LECTURE 13
DISCHARGE BY FRUSTRATION
INTRODUCTION
The common law originally insisted upon performance of obligations irrespective of
the impact that subsequent events may have had on the parties ability to perform the
contract: Paradine v Jane (1647) 82 ER 897. However, this changed with the
emergence of the doctrine of frustration which excused performance if supervening
events dramatically affected the nature of the contract. See Taylor v Caldwell (1863)
122 ER 309; Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125.
ELEMENTS OF FRUSTRATION
In National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, at 700 Lord Simon
listed the following elements of frustration:




There must be a supervening event that "significantly changes the nature (not
merely the expense or onerousness) of the outstanding contractual rights";
There must be no fault in either party;
The supervening event must not have been "reasonably contemplated by the
parties" at the time of the contract;
It must be unjust to hold the parties to the original contract.
INSTANCES OF FRUSTRATION





Destruction of the physical subject matter of the contract: Taylor v Caldwell
Death or incapacity of person in personal services contract
Non-occurrence of an event which is the basis of the contract: Krell v Henry
[1903] 2 KB 740
Supervening legal impossibility: Denny, Mott & Dickson Ltd v James B
Fraser & Co Ltd [1944] AC 265
Frustration of a commercial venture: Bank Line Ltd v Arthur Capel & Co
[1919] AC 435; FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum
Products [1916] 2 AC 397; Codelfa Pty Ltd v State Rail Authority of New
South Wales (1982) 149 CLR 337.
Self-induced acts cannot frustrate the contract. See Joseph Constantine SS Line v
Imperial Smelting Corporation [1942] AC 154.
Foreseeable events cannot frustrate the contract. What is the effect of a clause that
stipulates what is to happen to the contract in the event of stipulated events occurring?
See Metropolitan Water Board v Dick, Kerr & Co [1918] AC 119.
EFFECTS OF FRUSTRATION
At Common Law
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At common law frustration automatically discharges the parties as to future
obligations under the contract, but pre-frustration obligations are still enforceable:
Chandler v Webster [1904] 1 KB 493. But see Fibrosa Spolka Akcyjna v Fairbairn
Lawson Combe Barbour Ltd [1943] AC 32.
Frustrated Contracts Act 1978 (NSW)
The first thing to note about the Act is that it does not apply to all contracts. See s. 6.
By s. 7, a promise that was to have been performed before frustration but was not so
performed, is discharged, except to the extent that it is necessary to support a claim
for damages brought by the other party for breach of contract. In assessing damages in
such a case the court must have regard to the fact that the contract has been frustrated:
s. 8.
In situations where one party has fully performed its obligation prior to frustration, the
liability of the other party with respect to that performance is dealt with in s. 10.
Although not clear, it is suggested by Carter & Harland (at pp. 799-800) that the other
party is obliged to pay the market value of that performance. Section 10 does not
apply to situations where the obligation performed prior to frustration involves, in
whole or in part, the payment of money: s. 9.
Where one party has partially performed its obligation prior to frustration, the liability
of the other party is dealt with in s. 11. The section sets out a complex formula by
which the compensation payable to the first party is calculated. Again s. 11 does not
apply to situations where the obligation performed prior to frustration involves, in
whole or in part, the payment of money: s. 9.
Section 12 deals with the situation where the obligation performed prior to frustration
involves the payment of money. The section stipulates that such payments are to be
returned to the other party, provided that the money paid by the first party was paid as
consideration for performance by the other party.
Section 13 deals with the situation illustrated by the Fibrosa case, namely where
expenditure has been incurred by one party prior to frustration and that expenditure is
effectively wasted as a result of frustration. In such cases that amount of the wasted
expenditure is equally apportioned between the parties. If something can be salvaged
from the partially completed work by the first party, then that too is equally
apportioned between the parties.
Finally, it must be noted that the provisions set out in ss. 9-13 can be excluded by a
court order if applying the provisions would be manifestly inadequate or
inappropriate, or would cause a manifest injustice, or would be excessively difficult to
apply. In such cases, by s. 15, the court can make orders in the form of money
payments or otherwise as it considers proper.
DISCHARGE BY AGREEMENT
INTRODUCTION
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Just as parties can enter into contracts, they can agree to discharge the contract that
they have entered into, thereby releasing each other from unperformed obligations to
that contract. The discharging contract is like any pother contract in that it must fulfill
the requirements of a valid contract. This topic can be broken down into two parts:
discharge of a contract that has not been completely performed or executed by either
party – discharge of executory contracts, and discharge of a contract where one party
has completed performed or executed its obligations and the other has not – discharge
of executed contracts.
DISCHARGE OF EXECUTORY CONTRACTS
A critical aspect of discharge here is whether writing is required. Generally writing is
not required to discharge a contract even if the contract was one that was required to
be evidenced in writing when originally entered into. An oral discharging agreement’s
consequences will depend upon whether it simply discharges the original contract, or
discharges it and at the same time replaces it with another agreement between the
parties, or varies the original contract. See Tallerman & Co Pty Ltd v Nathan’s
Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 at 144; Morris v Baron & Co
[1918] AC 1; United Dominions Corporation (Jamaica) Ltd v Shoucair [1969] 1 AC
340.
DISCHARGE OF EXECUTED CONTRACTS
A critical factor in discharge here is whether the party that is being discharged has
provided consideration for the discharging agreement. See McDermott v Black (1940)
63 CLR 161, Foakes v Beer (1884) 9 App Cas 605.
ILLEGAL & VOID CONTRACTS
INTRODUCTION
Contracts can be called into question because their object is one which the law does
not wish to enforce. Such contracts can be declared to be either illegal or void. The
consequences of illegality are generally more far-reaching than if the contract is void.
ILLEGAL CONTTRACTS
Contracts can be declared illegal either pursuant to statute or common law principles.
Statutory Illegality
A contract can be declared illegal by a statute:
(i)
(ii)
expressly: see Re Mahmoud & Ispahani [1921] 2 KB 716, or
impliedly: see Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd
(1978) 139 CLR 410; Smith v Mawhood (1845) 153 ER 552; St John’s
Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267; Anderson v
Daniel [1924] 1 KB 138.
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Common Law Illegality
On public policy grounds contracts can be declared illegal. Such cases include:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
contracts to commit a crime. Tort or fraud on a third person: see Allen v
Rescous (1677) 2 Lev 174;
contracts that are sexually immoral: see Seidler v Schallhoper [1982] 2
NSWLR 80;
contracts which prejudice public safety or good relations with pother
states;
contracts that are prejudicial to the administration of justice: see Clegg v
Wilson (1932) 32 SR (NSW) 109;
contracts tending to promote corruption in public life: see Parkinson v
College of Ambulance Ltd & Harrison [1925] 2 KB 1; Wilkinson v
Osborne (1925) 21 CLR 89;
contracts to defraud the revenue: see Alexander v Rayson [1936] 1 KB
169.
Effects of Illegality
If both parties intend to commit an illegal act or act in a manner contrary to public
policy neither party can bring an action pursuant to the illegal contract. If only one
party is guilty of performance of an otherwise legal contract in an illegal manner or
for an illegal purpose, the other can sue on the contract: Archbolds (Freightage) Ltd v
Spanglett Ltd [1961] 1 QB 374.
However, even if contract is illegal as to its formation, an innocent party may have
alternative remedies, not based upon the contract. Possible alternatives include:
(i)
(ii)
(iii)
collateral contract: see Strongman (1945) Ltd v Sincock [1955] 2 QB 525
tort of deceit: see Hatcher v White (1953) 53 SR (NSW) 285
equitable estoppel.
In some circumstances the illegality can be severed from the contract. See Thomas
Brown & Sons v Fazal Dean (1962) 108 CLR 391.
Generally, courts will not assist either party to an illegal contract to recover property
that has passed pursuant to it. Exceptions here include:
(i)
(ii)
(iii)
the principle of locus poenitentiae (place of repentance): see Clegg v
Wilson;
if parties are not in pari delicto;
a party has alternative grounds for recovery such as in the law of torts: see
Singh v Ali [1960] AC 167; Bowmakers v Barnet Instruments [1945] 1 KB
65.
CONTRACTS VOID ON PUBLIC POLICY GROUNDS
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The three major areas in which common law principles will declare a contract as
being void are dealt with below. Generally, property that may have passed under a
void contract can be recovered.
Contracts to Oust the Jurisdiction of the Court
A contract or provision ousting the jurisdiction of the courts to hear disputes is void.
However, note Scott v Avery (1856) 10 ER 1121.
Contracts Prejudicial to the Status of Marriage
A contract that unduly restrains the freedom of a person to marry is void.
Contracts in Restraint of Trade
A contract, or term in a contract, in restraint of trade is one which restricts the right of
a person to freely carry on his or her trade, business or profession. The purpose of
such restraints is stated in Lindner v Murdock's Garage (1950) 83 CLR 628 at 636:
It is common to use the expression covenants in restraint of trade, with the covenantor
being the person burdened by the covenant and the covenantee being the person for
whose benefit the provision applies.
At common law such restraints are prima facie void and unenforceable. The fact that
a restraint clause has been freely bargained for and entered into by the parties does not
mean that the restraint is enforceable: Maggbury Pty Ltd v Hafele Australia Pty Ltd
(2001) 76 ALJR 246 at 256. However, if the restraint is reasonable it can be enforced.
A restraint of trade contained in a deed in which the covenantee has not provided
consideration, is not enforceable by the covenantee: Davis v Mason (1793) 101 ER 69
at 70.
The classic formulation of the common law principles on restraints of trade is found
in Nordenfeldt v Maxim Nordenfeldt Guns and Ammunition Co Ltd [1894] AC 535 at
565.
If a restraint is unreasonable it is unenforceable even if the covenantor has acted in a
way which would have been within the boundaries of a reasonable restraint:
Papastravou v Gavan [1968] 2 NSWR 286.
As can be seen from Nordenfeldt, the prima facie proposition that a restraint is
unenforceable is subject to the qualification that it will be enforced if reasonable. A
number of points relating to reasonableness need to be made.
(i)
Onus if Proof
See Herbert Morris Ltd v Saxelby [1916] 1 AC 688 at 700.
(ii)
The Time at Which Reasonableness is Assessed
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See Nordenfeldt at 573-574, but note Amoco Australia Pty Ltd v Rocca Bros (1973)
133 CLR 288 at 318.
(iii)
Reasonableness in the Interests of the Public
The major public interest is the maintenance of competition in business and trade.
However, simply because a restraint lessens competition does not necessarily mean it
is also unenforceable: Queensland Co-operative Milling Association v Pamag Pty Ltd
(1973) 133 CLR 260 at 265, 268, 277-9.
It has often been observed that if the restraint is reasonable in the interests of the
parties it is also reasonable from the perspective of the public interest. This has led
some judges to say that in fact there is only really one test. See Esso Petroleum Co
Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 at 324; Baker v Lintott (1980)
54 CPR (2d) 200.
(iv)
Reasonableness in the Interests of the Parties
The pivotal interest that a covenantee seeks to protect with a restraint is his/her
goodwill in a business. In assessing whether the restraint is reasonable it can only go
so far as to provide, as stated in Nordenfeldt, ‘adequate protection’ to the covenantee.
See Amoco Australia Pty Ltd v Rocca Bros (1973) 133 CLR 288; Geraghty v Minter
(1979) 142 CLR 177 at 185; Bridge v Deacons [1984] AC 705; Linder v Murdock’s
Garage (1950) 83 CLR 628; A Schroeder Music Publishing Co Ltd v Macaulay
[1974] 1 WLR 1308.
Effect of the Trade Practices Act 1974 (C’th)
The Trade Practices Act in Part IV is concerned with anti-competitive conduct
undertaken by corporations engaged in trade and commerce, eg. monoplisation,
exclusive dealing, retail price maintenance etc. However, s. 51(2) excludes from the
operation of these provisions, restraints on employees; restraints on partners, and
contracts for sale of a business protecting a purchaser’s goodwill in that business.
Thus, the common law rules are unaffected by the Act in these cases.
Effect of the Restraints of Trade Act 1976 (NSW)
The Restraints of Trade Act has the effect of saving some restraints that would
otherwise be unenforceable at common law. The key section is s. 4(1). It stipulates:
A restraint of trade is valid to the extent to which it is not against
public policy, whether it is in severable terms or not.
The effect of this provision is to overcome the type of situation described above and
which occurred in Papastravou v Gavan. See Orton v Melman [1981] 1 NSWLR 583;
Industrial Rollformers Pty Ltd & Anor v Ingersoll-Rand (Australia) Ltd [2001]
NSWCA 111 at [165].
Note s. 4(3): KA & C Smith Pty Ltd v Ward (1998) 45 NSWLR 702 at 728.
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