration. Second, we will look at the
categories of event that have been recognised by the courts as amounting to frustra-
tion of the contract. Third, the limitations on the doctrine will be examined.
Fourth, we will consider the effects of the doctrine at common law and fifth we will
examine the impact of the Law Reform (Frustrated Contracts) Act 1943. Finally,
we will examine the provisions of the UNIDROIT Principles and The Principles
of European Contract Law, and see how these international instruments make
provision for the adjustment of the contract in cases of hardship.

15.1.1 THE NATURE OF THE DOCTRINE


Initially, English law adopted a very strict approach, insisting on the literal per-
formance of contracts. In Paradine v Jane (1647) Aleyn 26, a tenant of a farm was
dispossessed for two years following an invasion by Prince Rupert of Germany. The
tenant claimed that he was not liable to pay rent for the two-year period. The court
held in favour of the landlord: ‘Now the rent is a duty created by the parties upon
the reservation, and had there been a covenant to pay it, there had been no question
but the lessee must have made it good, notwithstanding the interruption by
enemies, for the law would not protect him beyond his own agreement . . .’. The
justification for refusing to discharge the parties from their obligations was that the
parties could, if they wished, have included a specific term in the contract to deal
with the eventuality. Such clauses (known as force majeure or ‘hardship’ clauses) are
commonplace in commercial contracts and it is arguable that the Paradine v Jane
approach is the most economically efficient since the parties are in the best position
to determine the allocation of risk. Professor McKendrick (’The regulation of long
term contracts in English Law’, Chapter 12 in Beatson, J and Friedmann, D (eds),
Good Faith and Fault in Contract Law, 1995, pp 326–7, Oxford: Clarendon Press) has
commented:
‘[T]he diversity and sophistication of the various force majeure clauses which
are currently in use underlines the complexity of the issues dealt with by these
clauses and they are best resolved by the parties, not the courts. A force
majeure clause can be expected to define the events which are to trigger the
clause, make provision for the procedure to be followed upon the occurrence of
such an event, stipulate the effect which the event is to have on the contract
itself and, possibly, make provision for the adjudication of any disputes arising
out of the clause . . . The diversity of force majeure clauses suggests that it is
impossible to draft a ‘boiler-plate’ force majeure clause which will be suitable

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for all occasions and that it would be equally impossible for the courts to
provide a simple all-encompassing solution to all these problems via a wider
doctrine of frustration.’
Force majeure clauses are rare, however, outside of commercial contracts and eventu-
ally the courts recognised that the strict approach could lead to oppressive and
unjust results. Blackburn J adopted a more liberal approach in Taylor v Caldwell.

Taylor v Caldwell (1863) 3 B & S 826

Facts: On 27 May 1861, the plaintiffs entered into a contract by which the defendants
agreed to let the plaintiffs have the use of the Surrey Gardens and music hall on 17
June, 16 July, 5 August and 17 August, for the purpose of giving a series of four
concerts. After the making of the agreement, but before the first day on which a
concert was to be given, the music hall was destroyed by fire. The fire was not due to
the fault of either party but the damage caused was so extensive that the concerts
could not go ahead as intended. The plaintiffs brought a claim against the defendants
for breach of contract in failing to supply the hall.

Held: The Court of Queen’s Bench held that the contract was discharged for frustra-
tion on the ground that it contained an implied condition that the parties shall be
excused from performance if the subject matter of the contract is destroyed.

Blackburn J:
‘There seems no doubt that, where there is a positive contract to do a thing not in itself
unlawful, the contractor must perform it or pay damages for not doing it, although, in
consequence of unforeseen accident, the performance of his contract has become
unexpectedly burdensome, or even impossible . . . But this rule is only applicable when
the contract is positive and absolute and not subject to any condition either expressed
or implied; and there are authorities which, as we think, establish the principle that
where, from the nature of the contract, it appears that the parties must from the begin-
ning have known that it could not be fulfilled unless, when the time for the fulfilment of
the contract arrived, some particular specified thing continued to exist, so that when
entering into the contract they must have contemplated such continued existence as
the foundation of what was to be done, there, in the absence of any expressed or
implied warranty that the thing shall exist, the contract is not to be construed as a
positive contract, but as subject to an implied condition that the parties shall be
excused in case, before breach, performance becomes impossible from the perishing
of the thing without default of the contractor.
There seems little doubt that this implication tends to further the great object of
making the legal construction such as to fulfil the intention of those who enter into
the contract, for, in the course of affairs, men, in making such contracts, in general,
would, if it were brought to their minds, say that there should be such a condition.

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Accordingly, in the civil law, such an exception is implied in every obligation of the
class, which they call obligatio de certo corpore . . . Although the civil law is not of
itself an authority in an English court, it affords great assistance in investigating the
principles on which the law is grounded, and it seems to us that the common law
authorities establish that, in such a contract, the same condition of the continued
existence of the thing is implied by English law . . .
It may, I think, be safely asserted to be now English lain that in all contracts of loan of
chattels or bailment, if the performance of the promise of the borrower or bailee to
return the thing lent or borrowed becomes impossible because it has perished, this
impossibility, if not arising from the fault of the bailee, or from some risk which he has
taken upon himself, excuses the borrower or bailee from the performance of his prom-
ise to redeliver the chattel . . . The principle seems to us to be that in contracts in which
the performance depends on the continued existence of a given person or thing, a
condition is implied that the impossibility of performance arising from the perishing
of the person or thing shall excuse the performance. In none of these cases is the
promise in words other than positive, nor is there any express stipulation that the
destruction of the person or thing shall excuse the performance; that excuse is by law
implied, because from the nature of the contract it is apparent that the parties con-
tracted on the basis of the continued existence of the particular person or chattel. In
the present case, looking at the whole contract, we find that the parties contracted on
the basis of the continued existence of the music hall at the time when the concerts
were to be given, that being essential to their performance. We think, therefore, that,
the music hall having ceased to exist without fault of either party, both parties are
excused, the plaintiffs from taking the gardens and paying the money, the defendants
from performing their promise to give the use of the hall and gardens, and other things.
The rule must be made absolute to enter the verdict for the defendants.’

The first point to note is that by restricting the implied condition to ‘the impossi-
bility of performance arising from the perishing of the person or thing’, Blackburn J
avoided a direct conflict with the decision in Paradine v Jane, since in that case the
subject matter had not perished. Blackburn J purported to recognise an exception to
the general rule as stated in Paradine v Jane. However, as Professor Treitel (Treitel,
G, Frustration and Force Majeure, 2nd edn, 2004, Para 2–025, London: Sweet &
Maxwell) has noted: ‘the formulation of the exception took a form which made it
possible for later judges to extend the scope of the exception, so that in the course
of time what was the exception has become the general rule, and conversely’.
Blackburn J’s exception was based on the view that the general rule ‘is only applic-
able when the contract is positive and absolute and not subject to any condition
either expressed or implied’. The reference to implied conditions provided the
flexibility necessary for later courts to apply the exception in cases where the
frustrating event was something other than the perishing of the subject matter.

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The implied term approach to frustration had the merit of being consistent with
the prevailing notion of freedom of contract. It based the intervention of the court,
not on any assumed right of the law to intervene, but on the implied intention of
the parties. It was soon shown to be fictitious, however.

Davis Contractors Ltd v Fareham UDC [1956] AC 696

Facts: On 9 July 1946, Davis Contractors entered into a contract to build 78 houses for
Fareham UDC within eight months for £94,425. Due to unexpected circumstances,
which were not the fault of either party, adequate supplies of labour were not available
and the work took 22 months to complete at a cost to Davis of £115,233. Fareham
UDC paid Davis the contract price. Davis argued that the contract had been frustrated
and claimed to be entitled on a quantum meruit to a reasonable sum for the work done
(which would have exceeded the contract price).

Held: The House of Lords held that the contract had not been frustrated. The shortage
of labour had rendered the contract more onerous than had been contemplated but
was not sufficient to discharge the contract for frustration.

Lord Reid:
‘Frustration has often been said to depend on adding a term to the contract by implica-
tion: for example, Lord Loreburn in FA Tamplin Steamship Co Ltd v Anglo-Mexican
Petroleum Products Co Ltd [1916] 2 AC 397, 404 after quoting language of Lord
Blackburn, said:

“That seems to me another way of saying that from the nature of the contract it
cannot be supposed the parties, as reasonable men, intended it to be binding on
them under such altered conditions. Were the altered conditions such that, had
they thought of them, they would have taken their chance of them, or such that
as sensible men they would have said ‘if that happens, of course, it is all over
between us’? What, in fact, was the true meaning of the contract? Since the
parties have not provided for the contingency, ought a court to say it is obvious
they would have treated the thing as at an end?”

I find great difficulty in accepting this as the correct approach because it seems to me
hard to account for certain decisions of this House in this way . . .
I may be allowed to note an example of the artificiality of the theory of an implied
term given by Lord Sands in James Scott & Sons Ltd v Del Sel 1922 SC 592, 597:

“A tiger has escaped from a travelling menagerie. The milkgirl fails to deliver
the milk. Possibly the milkman may be exonerated from any breach of contract;
but, even so, it would seem hardly reasonable to base that exoneration on the
ground that ‘tiger days excepted’ must be held as if written into the milk
contract.”

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I think that there is much force in Lord Wright’s criticism in Denny, Mott & Dickson Ltd
v James B Fraser & Co Ltd [1944] AC 265, 275:

“The parties did not anticipate fully and completely, if at all, or provide for what
actually happened. It is not possible, to my mind, to say that, if they had thought
of it, they would have said: ‘Well, if that happens, all is over between us.’ On the
contrary, they would almost certainly on the one side or the other have sought to
introduce reservations or qualifications or compensations.”

It appears to me that frustration depends, at least in most cases, not on adding any
implied term, but 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 when
the contract was made . . .’

Lord Radcliffe:
‘The theory of frustration belongs to the law of contract and it is represented by a rule
which the courts will apply in certain limited circumstances for the purpose of deciding
that contractual obligations, ex facie binding, are no longer enforceable against the
parties. The description of the circumstances that justify the application of the rule and,
consequently, the decision whether in a particular case those circumstances exist are,
I think, necessarily questions of law . . .
Lord Loreburn ascribes the dissolution to an implied term of the contract that was
actually made. This approach is in line with the tendency of English courts to refer all
the consequences of a contract to the will of those who made it. But there is some-
thing of a logical difficulty in seeing how the parties could even impliedly have pro-
vided for something which ex hypothesi they neither expected nor foresaw; and the
ascription of frustration to an implied term of the contract has been criticised as
obscuring the true action of the court which consists in applying an objective rule of
the law of contract to the contractual obligations that the parties have imposed upon
themselves. So long as each theory produces the same result as the other, as normally
it does, it matters little which theory is avowed (see British Movietonews Ltd v London
and District Cinemas Ltd [1952] AC 166, 184 per Viscount Simon). But it may still be of
some importance to recall that, if the matter is to be approached by way of implied
term, the solution of any particular case is not to be found by inquiring what the parties
themselves would have agreed on had they been, as they were not, forewarned. It is
not merely that no one can answer that hypothetical question: it is also that the
decision must be given “irrespective of the individuals concerned, their temperaments
and failings, their interest and circumstances” (Hirji Mulji v Cheong Yue Steamship Co
Ltd [1926] AC 497). The legal effect of frustration “does not depend on their intention
or their opinions, or even knowledge, as to the event.” On the contrary, it seems that
when the event occurs “the meaning of the contract must be taken to be, not what
the parties did intend (for they had neither thought nor intention regarding it), but that
which the parties, as fair and reasonable men, would presumably have agreed upon if,
having such possibility in view, they had made express provision as to their several

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rights and liabilities in the event of its occurrence” (Dahl v Nelson (1881) 6 App Cas 38,
per Lord Watson).
By this time it might seem that the parties themselves have become so far dis-
embodied spirits that their actual persons should be allowed to rest in peace. In their
place there rises the figure of the fair and reasonable man and the spokesman of the
fair and reasonable man, who represents after all no more than the anthropomorphic
conception of justice, is and must be the court itself. So perhaps it would be simpler to
say at the outset that frustration occurs whenever the law recognises that without
default of either party a contractual obligation has become incapable of being per-
formed 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.
There is, however, no uncertainty as to the materials upon which the court must
proceed. “The data for decision are, on the one hand, the terms and construction of the
contract, read in the light of the then existing circumstances, and on the other hand the
events which have occurred” (Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd
[1944] AC 265, 274–275 per Lord Wright). In the nature of things there is often no room
for any elaborate inquiry. The court must act upon a general impression of what its rule
requires. It is for that reason that special importance is necessarily attached to the
occurrence of any unexpected event that, as it were, changes the face of things. But,
even so, it is not hardship or inconvenience or material loss itself which calls the
principle of frustration into play. There must be as well such a change in the signifi-
cance of the obligation that the thing undertaken would, if performed, be a different
thing from that contracted for.
I am bound to say that, if this is the law, the appellants’ case seems to me a long
way from a case of frustration. Here is a building contract entered into by a housing
authority and a big firm of contractors in all the uncertainties of the post-war world.
Work was begun shortly before the formal contract was executed and continued,
with impediments and minor stoppages but without actual interruption, until the 78
houses contracted for had all been built. After the work had been in progress for a
time the appellants raised the claim, which they repeated more than once, that they
ought to be paid a larger sum for their work than the contract allowed; but the respon-
dents refused to admit the claim and, so far as appears, no conclusive action was
taken by either side which would make the conduct of one or the other a determining
element in the case.
That is not in any obvious sense a frustrated contract . . .’

Before considering their Lordships’ rejection of the implied term theory, it is


important to note why the contractors’ claim failed. The case is not an example of
commercial impossibility at all. In fact, Davis Contractors were able to fulfil their
contractual obligations at a cost of just 23 per cent over the contract price. The
essence of their claim was that it had become commercially disadvantageous for

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them to perform the contract at the agreed price. This is not a recognised ground for
discharging a contract under English law.
Turning to their Lordships’ rejection of the implied term theory, Lord Radcliffe
believed that there was ‘a logical difficulty in seeing how the parties could . . .
impliedly have provided for something which ex hypothesi they neither expected
nor foresaw’. This objection is perhaps overstated. Force majeure clauses frequently
contain provisions as to the effect of unforeseen events. If this can be done by an
express clause, there seems to be no reason why it cannot be done by one that is
implied. Nevertheless, it is true to say that the implied term theory obscures what
the courts are actually doing. As the cases reveal, the courts are really seeking to
determine whether the supervening event has such an effect on the contract that it is
unfair to hold parties to their bargain, in the absence of fault and of any assumption
of the risk by either party. The theory preferred by Lords Reid and Radcliffe is based
on the construction of the contract. Both of these theories were included in a list of
possible bases for the doctrine of frustration provided by Lord Hailsham LC in
National Carriers v Panalpina (Northern) Ltd.

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

Lord Hailsham LC:


‘At least five theories of the basis of the doctrine of frustration have been put forward at
various times, and, since the theoretical basis of the doctrine is clearly relevant to the
point under discussion, I enumerate them here. The first is the “implied term” or
“implied condition” theory on which Blackburn J plainly relied in Taylor v Caldwell, as
applying to the facts of the case before him. To these it is admirably suited. The
weakness, it seems to me, of the implied term theory is that it raises once more the
spectral figure of the officious bystander intruding on the parties at the moment of
agreement . . .
Counsel for the respondent sought to argue that Taylor v Caldwell, 3 B & S 826, could
as easily have been decided on the basis of a total failure of consideration. This is the
second of the five theories. But Taylor v Caldwell was clearly not so decided, and in any
event many, if not most, cases of frustration which have followed Taylor v Caldwell
have occurred during the currency of a contract partly executed on both sides, when
no question of total failure of consideration can possibly arise.
In Hirji Mulji v Cheong Yue Steamship Co Ltd [1926] AC 497, 510 Lord Sumner
seems to have formulated the doctrine as a “. . . device [sic], by which the rules as to
absolute contracts are reconciled with a special exception which justice demands”
and Lord Wright in Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC
265, 275 seems to prefer this formulation to the implied condition view. The weakness
of the formulation, however, if the implied condition theory, with which Lord Sumner
coupled it, be rejected, is that, though it admirably expresses the purpose of the
doctrine, it does not provide it with any theoretical basis at all.

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Hirji Mulji v Cheong Yue Steamship Co Ltd is, it seems to me, really an example of
the more sophisticated theory of “frustration of the adventure” or “foundation of the
contract” formulation, said to have originated with Jackson v Union Marine Insurance
Co Ltd (1874) LR 10 CP 125, compare also, for example, per Goddard J in WJ Tatem
Ltd v Gamboa [1939] 1 KB 132, 138. This, of course, leaves open the question of what
is, in any given case, the foundation of the contract or what is “fundamental” to it, or
what is the “adventure”. Another theory, of which the parent may have been Earl
Loreburn in FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd
[1916] 2 AC 397 is that the doctrine is based on the answer to the question: “What in
fact is the true meaning of the contract?”: see p 404. This is the “construction theory”.
In Davis Contractors Ltd v Fareham UDC [1956] AC 696, 729 Lord Radcliffe put the
matter thus, and it is the formulation I personally prefer:

“. . . 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.” ’

Although Lord Hailsham regarded the theoretical basis of the doctrine as being
‘clearly relevant to the point under discussion’, several commentators have doubted
its practical importance. The point is made in H Beale, (ed) Chitty on Contracts, 29th
edn, 2004, para 23–018, London: Sweet & Maxwell:
‘It is difficult to discern any practical consequence which flows from the
different tests . . . The courts have regard to the construction of the contract,
the effect of the changed circumstances on the parties’ contractual obligations,
the intention of the parties (objectively construed) and the demands of justice
in deciding whether or not a contract has been frustrated. No one factor is
conclusive: the court will balance these different factors in determining
whether a contract has been frustrated.’
Professor Treitel agrees. He notes that in Davis Contractors, Lord Reid opined that
the parties’ intentions were relevant to the implied term theory, but not to the
construction theory. Professor Treitel (Treitel, G, Frustration and Force Majeure, 2nd
edn, 2004, Para 16–016, London: Sweet & Maxwell) doubts whether this is true:
‘[I]n construing the contract, the court does not wholly disregard the inten-
tion of the parties. The court may not have to ask: what would the parties have
said, had they thought of the frustrating event? But it does have to ask: in
what circumstances did the parties intend the contract to operate? In answer-
ing this question, the court will no doubt apply an objective test and may
refuse to admit evidence of the parties’ “subjective intent”; but it is only after

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the question has been answered that the intention of the parties becomes
irrelevant: that is, it is not necessary to go on and ask whether they would (if
they had considered the event) have agreed to discharge, or to some other
compromise solution. But this question does not arise under the “implied
term” theory either, as frustration at common law always results in total
discharge of the contract.’
Although there may be little practical difference between the five bases of the
doctrine, it seems that the ‘construction theory’ is the one that is currently favoured
(it has been adopted in the context of common mistake as well: see Great Peace
Shipping Ltd v Tsavliris Salvage (International) Ltd [2003] QB 679). The courts will
ask what the original contract required of the parties and then consider whether the
frustrating event has rendered performance ‘radically different’ from that which was
originally envisaged. This approach requires the courts to decide what situations
will make performance ‘radically different’. It is to this that we now turn in the
following section.

15.2 FRUSTRATING EVENTS

It is impossible to formulate an exhaustive list of frustrating events. The following


are given as examples of events that have been recognised by the courts as amounting
to frustration of the contract.

15.2.1 IMPOSSIBILITY
Impossibility of performance is the most obvious ground of frustration and it may
arise for a number of reasons.

15.2.1.1 Destruction of the subject matter


In Taylor v Caldwell, the performance of the contract was rendered impossible by the
destruction of the subject matter. The case is an example of partial impossibility
because the contract related to the use of the hall and the gardens, but it was only
the hall that was destroyed by the fire. Nevertheless, the use of the hall was deemed
to be a fundamental element of the contract (the hall being required for the giving
of concerts) and its destruction was sufficient to frustrate it.
It is not necessary to show complete destruction of the subject matter as long
as the nature of the thing has been materially altered. In Asfar v Blundell [1896]
1 QB 123, a cargo of dates was being carried on a barge that sunk in the Thames.
The dates were recovered and although they were still of value for the purpose of

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distillation into spirit, they had become contaminated with sewage and were in
such a condition of fermentation that they were no longer merchantable as dates.
Lord Esher MR said:
‘The nature of a thing is not necessarily altered because the thing itself has
been damaged; wheat or rice may be damaged, but may still remain the things
dealt with as wheat or rice in business. But if the nature of the thing is altered,
and it becomes for business purposes something else, so that it is not dealt
with by business people as the thing which it originally was, the question for
determination is whether the thing insured, the original article of commerce,
has become a total loss. If it is so changed in its nature by the perils of the sea
as to become an unmerchantable thing, which no buyer would buy and no
honest seller would sell, then there is a total loss. That test was applied in the
present case by the learned judge in the Court below, who decided as a fact
that the dates had been so deteriorated that they had become something which
was not merchantable as dates. If that was so, there was a total loss of the
dates.’

15.2.1.2 Death or incapacity


A contract for personal services will be frustrated on the death of either party (Cutter
v Powell (1795) 6 TR 320). The same principle applies where either party is per-
manently incapacitated from performing the contract. In Condor v Barron Knights
[1966] 1 WLR 87, a 17-year-old drummer collapsed and was admitted to a psychi-
atric hospital. Medical opinion was that he would only be fit to work four nights a
week. The band had engagements for seven nights a week and so the defendants
decided to dismiss the drummer. The court held it was, in a business sense, impos-
sible for the drummer to perform the contract and for that reason the contract was
discharged for frustration.

15.2.1.3 Unavailability
A contract may be frustrated if the subject matter is temporarily unavailable. The
court will have to determine whether the contractual performance when resumed
will be fundamentally different to what the parties had agreed to.

Jackson v Union Marine Insurance Company Ltd (1874) LR 10 CP 125

Facts: The plaintiff shipowner entered into a charterparty by which the ship was to
‘proceed with all possible dispatch from Liverpool to Newport, and there load a cargo

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of iron rails for San Francisco’. The ship set sail from Liverpool on 2 January 1872 but
ran aground on the following day in Carnarvon Bay. The repairs took eight months to
complete. In the meantime, on 15 February, the charterers repudiated the charter and
chartered another ship to carry the rails. The shipowner brought an action on his
insurance policy. In order to make a claim it was necessary for him to show that he
could not have brought a claim against the charterers for failing to load. A jury found
that the time necessary for repairs was so long as to make it unreasonable for the
charterers to supply the agreed cargo at the end of August and so long as to put an
end, in a commercial sense, to the commercial speculation entered upon by the
shipowner and the charterers.

Held: The Exchequer Chamber affirmed the decision of the court below, holding that
the contract was frustrated and the charterers were not under an obligation to load.
Accordingly, the shipowner was entitled to make a claim under his insurance policy.

Bramwell B:
‘I understand that the jury have found that the voyage the parties contemplated had
become impossible; that a voyage undertaken after the ship was sufficiently repaired
would have been a different voyage, not, indeed, different as to the ports of loading
and discharge, but different as a different adventure, – a voyage for which at the time of
the charter the plaintiff had not in intention engaged the ship, nor the charterers the
cargo; a voyage as different as though it had been described as intended to be a spring
voyage, while the one after the repair would be an autumn voyage . . .
The question turns on the construction and effect of the charter. By it the vessel is to
sail to Newport with all possible dispatch, perils of the seas excepted. It is said this
constitutes the only agreement as to time, and, provided all possible dispatch is used,
it matters not when she arrives at Newport. I am of a different opinion. If this charter-
party be read as a charter for a definite voyage or adventure, then it follows that there is
necessarily an implied condition that the ship shall arrive at Newport in time for it. Thus,
if a ship was chartered to go from Newport to St Michael’s in terms in time for the fruit
season, and take coals out and bring fruit home, it would follow . . . that, if she did not
get to Newport in time to get to St Michael’s for the fruit season, the charterer would
not be bound to load at Newport, though she had used all possible dispatch to get
there, and though there was an exception of perils of the seas.’

The court concluded that performance after the delay would have been a different
voyage altogether, and of no use to the charterer.

15.2.1.4 Government intervention


A contract may be frustrated by government intervention. For example, if, following
a declaration of war, one of the parties to the contract has become an enemy alien,
then the contract will be frustrated (Fibrosa Spolka Ackyjna v Fairbairn Lawson Combe

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Barbour Ltd [1943] AC 32). Similarly, if property is requisitioned by the govern-


ment, this may have the effect of frustrating the contract if the intervention
radically alters the nature of the contract.

FA Tamplin Steamship Company Ltd v Anglo-Mexican Petroleum


Products Co Ltd [1916] 2 AC 397

Facts: The defendants chartered a tank steamship for a period of five years to be used
for the carriage of oil. The charterparty contained the usual exceptions, including
arrests and restraints of princes, rulers, and peoples. The charterers also were permit-
ted to sublet the ship to the Admiralty or other service. Following the outbreak of the
war, when the charterparty still had three years to run, the ship was requisitioned by the
Admiralty for use as a transport for troops. The owners claimed that the charterparty
had been discharged by the requisition. The charterers, who wished to continue with
the contract, claimed that the government’s intervention was not sufficient to frustrate
the contract.

Held: The House of Lords held (Viscount Haldane and Lord Atkinson dissenting), that
the contract had not been frustrated.

Earl Loreburn:
‘Taking into account . . . all that has happened, I cannot infer that the interruption either
has been or will be in this case such as makes it unreasonable to require the parties
to go on. There may be many months during which this ship will be available for
commercial purposes before the five years have expired. It might be a valuable right for
the charterer during those months to have the use of this ship at the stipulated freight.
Why should he be deprived of it? No one can say that he will or that he will not regain
the use of the ship, for it depends upon contingencies which are incalculable. The
owner will continue to receive the freight he bargained for so long as the contract
entitles him to it, and if, during the time for which the charterer is entitled to the use of
the ship, the owner received from the Government any sums of money for the use of
her, he will be accountable to the charterer . . . Loss may arise to some one whether it
be decided that these people are or that they are not still bound by the charterparty.
But the test for answering that question is not the loss that either may sustain. It is this:
Ought we to imply a condition in the contract that an interruption such as this shall
excuse the parties from further performance of it? I think not. I think they took their
chance of lesser interruptions, and the condition I should imply goes no further than
that they should be excused if substantially the whole contract became impossible of
performance, or in other words impracticable, by some cause for which neither was
responsible. Accordingly I am of opinion that this charterparty did not come to an end
when the steamer was requisitioned and that the requisition did not suspend it or affect
the rights of the owners or charterers under it, and that the appeal fails.

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It will be noted that Earl Loreburn relied on the ‘implied term’ approach to frustra-
tion. There is no reason to believe, however, that a different outcome would have
been reached had a ‘construction’ approach been applied. The contract was not
deemed to have been frustrated because it was still likely that the ship would have
been available for commercial purposes prior to the expiry of the contract. The
owners had failed to demonstrate that ‘substantially the whole contract’ had become
‘impossible of performance’.
The contract will not be frustrated merely because government intervention has
made the contract more difficult or costly to perform.

Tsakiroglou & Co Ltd v Noble Thorl GmbH [1962] AC 93

Facts: The appellants agreed to sell Sudanese groundnuts to the respondents for
shipment from Port Sudan to Hamburg. Both parties expected that the shipment
would be made via the Suez Canal but there was no express term in the written
contract to this effect. On 2 November 1956 the Suez Canal was closed and the
only alternative route available to the appellants was to ship the goods round the
Cape of Good Hope. This would have taken twice as long and doubled the cost
of carriage. The appellants failed to ship the goods and the respondents sued for
non-performance.

Held: The House of Lords refused to imply a term into the contract that the goods
should be shipped via the Suez Canal and held that the contract had not been frus-
trated. Although the alternative route via the Cape of Hope involved a change in the
method of performance, it did not amount to a fundamental change from that which
had been agreed.

Viscount Simmonds:
‘I come then to the main issue and, as usual, I find two questions interlocked: (1) What
does the contract mean? In other words, is there an implied term that the goods shall
be carried by a particular route? (2) Is the contract frustrated?
It is convenient to examine the first question first, though the answer may be
inconclusive. For it appears to me that it does not automatically follow that, because
one term of a contract, for example, that the goods shall be carried by a particular
route, becomes impossible of performance, the whole contract is thereby abrogated.
Nor does it follow, because as a matter of construction a term cannot be implied, that
the contract may not be frustrated by events. In the instant case, for example, the
impossibility of the route via Suez, if that were assumed to be the implied contractual
obligation, would not necessarily spell the frustration of the contract.
It is put in the forefront of the appellants’ case that the contract was a contract for
the shipment of goods via Suez. This contention can only prevail if a term is implied, for
the contract does not say so. To say that that is nevertheless its meaning is to say in
other words that the term must be implied. For this I see no ground . . .

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I turn now to what was the main argument for the appellants: that the contract
was frustrated by the closure of the Canal from November 2, 1956, till April 1957.
Were it not for the decision of McNair J in Green’s case [1959] 1 QB 131, I should
not have thought this contention arguable and I must say with the greatest respect
to that learned judge that I cannot think he has given full weight to the decisions old
and new of this House upon the doctrine of frustration . . . [H]e concluded that the
continued availability of the Suez route was a fundamental assumption at the time
when the contract was made and that to impose upon the sellers the obligation to
ship by an emergency route via the Cape would be to impose upon them a funda-
mentally different obligation which neither party could at the time when the contract
was performed have dreamed that the sellers would be required to perform. Your
Lordships will observe how similar this line of argument is to that which supports
the implication of a term that the route should be via Suez and no other. I can see no
justification for it. We are concerned with a cif contract for the sale of goods, not
a contract of affreightment, though part of the sellers’ obligation will be to procure
a contract of affreightment. There is no evidence that the buyers attached any import-
ance to the route. They were content that the nuts should be shipped at any date
in November or December. There was no evidence, and I suppose could not be,
that the nuts would deteriorate as the result of a longer voyage and a double crossing
of the Equator, nor any evidence that the market was seasonable. In a word, there was
no evidence that the buyers cared by what route or, within reasonable limits, when
the nuts arrived. What, then, of the sellers? I recall the well-known passage in the
speech of Lord Atkinson in Johnson v Taylor Bros & Co Ltd [1920] AC 144, 155, where
he states the obligations of the vendor of goods under a cif contract, and ask which
of these obligations is (to use McNair J’s word) “fundamentally” altered by a change
of route. Clearly the contract of affreightment will be different and so may be the
terms of insurance. In both these respects the sellers may be put to greater cost:
their profit may be reduced or even disappear. But it hardly needs reasserting that an
increase of expense is not a ground of frustration: see Larrinaga Co Ltd v Société
Franco-Américaine des Phosphates de Medulla, Paris (1922) 38 TLR 739; 28 Com
Cas 1, CA.
Nothing else remains to justify the view that the nature of the contract was “funda-
mentally” altered . . . I venture to say what I have said myself before and others more
authoritatively have said before me: that the doctrine of frustration must be applied
within very narrow limits. In my opinion this case falls far short of satisfying the
necessary conditions.’

The mere fact that the method of performance had become impossible was insuffi-
cient to frustrate the contract. It was necessary to show that the nature of the
contract had been ‘fundamentally altered’ by the closure of the Suez Canal, and the
appellants had failed to demonstrate this. Interestingly, it seems that the result
would have been exactly the same, even if the contract had stipulated that the goods

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were to be shipped via the Suez Canal (see The Washington Trader [1972] 1 Lloyd’s
Rep 463).
The government intervention need not relate to international matters. In Gamerco
SA v ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226, the Spanish govern-
ment’s decision to close a stadium due to structural defects was held to frustrate a
contract to hold a rock concert there. Garland J concluded: ‘I am in no doubt
whatsoever that this contract was frustrated when, due to the discovery of high
alumina cement in the construction of the stadium, its use was banned pending
further investigations and the permit for its use was revoked.’

15.2.2 SUPERVENING ILLEGALITY


The doctrine of illegality was examined in Chapter 13. We saw that the courts will
not enforce a contract that is tainted by illegality at its formation. Here we are
concerned with contracts that are legal when formed, but have become illegal due to
a supervening prohibition.

Denny, Mott & Dickson Ltd v James B Fraser & Company Ltd
[1944] AC 265

Facts: In 1929, the respondents and appellants entered into an agreement under
which the respondents leased the appellants a timber yard (with an option to purchase
it) and agreed to purchase all their supplies of timber from the appellants. In 1939,
further transactions in timber were made illegal by virtue of the Control of Timber
(No 4) Order 1939. The appellants continued to occupy the timber yard and in July
1941 sent a letter to the respondents purporting to terminate the agreement and stat-
ing their intention to exercise the option to purchase the timber yard.

Held: The House of Lords held that the agreement was a single contract which had
been discharged due to frustration of its main object. The respondents were therefore
unable to exercise the option to purchase the timber yard.

In the following section we will examine a number of limitations on the doctrine


of frustration. In particular, we will see that there will be no frustration if the
parties foresaw the event or assumed the risk of it occurring. Neither of these
limitations applies when the contract is frustrated by supervening illegality (Ertel
Bieber and Co v Rio Tinto Co Ltd [1918] AC 260). This is because, in such cases, the
public interest in seeing the law observed may trump the importance of achieving
a fair distribution of losses between the parties (see Treitel, The Law of Contract, 11th
edn, 2003, p 887, London: Sweet & Maxwell).

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15.2.3 FRUSTRATION OF PURPOSE


As we have seen it is very rare for the courts to hold that a contract has been
frustrated by an event that merely renders its performance more difficult or expen-
sive than anticipated (Davis Contractors Ltd v Fareham UDC [1956] AC 696;
Tsakiroglou & Co Ltd v Noble Thorl GmbH [1962] AC 93). The courts will not permit
the doctrine to be used as a means of escape for a party that has simply entered into a
bad bargain. Similarly, the courts are reluctant to hold that a contract has been
discharged merely because its purpose has been frustrated. This is illustrated by the
cases of Krell v Henry and Herne Bay Steam Boat Co v Hutton.

Krell v Henry [1903] 2 KB 740

Facts: The defendant had agreed to hire from the plaintiff some rooms at 56A Pall Mall
to watch the coronation procession of King Edward VII on 26 and 27 June 1902. He
paid £25 as a deposit and was to pay the balance of £50 on 24 June. The King became
seriously ill and the coronation processions were postponed. The defendant refused to
pay the balance and the plaintiff brought a claim for the outstanding balance. The
defendant counter-claimed to recover the £25 deposit he had paid. At first instance,
Darling J held that there was an implied term in the contract that the procession should
take place. Accordingly, he gave judgment for the defendant on both the claim and the
counterclaim.

Held: The Court of Appeal dismissed the appeal, holding that the contract had been
frustrated.

Vaughan Williams LJ:


‘The real question in this case is the extent of the application in English law of the
principle of the Roman law which has been adopted and acted on in many English
decisions, and notably in the case of Taylor v Caldwell 3 B & S 826 . . .
English law applies the principle not only to cases where the performance of the
contract becomes impossible by the cessation of existence of the thing which is
the subject-matter of the contract, but also to cases where the event which renders the
contract incapable of performance is the cessation or non-existence of an express
condition or state of things, going to the root of the contract, and essential to its
performance. It is said, on the one side, that the specified thing, state of things, or
condition the continued existence of which is necessary for the fulfilment of the
contract, so that the parties entering into the contract must have contemplated the
continued existence of that thing, condition, or state of things as the foundation of
what was to be done under the contract, is limited to things which are either the
subject-matter of the contract or a condition or state of things, present or anticipated,
which is expressly mentioned in the contract. But, on the other side, it is said that the
condition or state of things need not be expressly specified, but that it is sufficient if

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that condition or state of things clearly appears by extrinsic evidence to have been
assumed by the parties to be the foundation or basis of the contract, and the event
which causes the impossibility is of such a character that it cannot reasonably be
supposed to have been in the contemplation of the contracting parties when the con-
tract was made. In such a case the contracting parties will not be held bound by the
general words which, though large enough to include, were not used with reference to
a possibility of a particular event rendering performance of the contract impossible. I
do not think that the principle of the civil law as introduced into the English law is
limited to cases in which the event causing the impossibility of performance is the
destruction or non-existence of some thing which is the subject-matter of the contract
or of some condition or state of things expressly specified as a condition of it. I think
that you first have to ascertain, not necessarily from the terms of the contract, but, if
required, from necessary inferences, drawn from surrounding circumstances recog-
nised by both contracting parties, what is the substance of the contract, and then
to ask the question whether that substantial contract needs for its foundation the
assumption of the existence of a particular state of things. If it does, this will limit the
operation of the general words, and in such case, if the contract becomes impossible
of performance by reason of the non-existence of the state of things assumed by both
contracting parties as the foundation of the contract, there will be no breach of the
contract thus limited. Now what are the facts of the present case? The contract is
contained in two letters of June 20 which passed between the defendant and the
plaintiff’s agent, Mr Cecil Bisgood. These letters do not mention the coronation, but
speak merely of the taking of Mr Krell’s chambers, or, rather, of the use of them, in the
daytime of June 26 and 27, for the sum of £75, £25 then paid, balance £50 to be paid
on the 24th. But the affidavits, which by agreement between the parties are to be taken
as stating the facts of the case, shew that the plaintiff exhibited on his premises, third
floor, 56A, Pall Mall, an announcement to the effect that windows to view the Royal
coronation procession were to be let, and that the defendant was induced by that
announcement to apply to the housekeeper on the premises, who said that the owner
was willing to let the suite of rooms for the purpose of seeing the Royal procession for
both days, but not nights, of June 26 and 27. In my judgment the use of the rooms was
let and taken for the purpose of seeing the Royal procession. It was not a demise of the
rooms, or even an agreement to let and take the rooms. It is a licence to use rooms for
a particular purpose and none other. And in my judgment the taking place of those
processions on the days proclaimed along the proclaimed route, which passed 56A,
Pall Mall, was regarded by both contracting parties as the foundation of the contract;
and I think that it cannot reasonably be supposed to have been in the contemplation of
the contracting parties, when the contract was made, that the coronation would not
be held on the proclaimed days, or the processions not take place on those days
along the proclaimed route; and I think that the words imposing on the defendant the
obligation to accept and pay for the use of the rooms for the named days, although
general and unconditional, were not used with reference to the possibility of the par-
ticular contingency which afterwards occurred. It was suggested in the course of the

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argument that if the occurrence, on the proclaimed days, of the coronation and the
procession in this case were the foundation of the contract, and if the general words
are thereby limited or qualified, so that in the event of the non-occurrence of the
coronation and procession along the proclaimed route they would discharge both
parties from further performance of the contract, it would follow that if a cabman was
engaged to take some one to Epsom on Derby Day at a suitable enhanced price for
such a journey, say £10, both parties to the contract would be discharged in the
contingency of the race at Epsom for some reason becoming impossible; but I do not
think this follows, for I do not think that in the cab case the happening of the race would
be the foundation of the contract. No doubt the purpose of the engager would be to go
to see the Derby, and the price would be proportionately high; but the cab had no
special qualifications for the purpose which led to the selection of the cab for this
particular occasion. Any other cab would have done as well. Moreover, I think that,
under the cab contract, the hirer, even if the race went off, could have said, “Drive me
to Epsom; I will pay you the agreed sum; you have nothing to do with the purpose for
which I hired the cab,” and that if the cabman refused he would have been guilty of a
breach of contract, there being nothing to qualify his promise to drive the hirer to
Epsom on a particular day. Whereas in the case of the coronation, there is not merely
the purpose of the hirer to see the coronation procession, but it is the coronation
procession and the relative position of the rooms which is the basis of the contract as
much for the lessor as the hirer; and I think that if the King, before the coronation day
and after the contract, had died, the hirer could not have insisted on having the rooms
on the days named. It could not in the cab case be reasonably said that seeing the
Derby race was the foundation of the contract, as it was of the licence in this case.
Whereas in the present case, where the rooms were offered and taken, by reason of
their peculiar suitability from the position of the rooms for a view of the coronation
procession, surely the view of the coronation procession was the foundation of the
contract, which is a very different thing from the purpose of the man who engaged the
cab – namely, to see the race – being held to be the foundation of the contract. Each
case must be judged by its own circumstances. In each case one must ask oneself,
first, what, having regard to all the circumstances, was the foundation of the contract?
Secondly, was the performance of the contract prevented? Thirdly, was the event
which prevented the performance of the contract of such a character that it cannot
reasonably be said to have been in the contemplation of the parties at the date of
the contract? If all these questions are answered in the affirmative (as I think they
should be in this case), I think both parties are discharged from further performance
of the contract. I think that the coronation procession was the foundation of this
contract, and that the non-happening of it prevented the performance of the con-
tract; and, secondly, I think that the non-happening of the procession, to use the
words of Sir James Hannen in Baily v De Crespigny LR 4 QB 185, was an event “of
such a character that it cannot reasonably be supposed to have been in the contem-
plation of the contracting parties when the contract was made, and that they are not
to be held bound by general words which, though large enough to include, were not

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used with reference to the possibility of the particular contingency which afterwards
happened” . . .
In the present case the condition which fails and prevents the achievement of that
which was, in the contemplation of both parties, the foundation of the contract, is not
expressly mentioned either as a condition of the contract or the purpose of it; but I
think for the reasons which I have given that the principle of Taylor v Caldwell ought to
be applied.’
[ROMER and STIRLING JJ delivered concurring judgments]

Herne Bay Steam Boat Company v Hutton [1903] 2 KB 683

Facts: Mr Hutton agreed to hire the steamship Cynthia from Herne Bay for 28 and
29 June ‘for the purpose of viewing the naval review and for a day’s cruise round the
fleet’. The hire charge was £250 and Mr Hutton paid a deposit of £50. On 25 June the
review was officially cancelled because of the King’s illness, but the fleet remained in
place. Mr Hutton sought to repudiate the contract. Herne Bay brought a claim for the
balance owing minus the profit they had made from using the Cynthia for their own
purposes on 28 and 29 June. Mr Hutton counter-claimed for the return of his £50
deposit. At first instance, Grantham J held that neither Herne Bay nor Mr Hutton could
recover.

Held: The Court of Appeal allowed the appeal, holding that the contract had not been
frustrated and accordingly the plaintiffs were entitled to recover damages for breach of
contract.

Vaughan Williams LJ:


‘Mr Hutton, in hiring this vessel, had two objects in view: first, of taking people to see
the naval review, and, secondly, of taking them round the fleet. Those, no doubt, were
the purposes of Mr Hutton, but it does not seem to me that because, as it is said, those
purposes became impossible, it would be a very legitimate inference that the happen-
ing of the naval review was contemplated by both parties as the basis and foundation
of this contract, so as to bring the case within the doctrine of Taylor v Caldwell 3 B & S
826. On the contrary, when the contract is properly regarded, I think the purpose of Mr
Hutton, whether of seeing the naval review or of going round the fleet with a party of
paying guests, does not lay the foundation of the contract within the authorities.
Having expressed that view, I do not know that there is any advantage to be gained
by going on in any way to define what are the circumstances which might or might not
constitute the happening of a particular contingency as the foundation of a contract. I
will content myself with saying this, that I see nothing that makes this contract differ
from a case where, for instance, a person has engaged a brake to take himself and a
party to Epsom to see the races there, but for some reason or other, such as the spread
of an infectious disease, the races are postponed. In such a case it could not be said

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that he could be relieved of his bargain. So in the present case it is sufficient to say that
the happening of the naval review was not the foundation of the contract.’

Romer LJ:
‘In my opinion, as my Lord has said, it is a contract for the hiring of a ship by the
defendant for a certain voyage, though having, no doubt, a special object, namely, to
see the naval review and the fleet; but it appears to me that the object was a matter
with which the defendant, as hirer of the ship, was alone concerned, and not the
plaintiffs, the owners of the ship.
The case cannot, in my opinion, be distinguished in principle from many common
cases in which, on the hiring of a ship, you find the objects of the hiring stated. Very
often you find the details of the voyage stated with particularity, and also the nature
and details of the cargo to be carried. If the voyage is intended to be one of pleasure,
the object in view may also be stated, which is a matter that concerns the passengers.
But this statement of the objects of the hirer of the ship would not, in my opinion, justify
him in saying that the owner of the ship had those objects just as much in view as the
hirer himself. The owner would say, “I have an interest in the ship as a passenger or
cargo carrying machine, and I enter into the contract simply in that capacity; it is for the
hirer to concern himself about the objects”.
The view I have expressed with regard to the general effect of the contract before us
is borne out by the following considerations. The ship (as a ship) had nothing particular
to do with the review or the fleet except as a convenient carrier of passengers to see it:
any other ship suitable for carrying passengers would have done equally as well. Just
as in the case of the hire of a cab or other vehicle, although the object of the hirer might
be stated, that statement would not make the object any the less a matter for the hirer
alone, and would not directly affect the person who was letting out the vehicle for hire.
In the present case I may point out that it cannot be said that by reason of the failure to
hold the naval review there was a total failure of consideration. That cannot be so. Nor
is there anything like a total destruction of the subject-matter of the contract. Nor can
we, in my opinion, imply in this contract any condition in favour of the defendant
which would enable him to escape liability. A condition ought only to be implied in
order to carry out the presumed intention of the parties, and I cannot ascertain any
such presumed intention here. It follows that, in my opinion, so far as the plaintiffs are
concerned, the objects of the passengers on this voyage with regard to sight-seeing
do not form the subject-matter or essence of this contract . . .’

Stirling LJ:
‘It is said that, by reason of the reference in the contract to the “naval review”, the
existence of the review formed the basis of the contract, and that as the review failed
to take place the parties became discharged from the further performance of the
contract, in accordance with the doctrine of Taylor v Caldwell. I am unable to arrive at
that conclusion. It seems to me that the reference in the contract to the naval review is
easily explained; it was inserted in order to define more exactly the nature of the
voyage, and I am unable to treat it as being such a reference as to constitute the naval

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review the foundation of the contract so as to entitle either party to the benefit of the
doctrine in Taylor v Caldwell. I come to this conclusion the more readily because the
object of the voyage is not limited to the naval review, but also extends to a cruise
round the fleet. The fleet was there, and passengers might have been found willing to
go round it. It is true that in the event which happened the object of the voyage became
limited, but, in my opinion, that was the risk of the defendant whose venture the taking
the passengers was.’

Much ink has been spilt on identifying the distinction between Krell and Hutton.
Both cases were decided at the same time by the same panel of judges, yet they
appear to be hard to reconcile. Why was a contract to let a room for the viewing of
the coronation frustrated by the cancellation of the coronation, while a contract to
hire a boat from which to watch the naval review was not? A number of answers
have been given:
1. The purpose in Krell (watching the coronation) was wholly frustrated by the
postponement of the coronation, whereas the purpose in Hutton was only par-
tially frustrated. As Stirling LJ noted, the object of the voyage was not limited
to the naval review, but also extended to a cruise round the fleet. The fleet was
still in place, and so the tour could go still ahead. Professor Treitel (Treitel, G,
Frustration and Force Majeure, 2nd edn, 2004, Para 7–014, London: Sweet &
Maxwell) has commented:
‘This reflects a recurrent feature of the cases on frustration of purpose,
which shows that the approach of the law to partial frustration of purpose
differs from that which it adopts to partial impossibility. In cases of partial
impossibility, a contract can be discharged if its main purpose can no
longer be achieved; but in cases of frustration of purpose the courts have
applied the more rigorous test of asking whether any part of the con-
tractual purpose (other than a part which was wholly trivial) could still be
achieved: if so, they have refused to apply the doctrine of discharge.’
2. The ‘common purpose’ of both parties in Krell was for the rooms to be used for
the viewing of the procession and this purpose was frustrated when the coron-
ation was postponed. There was no such common purpose in Hutton. Romer LJ
considered that, ‘[the] statement of the objects of the hirer of the ship would
not . . . justify him in saying that the owner of the ship had those objects just as
much in view as the hirer himself.’ This meant that, although the postpone-
ment had frustrated Hutton’s purpose in entering into the contract, it had not
frustrated Herne Bay’s purpose, which was presumably to provide a tour of the
fleet. Professor Treitel (at para 7–014) has written:

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‘This emphasis on the requirement that the purpose of both parties must
be frustrated is found also in other English and American cases. It means
that the supervening event must prevent one party from supplying, and
the other from obtaining, what the former had contracted to provide and
the latter to acquire under the contract.’
This also explains why the contract was not frustrated in Vaughan LJ’s
example of the taxi cab hired to go to Epsom on Derby Day. Although it
was the hirer’s purpose to view the Derby, this was not the taxi owner’s
purpose.
3. Professor Brownsword (‘Towards a rational law of contract’, in Willhelmson, T
(ed), Perspectives of Critical Contract Law, 1993, Aldershot: Dartmouth, pp 246–
247) has suggested that the true distinction lies in the fact Hutton was
engaged in a commercial enterprise (he intended to sell tickets for the trip on
the Cynthia at a profit), whereas Henry was in effect a ‘consumer’, whose only
interest was in getting a good view of the procession. The Court of Appeal in
Hutton was unwilling to allow the doctrine of frustration to be used as a means
of escaping from a bad commercial bargain.
4. A further explanation of the decision in Krell was provided by Posner CJ in
Northern Indiana Public Service Co v Carbon County Coal Co 799 F 2d 265. He
noted that, ‘Krell could always relet the room, at the premium rental, for the
coronation’s new date’. However, as Professor Treitel has observed (at para
7–011), this argument overlooks the fact that the procession that eventually
took place in October took a different route from the one that was planned for
June. Furthermore, it fails to take into account the expenditure that Mr Krell
had wasted on making preparations for the June procession.

15.3 LIMITATIONS ON THE DOCTRINE

There are two specific limitations on the doctrine of frustration.

15.3.1 SELF-INDUCED FRUSTRATION


The event that renders performance of the contract ‘radically different’ from that
which was envisaged must not be attributable to the fault of the party seeking to
rely on it. As Lord Sumner said in Bank Line Ltd v Arthur Capel & Co [1919] AC
435, 452:
‘[I]t is now well settled that the principle of frustration of an adventure
assumes that the frustration arises without blame or fault on either side.

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Reliance cannot be placed on a self-induced frustration; indeed, such conduct


might give the other party the option to treat the contract as repudiated.’
If a party wishes to argue that a frustrating event is self-induced by the other
party they must prove it on the balance of probabilities (Joseph Constantine Steamship
Line Ltd v Imperial Smelting Corpn Ltd [1942] AC 154). The limitation on self-
induced frustration is relatively straightforward but, in practice, it is often difficult
to apply.

Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524

Facts: The appellants chartered a steam trawler, the St Cuthbert, from the respond-
ents. It was fitted with an ‘otter trawl’, which it was an offence to use without a licence
from the Minister of Fisheries. In March 1933 the appellants applied for licences for the
five trawlers which they were operating. The Minister said that he would only grant
three licences and asked the appellants to name the three trawlers in respect of which
the licences would apply. The three trawler names given by the appellants did not
include the St Cuthbert. The appellants thereupon claimed that the charterparty had
been frustrated by the Minister’s refusal to issue a licence. The respondents brought a
claim for the hire due under the charter. The trial judge, Doull J, gave judgment for the
appellants. This decision was reversed by the Supreme Court of Nova Scotia.

Held: The Privy Council dismissed the appeal. The contract had not been frustrated
because the appellants’ own election had prevented the respondents’ trawler from
being used as an otter trawl.

Lord Wright (delivering the opinion of the Privy Council):


‘It is clear that the appellants were free to select any three of the five trawlers they were
operating and could, had they willed, have selected the St Cuthbert as one, in which
event a licence would have been granted to her. It is immaterial to speculate why they
preferred to put forward for licences the three trawlers which they actually selected.
Nor is it material, as between the appellants and the respondents, that the appellants
were operating other trawlers to three of which they gave the preference. What matters
is that they could have got a licence for the St Cuthbert if they had so minded. If the
case be figured as one in which the St Cuthbert was removed from the category of
privileged trawlers, it was by the appellants’ hand that she was so removed, because it
was their hand that guided the hand of the Minister in placing the licences where he did
and thereby excluding the St Cuthbert. The essence of “frustration” is that it should not
be due to the act or election of the party . . .
If it be assumed that the performance of the contract was dependent on a licence
being granted, it was that election which prevented performance, and on that assump-
tion it was the appellants’ own default which frustrated the adventure: the appellants
cannot rely on their own default to excuse them from liability under the contract . . .

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[T]heir Lordships are of opinion that the loss of the St Cuthbert’s licence can cor-
rectly be described, quoad the appellants, as “a self induced frustration” . . . On this
ground . . . their Lordships are of opinion that the appeal should be dismissed with
costs.’

Few would argue with the decision in Maritime National Fish Ltd. The appellants
had a choice as to the allocation of the licences and decided to allocate them to their
own trawlers rather than to the St Cuthbert. The issue would have been much more
difficult had all the trawlers been chartered to the appellants, so that they had to
decide which of the five chartered ships should be denied a licence. Such a situation
arose in The Super Servant Two.

J Lauritzen AS v Wijsmuller BV (The Super Servant Two)


[1990] 1 Lloyd’s Rep 1

Facts: The defendants, Wijsmuller, agreed to carry Lauritzen’s drilling rig (the Dan
King) from a shipyard in Japan to a delivery location off the coast of the Netherlands.
The rig was to be delivered on a date between 20 June 1981 and 20 August 1981,
using either the Super Servant One or the Super Servant Two. The contract contained a
force majeure clause which provided the following:

‘17. Cancellation
17.1 Wijsmuller has the right to cancel its performance under this Contract whether
the loading has been completed or not, in the event of force majeur(sic), Acts of God,
perils or danger and accidents of the sea, acts of war, warlike-operations, acts of
public enemies, restraint of princes, rulers or people or seizure under legal process,
quarantine restrictions, civil commotions, blockade, strikes, lockout, closure of the
Suez or Panama Canal, congestion of harbours or any other circumstances what-
soever, causing extra-ordinary periods of delay and similar events and/or circum-
stances, abnormal increases in prices and wages, scarcity of fuel and similar events,
which reasonably may impede, prevent or delay the performance of this contract.’

The defendants had intended to use Super Servant Two for the Dan King contract and
had entered into other contracts which they intended to perform using Super Servant
One. On 29 Jan 1981, Super Servant Two sank. The defendants informed the plaintiffs
that they could no longer carry out the Dan King contract, claiming that they were
permitted to cancel the contract under cl 17 and that, in any event, the contract had
been frustrated by the sinking of Super Servant Two.

Held: The Court of Appeal held that the contract could only be cancelled under cl 17 if
the loss of Super Servant Two had not been due to the negligence of the defendants.
The doctrine of frustration did not operate on the facts of the case because the

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defendants could have fulfilled their contractual obligations by using Super Servant
One. Additionally, the defendants would be precluded from relying on the doctrine of
frustration if it could be shown that the loss of Super Servant Two had been caused by
their own negligence.

Bingham LJ:
‘Certain propositions, established by the highest authority, are not open to question:

1. The doctrine of frustration was evolved to mitigate the rigour of the common law’s
insistence on literal performance of absolute promises . . . The object of the doctrine
was to give effect to the demands of justice, to achieve a just and reasonable result, to
do what is reasonable and fair, as an expedient to escape from injustice where such
would result from enforcement of a contract in its literal terms after a significant change
in circumstances . . .

2. Since the effect of frustration is to kill the contract and discharge the parties from
further liability under it, the doctrine is not to be lightly invoked, must be kept within
very narrow limits and ought not to be extended . . .

3. Frustration brings the contract to an end forthwith, without more and auto-
matically . . .

4. The essence of frustration is that it should not be due to the act or election of the
party seeking to rely on it . . . A frustrating event must be some outside event or
extraneous change of situation . . .

5. A frustrating event must take place without blame or fault on the side of the party
seeking to rely on it . . .

Question 2(a)
Mr Clarke for Wijsmuller submitted that the extraneous supervening event necessary
to found a plea of frustration occurred when Super Servant Two sank on Jan 29, 1981.
The Dan King contract was not, however, thereupon frustrated but remained alive until
Wijsmuller decided a fortnight later that that contract could not be, or would not be,
performed. There was, he submitted, factually, no break in the chain of causation
between the supervening event and the non-performance of the contract. He acknow-
ledged that Maritime National Fish Ltd, contained observations on their face inimical to
his argument, but distinguished that as a decision on causation confined to its own
peculiar facts and laying down no general rule. For authoritative support Mr Clarke
relied on cases dealing with the application of force majeure clauses in commodity
contracts, and in particular on an unreported judgment of Mr Justice Robert Goff, as he
then was, adopted with approval by the Court of Appeal in Bremer Handelsgesellschaft
mbh v Continental Grain Co [1983] 1 Lloyd’s Rep 269 at p 292:

“. . . the question resolves itself into a question of causation; in my judgment, at


least in a case in which a seller can (as in the present case) claim the protection
of a clause which protects him where fulfilment is hindered by the excepted peril,

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subsequent delivery of his available stock to other customers will not be regarded
as an independent cause of shortage, provided that in making such delivery the
seller acted reasonably in all the circumstances of the case. . . .”

A similar approach was reflected in other cases: see, for example, Intertradex SA v
Lesieur – Tourteaux SARL [1977] 2 Lloyd’s Rep 146 at p 115, per Mr Justice Donaldson
as he then was; [1978] 2 Lloyd’s Rep 509 at p 513, per Lord Denning, MR. Reliance
was also placed on passages in The Law of Contract (7th edn) by Professor Treitel,
which the Judge quoted in his judgment at p 152. Thus, Mr Clarke urged, this was a
case in which Wijsmuller could not perform all their contracts once Super Servant Two
was lost; they acted reasonably (as we must assume) in treating the Dan King contract
as one they could not perform; so the sinking had the direct result of making that
contract impossible to perform.
Mr Legh-Jones answered that since the contract provided for the carriage to be
performed by one or other vessel the loss of one did not render performance radically
different, still less impossible. That apart, Wijsmuller’s argument fell foul of the prin-
ciples summarised above since (among other things) the frustration they sought to
establish did not bring the contract to an end forthwith, without more and automatically
and was not independent of the act or election of Wijsmuller. The force majeure cases
were good law so far as they went, but it was one thing to construe and apply a
consensual force majeure clause, another to determine whether the facts were such
that the law should hold the contract to be discharged.
The doctrine of frustration depends on a comparison between circumstances as
they are or are assumed to be when a contract is made and circumstances as they are
when a contract is, or would be, due to be performed. It is trite law that disappointed
expectations do not of themselves give rise to frustrated contracts. To frustrate, an
event must significantly change –

“. . . the nature (not merely the expense or onerousness) of the outstanding con-
tractual rights and/or obligations from what the parties could reasonably have
contemplated at the time of [the contract’s] execution . . . [National Carriers Ltd,
at p 700, per Lord Simon of Glaisdale].

Had the Dan King contract provided for carriage by Super Servant Two with no alterna-
tive, and that vessel had been lost before the time for performance, then assuming no
negligence by Wijsmuller (as for purposes of this question we must), I feel sure the
contract would have been frustrated. The doctrine must avail a party who contracts to
perform a contract of carriage with a vessel which, through no fault of his, no longer
exists. But that is not this case. The Dan King contract did provide an alternative. When
that contract was made one of the contracts eventually performed by Super Servant
One during the period of contractual carriage of Dan King had been made, the other
had not, at any rate finally. Wijsmuller have not alleged that when the Dan King contract
was made either vessel was earmarked for its performance. That, no doubt, is why an
option was contracted for. Had it been foreseen when the Dan King contract was made

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that Super Servant Two would be unavailable for performance, whether because she
had been deliberately sold or accidentally sunk, Lauritzen at least would have thought
it no matter since the carriage could be performed with the other. I accordingly accept
Mr Legh-Jones’ submission that the present case does not fall within the very limited
class of cases in which the law will relieve one party from an absolute promise he has
chosen to make.
But I also accept Mr Legh-Jones’ submission that Wijsmuller’s argument is subject
to other fatal flaws. If, as was argued, the contract was frustrated when Wijsmuller
made or communicated their decision on Feb 16, it deprives language of all meaning to
describe the contract as coming to an end automatically. It was, indeed, because the
contract did not come to an end automatically on Jan. 29, that Wijsmuller needed a
fortnight to review their schedules and their commercial options. I cannot, furthermore,
reconcile Wijsmuller’s argument with the reasoning or the decision in Maritime National
Fish Ltd. In that case the Privy Council declined to speculate why the charterers
selected three of the five vessels to be licensed but, as I understand the case, regarded
the interposition of human choice after the allegedly frustrating event as fatal to the
plea of frustration. If Wijsmuller are entitled to succeed here, I cannot see why the
charterers lost there. The cases on frustrating delay do not, I think, help Wijsmuller
since it is actual and prospective delay (whether or not recognized as frustrating by a
party at the time) which frustrates the contract, not a party’s election or decision to
treat the delay as frustrating.
I have no doubt that force majeure clauses are, where their terms permit, to be
construed and applied as in the commodity cases on which Wijsmuller relied, but it is
in my view inconsistent with the doctrine of frustration as previously understood on
high authority that its application should depend on any decision, however reasonable
and commercial, of the party seeking to rely on it.
I reach the same conclusion as the Judge for the reasons which he lucidly and
persuasively gave.

Question 2(b)
The issue between the parties was short and fundamental: what is meant by saying
that a frustrating event, to be relied on, must occur without the fault or default, or
without blame attaching to, the party relying on it?
Mr Clarke’s answer was that a party was precluded from relying on an event only
when he had acted deliberately or in breach of an actionable duty in causing it. Those
conditions were not met here since it was not alleged Wijsmuller sank Super Servant
Two deliberately and at the material time Wijsmuller owed Lauritzen no duty of care if
(as I have held) cl 15 did not apply when the vessel sank. Mr Clarke relied on tentative
doubts expressed in Joseph Constantine Steamship Ltd, whether mere negligence
would render an event “self induced” and on a statement of Lord Diplock in Cheall v
Association of Professional Executive and Clerical Computer Staff [1983] 2 AC 180 at
pp 188–189 . . .
Wijsmuller’s test would, in my judgment, confine the law in a legalistic strait-jacket

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and distract attention from the real question, which is whether the frustrating event
relied upon is truly an outside event or extraneous change of situation or whether it is
an event which the party seeking to rely on it had the means and opportunity to prevent
but nevertheless caused or permitted to come about. A fine test of legal duty is
inappropriate; what is needed is a pragmatic judgment whether a party seeking to rely
on an event as discharging him from a contractual promise was himself responsible for
the occurrence of that event.
Lauritzen have pleaded in some detail the grounds on which they say that Super
Servant Two was lost as a result of the carelessness of Wijsmuller, their servants or
agents. If those allegations are made good to any significant extent Wijsmuller would
(even if my answer to Question 2(a) is wrong) be precluded from relying on their plea of
frustration.
I would answer this question also as the Judge did and would therefore dismiss the
appeal.’

Dillon LJ:
‘Issues 2(a) and (b) are concerned with frustration. Was the contract frustrated by the
sinking of Super Servant Two or by that event coupled with the subsequent election by
the defendants to use Super Servant One on other voyages and not for carrying the
Dan King? . . .
It is the view of Professor Treitel, expressed both in his own book on the Law of
Contract – see the 7th edn at pp 674–675 and 700–701 – and in the current editions of
well-known textbooks of which he is editor or an editor, that where a party has entered
into a number of contracts with other parties and an uncontemplated supervening
event has the result that he is deprived of the means of satisfying all those contracts,
he can, provided he acts “reasonably” in making his election, elect to use such means
as remains available to him to perform some of the contracts, and claim that the
others, which he does not perform, have been frustrated by the supervening event.
The reasoning depends on the proposition that if it is known to those concerned that
the party will have entered into commitments with others and if he acts “reasonably” in
his allocation of his remaining means to his commitments, the chain of causation
between the uncontemplated supervening event and the non-performance of those of
his contracts which will not have been performed will not have been broken by the
election to apply his remaining means in a “reasonable” way. Similar reasoning was,
as my Lord has pointed out, used by Mr Justice Robert Goff in relation to an excep-
tions clause in the unreported case of Westfalische Central-Genossenschaft GmbH
v Seabright Chemicals Ltd.
Such an approach is however inconsistent to my mind with the view expressed by
Lord Wright in that passage in Maritime National Fish . . . where he said: “It is imma-
terial to speculate why they preferred to put forward for licences the three trawlers
which they actually selected.” It is also, as my Lord has pointed out, inconsistent with
the long accepted view that frustration brings the contract to an end forthwith, without
more ado automatically. Plainly the sinking of Super Servant Two did not do that, since

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even after that sinking the defendants could have used Super Servant One to perform
the contract.
We in this Court should apply Maritime National Fish and the other authorities to
which my Lord has referred. Accordingly I agree with my Lord and the learned Judge
that issues 2(a) and (b) should be answered in the negative.’

The first point to note is that a party will only be entitled to rely on the doctrine of
frustration if s/he can show that the frustrating event took place ‘without blame or
fault’ on his/her part. For this reason, the Court of Appeal held that the defendants
would be precluded from relying on the doctrine of frustration if it could be shown
that Super Servant Two had been lost as a result of their own negligence.
Second, Bingham LJ held that the mere existence of a choice for one of the parties
was sufficient to preclude reliance on the doctrine of frustration. He relied on the
decision of the Privy Council in Maritime National Fish Ltd, and distinguished
the authorities relied on by the defendants on the ground that they concerned the
construction of force majeure clauses rather than the operation of frustration. The
decision in Super Servant Two has been strongly criticised by Professor Treitel
(Treitel, G, Frustration and Force Majeure, 2nd edn, 2004, Para 14–024, London:
Sweet & Maxwell):
‘Three lines of reasoning are given in the judgments but it is submitted with
great respect that none of them is wholly convincing. First, it was said that the
Maritime National Fish case had established that a party could not rely on
frustration where his failure or inability was due to his “election”; and that the
court in The Super Servant Two should follow the decision. It is, however,
submitted that the two cases are readily distinguishable: in the Maritime
National Fish case it was possible for the charterer to perform all the contracts
which he had made with the owners of the other trawlers, even though only
three licences had been allocated to him; while in The Super Servant Two it was
no longer possible, after the loss of the ship, for the carrier to perform all
the contracts which he had made to carry drilling rigs during the period in
question. Secondly, it was said that, if the carrier were given a choice which of
the contracts he would perform, frustration of the other or others could come
about only as a result of the exercise of that choice, and such a position would
be inconsistent with the rule that frustration occurs automatically, without any
election by either party. Again, it is submitted that this line of reasoning is
not conclusive since the rule that frustration operates automatically is subject
to qualification precisely in cases of allegedly self-induced frustration . . .
Moreover, the element of “election” could be eliminated if the question, which
of the contracts was to be discharged, were left to be determined, not by the

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free choice of the promisor, but by a rule of law, e.g. by a rule to the effect that
the various contracts should for this purpose rank in the order in which they
were made. It may, from this point of view, be relevant that, in The Super
Servant Two, some of the contracts which the carrier chose to perform (by the
use of his other ship during the relevant period) had not been made “at any
rate finally” until after the contract with the claimant . . . The third reason
given for the decision is that: “It is within the promisor’s own control how
many contracts he enters into and the risk should be his”. But this reasoning
seems to undermine the whole basis of the doctrine of frustration: it has just as
much force where the promisor enters into a single contract as it has where he
enters into two or more, with different contracting parties. This, indeed, is the
fundamental objection to the reasoning of The Super Servant Two, and it is
submitted that the rationale of the doctrine should lead to discharge of some
of the contracts where the supervening event which makes it impossible to
perform them all occurs without the fault of the party claiming discharge.
Consistency with the reasoning of the Maritime National Fish case could be
preserved by holding that which contracts were to be discharged should
depend, not on the free election of the party who can no longer perform them
all, but on a rule of law. On this view, the actual decision in The Super Servant
Two could be justified by reference to the order in which the various contracts
with the carrier were made.’
Professor Treitel’s criticisms are compelling. In practice, however, the effects of the
rule are often mitigated by the inclusion of a specific clause in the contract to deal
with the situation if it arises. Indeed, in The Super Servant Two, the Court of Appeal
held that the defendants were entitled to rely on cl 7 of the contract (a force majeure
clause), provided that the sinking of the vessel was not caused by their own neg-
ligence, even though the contract was not held to have been frustrated under the
common law. This brings us on to our second limitation – events foreseen and
provided for in the contract.

15.3.2 EVENTS FORESEEN AND PROVIDED FOR


If the contract itself makes provision for the supervening event, then the doctrine of
frustration will have no role to play. It is a question of construction whether the
terms of the contract are apt to cover the situation that has arisen. Historically, the
courts have narrowly construed force majeure clauses. In Jackson v Union Marine
Insurance Co Ltd (1874) LR 10 CP 125 (the facts of which we have already con-
sidered), the charter stated that the ship should ‘proceed with all possible dispatch
(dangers and accidents of navigation excepted)’. It was held by the Exchequer
Chamber that the exception in the contract absolved the shipowner of liability in

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the event of delay, but did not give him the right to bring an action if the delay was
bad enough to frustrate the contract. Bramwell B said:
‘Now, what is the effect of the exception of perils of the seas, and of delay
being caused thereby? . . . I think this: they excuse the shipowner, but give
him no right. The charterer has no cause of action, but is released from the
charter. When I say he is, I think both are. The condition precedent has not
been performed, but by default of neither . . . The exception is an excuse for
him who is to do the act, and operates to save him from an action and make his
non-performance not a breach of contract, but does not operate to take away
the right the other party would have had, if the non-performance had been a
breach of contract, to retire from the engagement: and, if one party may, so
may the other.’
Similarly, the House of Lords adopted a narrow construction of words defining an
event in:

Metropolitan Water Board v Dick Kerr [1918] AC 119

Facts: In 1914, the defendants agreed to construct a reservoir for the plaintiff water
board. The work was to be completed within six years, subject to a proviso (condition
32) that ‘if by reason of . . . any difficulties, impediments, obstructions, oppositions,
doubts, disputes, or differences, whatsoever and howsoever occasioned, the con-
tractor shall, in the opinion of the engineer (whose decision shall be final), have been
unduly delayed or impeded in the completion of this contract, it shall be lawful for the
engineer, if he shall so think fit, to grant . . . such extension of time either prospectively
or retrospectively . . . as to him may seem reasonable’. In 1916, the Ministry of
Munitions ordered the contractors to cease work on the contract pursuant to their
powers under the Defence of the Realm Acts and Regulations. The defendants
claimed that the contract had been frustrated. The plaintiffs argued that the contract
had not been frustrated on the ground that the event was provided for by the terms of
the contract.

Held: The House of Lords held that the provision was only intended to deal with
temporary delays and did not apply to the prohibition of the Ministry. Accordingly, the
contract was discharged for frustration.

Lord Finlay LC:


‘It is admitted that the prosecution of the works became illegal in consequence of the
action of the Minister of Munitions. It became illegal on February 21, 1916, and remains
illegal at the present time. This is not a case of a short and temporary stoppage, but of
a prohibition in consequence of war, which has already been in force for the greater
part of two years, and will, according to all appearances, last as long as the war itself,

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as it was the result of the necessity of preventing the diversion to civil purposes
of labour and material required for purposes immediately connected with the war.
Condition 32 provides for cases in which the contractor has, in the opinion of the
engineer, been unduly delayed or impeded in the completion of his contract by any of
the causes therein enumerated or by any other causes, so that an extension of time
was reasonable. Condition 32 does not cover the case in which the interruption is of
such a character and duration that it vitally and fundamentally changes the conditions
of the contract, and could not possibly have been in the contemplation of the parties to
the contract when it was made.’

It is clear that the parties will need to be very specific if they intend a clause to deal
with an event that would otherwise amount to frustration. In modern times, how-
ever, the courts have shown an increased willingness to interpret force majeure clauses
within their factual matrix, giving effect to the purposes that such clauses are
intended to fulfil.
There is an argument that force majeure clauses are in effect exclusion clauses,
falling within the scope of the UCTA 1977 (see Wheeler, S and Shaw, J, Contract
Law Cases, Materials and Commentary, 1994, p 760, Oxford: Clarendon Press). To the
extent that the clause provides that the contract is to remain in force, it is not a
clause that excludes or restricts liability. On the contrary, it is a clause that preserves
contractual liability, which would otherwise be discharged on the occurrence of the
frustrating event. If, however, the clause also deals with the effects of a frustrating
event, for example, by prohibiting restitution, the clause may fall within the scope
of the UCTA 1977, and it will need to meet the requirements of reasonableness
under ss 3 and 11 of the Act (see Chapter 8).

15.4 EFFECTS OF FRUSTRATION: COMMON LAW

The effects of a frustrating event are governed by the common law and the provi-
sions of the Law Reform (Frustrated Contracts) Act (LR(FC)A) 1943. In this section
we will examine the common law rules, and in the next we will consider the main
provisions of the Act. We will see that the objectives of the doctrine become
important in this context. The common law has historically adopted the view that
the aim of the doctrine is to relieve the parties from the burden of having to perform
obligations that have subsequently become impossible. This objective is achieved
by the automatic termination of the contract and a limited right to restitutionary
relief. A wider role for the doctrine has been envisaged by Parliament. The 1943
Act enables the courts to apportion the losses resulting from the unforeseen event by
means of a more flexible form of restitutionary relief.

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15.4.1 AUTOMATIC DISCHARGE


If a contract is frustrated it is automatically discharged at common law. It is not
open to the parties to decide that the contract should continue.

Hirji Mulji v Cheong Yue Steamship Co Ltd [1926] AC 497

Facts: In November 1916, the respondents entered into a charterparty under which
they agreed to place their ship, the Singaporean, at the disposal of the appellants on
1 March 1917 for 10 months. Shortly afterwards, the ship was requisitioned by the
Government. The respondents thought that the ship would soon be released and
asked the appellants whether they would still be willing to take up the charter when this
happened. The appellants said that they would. In fact, the ship was not released until
February 1919 and the appellants refused to take delivery of her at that time. The
respondents argued that the appellants had affirmed the contract after the frustrating
event and were therefore bound to take delivery of the ship.

Held: The Privy Council held that the contract had been automatically discharged by
the frustrating event. Accordingly, affirmation of the contract was not possible.

Lord Sumner (delivering the opinion of the Privy Council):


‘Throughout the line of cases, now a long one, in which it has been held that certain
events frustrate the commercial adventure contemplated by the parties when they
made the contract, there runs an almost continuous series of expressions to the effect
that such a frustration brings the contract to an end forthwith, without more and auto-
matically . . . [W]hatever the consequences of the frustration may be upon the conduct
of the parties, its legal effect does not depend on their intention or their opinions, or even
knowledge, as to the event, which has brought this about, but on its occurrence in such
circumstances as show it to be inconsistent with further prosecution of the adventure.
Sometimes the event is such as to speak for itself, like the outbreak of war on August 4,
1914, in Horlock v Beal: see per Lord Wrenbury [1916] 1 AC 486, 528. Sometimes the
frustration is evident, when the gravity and the circumstances of the breakdown can be
known, as in Bensaude’s case [1897] AC 609; sometimes, as in the case of requisition,
when it can be known that in all reasonable probability the delay will be prolonged and a
fortiori when it has continued so long as to defeat the adventure. Frustration is then
complete. It operates automatically: Larrinaga & Co’s case (1922) 27 Com Cas 160.
What the parties say and do is only evidence, and not necessarily weighty evidence, of
the view to be taken of the event by informed and experienced minds.’

15.4.2 PROSPECTIVE OPERATION OF DISCHARGE


Frustration discharges the contract prospectively. This means that the parties are
excused from their future obligations but not from the obligations that existed prior

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to the time of the frustrating event. Often this can lead to one party being unjustly
enriched at the expense of the other. For example, suppose that I agree to provide
you with a room from which to view the coronation of the new king of England.
Under the agreement you are required to pay me in full, 10 days prior to the
coronation. Tragically, the new king dies two days before his coronation and the
contract is frustrated. I am no longer bound to provide you with the room, since
the frustrating event has automatically discharged my future obligations. You,
however, are unable to recover the money you paid in advance, since the obligation
to pay the money arose prior to the frustrating event.
The traditional common law position was that money paid prior to the frustrat-
ing event could not be recovered and money payable prior to discharge remained
due (Chandler v Webster [1904] 1 KB 493). This rule was based on the mistaken
assumption that a restitutionary claim for total failure of consideration could only
be made if the underlying contract had been rescinded ab initio (from the beginning
– as in cases of common mistake). In other words, total failure of consideration
requires a total failure of the contractual promise, that is, the contractual consider-
ation. This view was rejected by the House of Lords in Fibrosa Spolka Akcyjna v
Fairbairn Lawson Combe Barbour Ltd. [1943] AC 32 (see full extract in Chapter 18).
Viscount Simon LC distinguished consideration in the formation of a contract from
restitutionary failure of consideration:
‘In English law, an enforceable contract may be formed by an exchange of a
promise for a promise, or by the exchange of a promise for an act . . . and thus,
in the law relating to the formation of a contract, the promise to do a thing
may often be the consideration, but when one is considering the law of failure
of consideration and of the quasi-contractual right to recover money on that
ground, it is, generally speaking, not the promise which is referred to as the
performance of the promise. The money was paid to secure performance and, if
performance fails the inducement which brought about the payment is not
fulfilled.’
Failure of consideration thus means failure of performance, not failure of the prom-
ise. Accordingly, a party can recover money paid under the frustrated contract as
long as s/he has received no part of the performance which s/he bargained for in
exchange for the payment.
Although the decision in Fibrosa opened the door to restitution under frustrated
contracts, the ‘total failure’ requirement represented a significant limitation on its
availability. If the other party has provided any part of the bargained-for perform-
ance, no matter how small, recovery will not be possible. In Whincup v Hughes
(1871) LR 6 CP 78, a father paid a premium of £25 to have his son apprenticed to a
watchmaker for six years. The watchmaker died after one year, frustrating the con-
tract. It was held that the father could not recover the premium in respect of the

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remaining five years because the consideration for the payment had only partially
failed. A second limitation on the availability of restitution at common law is that it
does not take into account any expenditure that may have been incurred by the
recipient in relation to the contract. This means that a recipient will be left out of
pocket if s/he has spent some or all of the prepayment on materials necessary for
performance. The common law also fails to provide assistance to a party who has
supplied services prior to the frustration of the contract, as seen in Appleby v Myers.

Appleby v Myers (1867) LR 2 CP 651

Facts: The plaintiffs contracted to erect and maintain certain machinery at the defend-
ant’s factory for a period of two years. Payment was to be made on completion of the
work. After some of the work had been completed, the factory and all the machinery in
it were destroyed by fire.

Held: The Exchequer Chamber held that the contract was frustrated and both parties
were discharged from future performance. The plaintiffs were not entitled to be paid in
respect of any of the work that had been completed because the obligation to pay had
not arisen at the time the contract was frustrated.

Blackburn J:
‘Had the accidental fire left the defendant’s premises untouched, and only injured a
part of the work which the plaintiffs had already done, we apprehend that it is clear the
plaintiffs under such a contract as the present must have done that part over again, in
order to fulfil their contract to complete the whole and “put it to work for the sums
above named respectively”. As it is, they are, according to the principle laid down in
Taylor v Caldwell, excused from completing the work; but they are not therefore
entitled to any compensation for what they have done, but which has, without any fault
of the defendant, perished. The case is in principle like that of a shipowner who has
been excused from the performance of his contract to carry goods to their destination,
because his ship has been disabled by one of the excepted perils, but who is not
therefore entitled to any payment on account of the part-performance of the voyage,
unless there is something to justify the conclusion that there has been a fresh contract
to pay freight pro rata.’

The LR(FC)A 1943 was enacted to address some of these inadequacies in the
common law.

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15.5 EFFECTS OF FRUSTRATION: LAW REFORM


(FRUSTRATED CONTRACTS) ACT 1943

The provisions of the LR(FC)A 1943 are set out in full below:

S 1 Adjustment of rights and liabilities of parties to frustrated contracts

(1) Where a contract governed by English law has become impossible of performance or
been otherwise frustrated, and the parties thereto have for that reason been discharged
from the further performance of the contract, the following provisions of this section
shall, subject to the provisions of section two of this Act, have effect in relation thereto.
(2) All sums paid or payable to any party in pursuance of the contract before the time when
the parties were so discharged (in this Act referred to as ‘the time of discharge’) shall, in
the case of sums so paid, be recoverable from him as money received by him for the use
of the party by whom the sums were paid, and, in the case of sums so payable, cease to
be so payable:
Provided that, if the party to whom the sums were so paid or payable incurred
expenses before the time of discharge in, or for the purpose of, the performance of the
contract, the court may, if it considers it just to do so having regard to all the circum-
stances of the case, allow him to retain or, as the case may be, recover the whole or any
part of the sums so paid or payable, not being an amount in excess of the expenses so
incurred.
(3) Where any party to the contract has, by reason of anything done by any other party
thereto in, or for the purpose of, the performance of the contract, obtained a valuable
benefit (other than a payment of money to which the last foregoing subsection applies)
before the time of discharge, there shall be recoverable from him by the said other party
such sum (if any), not exceeding the value of the said benefit to the party obtaining it, as
the court considers just, having regard to all the circumstances of the case and, in
particular, –
(a) the amount of any expenses incurred before the time of discharge by the benefited
party in, or for the purpose of, the performance of the contract, including any sums
paid or payable by him to any other party in pursuance of the contract and retained
or recoverable by that party under the last foregoing subsection, and
(b) the effect, in relation to the said benefit, of the circumstances giving rise to the
frustration of the contract.
(4) In estimating, for the purposes of the foregoing provisions of this section, the amount of
any expenses incurred by any party to the contract, the court may, without prejudice to
the generality of the said provisions, include such sum as appears to be reasonable
in respect of overhead expenses and in respect of any work or services performed
personally by the said party.
(5) In considering whether any sum ought to be recovered or retained under the foregoing
provisions of this section by any party to the contract, the court shall not take into
account any sums which have, by reason of the circumstances giving rise to the

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frustration of the contract, become payable to that party under any contract of insurance
unless there was an obligation to insure imposed by an express term of the frustrated
contract or by or under any enactment.
(6) Where any person has assumed obligations under the contract in consideration of the
conferring of a benefit by any other party to the contract upon any other person, whether
a party to the contract or not, the court may, if in all the circumstances of the case
it considers it just to do so, treat for the purposes of subsection (3) of this section
any benefit so conferred as a benefit obtained by the person who has assumed the
obligations as aforesaid.

S 2 Provision as to application of this Act

(1) This Act shall apply to contracts, whether made before or after the commencement of
this Act, as respects which the time of discharge is on or after the first day of July,
nineteen hundred and forty-three, but not to contracts as respects which the time of
discharge is before the said date.
(2) This Act shall apply to contracts to which the Crown is a party in like manner as to
contracts between subjects.
(3) Where any contract to which this Act applies contains any provision which, upon the
true construction of the contract, is intended to have effect in the event of circumstances
arising which operate, or would but for the said provision operate, to frustrate the con-
tract, or is intended to have effect whether such circumstances arise or not, the court
shall give effect to the said provision and shall only give effect to the foregoing section of
this Act to such extent, if any, as appears to the court to be consistent with the said
provision.
(4) Where it appears to the court that a part of any contract to which this Act applies can
properly be severed from the remainder of the contract, being a part wholly performed
before the time of discharge, or so performed except for the payment in respect of that
part of the contract of sums which are or can be ascertained under the contract, the
court shall treat that part of the contract as if it were a separate contract and had not
been frustrated and shall treat the foregoing section of this Act as only applicable to the
remainder of that contract.
(5) This Act shall not apply –
(a) to any charterparty, except a time charterparty or a charterparty by way of
demise, or to any contract (other than a charterparty) for the carriage of goods by
sea; or
(b) to any contract of insurance, save as is provided by subsection (5) of the foregoing
section; or
(c) to any contract to which [section 7 of the Sale of Goods Act 1979] (which avoids
contracts for the sale of specific goods which perish before the risk has passed to
the buyer) applies, or to any other contract for the sale, or for the sale and delivery,
of specific goods, where the contract is frustrated by reason of the fact that the
goods have perished.

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15.5.1 THE SCOPE OF THE ACT


Section 2 sets out some important limitations on the scope of the Act. Section 2(3)
makes it clear that the parties can agree to exclude the provisions of the LR(FC)A
1943. If the parties chose to do this, such exclusion will not be subject to the UCTA
1977, since s 29(1)(a) of the 1977 Act states that the Act does not effect any
contractual provision that ‘is authorised . . . by the express terms . . . of an enact-
ment’. The exclusion may, however, be affected by the UTCCR 1999 if it is con-
tained in a standard form consumer contract. In practice, the fact that s 2(3)
expressly authorises the parties to exclude the LR(FC)A 1943, is likely to support
the conclusion that the term is not ‘unfair’.
Section 2(4) provides that if parts of the contract that have been wholly per-
formed can properly be severed from the remainder of the contract, they are to be
treated as a separate contract, which has not been frustrated. The remainder of the
contract will be subject to s 1 of the LR(FC)A 1943.
Section 2(5) contains a list of contracts that are excluded from the scope of the
Act. This includes charterparties for a particular voyage and contracts of insurance.
It also includes contracts falling within s 7 of the Sale of Goods Act 1979. Professor
Glanville Williams has argued convincingly that there is no justification for this
latter exclusion (see Law Reform (Frustrated Contracts) Act 1943, 1944, London:
Stevens).

15.5.2 THE KEY PROVISIONS OF THE ACT


There are two key provisions in the Act. The first, s 1(2), deals with money paid or
owing under the contract prior to the frustrating event and the second, s 1(3), deals
with the situation where a party has obtained a non-money benefit before the time
of discharge. The leading case on the operation of these provisions is BP Exploration
Co (Libya) Ltd v Hunt (No 2).

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

Facts: The defendant, Mr Hunt, was the owner of an oil concession in Libya. He
entered into a ‘farm-in’ agreement with the plaintiff oil company under which they
would explore, develop and operate the oil concession and also make ‘farm-in’ contri-
butions to the defendant in cash and oil. In return, the plaintiff would receive a half
share of the concession. Furthermore, if oil was found, the plaintiff would be entitled to
repayment of its expenditure (both the ‘farm-in’ contributions and a half share of the
expenditure on exploration and development) out of the defendant’s share of the oil.
Large quantities of oil were discovered and the field came on stream in 1967. In 1971,
following a revolution in Libya, the plaintiff’s interest in the oil field was expropriated by
the Libyan government. The defendant continued to export oil from the field until 11

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June 1973, when his interest was expropriated. By this time, the plaintiff had already
received approximately one-third of the 50 million barrels of ‘reimbursement oil’ to
which it was entitled. It also received some compensation from the Libyan government
in relation to the facilities left at the field. The plaintiff claimed that the contract had
been frustrated by the expropriation of its interest in the oil field and sought an award
of a just sum under s 1(3) of the LR(FC)A 1943.

Held: Goff J held that the contract was frustrated and awarded the plaintiff a just sum
under s 1(3) of the LR(FC)A 1943.

Goff J:

‘(1) The principle of recovery


(a) The principle, which is common to both section 1(2) and (3), and indeed is the
fundamental principle underlying the Act itself, is prevention of the unjust enrichment
of either party to the contract at the other’s expense. It was submitted by [counsel for
the plaintiff] that the principle common to both subsections was one of restitution for
net benefits received, the net benefit being the benefit less an appropriate deduction
for expenses incurred by the defendant. This is broadly correct so far as section 1(2) is
concerned; but under section 1 (3) the net benefit of the defendant simply provides an
upper limit to the award – it does not measure the amount of the award to be made to
the plaintiff. This is because in section 1 (3) a distinction is drawn between the plaintiff’s
performance under the contract, and the benefit which the defendant has obtained by
reason of that performance – a distinction about which I shall have more to say later in
this judgment: and the net benefit obtained by the defendant from the plaintiff’s per-
formance may be more than a just sum payable in respect of such performance, in
which event a sum equal to the defendant’s net benefit would not be an appropriate
sum to award to the plaintiff. I therefore consider it better to state the principle under-
lying the Act as being the principle of unjust enrichment, which underlies the right of
recovery in very many cases in English law, and indeed is the basic principle of the
English law of restitution, of which the Act forms part.
(b) Although section 1 (2) and (3) is concerned with restitution in respect of different
types of benefit, it is right to construe the two subsections as flowing from the same
basic principle and therefore, so far as their different subject matters permit, to achieve
consistency between them. Even so, it is always necessary to bear in mind the differ-
ence between awards of restitution in respect of money payments and awards where
the benefit conferred by the plaintiff does not consist of a payment of money. Money
has the peculiar character of a universal medium of exchange. By its receipt, the
recipient is inevitably benefited; and (subject to problems arising from such matters as
inflation, change of position and the time value of money) the loss suffered by the
plaintiff is generally equal to the defendant’s gain, so that no difficulty arises concern-
ing the amount to be repaid. The same cannot be said of other benefits, such as goods
or services. By their nature, services cannot be restored; nor in many cases can goods
be restored, for example where they have been consumed or transferred to another.

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Furthermore the identity and value of the resulting benefit to the recipient may be
debatable. From the very nature of things, therefore, the problem of restitution in
respect of such benefits is more complex than in cases where the benefit takes the
form of a money payment; and the solution of the problem has been made no easier by
the form in which the legislature has chosen to draft section 1 (3) of the Act.
(c) The Act is not designed to do certain things: (i) It is not designed to apportion the
loss between the parties. There is no general power under either section 1(2) or section
1(3) to make any allowance for expenses incurred by the plaintiff (except, under the
proviso to section 1 (2), to enable him to enforce pro tanto payment of a sum payable
but unpaid before frustration); and expenses incurred by the defendant are only rele-
vant in so far as they go to reduce the net benefit obtained by him and thereby limit any
award to the plaintiff. (ii) It is not concerned to put the parties in the position in which
they would have been if the contract had been performed. (iii) It is not concerned to
restore the parties to the position they were in before the contract was made. A remedy
designed to prevent unjust enrichment may not achieve that result; for expenditure
may be incurred by either party under the contract which confers no benefit on the
other, and in respect of which no remedy is available under the Act.
(d) An award under the Act may have the effect of rescuing the plaintiff from an
unprofitable bargain. This may certainly be true under section 1 (2), if the plaintiff has
paid the price in advance for an expected return which, if furnished, would have proved
unprofitable; if the contract is frustrated before any part of that expected return
is received, and before any expenditure is incurred by the defendant, the plaintiff
is entitled to the return of the price he has paid, irrespective of the consideration
he would have recovered had the contract been performed. Consistently with sec-
tion 1 (2), there is nothing in section 1 (3) which necessarily limits an award to the
contract consideration. But the contract consideration may nevertheless be highly
relevant to the assessment of the just sum to be awarded under section 1 (3); this
is a matter to which I will revert later in this judgment.

(2) Claims under section 1 (2)


Where an award is made under section 1 (2), it is, generally speaking, simply an award
for the repayment of money which has been paid to the defendant in pursuance of the
contract, subject to an allowance in respect of expenses incurred by the defendant. It
is not necessary that the consideration for the payment should have wholly failed:
claims under section 1 (2) are not limited to cases of total failure of consideration, and
cases of partial failure of consideration can be catered for by a cross-claim by the
defendant under section 1 (2) or section 1 (3) or both. There is no discretion in the court
in respect of a claim under section 1 (2), except in respect of the allowance for
expenses; subject to such an allowance (and, of course, a cross-claim) the plaintiff is
entitled to repayment of the money he has paid. The allowance for expenses is prob-
ably best rationalised as a statutory recognition of the defence of change of position.
True, the expenses need not have been incurred by reason of the plaintiff’s payment;
but they must have been incurred in, or for the purpose of, the performance of the

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contract under which the plaintiff’s payment has been made, and for that reason it is
just that they should be brought into account. No provision is made in the subsection
for any increase in the sum recoverable by the plaintiff, or in the amount of expenses to
be allowed to the defendant, to allow for the time value of money. The money may have
been paid, or the expenses incurred, many years before the date of frustration; but the
cause of action accrues on that date, and the sum recoverable under the Act as at that
date can be no greater than the sum actually paid, though the defendant may have had
the use of the money over many years, and indeed may have profited from its use. Of
course, the question whether the court may award interest from the date of the accrual
of the cause of action is an entirely different matter, to which I shall refer later in this
judgment.

(3) Claims under section 1 (3)


(a) General. In contract, where an award is made under section 1 (3), the process is
more complicated. First, it has to be shown that the defendant has, by reason of
something done by the plaintiff in, or for the purpose of, the performance of the con-
tract, obtained a valuable benefit (other than a payment of money) before the time of
discharge. That benefit has to be identified, and valued, and such value forms the
upper limit of the award. Secondly, the court may award to the plaintiff such sum, not
greater than the value of such benefit, as it considers just having regard to all the
circumstances of the case, including in particular the matters specified in section 1 (3)
(a) and (b). In the case of an award under section 1 (3) there are, therefore, two distinct
stages – the identification and valuation of the benefit, and the award of the just sum.
The amount to be awarded is the just sum, unless the defendant’s benefit is less, in
which event the award will be limited to the amount of that benefit. The distinction
between the identification and valuation of the defendant’s benefit, and the assess-
ment of the just sum, is the most controversial part of the Act. It represents the solution
adopted by the legislature of the problem of restitution in cases where the benefit
does not consist of a payment of money, but the solution so adopted has been criti-
cised by some commentators as productive of injustice, and it certainly gives rise to
considerable problems, to which I shall refer in due course.
(b) Identification of the defendant’s benefit. In the course of the argument before
me, there was much dispute whether, in the case of services, the benefit should be
identified as the services themselves, or as the end product of the services. One
example canvassed (because it bore some relationship to the facts of the present
case) was the example of prospecting for minerals. If minerals are discovered, should
the benefit be regarded (as counsel for the defendant contended) simply as the
services of prospecting, or (as counsel for the plaintiff contended) as the minerals
themselves being the end product of the successful exercise? Now, I am satisfied that
it was the intention of the legislature, to be derived from section 1 (3) as a matter of
construction, that the benefit should in an appropriate case be identified as the end
product of the services. This appears, in my judgment, not only from the fact that
section 1 (3) distinguishes between the plaintiff’s performance and the defendant’s

946
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benefit, but also from section 1 (3) (b) which clearly relates to the product of the
plaintiff’s performance. Let me take the example of a building contract. Suppose that a
contract for work on a building is frustrated by a fire which destroys the building and
which, therefore, also destroys a substantial amount of work already done by the
plaintiff. Although it might be thought just to award the plaintiff a sum assessed on a
quantum meruit basis, probably a rateable part of the contract price, in respect of the
work he has done, the effect of section 1 (3) (b) will be to reduce the award to nil,
because of the effect, in relation to the defendant’s benefit, of the circumstances giving
rise to the frustration of the contract. It is quite plain that, in section 1 (3) (b), the word
“benefit” is intended to refer, in the example I have given, to the actual improvement to
the building, because that is what will be affected by the frustrating event; the subsec-
tion therefore contemplates that, in such a case, the benefit is the end product of the
plaintiff’s services, not the services themselves. This will not be so in every case, since
in some cases the services will have no end product; for example, where the services
consist of doing such work as surveying, or transporting goods. In each case, it is
necessary to ask the question: what benefit has the defendant obtained by reason of
the plaintiff’s contractual performance? But it must not be forgotten that in section 1 (3)
the relevance of the value of the benefit is to fix a ceiling to the award. If, for example, in
a building contract, the building is only partially completed, the value of the partially
completed building (i.e. the product of the services) will fix a ceiling for the award; the
stage of the work may be such that the uncompleted building may be worth less than
the value of the work and materials that have gone into it, particularly as completion by
another builder may cost more than completion by the original builder would have
cost. In other cases, however, the actual benefit to the defendant may be considerably
more than the appropriate or just sum to be awarded to the plaintiff, in which event the
value of the benefit will not in fact determine the quantum of the award. I should add,
however, that, in a case of prospecting, it would usually be wrong to identify the
discovered mineral as the benefit. In such a case there is always (whether the prospect-
ing is successful or not) the benefit of the prospecting itself, i.e. of knowing whether or
not the land contains any deposit of the relevant minerals; if the prospecting is suc-
cessful, the benefit may include also the enhanced value of the land by reason of the
discovery; if the prospector’s contractual task goes beyond discovery and includes
development and production, the benefit will include the further enhancement of the
land by reason of the installation of the facilities, and also the benefit of in part
transforming a valuable mineral deposit into a marketable commodity.
I add by way of footnote that all these difficulties would have been avoided if the
legislature had thought it right to treat the services themselves as the benefit. In the
opinion of many commentators, it would be more just to do so; after all, the services in
question have been requested by the defendant, who normally takes the risk that they
may prove worthless, from whatever cause. In the example I have given of the building
destroyed by fire, there is much to be said for the view that the builder should be paid
for the work he has done, unless he has (for example by agreeing to insure the works)
taken upon himself the risk of destruction by fire. But my task is to construe the Act as

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it stands. On the true construction of the Act, it is in my judgment clear that the
defendant’s benefit must, in an appropriate case, be identified as the end product
of the plaintiff’s services, despite the difficulties which this construction creates,
difficulties which are met again when one comes to value the benefit . . .
(d) Valuing the benefit. Since the benefit may be identified with the product of the
plaintiff’s performance, great problems arise in the valuation of the benefit. First, how
does one solve the problem which arises from the fact that a small service may confer
an enormous benefit, and conversely, a very substantial service may confer only a very
small benefit? The answer presumably is that at the stage of valuation of the benefit (as
opposed to assessment of the just sum) the task of the court is simply to assess the
value of the benefit to the defendant. For example, if a prospector after some very
simple prospecting discovers a large and unexpected deposit of a valuable mineral,
the benefit to the defendant (namely, the enhancement in the value of the land) may be
enormous; it must be valued as such, always bearing in mind that the assessment of a
just sum may very well lead to a much smaller amount being awarded to the plaintiff.
But conversely, the plaintiff may have undertaken building work for a substantial sum
which is, objectively speaking, of little or no value – for example, he may commence
the redecoration, to the defendant’s execrable taste, of rooms which are in good
decorative order. If the contract is frustrated before the work is complete, and the work
is unaffected by the frustrating event, it can be argued that the defendant has obtained
no benefit, because the defendant’s property has been reduced in value by the plain-
tiff’s work; but the partial work must be treated as a benefit to the defendant, since he
requested it, and valued as such. Secondly, at what point in time is the benefit to be
valued? If there is a lapse of time between the date of the receipt of the benefit, and the
date of frustration, there may in the meanwhile be a substantial variation in the value of
the benefit. If the benefit had simply been identified as the services rendered, this
problem would not arise; the court would simply award a reasonable remuneration for
the services rendered at the time when they were rendered, the defendant taking the
risk of any subsequent depreciation and the benefit of any subsequent appreciation in
value. But that is not what the Act provides: section 1 (3) (b) makes it plain that the
plaintiff is to take the risk of depreciation or destruction by the frustrating event. If the
effect of the frustrating event upon the value of the benefit is to be measured, it must
surely be measured upon the benefit as at the date of frustration. For example, let it be
supposed that a builder does work which doubles in value by the date of frustration,
and is then so severely damaged by fire that the contract is frustrated; the valuation
of the residue must surely be made on the basis of the value as at the date of
frustration . . .
Other problems can arise from the valuation of the defendant’s benefit as the end
product; I shall come to these later in the consideration of the facts of the present case.
But there is a further problem which I should refer to, before leaving this topic. Section
1 (3) (a) requires the court to have regard to the amount of any expenditure incurred
before the time of discharge by the benefited party in, or for the purpose of, the
performance of the contract. The question arises – should this matter be taken into

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FRUSTRATION

account at the stage of valuation of the benefit, or of assessment of the just sum? Take
a simple example. Suppose that the defendant’s benefit is valued at £150, and that a
just sum is assessed at £100, but that there remain to be taken into account defend-
ant’s expenses of £75: is the award to be £75 or £25? The clue to this problem lies, in
my judgment, in the fact that the allowance for expenses is a statutory recognition of
the defence of change of position. Only to the extent that the position of the defendant
has so changed that it would be unjust to award restitution, should the court make an
allowance for expenses. Suppose that the plaintiff does work for the defendant which
produces no valuable end product, or a benefit no greater in value than the just sum to
be awarded in respect of the work; there is then no reason why the whole of the
relevant expenses should not be set off against the just sum. But suppose that the
defendant has reaped a large benefit from the plaintiff’s work, far greater in value than
the just sum to be awarded for the work. In such circumstances it would be quite
wrong to set off the whole of the defendant’s expenses against the just sum. The
question whether the defendant has suffered a change of position has to be judged in
the light of all the circumstances of the case. Accordingly, on the Act as it stands,
under section 1 (3) the proper course is to deduct the expenses from the value of the
benefit, with the effect that only in so far as they reduce the value of the benefit below
the amount of the just sum which would otherwise be awarded will they have any
practical bearing on the award . . .
(e) Assessment of the just sum. The principle underlying the Act is prevention of the
unjust enrichment of the defendant at the plaintiff’s expense. Where, as in cases under
section 1 (2), the benefit conferred on the defendant consists of payment of a sum of
money, the plaintiff’s expense and the defendant’s enrichment are generally equal;
and, subject to other relevant factors, the award of restitution will consist simply of an
order for repayment of a like sum of money. But where the benefit does not consist of
money, then the defendant’s enrichment will rarely be equal to the plaintiff’s expense.
In such cases, where (as in the case of a benefit conferred under a contract thereafter
frustrated) the benefit has been requested by the defendant, the basic measure of
recovery in restitution is the reasonable value of the plaintiff’s performance – in a case
of services, a quantum meruit or reasonable remuneration, and in a case of goods, a
quantum valebat or reasonable price. Such cases are to be contrasted with cases
where such a benefit has not been requested by the defendant. In the latter class of
case, recovery is rare in restitution; but if the sole basis of recovery was that the
defendant had been incontrovertibly benefited, it might be legitimate to limit recovery
to the defendant’s actual benefit – a limit which has (perhaps inappropriately) been
imported by the legislature into section 1 (3) of the Act. However, under section 1 (3) as
it stands, if the defendant’s actual benefit is less than the just or reasonable sum which
would otherwise be awarded to the plaintiff, the award must be reduced to a sum equal
to the amount of the defendant’s benefit.
A crucial question, upon which the Act is surprisingly silent, is this: what bearing do
the terms of the contract, under which the plaintiff has acted, have upon the assess-
ment of the just sum? First, the terms upon which the work was done may serve to

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indicate the full scope of the work done, and so be relevant to the sum awarded in
respect of such work. For example, if I do work under a contract under which I am to
receive a substantial prize if successful, and nothing if I fail, and the contract is frus-
trated before the work is complete but not before a substantial benefit has been
obtained by the defendant, the element of risk taken by the plaintiff may be held to
have the effect of enhancing the amount of any sum to be awarded. Secondly, the
contract consideration is always relevant as providing some evidence of what will be a
reasonable sum to be awarded in respect of the plaintiff’s work. Thus if a prospector,
employed for a fee, discovers a gold mine before the contract under which he is
employed is frustrated (for example, by illegality or by his illness or disablement) at a
time when his work was incomplete, the court may think it just to make an award in the
nature of a reasonable fee for what he has done (though of course the benefit obtained
by the defendant will be far greater), and a rateable part of the contract fee may provide
useful evidence of the level of sum to be awarded. If, however, the contract had pro-
vided that he was to receive a stake in the concession, then the just sum might be
enhanced on the basis that, in all the circumstances, a reasonable sum should take
account of such a factor: cf Way v Latilla [1937] 3 All ER 759. Thirdly, however, the
contract consideration, or a rateable part of it, may provide a limit to the sum to be
awarded. To take a fairly extreme example, a poor householder or a small businessman
may obtain a contract for building work to be done to his premises at considerably less
than the market price, on the basis that he cannot afford to pay more. In such a case,
the court may consider it just to limit the award to a rateable part of the contract price,
on the ground that it was the understanding of the parties that in no circumstances
(including the circumstances of the contract being frustrated) should the plaintiff
recover more than the contract price or a rateable part of it. Such a limit may properly
be said to arise by virtue of the operation of section 2 (3) of the Act. But it must not be
forgotten that, unlike money, services can never be restored, nor usually can goods,
since they are likely to have been either consumed or disposed of, or to have depreci-
ated in value; and since, ex hypothesi, the defendant will only have been prepared to
contract for the goods or services on the basis that he paid no more than the contract
consideration, it may be unjust to compel him, by an award under the Act, to pay more
than that consideration, or a rateable part of it, in respect of the services or goods he
has received. It is unnecessary for me to decide whether this will always be so; but it is
likely that in most cases this will impose an important limit upon the sum to be awarded
– indeed it may well be the most relevant limit to an award under section 1 (3) of the
Act. The legal basis of the limit may be section 2 (3) of the Act; but even if that
subsection is inapplicable, it is open to the court, in an appropriate case, to give effect
to such a limit in assessing the just sum to be awarded under section 1 (3), because in
many cases it would be unjust to impose upon the defendant an obligation to make
restitution under the subsection at higher than the contract rate.’

Applying this approach to the facts of the case, Goff J found that the valuable
benefit obtained by the defendant, following frustration of the contract, consisted of

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the value of the oil he had actually obtained from the oilfield, plus the compensation
received from the Libyan government. This produced a ‘valuable benefit’ of $85
million. In assessing the ‘just sum’, Goff J took into account the expenses incurred
by the plaintiff and the ‘farm-in’ contributions received by the defendant, and then
deducted from this figure the value of the reimbursement oil received by the plain-
tiff. This produced a total of $35 million, which being less than the ‘valuable
benefit’, was awarded in full.
For our purposes, we do not need to focus on the complex facts of the case.
Instead we will direct our attention to the comments made by Goff J about the key
provisions of the Act.

15.5.2.1 The underlying purpose of the Act


Goff J considered that the purpose underlying the Act was the prevention of unjust
enrichment. The Court of Appeal affirmed his decision (as did the House of Lords),
although Lawton LJ doubted his analytical approach:
‘Mr Rokison, on behalf of the plaintiffs, accepted that there could be more
than one way of assessing a just sum. He pointed out that there was nothing in
the Act to indicate that its purpose was to enable the judge to apportion losses
or profits, or to put the parties in the positions which they would have been in
if the contract had been fully performed or if it had never been made. This we
accept. He submitted that the concept behind the Act was to prevent unjust
enrichment. This is what the judge had thought. We get no help from the use
of words which are not in the statute.’
It has been suggested that the assessment of a ‘just sum’ under s 1(3) exposes the
fact that the Act is really just a mechanism for loss apportionment. Haycroft and
Waksman (‘Frustration and Restitution’ [1984] JBL 207, 225) have written:
‘Unjust enrichment cannot be regarded as the basis of the Act; to suggest
otherwise simply ignores its wording and the conceptual distortion which
follows from such an idea can be seen to lead to great practical difficulties.
All that can be ventured about the real basis of the Act is that it is designed
to provide a flexible machinery for the adjustment of loss.
The inclusion of the word “just” merely sets a general standard for the
exercise of the court’s discretion as can be found in many other statutes, and
should not be seen as an invocation of the principle of unjust enrichment’
With respect, this is incorrect. Although the Act does confer a discretion on the
court, this does not amount to ‘a flexible machinery for the adjustment of
loss’. The first step for the court is to identify the benefit that the defendant
has obtained at the claimant’s expense. This figure operates as a ceiling for the

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defendant’s claim and ensures that recovery is limited to the amount by which the
defendant has been unjustly enriched at the claimant’s expense. It is only at this
stage that the judicial discretion comes into play. This discretion allows the courts
to reduce recovery to take into account the losses sustained by the defendant, but
it does not allow for the apportionment of losses, which are not matched by a
corresponding enrichment. Thus the discretion to adjust recovery is only a very
narrow discretion and it operates within the general framework of recovery for
unjust enrichment.

15.5.2.2 Operation of section 1(2): restitution of money


As Goff J notes, a major change brought about by s 1(2) of the LR(FC)A 1943 is
that money paid under a frustrated contract is recoverable, even where there is not a
total failure of consideration. This is a significant improvement on the common-law
position and it is argued elsewhere (see Chapter 18), that the same approach should
be applied to all claims for failure of consideration.
Section 1(2) also introduces a proviso that permits the court to set off against the
advance payment any expenses that may have been incurred by the defendant prior
to the frustrating event. Goff J suggested that this proviso is ‘best rationalised as a
statutory recognition of the defence of change of position’. This would mean that
the defendant is permitted, as of right, to set off expenses incurred in ‘the perform-
ance of the contract under which the plaintiff’s payment has been made’. A different
view was, however, taken by Garland J in Gamerco SA v ICM/Fair Warning (Agency)
Ltd [1995] 1 WLR 1226. The case concerned a contract to promote a ‘Guns N’
Roses’ concert, which was frustrated by the Spanish government’s decision to close
the stadium in which the concert was due to take place. The plaintiff had paid the
defendant $412,500 prior to the frustrating event and sought to recover this
amount under s 1(2). The defendants had incurred expenditure of approximately
$50,000 and argued that they should be allowed to retain this amount. Garland J
held that, taking into account the plaintiff’s loss (approximately $450,000),
justice would be done by allowing the plaintiffs to recover the advance payment in
full without any deduction for the defendant’s expenses. He concluded his judgment
as follows:
‘The approach to the proviso
The following have to be established: (1) that the defendants incurred
expenses paid or payable (2) before the discharge of the contract on 2 July (3)
in performance of the contract (which is not applicable) or (4) for the purposes
of the performance of the contract, and (5) that it is just in all the circum-
stances to allow them to retain the whole or any part of the sums so paid or
payable.

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The onus of establishing these matters must lie on the defendant. It is, in
the broad sense, his case to be made out and I am assisted by the Victorian case
of Lobb v Vasey Housing Auxiliary (War Widows Guild) [1963] VR 239 under
the corresponding Victorian Act of 1959, which is in very similar terms to the
Act of 1943.
I have already dealt with (1), (2) and (4) so far as the evidence allows. I turn
to (5) . . . Various views have been advanced as to how the court should
exercise its discretion and these can be categorised as follows.
(1) Total retention. This view was advanced by the Law Revision Committee in
1939 (Cmd. 6009) on the questionable ground “that it is reasonable to assume
that in stipulating for prepayment the payee intended to protect himself from
loss under the contract”. As the editor of Chitty on Contracts, 27th edn. (1994),
vol. 1, p 1141, para. 23–060, note 51 (Mr E G McKendrick) comments: “He
probably intends to protect himself against the possibility of the other party’s
insolvency or default in payment”. To this, one can add: “and secure his own
cash flow.”
In BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783, Robert
Goff J considered the principle of recovery under subsections (2) and (3).
He said . . .
“There is no discretion in the court in respect of a claim under section
1(2), except in respect of the allowance for expenses; subject to such
an allowance . . . the plaintiff is entitled to repayment of the money
he has paid. The allowance for expenses is probably best rationalised as a
statutory recognition of the defence of change of position. True, the
expenses need not have been incurred by reason of the plaintiff’s pay-
ments; but they must have been incurred in, or for the purpose of, the
performance of the contract under which the plaintiff’s payment has been
made, and for that reason it is just that they should be brought into
account.”
I do not derive any specific assistance from the BP Exploration Co case. There
was no question of any change of position as a result of the plaintiffs’ advance
payment.
(2) Equal division. This was discussed by Professor Treitel in Frustration and
Force Majeure, pp 555–556, paras. 15–059 and 15–060. There is some attrac-
tion in splitting the loss, but what if the losses are very unequal? Professor
Treitel considers statutory provisions in Canada and Australia but makes the
point that unequal division is unnecessarily rigid and was rejected by the Law
Revision Committee in the 1939 report to which reference has already been
made. The parties may, he suggests, have had an unequal means of providing

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against the loss by insurers, but he appears to overlook subsection (5). It may
well be that one party’s expenses are entirely thrown away while the other is
left with some realisable or otherwise usable benefit or advantage. Their losses
may, as in the present case, be very unequal. Professor Treitel therefore favours
the third view.
(3) Broad discretion. It is self-evident that any rigid rule is liable to produce
injustice. The words, “if it considers it just to do so having regard to all the
circumstances of the case”, clearly confer a very broad discretion. Obviously
the court must not take into account anything which is not “a circumstance of
the case” or fail to take into account anything that is and then exercise its
discretion rationally. I see no indication in the Act, the authorities or the
relevant literature that the court is obliged to incline towards either total
retention or equal division. Its task is to do justice in a situation which the
parties had neither contemplated nor provided for, and to mitigate the
possible harshness of allowing all loss to lie where it has fallen.
I have not found my task easy. As I have made clear, I would have welcomed
assistance on the true measure of the defendants’ loss and the proper treatment
of overhead and non-specific expenditure. Because the defendants have plainly
suffered some loss, I have made a robust assumption. In all the circumstances,
and having particular regard to the plaintiffs’ loss, I consider that justice is
done by making no deduction under the proviso.’

Carter and Tolhurst (‘Gigs N’ Restitution – Frustration and the Statutory Adjust-
ment of Payments and Expenses’ (1996) 10 JCL 264) have criticised the approach
adopted by Garland J in Gamerco. They note that the judge gave no reason for his
rejection of the ‘change of position’ rationalisation and question why he neglected
to consider the position at common law. They conclude as follows:

‘[W]hether or not one accepts change of position as the rationalisation, it


ought at least to have been clear that the Band was entitled to something,
because the circumstances activated the defence. In this regard it may be
important that the proviso requires an award of “the whole or . . . part of the
sums so paid or payable, not being an amount in excess of the expenses . . .
incurred”. Arguably, there was no discretion to award a nil sum. In other
words, the discretion was to award a sum which was just in the circumstances.
But even if that is not the correct interpretation, it can at least be said that once
the Band proved some expenses, Garland J ought to have awarded something
unless it was unjust to do so. Clearly, there was nothing in the evidence to
indicate that a zero sum was a just sum.’

It is regrettable that Garland J refused to identify any principles upon which the

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discretion exercisable under s 1(2) is to be based. We are left with a discretion that is
both ill-defined and difficult to apply. All we can really say is what the discretion is
not. First, attractive though the theory may be, the proviso cannot be rational-
ised as a form of change of position defence. This is because the proviso allows the
courts to take into account ‘all the circumstances of the case’, including the claim-
ant’s loss (Gamerco). Such considerations are irrelevant to change of position, which
focuses solely on the loss sustained by the defendant. Second, however, the
proviso cannot be rationalised as a full-blown mechanism for loss apportionment
either. This is because recovery is only possible where the claimant was obliged to
pay money prior to the frustrating event and recovery is limited to the value of the
advance payment. In truth, what we have in s 1(2) is a severely restricted mechan-
ism for loss apportionment, arbitrarily limited by the value of the defendant’s
enrichment.

15.5.2.3 Operation of section 1(3): restitution of non-money benefits


Goff J indicated that there are three stages to the operation of s 1(3). First, it has to
be shown that the defendant has obtained a ‘valuable benefit’ from the claimant
prior to the time of discharge. Second, the benefit must be valued. Third, the court
must determine what would be a ‘just sum’ to award to the claimant, having regard
to all the circumstances of the case, including in particular the matters specified in
section 1 (3)(a) and (b).
In relation to the valuing of the benefit, Goff J noted that s 1(3) (b) of the Act
requires the court to take into account ‘the effect, in relation to the said benefit, of the
circumstances giving rise to the frustration of the contract’. This led him to the
conclusion that the benefit is to be identified as the end product of the claimant’s
services rather than the services themselves. If this is correct, then Appleby v Myers
would be decided in the same way today. It will be remembered that in Appleby v
Myers the plaintiff provided valuable machinery to the defendant, which was sub-
sequently destroyed by fire. According to Goff’s J’s interpretation of s 1(3) (b) this
would mean that the ‘valuable benefit’ received by the defendant was nil, and since
the ‘just sum’ cannot exceed the ‘valuable benefit’, the ‘just sum’ must also be nil.
There are reasons to believe that Goff J’s approach to the interpretation of s 1(3) is
incorrect.

Burrows, A, The Law of Restitution, 2nd edn, 2002, Oxford: OUP,


at pp 370–371

With great respect, it is possible that Robert Goff J took a false step in regarding there
as being a crucial difference, so far as restitution is concerned, between the end

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product of contracted-for services and the services (or performance of the services)
themselves. Even if there is an end product produced by the services the defendant’s
benefit comprises his saving of expense in paying for the services producing that end
product. And the crucial line between when services constitute mere reliance loss to
the performer and when they become objectively beneficial to the other party (and
hence subject to subjective devaluation, belong within restitution) is, it is submitted,
when the other party receives the services. When the purpose of the services is to
produce an end product (eg, building work) it is true that one regards the owner as
receiving the services at the time when it receives part of the end product (eg, when the
first part of the building is erected). But the same notion of receipt explains why a
theatregoer is only objectively benefited when the play begins or why a home owner
who engages a gardener to mow the lawn is only objectively benefited when the
gardener starts to cut the lawn. On a restitutionary interpretation of s 1(3) the important
distinction is therefore between services that are not received and services that are
received and not between services and the end product of those services.
Once one excises the distinction between end product and services the acute
problems encountered by Robert Goff J in interpreting s 1(3) disappear. For example,
there is now no problem of a small service producing very substantial end products
and vice versa; there is no need to carve out inconsistent ‘exceptions’ where there is
no end product or an end product of no objective value; there is no reason to confine a
true restitutionary analysis to the assessment of the just sum; and, while the same
conclusion may be reached by applying ‘change of position’ reasoning, s 1 (3) (b) does
not have to be interpreted as meaning that no valuable benefit was obtained where a
building under construction is destroyed by fire.’

Treitel, G, The Law of Contract, 11th edn, 2003, London:


Sweet & Maxwell at p 915

[A]n alternative interpretation of s 1(3) is to be preferred. This would make the destruc-
tion of the benefit relevant, not to the identification of the benefit, but to the assess-
ment of the just sum. Two points seem to support such an interpretation. First, s 1(3)
applies where a valuable benefit has been obtained before the time of discharge: thus
to identify the benefit in a case like Appleby v Myers the court must look at the facts as
they were before, and not after, the fire. The partly completed installation would at least
prima facie be a benefit, since completion of the installation would be likely to cost less
after part of the work has been done. Secondly, there is the structure of the subsection.
This begins by setting out the circumstances in which the court has power to make an
award (ie when a valuable benefit has been obtained) and then provides guidelines for
the exercise of that power. The guideline contained in s 1(3)(b) is introduced by the
words ‘such sum as the court thinks just having regard to . . .’; and these words
seem to link the guideline to the exercise rather than to the existence of the court’s

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discretion. This interpretation cannot cause any injustice, for if the court thinks that
very little or nothing should be awarded it can exercise its discretion to that effect; and
for this purpose the court can take the destruction of the benefit into account so as to
split the loss in such proportions as the court thinks just. But if such destruction
necessarily led to the conclusion that no valuable benefit had been obtained before
frustration, the court would have no discretion to award anything at all. It would be a
pity if this useful discretion were restricted in a way that is neither clearly required by
the words of the subsection nor necessary to promote justice.

It is submitted that the criticisms of Professor Burrows and Professor Treitel are
compelling. Although the destruction of the end product is relevant to the assess-
ment of the just sum under s 1(3), it should not be taken into account at the earlier
stage of assessing the benefit received by the defendant. The view expressed by Goff
J that s 1(3)(a) is a statutory recognition of the change of position defence should
also be rejected. This is clearly too narrow a view of the provision given that s 1(3)(a)
and (b) clearly allow the courts, within limits, to apportion the losses between the
parties.

15.5.3 CRITICISMS OF THE LAW REFORM (FRUSTRATED


CONTRACTS) Act 1943
The LR(FC)A 1943 has been criticised on a number of grounds. Professor
McKendrick (‘The Consequences of Frustration – The Law Reform (Frustrated
Contracts) Act 1943’ in Force Majeure and Frustration of Contract, 2nd edn, 1995,
London: Lloyds of London Press at p 243) writes:
‘It is now clear that the Law Reform (Frustrated Contracts) Act 1943 suffers
from a number of deficiencies and that the Law Reform Commission of British
Columbia was right to conclude that the Act “was not well thought out or
well drafted”.’
Criticisms of the Act proceed on two fronts. First, it is argued that the Act leaves
too much discretion to the trial judge. Professor McKendrick (above at p 238)
writes:
‘Lawton LJ [in BP v Hunt] concluded that “[w]hat is just is what the trial
judge thinks is just” and he held that an appellate court is not entitled to
interfere with the assessment of the just sum by the trial judge “unless it is so
plainly wrong that it cannot be just”. This leaves the issue virtually to the
untrammelled discretion of the trial judge and it is regrettable that the Court
of Appeal did not establish guidelines to assist trial judges in the exercise of

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their discretion and to ensure a measure of consistency in decided cases and out
of court settlement.’
McKendrick’s criticisms are perhaps overstated. If the parties desire certainty, then
this can be achieved by incorporating a force majeure clause into the contract. Indeed,
this is what many commercial contractors choose to do. The rules on frustration
only come into play when something unforeseen has occurred. It is pointless sug-
gesting that contractual planning can be made more efficient in this area by the
adoption of fixed guidelines, since frustration necessarily involves events that the
parties have not planned for. The problem is not that the LR(FC)A 1943 confers too
much discretion on the courts, but that it limits that discretion in arbitrary ways.
This leads us onto our second ground for criticising the Act, which is that it
is hopelessly muddled. Graham Virgo (The Principles of the Law of Restitution,
2nd edn, 2006, Oxford: OUP, p 369) writes:
‘Subsections 1(2) and 1(3) of the 1943 Act are somewhat schizophrenic provi-
sions, embodying as they do both principles of restitution founded on the
reversal of the defendant’s unjust enrichment and the allocation of losses
between the parties. But this attempt to allocate losses is half-hearted.’
Professor Campbell (Remedies in Contract and Tort, 2nd edn, 2002, Cambridge: CUP
at p 248) agrees, arguing that the proviso under s 1(2) is a ‘curious hybrid unknown
to reliance or restitution’ with ‘no sound foundation in either principle’. Would it
be better then to replace the LR(FC)A 1943 with a new scheme, which allows for
the full apportionment of losses between the parties? Stewart and Carter think not.

Stewart, A and Carter, JW, ‘Frustrated contracts and statutory


adjustment: the case for a reappraisal’ (1992) CLJ 66, 109–110

[I]t is our view that the philosophy of loss apportionment should be rejected. We
have already questioned the assumptions underlying the notion that post-frustration
losses should be shared. For all the incursions of equity in Australia, the common
law of contract in that country, as much as in Britain, is still marked by a refusal to
view ordinary commercial transactions as joint ventures. Unconscionable conduct is
increasingly attracting liability, but the point has not yet been reached where con-
tractors are expected to take positive steps to conserve the welfare of their ‘partners’.
And even if this admittedly harsh and individualist stance were to be rejected, the case
for apportionment would still lack substance. If one looks past the slogans, it is hard to
find convincing reasons, economic or otherwise, for compelling one party to act as the
other’s insurer.
Moreover, even if a favourable view were taken of the principle of loss apportion-
ment, successfully putting it into practice appears to be another matter altogether. The

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three statutory models [in South Australia, New South Wales and British Columbia]
amply demonstrate what we consider the impracticability of finding a workable formula
which adequately separates out those losses to be attributed to the frustrated contract
from those which are referable to the parties’ general business activities, or which fairly
and predictably identifies the losses of one which can reasonably be foisted on the
other. Nor does there appear to be an acceptable way of respecting the strength or
weakness of the original bargain. Only the British Columbian Act adopts a workable
approach; but that is achieved by excluding all anticipatory or overhead expenses from
the equation, a restrictive approach which becomes so arbitrary in its application as to
make a mockery of the apportionment principle and which is as biased in its own way
to recipients as the New South Wales and South Australian schemes are to performers.

Professor Burrows (The Law of Restitution, 2nd edn, 2003, London: Butterworths at
pp 365–366) argues that loss splitting ‘contradicts the basic individualistic trad-
ition of contract law whereby contracting parties are viewed as pursuing their own
self interest and taking their own risk’. It will also lead to uncertainty, Professor
Burrows contends, not least because it will require the courts to take into account the
relative fault of the parties. Goff and Jones (The Law of Restitution, 6th edn, 2002,
London: Sweet & Maxwell at para 20–082) agree: ‘Apportionment of loss suffered in
consequence of an unforeseen event is superficially a seductive principle. But to
direct a court to apportion loss is to initiate an inquiry of considerable complexity’.
Other commentators argue that we should adopt a scheme of full apportionment
of losses.

McKendrick, E, ‘Frustration, Restitution and Loss Apportionment’ in


Burrows, A (ed), Essays on the Law of Restitution, 1991, Oxford:
Clarendon Press, pp 168–169

[T]here are arguments in favour of apportioning the loss between the parties. The first is
that apportionment of loss is ‘economically sounder’ because ‘each of the two parties
may be able to bear half the loss without serious consequences when the whole loss
might come close to ruining him’. The second argument is that a failure to take explicit
account of the reliance interest may lead to the adoption of an unnatural definition
of benefit. Restitution lawyers have been warned about adopting an ‘over-inclusive con-
cept of enrichment’ and of ‘marginalising’ the ‘principle of injurious reliance’. The clas-
sic example of this process is, of course, the British Columbian Frustrated Contracts
Act which . . . defines a benefit as ‘something done in the fulfilment of contractual
obligations whether or not the person for whose benefit it was done received the
benefit’. To force losses incurred into the language of benefit distorts the concept of
benefit and hinders the development of a principle of injurious reliance in English law.

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The final argument is that the situation with which frustrated contracts legislation is
concerned ‘is the familiar one in which one of two parties has to suffer loss for which
neither is responsible’ and that in the ‘normal case’ the just course ‘would be to order
the retention or repayment of half the loss incurred’. The ‘justice’ involved in being
required to share in the losses of the other party may not be readily apparent. But,
while it may be true to say that contracting parties enter into contracts to serve their
own interests, it should not be assumed that upholding the pursuit of self-interest is
the basis of the doctrine of frustration . . . It must . . . be remembered that the frustrat-
ing event which has occurred is one which neither party has foreseen and neither
party has assumed the risk of its occurrence. Moreover, neither party has been at
fault. Justice and reasonableness surely demand that such expenditure be brought
into account so that, on the frustration of a contract, the position is reached whereby
both parties are discharged from their obligations to perform in the future (the expect-
ation interest of neither party being protected), benefits conferred must be paid for
(thus protecting the restitution interest), and losses suffered as a result of wasted
expenditure be apportioned between the parties (thus taking account of the reliance
interest).

On balance, it is submitted that a scheme that allows for the full apportionment
of losses is preferable. The arguments levelled against such an approach largely
ignore the fact that we are dealing with events that are unforeseen and not provided
for by the contract. In such a context, arguments based on the need for certainty
and the individualistic tradition of contract law carry little weight.
Should we therefore expect to see a change in the law? The answer is probably no.
In the 50 years since the Act was passed, there have only been two decisions
interpreting the Act. This suggests that its provisions do not present any real
problems for the commercial community. Professor Campbell (Remedies in Contract
and Tort, 2nd edn, 2002, Cambridge: CUP at p 253) explains why:
‘Competent commercial parties, faced with the absurdity of the law of . . .
frustration, have included modification provisions in contracts of sufficient
value and complexity to make this worthwhile. These clauses provide for
non-binding alternative dispute resolution or arbitration (including arbitra-
tion ex aequo et bono), which gives the parties far more flexibility to apportion
loss than any conceivable restitutionary recasting of the frustration rules
might do.’
It therefore seems that reform is unlikely for the simple reason that the law of
frustration is of little practical importance in the commercial world.

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15.6 RELIEF IN CASES OF HARDSHIP UNDER THE


INTERNATIONAL CONTRACT LAW INSTRUMENTS

A wider doctrine of frustration exists in Australia where relief may be given on the
ground that one of the party’s obligations have become more onerous (see Codelfa
Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR
33). The Principles of European Contract Law and the UNIDROIT Principles of
International Commercial Contracts, both of which contain provisions for hardship,
adopt a similar approach.

PRINCIPLES OF EUROPEAN CONTRACT LAW


Article 6:111: Change of Circumstances

(1) A party is bound to fulfil its obligations even if performance has become more onerous,
whether because the cost of performance has increased or because the value of the
performance it receives has diminished.
(2) If, however, performance of the contract becomes excessively onerous because of a
change of circumstances, the parties are bound to enter into negotiations with a view to
adapting the contract or terminating it, provided that:
(a) the change of circumstances occurred after the time of conclusion of the contract,
(b) the possibility of a change of circumstances was not one which could reasonably
have been taken into account at the time of conclusion of the contract, and
(c) the risk of the change of circumstances is not one which, according to the contract,
the party affected should be required to bear.
(3) If the parties fail to reach agreement within a reasonable period, the court may:
(a) end the contract at a date and on terms to be determined by the court; or
(b) adapt the contract in order to distribute between the parties in a just and equitable
manner the losses and gains resulting from the change of circumstances.
In either case, the court may award damages for the loss suffered through a party
refusing to negotiate or breaking off negotiations contrary to good faith and fair dealing.

Article 8:108: Excuse Due to an Impediment

(1) A party’s non-performance is excused if it proves that it is due to an impediment beyond


its control and that it could not reasonably have been expected to take the impediment
into account at the time of the conclusion of the contract, or to have avoided or over-
come the impediment or its consequences.
(2) Where the impediment is only temporary the excuse provided by this Article has effect
for the period during which the impediment exists. However, if the delay amounts to a
fundamental non-performance, the creditor may treat it as such.
(3) The non-performing party must ensure that notice of the impediment and of its effect
on its ability to perform is received by the other party within a reasonable time after the
non-performing party knew or ought to have known of these circumstances. The

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other party is entitled to damages for any loss resulting from the non-receipt of such
notice.

UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS


Article 6.2.1 (Contract to be observed)
Where the performance of a contract becomes more onerous for one of the parties, that
party is nevertheless bound to perform its obligations subject to the following provisions on
hardship.

Article 6.2.2 (Definition of hardship)


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 receives 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.

Article 6.2.3 (Effects of hardship)

(1) In case of hardship the disadvantaged party is entitled to request renegotiations. The
request shall be made without undue delay and shall indicate the grounds on which it is
based.
(2) The request for renegotiation does not in itself entitle the disadvantaged party to
withhold performance.
(3) Upon failure to reach agreement within a reasonable time either party may resort to the
court.
(4) If the court finds hardship it may, if reasonable,
(a) terminate the contract at a date and on terms to be fixed, or
(b) adapt the contract with a view to restoring its equilibrium.

Article 7.1.7 (Force majeure)

(1) 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.
(2) When the impediment is only temporary, the excuse shall have effect for such period as
is reasonable having regard to the effect of the impediment on the performance of the
contract.
(3) The party who fails to perform must give notice to the other party of the impediment
and its effect on its ability to perform. If the notice is not received by the other
party within a reasonable time after the party who fails to perform knew or ought

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to have known of the impediment, it is liable for damages resulting from such non-
receipt.
(4) Nothing in this article prevents a party from exercising a right to terminate the contract or
to withhold performance or request interest on money due.

The international instruments draw a distinction between events that make a


contract more onerous (hardship) and events that constitute an impediment to
performance (frustration). If the event falls within the former category the contract
is not discharged, but the parties are required to renegotiate. This is a concept that
is alien to English law and although renegotiation is not unusual in commercial
practice, the difference here is that it becomes mandatory. If the parties fail to reach
an agreement within a reasonable time, the court can step in and terminate or
modify the agreement. The court even has power under the Principles of European
Contract Law to award damages against a party that has refused to negotiate or
broken off negotiations contrary to good faith and fair dealing.
It is rather difficult to predict what change of circumstances will amount to
hardship under the international instruments. Lando and Beale (Principles of Euro-
pean Contract Law Parts I and II, 2000, The Hague: Kluwer Law International at
p 324) state that ‘the change in circumstances must have brought about a major
imbalance in the contract’. This may include certain types of frustrating event, but
clearly it includes a much wider range of circumstances. It will, for instance, include
the closure of the Suez Canal (Lando and Beale at p 325), which has been held by the
English courts not to amount to frustration (see Tsakiroglou & Co Ltd v Noble Thorl
GmbH [1962] AC 93). Uncertainty also surrounds the scope of the hardship provi-
sions under the UNIDROIT Principles. According to the Official Comments to the
1994 edition of the Principles an ‘alteration amounting to 50% or more of the cost
or the value of the performance is likely to amount to a fundamental alteration’. Ten
years later, however, in the 2004 edition, the comments state: ‘Whether an alter-
ation is “fundamental” in a given case will of course depend on the circumstances’.
This level of uncertainty is undesirable from an English perspective.
The provisions on impediment/force majeure are much more familiar to English
lawyers and they are generally in line with the rules that apply in English law to
contracts frustrated by impossibility. One difference is that both instruments
require the non-performing party to give notice of the impediment within a reason-
able time. The other party will be entitled to damages for any loss resulting from
failure to give such notice.

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15.7 ADDITIONAL READING

Law Reform Committee of British Columbia, ‘Report on the need for frustrated contracts
legislation in British Columbia’ (Project No 8).
Lookofsy, J, ‘Impediments and hardship in international sales: a commentary on Catherine
Kessedjian’s “Competing approaches to force majeure and hardship” ’ (2005) 25 Inter-
national Review of Law and Economics 434.
Posner, RA, and Rosenfield, AM, ‘Impossibility and related doctrines in contract law: an
economic analysis’ (1977) 6 JLS 83.
Schanze, E, ‘Failure of long-term contracts and the duty to re-negotiate’, in Rose, F (ed),
Failure of Contracts, 1997, Oxford: Hart Publishing.
Smith, JC, ‘Contracts: mistake, frustration and implied terms’ (1994) 110 LQR 400.
Weiss, PD, ‘Apportioning loss after discharge of a burdensome contract: a statutory solution’,
(1960) 69 YLJ 1054.

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