The Theory of Frustration in English Law

Does the doctrine of frustration have a useful and coherent role to play in English contract law?

Introduction

‘Discharge’ is the technical name for bringing contractual relations to an end. A contract can be discharged in one of four ways. The main one is Frustration.

‘Frustration’ is an event that occurs outside the parties’ control, which prevents the contract from being carried out

Frustration under English law is a doctrine, which acts as a device to discharge contracts where an unexpected event either transmutes contractual obligations impossible, or drastically modifies the party’s initial purpose for entering into the contract.

The common law doctrine of Frustration comes into play to discharge contractual obligations when no party is at fault. What actually happens is that an intervening event occurs that disables the performance of a contract. This event turns performance physically, commercially or legally impossible or transforms the obligations of the contract profoundly different from those, which were agreed at first place.

With a first sight, it would seem that there is a clear picture; frustration will take place in rare occasions falling under those specific categories. However, no clear-cut list of events leading to frustration exists. In addition to this the doctrine has been developed on a case-by-case approach. Therefore, it is far from clear as to what equals to a frustrated contract.

Indeed, when the doctrine should apply is a very contrasting topic. Today the subjective implied term theory has been replaced by the objective ‘reasonable man’ hypothesis. The main issue rests with the courts. They are the one who will decide when an exterior event equalled to sufficient frustration and proceed in the discharge of the contract. It is a fact that courts nowadays show reluctance in discharging contracts as frustrated.

There have been five theories[1] developed over the years attempting to set in order this area. However if we want to identify the peculiarities of its purpose in modern contract law we need to follow the development this doctrine.

Frustration: a struggle to categorize the doctrine

However we may argue that Frustration in modern contract law operates under three comprehensive categories. The basic factor is an intervening act, which makes performance impossible, illegal or commercially sterile.

Thus, Frustration is created by the impossibility of a contract. This means that supervening events occur that may render impossible the performance in occasions that involve a definitive damage of the subject matter [2].

However if the subject matter is damaged that does not necessarily mean that it will frustrate a contract. The risk of loss is an important element that should be taken into serious consideration.

This point can be mirrored in the following example: A has agreed to install an oven in B’s bakery, if, before the work was completed, the bakery is destroyed the contract is frustrated but if only the oven is destroyed, A is obliged to redo the work without any obligation from the other party.

Impossibility also occurs by the death or illness of a party, outbreak of war, strikes etc.

Subsequent illegality is another factor that can frustrate a contract. This happens when parties are ready to perform but changes in the law prevent it, such as the law in another country changes or the law changes due to an outbreak of war [3].

The third scenario, which leads to frustration, is commercial sterility; this arises when the central purpose of the contract is destroyed unless substantial purpose remains.

Supervening events, which may equal in frustrating a contract, will not necessarily occur to this result, since certain features may omit the doctrine of frustration.

Provisions of Contractual Relationships

The common law relating to frustration leads to ‘dead or alive’ practices. If the doctrine applies, the contract is considered as a dead one; if it does not apply the contract sustains all its legal effects. The parties though may decide to agree on middle solutions.

For example, as far as the coronation seat cases are concerned, the contracts provided that, if the processions were postponed, the tickets should be valid for the days on which the procession eventually did take place; or that the ticket holders should get their money back less a sum to cover the other party’s expenses.[4] When the coronation was postponed, these provisions effected in order to exclude the doctrine of frustration.

If a contract contains an express clause, which specifically covers the casus, it is questionable whether or not the provision covers the events, which have occurred.[5] In one case a contract to build a reservoir in six years provided that the builder should have an extension of time for delays ‘however occasioned’. This provision was interpreted as giving him a period of grace only in the event of non-frustrated delays. It did not cover the delays that had actually occurred when the First World War brought the work to termination, and forced the builder to sell his construction plant. The builder’s plea of frustration succeeded.

Also, the fact that the contract makes some provisions for a supervening event will not exclude frustration if the provision is incomplete. A charter party may, for example, provide that the ship owner is not liable for delays due to certain events outside of his power. A clause like the above will not prevent the charterer from founding a ground of frustration. This happens because the provision deals only with one possible effect of the delay, explicitly its result on the liability of the ship owner for breach. It clearly does not contain anything about the liabilities of the charterer, which can consequently be discharged as a result of frustration.

A contractual provision for the event will not exclude frustration in certain cases of supervening illegality. Setting an example, if one of the contracting parties becomes an alien enemy the contract would not be saved by even the clearest obvious provision for that event; for the parties cannot ‘contract out’ of the predominantly strong public policy against aiding the enemy economy in time of war. On the other hand, clauses dealing with export or import prohibition [6] are commonly supported that they assume that the prohibition will be observed and do not subvert its purpose.

To conclude there is the possibility that a contract may particularly provide for discharge on the occurrence of listed events, whether or not these events generate a change of circumstances that would be sufficiently essential to frustrate the contract. Such clauses are meant to decrease the uncertainty which can result from the struggle to decide whether the change is of this kind: and also to moderate the hardship which a party may suffer where the damage is not ultimate so that he would stay bound even though the contract has become unpredictably burdensome on him. If the specified event occurs, the contract is discharged under the express term and not the doctrine of frustration.

‘Self-induced’ frustration

Neither party can rely on ‘self-induced’ frustration that is on a hurdle to performance raised by default or deliberate act of one of the parties.[7] This is most obvious where that conduct constitutes itself a breach of the contract. The venture may be discharged but the person whose conduct induced the casus will stay contractually liable.[8] Therefore, he is in breach of contract guiding the ship to war zone, resulting in her detainment and cannot rely on the detention as a ground of frustration. The doctrine similarly does not apply where the breaches of both parties contribute to a frustrated delay. Neither can a party rely on an event which was due to his liberate act, even though that act is not itself a breach. E.g. an actor who had contracted to give a theatrical show on an indicated day could not rely on failure to perform due to his imprisonment. Even negligence in bringing on the incident would normally omit frustration. The defendants in Taylor v Caldwell would not have been able to rely on the doctrine if the fire was caused by their own negligence.

Following this principle the position ought to be the same where a singer was unable to perform because he did not take care and contracted flu; but as the effect of such conduct on a persons’ health is hard to predict it may be that the contract could be frustrated in such a scenario.

The purposefulness of the rule that a party cannot rely on self-induced frustration is to deprive the party of the benefit of the doctrine of discharge; the rule must not result to prejudgment of the other party. It follows that the party whose conduct has brought about the event cannot rely on it as a foundation of discharge. However, the other party may be able to do so. E.g. an employee who is prevented from working by a sentence of imprisonment cannot be based on this fact and frustrate the contract. However, his employee could rely on it, with the result that he would not be liable for unjust firing.

The question whether frustration is indeed due to the voluntary act of a party can also arise where A enters into several contracts with different parties and the supervening event deprives him of the power of performing some, but not all, of those contracts. Suppose A has planted a crop of vegetables in a farm, which is normally expected to produce 20 tons. He agrees to sell 10 tons of this expected crop to X and 10 tons to Y; but as a result of events beyond his control, the total yield is only 10 tons. One view, for which there is considerable support in the authorities that if A delivers the 10 tons to X, his contract with Y will not be frustrated since his failure to perform it was due to A’s voluntary act; and that for the same reason his contract with X would not be frustrated if he delivers the 10 tons to Y. Yet it seems inconsistent with the principle of frustration to hold A liable for a shortfall due to an event beyond his control, which would have provided him with an excuse if he had agreed to sell the whole quantity to only one buyer. As long as A acts reasonably in allocating the actual yield (in delivering the 10 tons to the first of the two buyers to have contracted with him) he should be under no further liability. It might also be reasonable for him to allocate 5 tons to each buyer. He could then rely by way of excuse on an express contractual provision for the event, but probably not on the common law doctrine of frustration, since the effect of that doctrine is generally said to be to bring about the total discharge of the contract.

Foreseen and foreseeable events: Risk and Frustration

In many frustration cases, the courts have underlined the unexpected nature of the supervening event. Herein, there can be no frustration if, at the time of the contracting, the parties actually foresaw that the event would, or was very possible to occur. This view is based on the hypothesis that, in these circumstances, the parties accepted a possible risk that the event may arise.

Such a risk would undoubtedly be mirrored in the contract price; and if the parties did not want to take the risk, they could clearly avoid it. To strengthen this argument, it is necessary to define exactly what the parties foresaw. The fact that they anticipated a delay does not prevent frustration if the delay that took place was of an absolutely different order or magnitude and was not predicted.

Neither is the doctrine of frustration eliminated merely because a party could have foreseen that the event would occur. No doubt, it was ‘reasonably foreseeable’ that King Edward VII might fall ill at the time fixed for his coronation, but this did not prevent the doctrine of frustration from applying in such a case.

Several judicial statements support a more strict method and assert that a contract can be frustrated even by an event, which was perfectly foreseen. It is hard to understand why the courts should alter the contractual dangers, which have been deliberately undertaken; and the desirable view seems to be that, if parties contract with reference to risk of which they were aware then they should normally be able to rely on the doctrine of frustration.

They should be able to do so only if the contract specifies that they had not intended to provide for the risk. For example they could claim that, if such an event occurs, they would leave the legal experts to sort it out and if their efforts to do so ended in deadlock, the contract could indeed be frustrated.

Conclusion

The doctrine of frustration seems to become more and more rare in the courts of England. Since the frustration of contracts is highly restricted, a defense in frustration of a contract is highly unlikely because the key element is that a valid contract has been made and the good faith it has been structured upon should be under respect.