Frustration. Brief Summary of Legal Aspects. Last updated 14-May-2015

Frustration brings contract to an end

…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.
Krell v Henry [1903] 2 KB 740 per Vaughan Williams LJ at p.751.

Under the common law frustration kills the contract itself and discharges the parties from their further contractual obligations ‘forthwith, without more and automatically’. Therefore application of the doctrine not only released the parties from their future respective obligations under the contract, it eliminated all contractual relationships between the parties and any rights already accrued as from the time of frustration.

Rapid development of the doctrine begun in the first years of the twentieth century, when financial loss, incurred as a result of frustrating event - sudden illness of King Edward VII in June of 1902 and subsequent cancellation of the coronation procession - brought in existence a line of ‘coronation cases’. Anticipating an event, spectators leased many rooms and bought seats in stands, along the route planned for the coronation procession. Moreover, some boats were hired for the purpose of viewing the naval review, which should take place same day with procession. Many spectators had contracted their leases or hires and made payments in advance before the King fell ill, and claimed afterwards that their contracts were frustrated. Collins M.R., in Chandler v Webster [1904] 1 KB 493 stated that the law relives parties from further performance of the contract and leaves both sides where they were at the moment of frustration – ‘the loss lies where it falls’, but everything that has already been done in pursuance of the contract has been considered as validly done. The Master of the Rolls rejected soundness of claim to recover money had and received on a total failure of consideration, saying that such remedy is available only when the contract was wiped out altogether, ‘But that is not the effect of the doctrine; it only releases the parties from further performance of the contract’.

This state of law, when lack of legal instruments to deal with financial consequences of frustration resulted in hardship, was sometimes considered to be arbitrary and open to review , but nevertheless remained in force for almost forty years. Only in Fibrosa Spolka Akcyjna v Fairbaim Lawson Combe Barbour Ltd [1943] AC 32 the House of Lords unanimously held that there is no strict principle of law stating that "the loss lies where it falls" which has to be applied to the contracts frustrated by a supervening event releasing the parties from further performance. That the money paid under a contract can be recovered when consideration has wholly failed on the ground that the law gives a remedy in quasi-contract based on natural justice and equity. It is well to emphasize here that although the House of Lords has undoubtedly articulated in favour for a "more civilized rule", Viscount Simon L.C. at p.49 and Lord Porter at p.78, entered a caveat of caution that ‘whether one adopts the principle that money so paid is recoverable or irrecoverable, one may be found to have treated one side or the other with considerable harshness’.

Basic principles of Fibrosa case has been later developed into the statue law, and nowadays financial consequences of frustration are regulated by the law of restitution, most of which can be found in the Law Reform (Frustrated Contracts) Act 1943.

Frustration happens without fault from either side

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.
Lauritzen A.S. v Wijsmuller B.V., (The Super Servant Two) [1990] 1 Lloyd’s Rep. 1, per Lord Justice Bingham at p.9.

There are two equally important points which almost inevitably come to consideration when frustration of the contract argued.

First flows from the assertion that the contract ceases to exist automatically as from the moment of frustration. Therefore happening of frustrating event cannot be in any way influenced by the parties to the contract.

Lord Wright in his speach in Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524, at pp.529-530 said:

…the simple conclusion that it was the act and election of the appellants which prevented the St. Cuthbert from being licensed for fishing with an otter trawl. 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.

Second point based on the rule that the party seeking to rely on an event as discharging him from his obligations must not be responsible for the occurrence of that event.

This test was applied by Moore-Bick J. in The "Fjord Wind" [1999] 1 Lloyd’s 307, at p.335:

In my judgment the delay in the completion of the voyage in this case and the greatly enhanced risk of damage to the cargo as a result of that delay was sufficient to frustrate the adventure. However, since, as I have already held, that situation was brought about by a breach of contract on the part of each of the defendants, they are liable for any loss which the plaintiffs have suffered as a result.

The words "without default on either side" do not impose on party seeking the defence under the doctrine onus of establishing that frustration was not brought into operation by his default, Joseph Constantine Steamship Line, Ltd v Imperial Smelting Corporation, Ltd [1942] A.C. 154.

The matter of volition or rather choice was recently discussed in CTI Group Inc v Transclear SA [2008] EWCA Civ 856. Moore-Bick LJ stressed that contract is not frustrated if the sellers’ cargo was physically available for shipment but the sellers’ sub-contractors simply chose not to make the goods available for shipment, because that was a matter of someone’s choice, which in that particular case sub-contractors were free to exercise, being under no contractual obligation to the sellers. It was held that the seller bore the risk of a refusal on the part of the supplier to make goods available.

Frustration does not depend on parties intentions

… 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. 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.
Per Lord Sumner in Hirji Mulji v Cheong Yue Steamship Co [1926] AC 497 at p. 510

The legal effect of frustration does not depend on intentions or opinions of parties, 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.

Lord Brandon of Oakbrook in Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal (The "Hannah Blumenthal") [1983] 1 All ER 34, at p.44 defined two essential factors necessarily to be present in any frustrating event:

…there are two essential factors which must be present in order to frustrate a contract. The first essential factor is that there must be some outside event or extraneous change of situation, not foreseen or provided for by the parties at the time of contracting, which either makes it impossible for the contract to be performed at all, or at least renders its performance something radically different from what the parties contemplated when they entered into it. The second essential factor is that the outside event or extraneous change of situation concerned, and the consequences of either in relation to the performance of the contract, must have occurred without either the fault or the default of either party to the contract.

Necessity of supervening event to invoke the doctrine of frustration was recently underlined in CTI Group Inc v Transclear SA [2008] EWCA Civ 856. Moore-Bick LJ stated that:

In order to rely on the doctrine of frustration it is necessary for there to have been a supervening event which renders the performance of the seller’s obligations impossible or fundamentally different in nature from that which was envisaged when the contract was made. In the present case, however much pressure [seller] put on suppliers, the nature of the performance called for by the contract remained the same. Whether the suppliers chose to succumb to that pressure was a matter of choice.

Frustration does not depend on parties knowledge, assumptions and contemplations

The probabilities as to the length of the deprivation and not the certainty arrived at after the event are also material. The question must be considered at the trial as it had to be considered by the parties, when they came to know of the cause and the probabilities of the delay and had to decide what to do.
Per Lord Sumner in Bank Line, Limited v Arthur Capel & Co [1919] AC 435 at 454.

The parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, objectively estimated, are among those factors to be considered when appropriateness of application of the doctrine is under scrutiny. It brings about an issue of foreseeability of the risk, which in its turn, is of twofold nature. On the one hand there is no strict requirement for frustrating event to be either foreseeable and foreseen or unforeseen. It can be reasonably said about almost any frustrating event that is was foreseeable to a greater or lesser degree, moreover the parties can make special provision in their contract with regard to such event or events, but it will not necessarily prevent operation of the doctrine of frustration. In Tatem v Gamboa [1939] 1 KB 132 Goddard J said at p.137: "It is true that in many of the cases there is found the expression unforeseen circumstances, and it is argued that unforeseen circumstances must mean circumstances that could not have been foreseen. But… it makes very little difference whether the circumstances are foreseen or not. If the foundation of the contract goes, it goes whether or not the parties have made a provision for it." In Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724 Lord Roskill explained that:

It is not the nature of the cause of delay which matters so much as the effect of that cause upon the performance of the obligations which the parties have assumed one towards the other.

On the other hand the fact that occurrence which suppose to trigger the doctrine was foreseeable and foreseen leads to conclusion that parties contemplated the matter of risk allocation as a consequence of said occurrence before entering into the contract.

Clear and thoughtfully drafted force majeure and the hardship clauses serve the purpose of regulation of events which may impede or hinder performance of the contract, thus allocating the risk between the parties in case of happening of such events without necessity of invocation the doctrine of frustration.

Mere hardship is not enough to frustrate contract

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.
By Lord Radcliffe in Davis Contractors Ltd. v Fareham Urban District Council [1956] A.C. 696, at p.729.

In cases of mere hardship or inconvenience or material loss, when, for example, changed circumstances made contract price so very unfair to one of the parties, court will not be ready to release the parties from their contracted duties, because operation of the doctrine must be kept within ‘very narrow limits’.

Lord Radcliffe in Davis Contractors Ltd. v Fareham Urban District Council [1956] AC 696 stressed that frustration is not a device to set the contract aside when it has turned out to be a bad bargain. His Lordship said at p.727 and 730-731:

…in my opinion, full weight ought to be given to the requirement that the parties "must have made" their bargain on the particular footing. Frustration is not to be lightly invoked as the dissolvent of a contract. … if without default on either side the contract period was substantially extended, that circumstance itself rendered the fixed price so unfair to the contractor that he ought not to be held to his original price. I have much sympathy with the contractor, but, in my opinion, if that sort of consideration were to be sufficient to establish a case of frustration, there would be an untold range of contractual obligations rendered uncertain and, possibly, unenforceable.

In Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal (The Hannah Blumenthal) [1983] 1 All ER 34 case for example, it was held that prolonged delay in proceeding with arbitration cannot frustrate contract. It is worth mentioning here that it is not enough to show that without default of either party the contract has become incapable of being performed. It must be shown that the incapability is because the circumstances at the time would render performance radically different from that which was undertaken by the contract.

It is not surprising therefore that in many cases concerning to detention and delays one of the parties arguing dissolution of the contract, contends that further performance was radically different from that what was initially contracted. There is, however, noted difficulty in application of ‘radically different’ test if we recall that ultimate purpose of invocation of the doctrine of frustration was to escape from injustice in the first place. This difficulty was recently underlined by Rix LJ in The Sea Angel [2007] EWCA Civ 547:

What the ‘radically different’ test, however, does not in itself tell us is that the doctrine is one of justice, as has been repeatedly affirmed on the highest authority. Ultimately the application of the test cannot safely be performed without the consequences of the decision, one way or the other, being measured against the demands of justice. Part of that calculation is the consideration that the frustration of a contract may well mean that the contractual allocation of risk is reversed.

Frustration. Partial impossibility. Speculative contracts

… it does not automatically follow that, because one term of a contract, e.g., 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 contracted obligation, would not necessarily spell the frustration of the contract.
By Viscount Simonds in Tsakiroglou & Co., Ltd. v Noblee & Thorl, G.M.B.H. [1961] 1 Lloyd’s Rep 329, at p.333.

In cases of partial impossibility - Krell v Henry [1903] 2 KB 740, a contract can be discharged if its main purpose can no longer be achieved; but in cases of frustration of purpose - Heme Bay Steam Boat Company v Hutton [1903] 2 KB 683 - the courts have applied the more rigorous test of asking whether any part of the contractual purpose (other than a part which was wholly trivial) could still be achieved: if so, they have refused to apply the doctrine of discharge. The Heme Bay case fell far short of satisfying this test.

In a recent case of Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Ltd [2010] EWHC 2661 (Comm) the court was invited to examine the effect of measures to promulgate the Financial Restrictions (Iran) Order 2009 SI No 2725 of 2009 taken by HM Treasury pursuant to powers conferred by the Counter-Terrorism Act 2008 on a contract of insurance between the shipowner, IRISL and the insurer, P&I Club. The Financial Restrictions Order prohibited transactions and business relationships between persons operating in the financial sector ("relevant persons") and two designated Iranian entities, IRISL (the shipowner) and Bank Mellat. By this Order HM Treasury granted P&I Club a licence where the scope of the risks covered was significantly reduced, but which did not render it unlawful for the Club to provide insurance cover and thereby to indemnify IRISL in respect of claims made by third parties against IRISL for pollution damage. One of the shipowner’s vessel suffered a casualty causing bunker oil pollution in respect of which the owner sought to be indemnified.

The Club contended that because it became unlawful for the Club to insure all the other risks, the contract of insurance between IRISL and the Club was discharged by frustration. Beatson J agreed with the owner, IRISL that whilst the scope of cover permitted was significantly narrower than it was prior to the Order its nature as an indemnity insurance policy was not affected. The judge held that ‘…the purpose of the contract between the Club and IRISL … was to provide indemnity insurance. Part of that purpose remained lawful.’

The doctrine can rarely be applied to speculative contracts

The doctrine of frustration can rarely, if ever, be applied to speculative contracts because the basis of a speculative contract is to distribute all the risks on one side or on the other and to eliminate any chance of the contract falling to the ground, unless, indeed, the law has put an end to it, see Larrinaga & Co, Ltd v Societe Franco-Americaine des Phosphates de Medulla [1923] All ER Rep 1 per Lord Sumner.

Frustration. Multi-factorial approach

Of course, the doctrine needs an overall test, such as that provided by Lord Radcliffe, if it is not to descend into a morass of quasi-discretionary decisions. Moreover, in any particular case, it may be possible to detect one, or perhaps more, particular factors which have driven the result there. However, the cases demonstrate to my mind that their circumstances can be so various as to defy rule making.
Per Rix LJ in The Sea Angel [2007] EWCA Civ 547 at para 110.

From all those factors mentioned above it is logical to conclude that application of the doctrine of frustration often raises complicated questions with probable answers, concerned to the matter of the allocation of risks, lying at diametrically opposite sides, and therefore produces not always entirely satisfactory results.

Wide variety and multitude of aspects to be born in mind in attempt to achieve fair decision make it sensible to look for some compromise as a more reasonable solution. It is admitted that application of the doctrine requires a multi-factorial approach. That constitutes appraisal of ‘the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.

In ["wait and see"] situations, it is a matter for assessment, on all the circumstances of the case, whether by a particular date the tribunal of fact, putting itself in the position of the parties, and viewing the matter in the role of reasonable and well-informed men, concludes that those parties would or properly speaking should have formed the view that, in all fairness and consistently with the demands of justice, their contract, as something whose performance in the new circumstances, past and prospective, had become "radically different", had ceased to bind.
Per Rix LJ in The Sea Angel [2007] EWCA Civ 547 at para 120.

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