Law Reform (Frustrated Contracts) Act 1943

Brief Background

The Law Reform (Frustrated Contracts) Act 1943, is an Act of Parliament which governs the liabilities and the rights of those parties who are involved in a frustrated contract in the United Kingdom. The Act provides a different approach to that of the common law at the time which did not permit a party in a frustrated contract to recover the money that had been paid ahead of a contract becoming impossible to perform.

Why was it introduced?

Prior to the introduction of the Act, the rule that was created in Chandler v Webster [1904] restricted the rights of a claimant seeking payment in the circumstances of a frustrated contract. In Chandler v Webster, Webster agreed to rent a room to Chandler so he could witness the king’s coronation. Chandler paid for his room on the basis of the agreement but the coronation never took place. Chandler’s claim for a refund was rejected by the court and he had to pay the remainder of the sum that had been agreed. This rule was considered to be generally unjust, however, it stood for decades before the Law Revision Committee suggested changes to the rule by way of the Law Revision Committee’s Seventh Interim Report. It was felt that a less arbitrary rule should be imposed that allowed the claimant to claim for the money he/she had paid.

In response to the recommendation, a Bill was introduced by the government shortly afterward and the Law Reform (Frustrated Contracts) Act 1943, came into effect in August 1943.

What was the aim of the Act?

The aim of the Act was to provide greater protection to a party that is paying a sum of money on the basis of a contractual agreement in circumstances where the contract has been frustrated. Specifically, this would be to remedy the unfortunate situations that had been previously seen in cases such as Chandler v Webster.

What main changes did it make to the law?

As previously noted, the rule in Chandler v Webster provided that the claimant could not recover the money he/she had paid on the basis of the contract, before the contract had become frustrated. The primary change that the Law Reform (Frustrated Contracts) Act 1943 made was to ensure that the sums paid would become either partially or fully recoverable, if a contract was impossible to perform. Legally, this provided the opportunity for a party to recover the benefit which has unjustly enriched the other party.

Key Sections

Law Reform (Frustrated Contracts) Act 1943 section 1 is a lengthy section that states the adjustments to the rights of the parties to frustrated contracts. Section 1 (1) states that the Act applies to any contract that applies to English law and that has become impossible of performance.

Law Reform (Frustrated Contracts) Act 1943, section 1 (2) states that sums of money paid before the contract was discharged shall be recoverable from the claimant. However, this section does allow for the payee to retain a portion of the money if he/she had occurred expenses in the process of carrying out the contract. Law Reform (Frustrated Contracts) Act 1943, section 1 (4) states that in estimating the expenses of any party to the contract, the court may include such sum as appears ‘reasonable’ in relation to the overhead expenses of said party. There is no further definition of reasonableness listed within the Act.

Law Reform (Frustrated Contracts) Act 1943, section 1 (3) deals with situations where one party may have obtained a benefit, other than the payment of money, ahead of a frustrating event occurring.

Law Reform (Frustrated Contracts) Act 1943, section 2 deals with specific logistics of the introduction of the Act. For example, section 2 (1) states that the Act shall apply to all contracts that are due to be discharged on or following the introduction of the Act, but not to those that will be discharged this date. Moreover, section 2 (2) states that the Act also applies to contracts to which the Crown is a party.

Lastly, Law Reform (Frustrated Contracts) Act 1943, section 3 (2) defines ‘court’ for the purposes of the Act.

Importantly, Law Reform (Frustrated Contracts) Act 1943, section 2 (3) states that parties may agree on contractual terms which limit or exclude the terms within the Act. However, as Lord Goff stated in BP Exploration Co (Libya) Ltd v Hunt [1979], the court would have to be careful in instances where it drew this inference as the clause might be considered to be intended to be applicable in ‘radically changed circumstances’.