Frustration of contract

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A contract is said to be `frustrated' if it becomes impossible to perform, or if circumstances change to the extent that performance would be substantially different from what was anticipated by the parties. Consider the following (imaginary, but typical) case. X offers 50,000 to Y to build an extension on his (X's) house. X pays a deposit of 2,000, with an agreement to pay the balance on completion. After Y has started work, it becomes apparent that the ground around X's house is not stable enough to support an extension, and any attempt to do so would result in the foundations disappearing rapidly into the ground. Y cannot, therefore, perform his part of the contract. X has paid his deposit, but not got anything in return. Y has incurred considerable expense in designing the extension and getting in supplies. So X would like to recover his deposit from Y, Y would like to recover his expenses from X, and both parties would like to be released from any further obligations under the contract.

The balance of losses in cases of frustration has been significantly modified from the common law position by the Law Reform (Frustrated Contracts) Act (1943). However, the circumstances in which the courts are prepared to find frustration have not changed, so the common law is still relevant. In particular, in deciding whether frustration has occurred, the courts have to balance two competing requirements. On the one hand, there is the desire for certainty of contract. Good business relations depend on an assumption that once a contract has been entered into, it will be performed by both parties and, if it is not, the wounded party is entitled to compensation. The courts should not lightly intervene to set aside a good contract, even if future events reveal it to be onerous for one party. It would be difficult to do business at all if money received as part of a contractual arrangement could not be spent until the contract was fully performed, in case a court acted to undo the contract. On the other hand there is the requirement to try to do justice in the individual case. If it becomes impossible to perform a contract owing to events beyond the control of the parties, it is not particularly just that one party should end up having to compensate the other when he is not at fault. This tension is not easy to resolve, but in general the courts will not set aside a contract that was good when it was made unless supervening events have made it essentially impossible to perform, or performance would render to one or other party none of the benefit that was anticipated.

Although if a contract is frustrated it is deemed to be discharged, there remains the problem of how any losses should be apportioned between the parties. The rule at common law was first definitively set out by the King's Bench in Chandler v webster (1904), although a number of earlier cases had reached the same conclusion. This rule said that the losses should `lie where they fall'. That is, any losses incurred before the supervening frustrating event could not be recovered. This was a simple rule, but a harsh one, and it was often criticised. In our example of the extension builder, X would be unable to reclaim his deposit and, indeed, would still be under an obligation to pay the balance, this obligation having accrued before frustration.

The finding of the House of Lords in The fibrosa (1943) partially overruled Chandler v Webster. In this case it was held that, where there was a total failure of consideration, losses that accrued up to the frustration would be recoverable. Under the Fibrosa principle, X might be able to recover his deposit from Y, as he has received none of the benefits that both parties expected to be delivered by the contract.

The Fibrosa principle was given statutory backing in the Law Reform (Frustrated Contracts) Act (1943). This says that monies paid under a frustrated contract can be recovered, but the party that has receieved payment is entitled to a quantum meruit award to compensate him for expenditure he may have incurred in trying to perform the contract. In the house extension case, the builders Y can be forced to return the deposit they recevied from X, but they may be entitled to be paid in respect of work they have already carried out.

Contract Law