War in the Middle East and the doctrine of frustration - a brief note

A contract may be discharged on the ground of frustration when something occurs after the formation of the contract which renders it physically, legally or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract.

In National Carriers Ltd v Panalpina (Northern) Ltd [1981] A.C. 675, the test was set out as follows:

"Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.”

Generally speaking, a frustrating event is an event which:

• Occurs after the contract has been formed.

• Is so fundamental as to be regarded by the law both as striking at the root of the contract and as entirely beyond what was contemplated by the parties when they entered the contract.

• Is not due to the fault of either party.

• Renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract.

Recent authority suggests that a "multi-factorial" approach should be taken when deciding whether a contract has been frustrated. This would involve consideration of matters including:

“… the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.”

Case examples of frustrating events include:

• Destruction by fire or other cause of the subject matter of the contract.

• Unavailability of the subject matter.

• The outbreak of war. The outbreak of war makes all commercial agreements between British subjects and alien enemies illegal. 

• The cancellation of an expected event.

• Unexpected delay in its performance due to an unexpected event or change in circumstances. To frustrate a contract, the delay must be abnormal so that it falls outside what the parties could contemplate at the time of contracting.

Case examples of where a contract has been held not to be frustrated include:

• The parties have made express provision for the consequences of the particular event which has occurred.

• The alleged frustrating event should have been foreseen by the parties.

• An alternative method of performance is possible.

• The contract is merely more expensive to perform.

• The seller under a sale of goods contract is let down by its own supplier (the seller assumes the risk of its supplier's failure to perform).

• There are changes in economic conditions. 

• The alleged frustrating event is already apparent when the contract is made and gets no worse during the contract term. 

At common law, if a contract has been frustrated it is automatically discharged and the parties are excused from their future obligations. The contract is brought to an end forthwith and automatically. If a party incurred obligations before the time of frustration, it remains bound to perform them (including any payment obligations which have accrued due). Any expenditure incurred in performing the contract is not recoverable.

Under the Law Reform (Frustrated Contracts) Act 1943:

• Money paid before the frustrating event can be recovered and money due before the frustrating event, but not in fact paid, ceases to be payable (section 1(2), LRA).

• A party who has incurred expenses is permitted, if the court thinks fit, to retain an amount up to the value of the expenses out of any money they have been paid by the other party before frustration; or where money was due and payable at the time of frustration, recover a sum not exceeding that amount for expenses (section 1(2), LRA).

• The court may require a party who has gained a valuable benefit under the contract before the frustrating event occurred, to pay a "just" sum for it. This is so whether or not anything was paid or payable before the frustrating event (section 1(3), LRA).