Frustration

1. The effect of frustration is to discharge both parties from further contractual performance where, after contract formation, unforeseen events occur which would make the parties’ rights and obligations radically different from those originally undertaken. Discharge operates automatically irrespective of the parties’ wishes.

2. The frustration doctrine is analogous to the doctrine of common mistaken assumptions since both deal with the problem of assumptions (rather than contract terms) turning out to be radically different from those assumed by the parties; relief is justified on similar grounds, the most convincing being that the consent attaching to the original contract does not extend to the actual or new situation.3. As with the mistake doctrine, a three-step approach applies to frustration claims. At step 1, the contract is not frustrated if construction of the contract shows that the parties have allocated the risk of the supervening event expressly (but the provision must be ‘full and complete’) or impliedly (the parties do not qualify their obligations despite foreseeing the risk which eventuates; however, they have not allocated the risk if they simply intended to leave the matter to be determined by the court according to the frustration doctrine).

4. At step 2, the contract is not discharged if one party is at fault due to frustration being self-induced (and inoperative). Frustration is self-induced if it results from the claimant’s voluntary conduct amounting to: (a) breach of contract; (b) anticipatory breach of contract; or (c) an election whether to perform or breach (ie where a supervening event disables the claimant from performing all her contracts, any choice about which to perform would bar appeal to frustration).

5. At step 3, frustrating events must radically alter the rights and obligations undertaken by the parties by for example making performance: (a) illegal; (b) physically impossible or substantially transformed; or (c) purposeless. The categories may overlap and the question of radical change is one of degree.

6. Under section 1(2) of the Law Reform (Frustrated Contracts) Act 1943, the payer can recover money paid under the contract prior to frustration and need not pay any sum due prior to frustration. The payee can offset against the sum to be returned (or recover from the sum due) her ‘just expenses’ spent in or for the purpose of contractual performance before frustration.

7. Under section 1(3) of the 1943 Act, a party can claim a ‘just sum’ for the non-monetary benefit that her contractual performance conferred on the other party prior to frustration. The court must take account of all the circumstances, including the contract valuation of the benefit conferred, the recipient’s expenses in rendering reciprocal performance and the effect of the frustrating event on the benefit conferred. The ‘just sum’ cannot exceed the value of the benefit conferred.