Frustration operates to terminate a contract where the law recognises that, without the fault of either party, performance of a contractual obligation is no longer possible due to unforeseen circumstances that have arisen since the formation of the contract.
Performance under these circumstances may be impossible, illegal or something radically different from that which was in the contemplation of the parties at the time they entered into the contract.Â For example, the destruction of the subject matter in a sale of goods contract would render performance impossible. Alternatively, performance may be possible but the common purpose of the contract may have been undermined.
In Krell v Henry 2 KB 740, Henry had contracted to hire KrellÃ¢ÂÂs flat in London for the purpose of viewing the coronation procession of King Edward VII. When the King became ill the coronation was postponed and Henry refused to pay. The purpose of the contract was held to have been frustrated.Â Â Â Â
Frustration is significant in that it operates to terminate a contract irrespective of the partiesÃ¢ÂÂ wishes. However, the practical application of frustration is limited. Firstly, it will not apply where the parties have made express provision for the frustrating event in the form of a “force majeure” or hardship clause in their contract. In this situation the impact of the events will be regulated by the terms of the contract rather than the doctrine of frustration. Secondly, frustration will not apply where the event was in fact foreseen by the parties and therefore within their contemplation when entering the contract. Finally, the doctrine of frustration can not be invoked where the alleged frustrating event was caused by the conduct of one of the parties to the contract. Only a supervening event, outside of the control of the parties will suffice to frustrate a contract.
When a contract is frustrated, the obligations of both parties are automatically discharged. The parties are therefore released from their obligations to perform the contract after the date of discharge without incurring any liability for breach of contract due to their failure to perform. Termination of a contract on the basis of frustration is not retrospective and so in effect, the “loss lies where it falls.” The Law Reform (Frustrated Contracts) Act 1943 regulates the financial consequences of frustration.Â
Section 1(2) provides that all sums paid to any party in the pursuance of the contract before it was frustrated shall be recoverable whilst sums payable before frustration shall cease to be payable.
Section 1(3) provides that where any party to the contract has obtained a non-monetary benefit, before the time of frustration, it shall be recoverable from him as the court considers just.