CONTRACT LECTURE 12 TRANSCRIPT
C STRICKLAND
FRUSTRATION
TOTAL TIME = 55 mins 34 secs
Track/slide 1 2.11
In a previous lecture we have considered ‘discharge of contract’ and looked at how a contract
may be discharged through:
performance
agreement
breach, and through
operation of law.
We noted that in the latter category, operation of law, discharge of a contract through the
doctrine of frustration was a large topic that required separate consideration.
In this lecture, we now consider the situation when a contract is discharged under the
doctrine of frustration and begin with some introductory remarks.
We noted when looking at exclusion clauses that they can be put into a contract by one party
and can be seen as one way of allocating ‘risk’ under the contract. When the contract itself
provides for what should happen if something goes wrong like this, we can call it ‘planned
for risk’. Here the job of the court is to decide whether or not to ‘enforce’ the clauses
allocating risk, and we have seen that they can now rely heavily on the Unfair Contract
Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999.
However, it is often the case that whilst some risks have been foreseen and catered for in the
contract, there may be some unforeseen risks, and this is ‘unplanned for risk’. Should things
go wrong, the courts may have to decide which of the contracting parties is to bear the risk,
and hence any losses, in question.
Two doctrines may be used by the court, common mistake and frustration.
Track/slide 2 2.01
Common mistake is not a topic we are covering just now. Note however that a main
difference between the operation of mistake and frustration is that for mistake, the event
causing loss takes place ‘before’ the contract is concluded, whereas for frustration, the event
causing loss takes place ‘after’ the contract has been concluded.
In the mistake cases it can be seen that the common law approach has grown up such that a
‘hard line’ is taken, epitomised in the case of Bell v Lever Bros Ltd 1932 such that the
courts do not readily let claimants get out of bad contracts by using common mistake. This
preserves the idea of laissez-faire where the parties are of equal bargaining power. However,
the courts may ‘soften’ this hard line approach by invoking equitable principles as shown in
the leading case of Solle v Butcher 1950.
What we shall see with the doctrine of frustration is that the doctrine developed gradually
and culminated in application in the cases surrounding the coronation of Edward VII. Since
this time, a ‘harder line’ seems to have been taken by the courts, such that the judges are less
willing to let claimants get out of a contract by pleading frustration. A key case in this
respect is the Davis Contractors case 1956 that we consider below.
Track/slide 3 2.08
A possible definition of frustration is:
A contract is frustrated where after the contract was concluded unforeseen events occur
which make performance of the contract impossible, illegal or something radically different
from that which was in the contemplation of the parties at the time they entered the contract
and neither party must be at fault.
A good explanation of the main points of frustration are to be found in the words of Bingham
LJ in the Super Servant Two case 1990
‘The doctrine of frustration was evolved to mitigate the rigour of the common law’s
insistence on literal performance of absolute promises...The object of the doctrine was to give
effect to the demands of justice, to achieve a just and reasonable result, to do what is
reasonable and fair... after a significant change in circumstances... Since the effect of
frustration is to kill the contract and discharge the parties from further liability under it, the
doctrine is not to be lightly invoked, must be kept within narrow limits and ought not to be
extended...Frustration brings the contract to an end forthwith ... and automatically... The
essence of frustration is that it should not be due to the act or election of the party seeking to
rely on it... A frustrating event must be some outside event or extraneous change of situation
... A frustrating event must take place without blame or fault of the side of the party seeking
to rely on it.’
Track/slide 4 3.29
Now we can note a little on the origins and justification for the doctrine of frustration.
The doctrine of frustration grew up in the courts to avoid the harsh rule at common law that if
you make a contract you have to perform it; if you cannot perform it you are in breach of
contract and feel the consequences of being in breach of contract EVEN if the breach was
beyond your control. In this way liability for breach of contract is seen as STRICT – it
makes no difference whether or not you were at ‘fault’.
The case that demonstrates this harsh common law approach is Paradine v Jane 1647. In
this case a tenant farmer was dispossessed of his farm by the King’s enemies. Despite this,
and although not at fault, when he claimed that he should not be liable to pay the rent for the
period of 2 years he was dispossessed, it was held that he had to pay the rent because of the
‘absolute’ nature of his contractual obligations.
Thus, the common law courts were making the point that the courts would not interfere with
the contracts made between 2 parties – holding true to the idea of laissez faire.
However, this very ‘absolute’ approach has gradually been diluted, though not very much.
The doctrine of frustration is such that the courts will allow a party to escape the rigours of
being held to be in breach of contract if somehow he can show that the contract was
frustrated. However, the courts do not allow frustration of contract to be successfully
pleaded very often – harping back to the notion in Paradine v Jane.
The key early case allowing the absolute nature of contractual obligations to be weakened by
the idea of frustration is Taylor v Caldwell 1863. The cases that have followed do allow
frustration for some reasons but the courts are still very reluctant to find it.
Although the doctrine of frustration is now firmly established in contract law, the
justification for it is unclear. In the case of National Carriers Ltd v Panalpina (Northern)
Ltd 1981 we can see 5 possible bases for the doctrine as expounded by Lord Wilberforce and
Lord Hailsham. Lord Wilberforce stated that in his opinion the 5 justifications really ‘shade
into one another and that a choice between them is a choice of what is most appropriate to the
particular contract under consideration the doctrine  is and ought to be flexible and
capable of new applications.’
Track/slide 5 4.49
Frustration is generally invoked by the defendant who has not performed his side of a
contract as a defence to an action for breach of contract. If the defendant cannot successfully
raise the defence of frustration or any other defence, he will be liable for breach of contract.
The doctrine of frustration may also be the grounds for one side claiming more money under
a contract which is what happened in the Davis case below.
We can see why the courts are reluctant to allow it as a defence in the following 2 reasons:
i.
The courts don’t want frustration to be seen as an easy way out of
a bad bargain made by one of the parties – this can be seen in the
case of Davis Contractors Ltd v Fareham UDC 1956.
The claimant contractors agreed to build 78 houses for the
defendants for £94,000. Although the work was only supposed to
take 8 months to complete it took an extra 14 months due to
shortages of skilled labour. As a result it cost £115,000. The
contractors wanted to claim more money and took the case to
arbitration. They argued that the original contract had been
frustrated at some time when they couldn’t get labour. On this
basis, since the original contract thus came to an end by
frustration, a new contract could be implied by conduct – they
had continued to build the houses and the other side had not done
anything to the contrary. They claimed more payment for the work
than the original contract had specified on a quantum meruit basis.
Eventually the case got to the House of Lords where the frustration argument was
rejected.
Lord Radcliffe stated:
‘... it was not hardship or inconvenience or material loss itself
which calls the principle of frustration into play. There must be as
well such a change in the significance of the obligation that the
thing undertaken would, if performed, be a different thing from
that contracted for’.
In this case the thing undertaken and performed was not different to that that was contracted
for. Lord Reid stated:
‘... the question is whether the causes of the delays or the delays were fundamental enough to
transmute the job the contractor had undertaken into a job of a different kind, which the
contract did not contemplate... In most cases the time when the new situation emerges is clear
– there is some PARTICULAR EVENT which makes all the difference’.
In this case it was impossible to state just ‘when’ the original contracted could be said to
have ended and the job was essentially the same – building the houses. The job became more
onerous for the contractors because of the delay but it never became a different job – builders
do indeed make some allowance for delays when they take on a job and decide on the
contract price.
Thus, although the deal turned out to be a bad one for the claimants, the courts refused to
rescue them. Although this might seen harsh on the claimants, the courts want certainty in
dealings for business people and won’t let frustration be a way to avoid a bad bargain.
Frustration can only be invoked where the supervening event was unforeseen and ‘radically’
or ‘fundamentally’ changes the nature of performance.
Track/slide 6 2.12
The courts are also reluctant to invoke frustration because the parties could easily have
included a ‘force majeure’ or ‘hardship’clause in the contract. These are clauses in the
contract by which the parties agree at the outset that should certain events which they
list happen, then one of the parties will not be liable. A typical force majeure clause looks
like this:
‘A party shall not be liable in the event of non-fulfilment of any
obligation arising under this contract by reason of Act of God,
disease, strikes, lock-outs, fire and any accident or incident of any
nature beyond the control of the relevant party’.
They are a bit like an exclusion clause but relate to more drastic possibilities.
One advantage of a force majeure or hardship clause is that it helps to soften the otherwise
harsh consequence of frustration. If frustration is a successful defence then the contract is
terminated straight away irrespective of what the 2 sides want – and one or both sides might
have wanted to try to make a go of things rather than just end the contract abruptly.
So, with one of these clauses, the contract will not be terminated by frustration of contract
if the event that happens is in the list. Thus, the effect of a force majeure clause is that the
contract STILL STANDS – IT IS NOT FRUSTRATED.
Note that most contracts these days will have a force majeure clause in addition to any
number of exclusion clauses.
Track/slide 7 0.39
There are three broad categories of frustration
and we can look at frustration under them, although they are by no means set in stone – each
case will be determined on its own facts. The frustrating, unforeseen event may result in
-
impossibility of performance
illegality of performance
radically different performance from that contracted for.
Track/slide 8 2.28
First then, we shall look at the position where performance of the contract is Impossible.
A contract may be frustrated where some physical item that is needed is destroyed or if it is
for personal services, the person dies or is ill.
A classic case for physical items is Taylor v Caldwell 1863. In this case the defendants
hired the Surrey Gardens and Music Hall to the plaintiffs for a series of concerts at a fee of
£100 per concert. After the contract was made the concert hall was accidentally destroyed in
a fire and so the concerts couldn’t go ahead. The plaintiffs sued the defendants for breach of
contract for not supplying the hall and wanted damages for their wasted advertising
expenditure. However, the court held that the contract was frustrated as the destruction of
the hall made performance of the contract impossible and was not foreseen by the parties
when they made the contract. The frustrating event had the effect of ending the contract and
thus ending the obligations of each party under the contract. This meant that the defendants
were no longer under an obligation to supply the hall and as such they were not in breach of
contract.
A more modern case on this is the Gamerco case that we deal with later.
A case for personal services is Robinson v Davison 1871 in which a contract was held to be
frustrated when a piano player was unable to perform a concert because of a serious illness.
Thus, the lady was able to successfully defend an action for breach of contract. For illnesses,
the courts have to take account of the nature of the illness to see whether it defeats the whole
point of the contract or not.
Track/slide 9 1.03
We can now look at the position where it would be Illegal to perform the contract.
A contract may be frustrated if an unforeseen event causes the contract to become illegal in
its operation. Thus, if A in England makes a contract to supply weaponry to B in a foreign
country and war breaks out between the two countries, the contract will be frustrated as it is
illegal to trade with the enemy in times of war. Thus, in the case of Fibrosa Spolka
Akcyjna v Fairburn Lawson Combe Barbour Ltd 1943 (the Fibrosa case) a contract to
sell machinery to the buyers in Poland was frustrated when Poland was occupied by the
Germans during World War Two.
Track/slide 10 3.10
We can now look at the position where circumstances are such that a Radically different
performance is what may take place.
In some cases an unforeseen event may occur after the contract was made when although it is
still physically possible to carry out the contract, the event makes the performance of the
contract ‘radically different’ to the performance the 2 sides had in mind. This can frustrate
the contract.
We have already seen in the Davis case that the courts do not readily allow parties to say a
contract is frustrated for this reason – in the Davis case the performance was essentially the
same, it just took longer. Thus, frustration of the ‘purpose’ of the contract is only allowed
sparingly by the courts.
Two contrasting cases are Krell v Henry 1903 and Herne Bay Steam Boat Co v Hutton
1903.
In the Krell case the defendant hired a flat in central London for 2 days to view the
coronation procession of Edward VII, although the purpose of hiring the room was not stated
in the contract. He paid £25 in advance of the full contract price of £75. The procession did
not take place though because Edward became ill. The plaintiff sued for the balance of £50.
The Court of Appeal held that although it was still physically possible to carry out the
contract, to sit in the room and watch the procession, the real purpose of the contract that was
known to both sides, to watch the procession, had been frustrated. Vaughan Williams LJ
thought that this knowledge on both sides was very important as both understood that
watching the procession was the ‘foundation’ of the contract. Thus, the defendant did not
have to pay the £50.
IN the Herne Bay case the defendant had hired a boat from the plaintiff to watch the Naval
Review for the King and to cruise around the fleet. When the Review was cancelled due to
the King’s illness the defendant refused to take the boat and the plaintiff sued for the hire
charge. The defendant argued by way of defence that the contract was frustrated. The Court
of Appeal disagreed – the fundamental purpose of the contract was still intact – cruising
around the fleet – performance was thus not radically different from what had been intended.
Track/slide 11 2.55
We can now move on to consider those instances when frustration will not apply. These
are:
-
when the alleged frustrating event is self induced
when the contract has specifically provided for the alleged frustrating event, and
when the alleged frustrating event was foreseen by the parties at
the time the contract was made
First then, we shall consider
Self induced frustration.
Since the doctrine of frustration only operates when ‘neither party is at fault’ if either party
makes the performance of the contract impossible they cannot claim frustration.
An illustrative case is Maritime National Fish Ltd v Ocean Trawlers Ltd 1935. In this
case the charterers, the defendants, hired a steam trawler, the St Cuthbert, from the plaintiffs.
Both parties knew the St Cuthbert needed a licence from the Canadian Government to
operate as a trawler. The charterers had 4 of their own trawlers and so they applied for 5
licences in total. They were only granted 3 licences and used these for their own trawlers.
They then claimed that the charter was frustrated.
It was held by the Privy Council that it was their own choice not to use one of the licences for
the chartered trawler and so they could not claim frustration.
Lord Wright stated:
‘The essence of frustration is that it should not be due to the act or election of the party... If it
be assumed that the performance of the contract was dependent on a licence being granted, it
was [the appellants’] election which prevented performance, and on this assumption it was
the appellants’ own default which frustrated the adventure: the appellants cannot rely on their
own default to excuse them from liability under the contract.’
Where one side is pleading that the contract has been frustrated in defence to an action for
breach of contract, if the claimant thinks the defendant caused the frustrating event, the
claimant has to prove this on the balance of probablilities.
Track/slide 12 7.42
The courts have not ruled on the degree of fault that amounts to self induced frustration but it
is likely that a ‘negligent’ act by the defendant ‘will’ amount to self induced frustration
because when someone is negligent and an adverse event happens it cannot be said that the
alleged frustrating event was altogether outside the control of either party, nor unforeseen.
This is confirmed in the case below, that also explores the issue of the defendant having a
‘choice’ in what he does in relation to frustrating the contract.
The case we can consider is Lauritzen AS v Wijsmuller BV (The Super Servant Two)
1990.
The defendants, Wijsmuller, agreed to carry the plaintiff’s (Lauritzen’s) drilling rig, the Dan
King, from Japan to a location off Rotterdam. The rig was to be moved by a self-propelled
barge, either Super Servant One or Super Servant Two as would be decided by Wijsmuller.
The defendants put a Force Majeure clause in the contract, clause 17, which stated that they
could cancel their performance under the contract in the event of, inter alia:
‘Acts of God, perils or danger and accidents of the sea, acts of war and so forth’ – quite a
long list of eventualities beyond the control of either party.
Before the Dan King was due to be moved, Super Servant 2 sank in the Zaire river. Super
Servant 2 had been allocated to move the Dan King rig. Super Servant 1 could not be used to
move the Dan King because it had been allocated to other contracts during the relevant
period for moving the Dan King.
To effect a solution, the parties entered into a ‘without prejudice’ agreement to move the Dan
King on a barge. This involved both parties in extra expenses. The plaintiffs claimed the
losses they had suffered and the defendants counter-claimed for their losses.
The defendant’s appeal to the Court of Appeal was based on 2 grounds:
First, that the contract was frustrated by the sinking of SS2, and/or
Second, that they were entitled to regard the contract as ‘discharged’ or cancelled, under the
force majeure clause provided in clause 17 even if the sinking of SS2 was caused by
their negligence
Bingham LJ noted that the clause 17 force majeure was NOT an EXCLUSION CLAUSE.
This seems to be based on the fact that the things in the list of the Force Majeure clause
related to events that might occur and be totally beyond the direct or indirect control of
Wijsmuller. Whereas he felt that clause 16 was an exclusion clause.
With regards to frustration, he held that had the contract provided that the Dan King was
ONLY to be moved by SS2, then the contract would have been frustrated, so long as there
was no negligence by Wijsmuller. However, that was not the case because they had a choice
– during the time Dan King was to be moved by SS2, SS1 had been available but had been
used on another job. Thus, the sinking of SS2 was not a frustrating event – it was not totally
beyond their control. In addition, when SS2 sank, Wijsmuller waited 2 weeks before telling
Lauritzen that they couldn’t use SS2 – in other words, the contract was not ‘automatically
ended’ by a frustrating event.
With regards to the force majeure clause, clause 17, Bingham LJ said that the defendants
could not rely on the Force Majeure clause to say that the contract was discharged, if the
event in the Force Majeure list that actually happened was in any way caused by their own
negligence. As the plaintiffs had listed in some detail the grounds on which the sinking of
SS2 was caused by the carelessness of Wijsmuller, then Bingham LJ stated that Wijsmuller
would be precluded from relying on the force majeure clause.
You can see that the courts are reluctant to allow contracts to end by frustration. In this case
Wijsmuller was in breach of contract.
The onus of proof for self induced frustration lies on the party raising this allegation.
Professor Treitel takes a different view and suggests that where a businessperson makes
several contracts with various parties and an uncontemplated event happens such that one or
more contracts cannot be fulfilled by him, then the event may frustrate such contracts so long
as the businessperson has ‘acted reasonably’ in deciding which contracts to perform.
Bingham LJ rejected this view.
In Davies on Contract, 9th edition, on page 261 it states:
‘A difficulty with this reasoning [in the Super Servant 2 case] is that the Maritime National
Fish case could surely be distinguished on the basis that in that case it was perfectly
foreseeable that the Minister would not issue enough licences. The charterers took a
commercial gamble. In the Super Servant 2 nobody considered the possibility that the ship
would sink and it seems artificial to say that the carriers had much of a choice of election in
the matter. They were unable to perform their contract in unforeseen circumstances for
which they may not have been responsible. That is surely just when frustration should come
into play.’
Track/slide 13 3.18
We can now move on to consider the position
Where the contract expressly provides for the alleged Frustrating event
If a clause/term in the contract actually expressly makes reference to the alleged frustrating
event then the event generally cannot frustrate the contract because it is not an ‘unforeseen’
event. Of particular relevance here then are force majeure clauses which list events, the
occurrence of which, will not give rise to frustration. So, if a Force majeure clause relates to
Act of God, strikes, lock outs, etc’ and there is a flood, then if the flood destroys the subject
matter of the contract or prevents a venue from being used for a concert, or other
performance of the contract, the flood will not frustrate the contract as it was foreseen and
expressly provided for in the contract.
In the Super Servant 2 case, there was a force majeure clause and it was held that this could
have been invoked to protect the defendants had they not been negligent. The clause stated
that the contract would come to an end if any of the things in the list happened.
However, we must note a word of caution.
The courts may interpret Force Majeure clauses narrowly so that even if the event is listed in
the Force Majeure clause, the Force Majeure clause may be held not to apply to ‘all’
instances of the event. Thus, in Metropolitan Water Board v Dick, Kerr and Co 1918
contractors agreed to construct a reservoir in 6 years. The contract had a Force Majeure
clause which stated that ‘in the event of delay whatsoever and howsoever occasioned, the
contractors were to apply to the engineer for an extension of time.’ By a Government Order
the contractors had to sell the plant and stop work on the reservoir. It could have been held
that the contract was not frustrated because of the Force Majeure clause. However, the court
said that the contract was frustrated because the Force Majeure clause had to be interpreted
narrowly – it only covered ‘temporary’ delays and not such a fundamental change of
circumstances.
Basically, the greater the magnitude of the event, the more catastrophic it is for one or both
sides, the less likely it is that the courts will say that a Force Majeure clause excludes
frustration of the contract.
Track/slide 14 0.32
Apart from force majeure clauses, it is also possible that the
alleged frustrating event was foreseen by the parties when the contract was made
An event is foreseeable and will prevent the contract being frustrated only where it is one
which ‘any person of ordinary intelligence would regard as likely to occur’ when the contract
was initially made.
Track/slide 15 2.24
We can now move on to consider the
Effects of frustration
The first point to note is that at the time of the frustrating event, the contract is BROUGHT
TO AN END AUTOMATICALLY. There is no breach of contract, just frustration of the
contract, and so neither side can bring an action for damages for breach of contract.
What happens after the frustrating event is now determined by the
Law Reform (Frustrated Contracts) Act 1943.
This Act has got rid of some of the injustices that existed at common law.
These injustices can be seen in the case of Chandler v Webster 1904 and in the Fibrosa
case 1943. The Fibrosa case led to less severe consequences for the parties than had the
Chandler case but the Fibrosa case still caused injustices eg.
-
-
money was only recoverable if the party concerned could show a
‘total’ failure of consideration – so any performance would prevent
recovery of monies paid in advance
if one party had spent money in getting ready for contract performance they could not
recover it
the Fibrosa case only applied to ‘money’ being paid not to any other benefits that
might accrue to one side other than money
We can consider the effects of the Law Reform(Frustrated Contracts) Act 1943 under 2
headings:
i.
a claim to recover MONEY that was paid or was payable before
the frustrating event happened - section 1(2)
ii.
a claim to recover the value of GOODS SUPPLIED or SERVICES
PROVIDED before the frustrating event happened – section 1(3)
Track/slide 16 7.13
First then, we shall consider a claim to recover MONEY that was paid or was payable
before the frustrating event happened
Section 1(2) states that any sums PAID before the frustrating event are recoverable and any
sums that were PAYABLE before the frustrating event are no longer payable. But, this is
modified –
from money that has already been paid, the payee may be able to keep such sums that he
spent in connection with the contract before the frustrating event,
and
from money that was payable before the frustrating event, he may be able to recover such
money that he spent on expenses in relation to the contract from the other side.
However, whether or not any money paid can be retained or money that was payable can be
received after the frustrating event, has to be decided by the court – and it is discretionary –
decided on the basis of whether the court thinks it is ‘just to do so’ ‘having regard to all the
circumstances of the case’.
The leading case is Gamerco SA v ICM/Fair Warning (Agency) Ltd 1995 QB Div.
In this case the Spanish Pop Concert promoters, Gamerco, were suing ICM as the first
defendants and Missouri Storm Inc MSI (the corporate persona of the group Guns N’Roses)
as second defendants. The pop group were touring Europe from mid May to early July 1992
and there would be 24 open air concerts in 12 countries (20 actually took place). The
plaintiff was the chosen promoter of the venues in Spain.
The case concerned the planned concert for 4th July in Madrid in the Vicente Calderon
Stadium – the home of Atletico Madrid. On 30th June engineers reported that the stadium
was not safe for use as it was built with High Alumina Cement and had to be checked out.
On 1st July the Madrid City Council and an arm of central government banned the use of the
stadium. The permit to hold the concert was revoked. Attempts to find an alternative venue
failed.
Gamerco had paid MSI US $ 412,500 on account. There was a balance of US $ 362,500.
The issues in the court concerned, inter alia:
i.
ii.
iii.
iv.
was the contract between the 2 sides frustrated by the actions of the public
authorities?
If the contract was frustrated, could the plaintiffs recover the
US $ 412,500
had the defendants incurred any expenses in connection with the
concert prior to the closing of the stadium
if so, could all or any of such expenses be deducted from the
US $412,500 that was returnable to the plaintiffs?
Garland J held that the contract was frustrated. It had become both physically and legally
impossible to perform and there was no force majeure clause that had provided for the
eventuality, so it was a totally unforeseen event outside the control of the parties. The
frustrating event happened when the stadium’s use was banned.
The plaintiffs were claiming their money back and the defendants were claiming payment of
the balance. The judge held that under s 2(1) of the Law Reform (FCA) 1943 Gamerco were
entitled to recover the $ 412,500 already paid by them, and did not have to pay the balance
which was no longer payable.
Had the defendants incurred any expenses prior to the frustrating event?
The judge said he had scant real evidence to establish just what expenses had been incurred
by the group but gauged it at US $ 50,000 and everyone agreed with this.
Could they retain any of the $ 412,500 to offset this $50,000?
To work this out the judge noted that it was at the court’s discretion according to what it felt
was just in all the circumstances. He said that the best approach was for the court to use a
‘broad’ discretion as any rigid rule would be liable to produce injustices. The court’s task he
said was :
‘to do justice in a situation which the parties had neither contemplated nor provided for,
and to mitigate the possible harshness of allowing all loss to lie where it has fallen’.
In the circumstances of this case he decided that Gamerco could recover all of the $412,000.
In coming to this conclusion, the judge had considered that Gamerco had had expenses as
well and these totalled US$ 450,000. However, this was a one off contract for Gamerco
whereas it was the last of 20 for the defendants, and that the expenditure of both sides was
totally wasted.
Track/slide 17 3.52
We can now consider
a claim to recover the value of Goods Supplied or Services provided before the
frustrating event happened
Section 1(3) is quite complicated but means that where one party had conferred a ‘valuable
benefit’ on the other party (other than a payment of money that is covered by 1(2)), the one
conferring the benefit shall be able to recover a ‘just sum’ which should not exceed the value
of the benefit conferred.
In BP v Hunt 1979 Robert Goff J stated that there are 2 stages here:
-
first to identify a benefit and value it
second, to decide upon a ‘just sum’
The problem is that the section does not define what a benefit is. It could be the value of
services provided or the end product of services. A case in point is BP v Hunt 1979 in
which it was decided that for section 1 (3) ‘benefit’ normally means the ‘end product’ of
services not the services themselves. This case was about oil concessions from the Libyan
government to Hunt and implemented by BP, sharing half the profits each. A big oil field
was found and oil produced for 4 and a half years with BP and hunt sharing the profit. But
then the Libyan govt took the concession back.
BP brought the case saying that the contract was frustrated and claiming money under s 1(3)
LR(FCA)1943. The court thus had to analyse the nature of benefit. In this case Robert Goff
J said that the benefit to Hunt did not consist of the services of BP in exploring for oil since
the act of looking for oil did not confer a benefit on him. Nor did finding the oil confer a
benefit on Hunt as he already owned the oil. The value he got from BP’s services was the
increased value in the concession once oil was actually discovered ie. the valuable benefit
was not the exploration for oil (the services) but the end product of the services (the
increased value of the concession).
However, since the Libyan Govt had taken the concession back, it was now valueless so you
could argue BP had not conferred a benefit on Hunt. However, Hunt had received lots of oil
from BP before the concession was taken back. The ‘just sum’ was determined by taking
account of the work BP had done for Hunt and the oil it had transferred to him, minus the oil
BP had already had transferred to it. This came to $35 million.
Track/slide 18 2.16
Most academics seem to say that the result of this case means that the old case of Appleby v
Myers 1867 would still be good law today. In that case the plaintiffs agreed to erect
machinery on the defendant’s premises for £459. When the work was nearly finished there
was a fire on the premises that totally destroyed all the work done to date. The plaintiffs
brought an action for £419 for work done and materials supplied. It failed. The contract was
frustrated and so both parties were excused from their obligations under the contract. As
such the defendants did not have to pay for services already rendered.
We can see today that the services rendered had not conferred a benefit on the defendants –
since the subject matter of the services had been destroyed the other party did not have any
benefit conferred on him. This is what Goff J had said in BP v Hunt – that if the end product
of the services is destroyed by the frustrating event then the provider of the services can not
make a claim under s 1(3). This means that the provider of services takes the ‘risk’ of any
depreciation or destruction of the end product of his services under s 1(3).
Where the contract is one just of ‘services’ without an ‘end product’, such as gardening,
surveying or transporting goods, then Robert Goff J said that the ‘benefit’ here is the services
themselves and these are what have to be valued. One has to remember that if the services
have conferred no benefit on the other party, then there is no value to quantify.
Track/slide 19 1.12
Once a benefit has been identified the next step is to decide upon a ‘just sum’ and it seems
that this is down to the trial judge. The idea is to prevent one side being ‘unjustly’ enriched at
the expense of the other.
We also need to note the provisions of section 2(3) and 2(4).
Under section 2(3) the Act will not be applied where the parties to the contract have included
in the contract a clause detailing what is to happen if a frustrating event occurs.
Under section 2 (4) if a contract can be broken down into bits and some of the bits have been
performed, then these performed bits can be ‘severed’ from the contract and the frustrating
event and the Act will only apply to the unsevered bits. Thus, wholly performed bits will not
be affected by the frustrating event.