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Oxford Law Citator

Part VII Discharge and Breach, 26 Force Majeure and Frustration

From: Contract Law in Practice

Neil Andrews

Content type:: Book content

Product:: International Commercial Law [ICML]

Published in print:: 27 May 2021

ISBN:: 9780192897947

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Subject(s):: Force majeure and contract — Frustration and contract

(p. 562) 26 Force Majeure and Frustration

Force Majeure Clauses

Nature.¹

26.01 Such a clause has the effect of defining the relevant party or parties’ primary obligations so that, if the relevant event occurs, there will be no breach and hence no contractual liability to pay compensation. Such a clause will normally broaden the relevant party’s immunity from liability for default beyond the narrow set of excuses applicable as a result of the Common Law doctrine of frustration² (and so the force majeure clause operates similarly to an exclusion clause: and see [26.14]).³

26.02 A force majeure clause will operate:

(1) primary obligation qualified: to qualify an obligation so that upon the occurrence of a particular event falling within the scope of the force majeure clause no contractual default will arise, that is, no breach of a primary obligation will have occurred (this is the invariable or minimum impact of the clause);

in addition such a clause might (not necessarily will):
(2)
1. (a) contractual suspension: have the effect of entitling a party to suspend the contract, or the relevant part of it (see the Tennants case [26.07] below); or
2. (b) cancellation right: allow a party to cancel the contract (as in ‘The Super Servant Two’; see clause 17.1 cited at [26.04] below); or
3. (c) cessation without notice: provide that the relevant event will produce automatic termination of the contract; this takes effect as a consensual form of termination; it does not operate on the basis of Common Law frustration (on the automatic operation of that form of termination see [26.107]).⁴

26.03 The clause in the Classic Maritime case [26.14] was not a force majeure clause of type (2)(a) to (c) (see [26.02]) but an exceptions clause, the effect of which was that the party who failed to perform in specified circumstances, despite breach, was not liable to pay damages (in (p. 563) other words, it was an exclusion clause). However, it was held that the clause only protected the party in default if he had been ready and willing to perform.

No Protection Where Party at Fault.

26.04 In ‘The Super Servant Two’ (1990)⁵ (for the facts of this case and the discussion of self-induced frustration, see [26.101]), the relevant clause stated:

17.1. Wijsmuller has the right to cancel its performance under this Contract whether the loading has been completed or not, in the event of force majeur [sic], Acts of God, … [etc] and similar events, which reasonably may impede, prevent or delay the performance of this contract.

26.05 The Court of Appeal said that this was not an exclusion clause. The right to cancellation given by this clause could not be relied upon where Wijsmuller (the owner of two giant barges used for the transporting of oil rigs) had been at fault or had not acted reasonably, whether that fault or failure occurred during or (as here) before the time for performance.⁶

‘Beyond Reasonable Control’.

26.06 The Court of Appeal held in Elephant Corpn v Trafigura Beheer BV (‘The Crudesky’) (2013)⁷ that the force majeure clause in that case did not avail a party because the relevant event was not something beyond its reasonable control. More generally, Longmore LJ said:⁸

[25] … a force majeure clause … (a) … is an exceptions clause and any ambiguity must be resolved against the party seeking to rely on it and (b) that the concept of being ‘beyond [a corporate person’s] control’ sets a comparatively high hurdle since corporations usually do have a significant measure of control over their own business.

[28] … the delay was not beyond Total’s ‘reasonable control’ if one looks (as one should) at Total as one entity. …

Short Supply: Supplier Exonerated.

26.07 In Tennants (Lancashire) Ltd v CS Wilson & Co Ltd (1917)⁹ the House of Lords (Lord Finlay LC dissenting) held that the seller’s inability to satisfy all its subsisting contractual commitments, including its obligations towards the present buyer, was enough to fall within the scope of the force majeure clause, which had the effect of suspending obligations in the event that there was short supply in the market and that satisfaction of the seller’s obligation had been ‘hindered’ (reversing the Court of Appeal). The main supplier of the relevant chemical was German, and the First World War had precluded supply from that German source (following the declaration of war with Germany, obtaining supplies from Germany would involve illegality, namely trading with the enemy). A limited supply existed from an English source, but it was insufficient to satisfy the supplier’s needs under various contracts with different buyers, including the present. The supplier’s other customers had not challenged the supplier’s decision to suspend full performance of their contracts. But the present buyer was dissatisfied and contended that the supplier was in (p. 564) breach and that the force majeure clause did not apply. As mentioned, the clause was held to exonerate the seller on the present facts.

Only One Party Covered in Relevant Event; Severe Financial Downturn Not Force Majeure.

26.08 In Tandrin Aviation Holdings Ltd v Aero Toy Store LLC (2010), Hamblen J said:¹⁰

… a change in economic / market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed, is not regarded as being a force majeure event … see ‘The Concadoro’ [1916] AC 2 AC 199; and likewise a rise in cost or expense—see Brauer & C (GB) Ltd v James Clark (Brush Materials) Ltd [1952] 2 All ER 497 . …

26.09 In the Tandrin case a buyer of an executive jet tried to withdraw, relying on a force majeure clause. The buyer had suffered from the 2008 financial crash and was now seeking to resile from the purchase of a US$31.75 million executive jet. The issue was whether the seller was entitled to retain a deposit, paid by the buyer, which represented 9.5 per cent of that purchase price. The first point of decision was that the force majeure clause operated only in favour of the seller with respect to the events specified, and not with respect to the buyer, so that the remaining discussion in the judgment comprises considered dicta, but from an authoritative and commercially renowned judge. Clause 7.17 provided as follows:

Force Majeure: Neither party shall be liable to the other as a result of any failure of, or delay in the performance of, its obligations hereunder, for the period that such failure or delay is due to: Acts of God etc… or any other cause beyond Seller’s reasonable control… [emphasis added]

26.10 Even if potentially the buyer had been able to take shelter under this force majeure clause (which obviously the buyer could not), Hamblen J explained that it would not have been enough that there had been a severe economic depression, flowing from the financial crisis of 2008.¹¹

Economic Interest of a Party Insufficient.

26.11 Similarly, Christopher Clarke J in Thames Valley Power Ltd v Total Gas & Power Ltd (2015) rejected¹² a gas supplier’s contention that a force majeure clause operated so as to qualify its duty to make supply when, as had occurred, the cost to the supplier had become (extremely) financially unattractive. This discussion was considered by Hamblen J in the Tandrin case, see above [26.09].

Reasonable Endeavours to Remedy Situation.

26.12 In Seadrill Ghana Operations Ltd v Tullow Ghana Ltd (2018) Teare J concluded¹³ on the facts that a party had failed to satisfy the obligation to use all reasonable endeavours to remedy the situation, even though a force majeure ‘occurrence’ had arisen. The relevant clause stated:¹⁴ ‘clause 27.5: In the event of force majeure occurrence, the party that is or may be delayed in performing the Contract shall notify the other party without delay giving the full particulars thereof and shall use all reasonable endeavours to remedy the situation without delay’.

Force Majeure Clauses and Notification Requirements.

(p. 565) 26.13 In Scottish Power UK plc v BP Exploration Operating Company Ltd (2015)¹⁵ Leggatt J examined the case law¹⁶ concerning the possibility that, even though damages are not in issue, an intermediate term might apply to certain duties of notification imposed under contract, with the result that the underlying right will be lost if the failure to notify has in fact caused very serious prejudice (and, conversely, the right will not be affected if the failure to comply is not serious in its impact on the facts of the case). But on the facts of the Scottish Power case (2015) Leggatt J held that failure to satisfy the relevant notification requirement did not constitute a condition precedent nor did it operate even potentially in a preclusive manner on the basis of an intermediate term.

Force Majeure Clauses and Exceptions Clauses.

26.14 In Classic Maritime v Limbungan Makmur Sdn Bhd (2019)¹⁷ the Court of Appeal held that the clause in that case did not constitute a force majeure clause. Instead the clause provided a defence to liability to pay damages following breach. But this exclusion of liability operated only if the party had been ready and willing to perform. The trial judge found as a matter of fact that the charterer had not been prepared to perform. It followed that the exceptions clause did not apply.

26.15 The result was that the charterer was liable for non-supply of cargoes (iron ore pellets to be shipped from one of two nominated Brazilian ports to Malaysia) under the contract of affreightment and the shipowner was entitled to damages in respect of its loss of freight, resulting in damages (agreed as a figure) of US$19,869,573 in respect of the five lost shipments. The obligation to supply was an absolute obligation, subject to an exceptions clause. The exceptions clause included the present event (flooding of the mine). But the exceptions clause’s protection did not apply unless the party invoking it was engaged in performance or ready and willing to perform.

26.16 And so the Court of Appeal held that there had been a breach; the exceptions clause did not apply because the defendant charterer had not in fact wished to perform; and damages would be awarded even though the cargoes could not have been procured from the intended mine (because of the dam burst) nor from the other available mine. The clause (Clause 32) in this case (described¹⁸ as a ‘ragbag’), was construed as a set of exceptions from liability to pay damages. Clause 32 provided:

Exceptions. Neither the Vessel, her Master or Owners, nor the Charterers, Shippers or Receivers shall be Responsible for loss or damage to, or failure to supply, load, discharge or deliver the cargo resulting From: … accidents at the mine or … or any other causes beyond the Owners, Charterers, Shippers’ or Receivers’ Control; always provided that any such events directly affect the performance of either party under This Charter Party. … (Emphasis added)

26.17 On the force majeure/exceptions clause distinction, Males LJ said:¹⁹

[61] … a ‘contractual frustration’ clause brings the contract (or the relevant part of the contract: in the present case, no doubt, each shipment would be treated as a separate (p. 566) adventure) to an end forthwith and automatically once an event occurs, regardless of the wishes of the parties, thereby relieving both parties from any further obligation to perform under the contract or to accept the other’s performance in the future. An exceptions clause, however, simply operates to relieve a party from the obligation to pay damages after a breach has occurred. [62] Clause 32 does not provide for any automatic cancellation of the contract (or of individual shipments) for the future and, accordingly, the reasoning of the House of Lords in Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109 cannot apply to it. It was not a ‘contractual frustration’ clause. …

26.18 In his penetrating note on this case, Bridge says²⁰ that, although in breach, the charterer had not caused the shipowner any loss. This is because it would not have been possible for the relevant five cargoes to have been found. The dam burst was the reason for that inability. And that inability to perform arose without the charterer needing to invoke the exceptions clause.

26.19 To sum up, this appears to have been an unjustified award of substantial damages. If the dam burst was a frustrating event, there had been no breach. If frustration had not occurred, the charterer’s failure to present the relevant five cargoes was a technical breach not accompanied by substantial loss. Admittedly, the exceptions clause did not apply because of the absence of willingness to perform. Even so, and with respect, the Court of Appeal erred: the charterer should not have been ordered to compensate for what was in reality a phantom loss. There had been no real loss at all on the facts because performance was not practicable.

Force Majeure: Express Exception.

26.20 In Gemcorp Commodities Trading SA v Zeefacto Oil & Gas Company (2018)²¹ Popplewell J noted that the force majeure clause (clause 14) was formulated so as to exclude from its scope the buyer’s obligation to pay for goods supplied. As for Common Law frustration, see discussion of the case at [26.52] (frustration inapplicable if obligation becomes more onerous but is not radically different).

Frustration: General Features

Outline.²²

26.21 This is a narrow doctrine of excuse, or release. Because of its narrow scope, parties often include force majeure clauses (see earlier part of this chapter) to widen the grounds upon which non-performance, or defective performance, will be excused by reason of (p. 567) factors occurring subsequent to the contract’s formation. The doctrine of frustration is a Common Law doctrine operating unless the contract provides otherwise. This doctrine can be summarized in the following eleven propositions.

26.22 (1) A contract will be frustrated if, without a party’s default, changed circumstances have rendered performance by a party something radically different from that which was originally undertaken.

26.23 (2) Frustration operates only if the risk of the supervening event is not allocated to a party. For this purpose, the fact that the risk of the supervening event is foreseeable is relevant, but not decisive: foreseeable or foreseen risks can sometimes give rise to frustration.

26.24 (3) Frustration releases the parties from their unperformed future obligations, and it operates automatically, that is, even if the parties are unaware that frustration has occurred, and without the need for formal notification by either party to the other. There can be frustration of the whole contract or of a part of it.²³

26.25 (4) There is no frustration if a contract has merely become more difficult to perform.

26.26 (5) The contract will be frustrated if, subsequent to the contract’s formation, the contract’s continuation becomes illegal. The supervening illegality might be (a) a change in the circumstances which renders performance illegal, or (b) a statutory change (including a change in the operation of a statutory regime), or (c) a non-statutory legal change, or (d) implementation of a subsisting source of prohibition, or (e) withdrawal (or serious modification) of a legal permission which has the effect that contractual performance is no longer lawful.

26.27 (6) A contract for the performance of personal services by an individual who is party to the contract is frustrated if, before completion, without his default, he is incapacitated by illness, or becomes mentally incapable of acting, or dies, or is otherwise physically unable to perform. Frustration can occur when, without the relevant party’s default, the physical subject matter of the proposed performance is destroyed or disappears.

26.28 (7) Delay, not attributable to the relevant party’s default, might cause the relevant contract to be frustrated but only if (a) the result is that the parties’ assumptions at the time of formation have been radically altered and (b) the risk of such an alteration is not allocated to one of the parties.

26.29 (8) Exceptionally, even though none of the preceding categories of frustration applies, frustration can occur if a supervening change has defeated the underlying purpose of the transaction.

26.30 (9) Frustration does not occur if the supervening event is the result of ‘self-induced frustration’, that is, the event is attributable to: (a) a party’s (i) breach of contract or (ii) criminal wrongdoing or (iii) other blameworthy conduct, or (b) the relevant party’s choice. As for (b), frustration does not apply if it is physically possible for a party to perform his contract, but he chooses not to do so, because, following the supervening event, he prefers to advance his own interests; or he has already chosen to make arrangements with third parties which (p. 568) (in combination with the supervening event) preclude him from satisfying his contractual obligation to the other party; or, more generally, a party could have taken steps to keep open the possibility of performance under the contract but he chose not to do so.

26.31 (10) Under statute, a party can reclaim money paid before the frustrating event, even if there has been partial performance by the recipient. But an order for repayment is subject to a possible allowance in respect of the recipient’s expenditure. Whether such an allowance is granted, and its extent, are subject to the court’s discretion. Prima facie a sum payable before frustration but not yet paid will no longer be owed, but this cancellation can be reversed, in whole or in part, if, in exercise of its discretion, the court decides that the intended payee should receive money to cover his expenditure.

26.32 (11) Also under statute, the court has a discretion to award a ‘just sum’ to the party whose work or provision of goods has conferred, before the date when frustration occurred, a ‘valuable benefit’.

Frustration: Genesis.

26.33 In Taylor v Caldwell (1863)²⁴ Blackburn J broke new ground by recognizing a general doctrine of frustration. The decision in that case was that where the subject-matter of the contract physically ceases to exist or be available, frustration of the contract might arise, provided (1) neither party has been in default and (2) the risk of relevant event has not been expressly or impliedly allocated to a party. Under an entertainment joint venture, the relevant music hall burned down, without either party having been at fault or having contractual responsibility for this outcome. The result of this contractual frustration was that the parties’ prospective obligations terminated by operation of law.

26.34 Blackburn J’s innovation in Taylor v Caldwell (1863) was to fashion a general doctrine, based on three pre-existing instances where a party is excused from performance: (i) a contracting party’s death in a contract of personal services (his spiritual survival not being enough, as where the piano recitalist dies halfway through the concert) (see [26.60] on frustration of contracts for personal services); (ii) destruction of specific goods after property has passed to the buyer; (iii) bailment where goods are destroyed without the bailee’s fault. In effect Blackburn J joined up the dots, creating a new general doctrine which extended to physical annihilation of the contract’s subject-matter (on the facts of this case, destruction of the music hall), and which was capable of expansion over the ensuing decades.

26.35 Before Taylor v Caldwell, subject to the three qualifications just mentioned, contractual obligations were strict. In Paradine v Jane (or Jayne) (1647)²⁵ a tenant was held liable to continue paying rent even though he had (or so he wished to contend) been unable to make use of the land during the English Civil War, when Royalist forces had commandeered the property for the use of their army.

26.36 In greater detail, Paradine sued Jayne for three years’ arrears of rent payable in respect of seventeen acres of land leased to him in 1637 for twenty-one years at a rent of £21 year, in Bedminster, Bristol. The tenant was held liable to pay, even though irresistible third party force had prevented him from occupying the demised premises during this period (the (p. 569) Royalist army, led by Prince Rupert, had seized and occupied the land during the English Civil War). The lease contained no force majeure clause. And so, the obligation to pay rent applied strictly.²⁶

26.37 Lord Hailsham in National Carriers Ltd v Panalpina (Northern) Ltd (1981)²⁷ reviewed an array of theories, or ‘juristic bases’, for frustration. These are (i) implied term (ii) total failure of consideration (iii) just solution (iv) foundation of the contract (v) construction of the contract’s wording. He noted that the modern law had adopted theory (v).

26.38 As for the implied term theory concerning frustration, Lord Denning MR said in ‘The Eugenia’ (1964):²⁸

… the theory of an implied term has now been discarded… for the simple reason that it does not represent the truth. The parties would not have said: ‘It is all over between us.’ They would have differed about what was to happen. Each would have sought to insert reservations or qualifications of one kind or another.

26.39 The Davis Contractors case also made clear that the implied term theory must be abandoned, Lord Radcliffe commenting:²⁹

there is something of a logical difficulty in seeing how the parties could even impliedly have provided for something which ex hypothesi they neither expected nor foresaw; and the ascription of frustration to an implied term of the contract has been criticized as obscuring the true action of the court which consists in applying an objective rule of the law of contract to the contractual obligations that the parties have imposed upon themselves. So long as each theory produces the same result as the other, as normally it does, it matters little which theory is avowed … But it may still be of some importance to recall that, if the matter is to be approached by way of implied term, the solution of any particular case is not to be found by inquiring what the parties themselves would have agreed on had they been, as they were not, forewarned.

26.40 Lord Radcliffe quoted judgments which had tried to apply the implied term theory in an abstract fashion:³⁰

By this time it might seem that the parties themselves have become so far disembodied spirits that their actual persons should be allowed to rest in peace. In their place there rises the figure of the fair and reasonable man. and the spokesman of the fair and reasonable man, (p. 570) who represents after all no more than the anthropomorphic conception of justice, is and must be the court itself. So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.

26.41 The ‘Radical Difference’ Test. The House of Lords decision in Davis Contractors Ltd v Fareham UDC (1956)³¹ remains the seminal authority governing the scope of the doctrine of frustration. The court there emphasized that frustration does not arise if a contract becomes more difficult or expensive to perform (and see the contractual bond principle, considered at [2.40]). It is not enough that a party’s profit margin is reduced or even that the deal becomes an economic disaster for this party. No radical frustrating difference had arisen merely because a skilled-labour shortage had caused a fourteen-month delay and a 25 per cent increase in the cost of completing a building contract. In this case Lord Radcliffe said:³² ‘frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract’.

26.42 Lord Radcliffe was emphatic that no frustration arose on these facts:³³

… the possibility of enough labour and materials not being available was before their eyes and could have been the subject of special contractual stipulation… [It] is useless to pretend that the contractor is not at risk if delay does occur, even serious delay, and I think it a misuse of legal terms to call in frustration to get him out of his unfortunate predicament.

26.43 The Davis Contractors case also confirmed that a builder bears the risk that building materials might become scarce, leading to delayed performance.

The ‘Multifactorial’ Test.

26.44 Rix LJ’s judgment in the ‘The Sea Angel’ is the current authority frequently³⁴ cited for the following ‘template’ of issues (the so-called ‘multifactorial’ test for frustration).³⁵ His judgment confirms that frustration is exceptional and will arise only if the event, and all relevant circumstances, ‘tick’ each of the following ‘boxes’:³⁶

(p. 571)

(1) the relevant event must be potentially frustrating (supervening illegality, physical destruction, frustrating delay, or very occasionally frustration of the venture);³⁷
(2) there has been a complete undermining or destruction of the contract’s foundation;
(3) the risk is not allocated to a party, expressly or impliedly;
(4) nor was a party in default;
(5) nor was a party making a choice;³⁸
(6) a ‘reality check’: this last factor requires the court to consider whether a finding of frustration would be perceived by the commercial community as unjust and unacceptable; Rix LJ explained in ‘The Sea Angel’ (2007):³⁹

[As for ‘justice’], … [this] is not an additional test, but it is a relevant factor which underlies all and provides the ultimate rationale of the doctrine. If one uses this factor as a reality check, its answer should conform with a proper assessment of the issue of frustration. If it does not appear to do so, it is probably a good indication of the need to think again.

26.45 No frustration arose on the facts of ‘The Sea Angel’. Foreign official obstruction prevented the charterer from returning a salvage vessel for 108 days. Instead the chartered craft had been under official arrest during this period, in a foreign port. This was a risk borne by the charterer. It is no real surprise that a salvage operation, involving a vessel which is causing pollution, might have triggered overreaction on the part of national officials who were anxious to monitor and hasten the mopping up process.

26.46 In greater detail, in ‘The Sea Angel’ a vessel was hired for up to twenty days to assist in a salvage operation. But the vessel was prevented by the Pakistani port authority from leaving its port until payment had been made for the loss caused by pollution (oil leaking from a tanker which the salvage vessel had been hired to rescue). Extricating the salvage vessel from this situation prolonged the transaction by over three months (as mentioned, the anticipated length of the salvage hire was merely twenty days). But the Court of Appeal (upholding Gross J at first instance) held that the charterparty had not been frustrated. This was because delay, even if significant, fell within the scope of the risk borne by the charterer. That party was, therefore, liable to pay hire at the agreed daily rate during the entire period when the vessel had been on hire, that is, before its return to the owners.

26.47 In ‘The Sea Angel’ (2007) Rix LJ analysed the frustration as follows:⁴⁰

[111] … [Application] of the doctrine of frustration requires a multifactorial approach. Among the factors which have to be considered are 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. Since the subject matter of the doctrine (p. 572) of frustration is contract, and contracts are about the allocation of risk, and since the allocation and assumption of risk [are not simply matters] of express or implied provision but may also depend on less easily defined matters such as ‘the contemplation of the parties’, the application of the doctrine can often be a difficult one. In such circumstances, the test of ‘radically different’ is important: it tells us that the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.

26.48 Notwithstanding ‘The Sea Angel’ (2007), Davis Contractors Ltd v Fareham UDC (1956) [26.41] remains the leading authority because it crystallized the ‘radical difference’ general criterion of frustration. Furthermore, it made clear that commercial hardship does not constitute frustration. But, against that background, the current approach is to follow the guidance of Rix LJ’s ‘multi-factorial’ approach in ‘The Sea Angel’ (2007). That involves focusing on (i) whether the event falls within the scope of the established categories of frustration, (ii) whether the risk of the event is allocated, expressly or impliedly, to one of the parties, and (iii) whether a finding of frustration would be consistent with commercial conceptions of fairness, bearing in mind that contractual excuses on the basis of frustration are not to showered on parties like confetti.

26.49 As for element (iii), see above, the residual criterion is not ‘fairness’ or ‘justice’ but whether a release of both parties from their obligations would be consistent with commercial and practical expectations of the limits of binding promises, neither party being in default, or having made a choice, and the relevant risk not having been allocated expressly or impliedly to each other.

26.50 It is submitted, with respect, that judicial references to ‘justice’ in an abstract sense, even as one facet of the ‘multifactorial’ test, are unhelpful and perilous.⁴¹ Indeed, as Rix LJ emphasized in ‘The Sea Angel’ (2007), the so-called justice factor is really a misnomer.⁴² The court has no broad absolving power.⁴³ This is the perspective, for example, in which Nickoll & Knight v Ashton, Edridge & Co (1901) can be criticized (on that case [26.72]). ‘Justice’ is a jejune way of summarizing the doctrine’s overall effect, and it is no more than confusing shorthand to refer to the final ‘reality check’.⁴⁴ This used to be called ‘the ultimate question’ for the jury; that is, the final determination. Without the assistance of a civil jury, the court in modern times must stand back at the final stage of assessment and consider whether giving effect to the doctrine of frustration might produce a commercially counter-intuitive result. In ‘The Sea Angel’ Rix LJ concluded on this topic as follows:⁴⁵

(p. 573)

[As for ‘justice’], [this] is not an additional test, but it is a relevant factor which underlies all and provides the ultimate rationale of the doctrine. If one uses this factor as a reality check, its answer should conform with a proper assessment of the issue of frustration. If it does not appear to do so, it is probably a good indication of the need to think again.

26.51 Hardship or Greater Onerousness Does Not Constitute Frustration. This is a trite proposition of English law, as Hamblen J noted in Tandrin Aviation Holdings Ltd v Aero Toy Store LLC (2010).⁴⁶ He cited National Carriers Ltd v Panalpina (Northern) Ltd (1981)⁴⁷ for the proposition ‘that an increase in the mere expense or onerousness of the contract cannot constitute frustration’. The Tandrin case is noted more fully in the context of force majeure clauses at [26.08].

26.52 Similarly, in Gemcorp Commodities Trading SA v Zeefacto Oil & Gas Company (2018) (on the force majeure clause [26.20]) the buyer contended⁴⁸ that it was ‘the [implicit] foundation’⁴⁹ of the payment obligation that the buyer would be able to fund the payment by converting receipts from sub-sales from one particular foreign currency into US dollars. On the facts, there had been a fall in the value of the exchange rate, to the payor’s detriment, and that occurred after formation of the contract. But Popplewell J held⁵⁰ that the risk of foreign fluctuation is borne by the payor. Furthermore, the change had merely rendered performance more onerous, and the events fell outside the recognized categories of frustration. As Popplewell J explained:⁵¹

This is simply a case where performance of the contract on the part of the defendant has become about 30 per cent more expensive by reference to the means by which the defendant intended to perform its obligations. That is not a change in the nature of the payment obligation, let alone a significant one. At most, it is a change in the onerousness or expense of it.

The buyer unsuccessfully contended that adverse currency movement subsequent to formation of the contract constituted frustration. But Popplewell J held that this was merely a case of a more onerous performance and fell outside the recognized categories of frustration:⁵²

(p. 574) 26.53 Foreseeability and Risk Allocation. The Court of Appeal’s decision in ‘The Eugenia’ (Ocean Tramp Tankers Corporation v V/O Sovfracht) (1964) is notable for the following clarification concerning the issue of foreseeability. Foreseeable events are less likely to be the cause of frustration. But the real issue is not whether an event is foreseeable or foreseen, but whether the contract expressly or impliedly allocates the risk of the relevant event to one of the parties. On this point, Lord Denning MR said:⁵³

It has frequently been said that the doctrine of frustration only applies when the new situation is ‘unforeseen’ or ‘unexpected’ or ‘uncontemplated,’ as if that were an essential feature. But it is not so. The only thing that is essential is that the parties should have made no provision for it in their contract. The only relevance of it being ‘unforeseen’ is this: If the parties did not foresee anything of the kind happening, you can readily infer they have made no provision for it: whereas, if they did foresee it, you would expect them to make provision for it. But cases have occurred where the parties have foreseen the danger ahead, and yet made no provision for it in the contract [citing WJ Tatem Ltd v Gamboa [1939] 1 KB 132]. So here the parties foresaw that the canal might become impassable: it was the very thing they feared. But they made no provision for it. So there is room for the doctrine to apply if it be a proper case for it.

26.54 Similarly, in ‘The Sea Angel’ (2007), Rix LJ said:⁵⁴

… Even events which are not merely foreseen but made the subject of express contractual provision may lead to frustration: as occurs when an event such as a strike, or a restraint of prices, lasts for so long as to go beyond the risk assumed under the contract and to render performance radically different from that contracted for. However … the less that an event, in its type and its impact, is foreseeable, the more likely it is to be a factor which, depending on other factors in the case, may lead on to frustration.

26.55 Risk Expressly Allocated. In Gold Group Properties Ltd v BDW Trading Ltd (2010),⁵⁵ Coulson J held that a significant drop in property prices did not constitute a frustrating event within a Barratt Homes development contract. After a careful review of the leading authorities, the judge held that this was a risk for which there was already contractual provision, enabling the parties to negotiate a possible revision of the financial terms. In any event, it seems highly unlikely, if not simply inconceivable, in the light of the Davis Contractors case (1956) [26.41], that an economic or market ‘down-turn’ could constitute a frustrating event. As the Davis case demonstrates, frustration does not arise merely because the supervening change of economic fortunes has the effect of reducing or eliminating the builder’s profit, and the same should apply even if the contract becomes a loss-making venture. It should be noted that many businesses operate subject to periods of loss. Or at any rate, certain projects will be run at a loss. The losses are incurred in the expectation that the storm will be weathered. A ‘loss-leader’ is a service or product which is provided strategically in order to win goodwill with a customer, or a potential clientele, in the hope that profitable orders will ensue.

(p. 575) Supervening Illegality

26.56 The contract will be frustrated if, subsequent to the contract’s formation, performance of the contract for either party becomes illegal.⁵⁶ The supervening illegality might be a statutory change (including a change in the operation of a statutory regime), or a non-statutory legal change, or implementation of a subsisting source of prohibition, or withdrawal or serious modification of a legal permission. It is not possible to contract out of supervening illegality if to do so would be contrary to public policy.⁵⁷

26.57 In the Fibrosa case,⁵⁸ a contract for the supply by a British company of machinery to a port in Poland was frustrated when the German forces took control of Poland. In this situation, the contract became one requiring the supplier to trade with the enemy. That is a clear-cut instance of illegality.

26.58 In the ‘Brexit’ case (the UK’s secession from the European Union, with effect from 1 January 2021), Canary Wharf (BP4) T1 Ltd v European Medicines Agency (2019),⁵⁹ Marcus Smith J held that a lease of London premises had not been frustrated (whether on the ground of illegality or frustration of the venture) by the UK’s decision to leave the European Union (or by the eventual political and legal departure from the European Union in 2020).

26.59 In Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Ltd (2010) Beatson J held⁶⁰ that partial supervening illegality did not have the effect of frustrating a contract of marine insurance, because its essence had not been radically altered.

Supervening Personal or Physical Impossibility

Outline.

26.60 A contract for the performance of personal services⁶¹ by an individual who is party to the contract will be frustrated if, before completion, without his default, he or she dies, or is incapacitated by illness, or becomes mentally incapable of acting, or is otherwise physically unable to perform, including having become incarcerated (including ‘security tagging’). Whether less obvious degrees of infirmity, etc, create frustration is intensely ‘fact-dependent’.

Death.

26.61 As for death, Pollock CB said in Hall v Wright (1858):⁶²

All contracts for personal services which can be performed only during the lifetime of the party contracting are subject to the implied condition that he shall be alive to perform (p. 576) them: and, should he die, his executor is not liable to an action for the breach of contract occasioned by his death.

26.62 In Phillips v Alhambra Palace Company (1901) a contract between the claimant performers and a three-person partnership, for performance at a theatre, was not frustrated when one of the three partners died. Lord Alverstone CJ said:⁶³

In the present case … the plaintiffs did not rely on the personnel of the partners, who were unknown to them. And under those circumstances I am of opinion that the liability contracted by the three partners can after the death of one of them be enforced against the two survivors.

‘Death Clause’ Operating to Exclude Doctrine of Frustration.

26.63 In Higgins & Co Lawyers Ltd v Evans (2019),⁶⁴ Saini J upheld a solicitor firm’s claim, deciding (amongst other things) that the clause validly imposed liability to pay the lawyers for their work in the event of the client’s death, the contract providing expressly that the contract was terminated on death.

Severe Illness.

26.64 In Notcutt v Universal Equipment Co (London) (1986)⁶⁵ a contract of employment was frustrated (at the latest) when the employee was medically diagnosed as no longer employable because of a recent heart attack. The effect was that the contract had become discharged from that point onwards by operation of law, and the employer’s giving of notice was otiose and irrelevant.

Mental Incapacity.

26.65 A person’s supervening mental capacity might cause the contract to become frustrated. For example, a professor whose madness progresses from sporadic and partial to permanent and total will (probably) be incapable of teaching and this will cause the contract to be frustrated, unless the particular office carries no teaching responsibility and is solely research-based. Even then it will be a question of fact whether the form of insanity impedes or prevents satisfactory research activity.

Litigation Funding Arrangement Not Frustrated by Client’s Incapacity.

26.66 In Blankley v Central Manchester Children’s University Hospitals NHS Trust (2015)⁶⁶ the Court of Appeal held that a conditional fee agreement is not frustrated if the client had become incapable of giving personal instructions because, since commencement of the lawyer–client relationship, the client had ceased to have mental capacity. Even after the client’s mental collapse, a representative of the client might still have given instructions to the lawyer.

War-time Imprisonment by Enemy.

26.67 In Horlock v Beal (1916)⁶⁷ the House of Lords held that a contract of service had been frustrated when the ship on which the employees were serving was detained by Germans, at the outbreak of the first world war, and the men were later imprisoned. Lords Atkinson, Shaw, and Wrenbury considered that the moment of frustration was the detention of the ship. Earl Loreburn was prepared to wait until November, a few months later, when the men were taken from the ship (which had been under arrest) (p. 577) and removed to imprisonment. Lord Parmour dissented, taking the view that these events outside the scope of the frustration rule.

Peace-time Imprisonment.

26.68 A sufficient period of imprisonment, or similar incarceration, will frustrate a contract or employment, or other undertaking requiring provision of personal services. For example, in Harrington v Kent County Council (1980)⁶⁸ a sentence of twelve-months’ imprisonment imposed on a schoolmaster convicted of indecency was held to have frustrated his contract of employment.

26.69 Similarly, in FC Shepherd (FC) & Co Ltd v Jerrom (1987)⁶⁹ frustration had occurred as a result of penal incarceration. The Court of Appeal rejected an apprentice’s contention that frustration had not terminated his contract by reason of his having been sentenced to a period of imprisonment. This was a tactical attempt to argue that the apprentice had been unfairly dismissed, rather than that the contract had been frustrated. The apprentice’s submission was unsuccessful because it would involve his own reliance on his own admitted ‘self-induced frustration’, that is, he would be seeking to put forward his own criminal conduct as the means of defeating termination for frustration, and so his strategy was devoid of merit. As Lawton LJ explained,⁷⁰ Jerrom’s four-year apprenticeship had begun in June 1980. Thereafter he became involved in an organized out-of-work ‘punch up’ with a rival gang. In June 1981 he was convicted of assault and affray, and he was likely to serve thirty-nine-weeks of incarceration in a Borstal (a youth prison). Mustill LJ concluded that frustration had occurred:⁷¹

Here there was a contract for a period of four years … By the time his sentence was imposed there remained rather more than half this period still to run. The sentence was indeterminate … His training would inevitably suffer really substantial disruption, as would the timetable of the employers, who had planned to train him up to replace one of their full-time plumbers who was due to retire … [In] the special circumstances of this case the likely interruption was sufficient to discharge the employers from any further obligation, from the moment when the sentence of Borstal training was imposed.

Supervening Physical Impossibility: Vital Premises Destroyed.

26.70 Frustration can also occur when, without the relevant party’s default, the physical subject-matter of the proposed performance is destroyed or disappears. In Taylor v Caldwell (1863)⁷² a music hall was destroyed by fire. The contract required use of the hall. Blackburn J extended the law by declaring that the contract had become physically impossible to perform and that it had ceased to bind either party. Blackburn J concluded:⁷³

In the present case … we find that the parties contracted on the basis of the continued existence of the Music Hall at the time when the concerts were to be given; that being essential to their performance. We think, therefore, that the Music Hall having ceased to exist, without fault of either party, both parties are excused, the plaintiffs from taking the (p. 578) gardens and paying the money, the defendants from performing their promise to give the use of the Hall and Gardens and other things.

Foreign Nation’s Social Breakdown Insufficient to Constitute Frustration of Music Tour.

26.71 In The Flying Music Company Ltd v Theater Entertainment SA (2017) it was held that inability to give a high proportion of the scheduled performances on a music tour in Greek cities, as a result of civil unrest, was not as a supervening event but as a continuation of a known problem subsisting at the time of formation. The judge concluded that the chaos in this case had already begun before the contract was formed and that these events fell short of being frustrating:⁷⁴

[67] … If a bad situation becomes protracted, the consequences may be increased by the passage of time. But that does not mean that there has been a frustrating event. There has, in fact, been no change, and it is the lack of change which increases the consequences of an existing state of affairs. Even if the prolongation of trouble was unexpected, as [the defendant] says it was to her, it was clearly a possibility, and it was for the parties to make their bargain accordingly.

[68] … [By] the time [the contract] was signed, the difficulty [involving social unrest] was already sufficiently apparent… How long it would last was uncertain. Ticket sales had already begun, and they were low… The parties both knew enough about the risks that this posed to the success of the production for it to be wrong, now, with the benefit of hindsight, to re-allocate those risks by releasing the Theater Entertainment from its Contract obligations.

Physical Impossibility Without Destruction.

26.72 (Compare the cases concerning human incarceration at [26.67].) In Nickoll & Knight v Ashton, Edridge & Co (1901),⁷⁵ the majority of the Court of Appeal held that where a stipulated vessel had not perished, but had become unavailable because it had run aground, the contract for sale of a cargo of cotton, for the supply of which the vessel was intended, was frustrated (the ship was proceeding to the port where the cargo would be loaded by the seller). The decision is unpersuasive both because (i) the time restriction and (ii) the vessel’s identity should not have been regarded as commercially critical. This was a contract for the sale of cotton-seed, the cargo to be delivered in Alexandria to the claimant buyer in January 1900 on the ship ‘The Orlando’. It was held that the contract was frustrated when that ship, for the relevant month, became stranded on a rock in the Baltic. This was a maritime casualty not attributable to either party’s fault. And the majority considered that this risk was not borne by either party.⁷⁶ This majority decision enabled the seller to escape a bad bargain (the price of cotton-seed having increased).The majority failed to alert themselves sufficiently to the fact that the buyer had been prepared to provide an alternative vessel for the transporting of this cargo.⁷⁷

26.73 In his dissent, Vaughan Williams LJ preferred the view⁷⁸ that the subsequent event had not absolutely undermined the contract, and that the timing issue might have been waived (p. 579) without destroying the essence of the contract. This dissentient considered it unjust, therefore, to allow the seller to wriggle free on the basis of a time specification which scarcely formed the kernel of the contract, and which the buyer would have been happy to waive.

Severe Delay

Test Encapsulated.

26.74 Delay, not attributable to the relevant party’s default, might cause the relevant contract to be frustrated but only if (i) the delay was so great that the parties’ assumptions at the time of formation have been radically altered and (ii) the risk of such an alteration is not allocated to one of the parties.⁷⁹

Case Law Examination.

26.75 In ‘The Sea Angel’ (2007) Rix LJ referred⁸⁰ to situations where the period of interruption attributable to delay is not immediately and manifestly sufficient to constitute frustration. Instead a mature assessment must be made after the relevant event has already started to impinge:

… this is not a case like (1) Anglo-Northern Trading Co Ltd v Emlyn Jones & Williams [1917] 2 KB 78, affirmed Countess of Warwick Steamship Co v Le Nickel Société Anonyme [1918] 1 KB 372 and (2)⁸¹ Tatem v Gamboa, where the charters were frustrated then and there by the supervening event. Ours is one of those ‘wait and see’ situations discussed in other authorities. In such situations, it is a matter for assessment, on all the circumstances of the case, whether by a particular date the tribunal of fact, putting itself in the position of the parties, and viewing the matter in the role of reasonable and well-informed men, concludes that those parties would or properly speaking should have formed the view that, in all fairness and consistently with the demands of justice, their contract, as something whose performance in the new circumstances, past and prospective, had become ‘radically different’, had ceased to bind.

Performance is Now Completely Pointless

Exceptional Basis of Frustration.

26.76 Frustration might occur in the absence of both supervening illegality and physical impossibility or extreme delay. This residual, but highly exceptional, category applies where the central purpose of the contract has been annihilated, in an abstract sense, so that a supervening change has removed the underlying purpose of the transaction.

26.77 Krell v Henry (1903)⁸² shows that a contract can be frustrated even though it has not become illegal to perform and even though the contracting parties survive and are physically capable and the physical subject matter of the contract also remains intact. Exceptionally, the (p. 580) abstract platform of the contract can disappear, rendering physical performance a hollow and futile activity. This is known as ‘frustration of the venture’. But total solar eclipses are more common. Frustration of the venture has seldom been successfully argued in a reported case. Lord Wright in the Maritime National Fish case (1935) noted⁸³ the exceptional nature of Krell v Henry.

Room for View of Royal Procession: Frustration When Coronation Postponed.

26.78 In Krell v Henry (1903)⁸⁴ the Court of Appeal held that frustration occurred when a room which had been specially hired as a vantage-point from which to view the procession on Edward VII’s Coronation day. This booking became useless to the licensee because the event had to be postponed, the King having suffered appendicitis. It was clear that the hire was for the specific purpose of witnessing a one-off event on a special occasion: the licensee could not sensibly be expected to pay to languish in this room if the procession did not take place that day. It can be deduced from this exceptional case that a contract which is based on a shared assumption, neither party bearing the relevant risk either expressly or impliedly, will become frustrated if the contract has become pointless or useless, to the point of having become a farce, due to a change of events. The risk that the Coronation would be postponed could not fairly be allocated to the licensee.

26.79 In Krell v Henry Vaughan-Williams LJ, in a closely reasoned discussion, concluded that the foundation of the present contract was that the room would be enjoyed as a vantage-point to view the relevant Coronation processions. Absent the King, and, in his absence, without the spectacle of Coronation processions, the contract to view these processions had clearly aborted. This was not a private or unilateral feature: both parties shared the assumption that the contract was ‘all about the coronation processions’. Nor could the risk of this non-event be allocated to the licensee. The position was not the same as a cab driver who is hired to take the customer to Epsom to see the Derby horse-race, and the race event is subsequently abandoned due to some freak event.⁸⁵ Vaughan Williams LJ concluded:⁸⁶

… in this case, where we have to ask ourselves whether the object of the contract was frustrated by the non-happening of the coronation and its procession on the days proclaimed, parol evidence is admissible to shew that the subject of the contract was rooms to view the coronation procession, and was so to the knowledge of both parties. When once this is established, I see no difficulty whatever in the case.

Other Cases: No Frustration Found.

26.80 In Gemcorp Commodities Trading SA v Zeefacto Oil & Gas Company (2018) the buyer (on which [26.20] and [26.52]) contended⁸⁷ unsuccessfully that the foundation of the payment obligation was that the buyer would be able to fund the payment by converting receipts from sub-sales from one particular foreign currency into US dollars.⁸⁸

(p. 581) 26.81 Similarly, an unsuccessful argument based on alleged ‘frustration of the venture’ was considered in Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Ltd (2010). Beatson J held that partial supervening illegality did not have the effect of frustrating a contract of marine insurance, because its essence had not been radically altered.⁸⁹ In that case Beatson J also noted a 1916 case in which the Court of Appeal had held that frustration had not occurred because, although substantially the commercial purpose had become impossible, the entire contractual performance had not. Beatson J commented as follows:⁹⁰

[The Court of Appeal’s decision in] Leiston Gas Co v Leiston-cum-Sizewell UDC [1916] 2 KB 428 … [was] doubted in Denny-Mott’s case by Viscount Simon LC and Lord Wright: see [1944] AC 265, 271 and 280 (HL). The Leiston Gas case concerned the impact of wartime blackout regulations on a five-year contract to provide gas street lamps, to maintain them, and to light and extinguish them at set times. Four years later the lighting of street lamps was prohibited by the regulations. It was held that the contract was not frustrated because the contract also provided for supply and maintenance of the plant and those parts of the contract remained lawful. [As for] … the doubt expressed in Denny-Mott’s case by Viscount Simon and Lord Wright about the result … [the explanation] may possibly be because they considered that lighting the district was in fact the main purpose of a street-lighting contract. In any event, the House of Lords did not overrule the decision and it is not questioned by Sir Guenter Treitel in Frustration and Force Majeure [(3rd edn, Sweet and Maxwell 2014), 7-017 ff and 8-31]. Sir Guenter notes that in none of the English cases in which the effect of blackout regulations on street-lighting contracts was considered was the contract held to be frustrated.

Commercial Hire Not Frustrated by King’s Absence at Review of the Fleet.

26.82 By contrast with Krell v Henry (see [26.78] and [26.79]), where frustration was found to have occurred, in the sister Coronation case, Herne Bay Steam Boat Co v Hutton (1903),⁹¹ the Court of Appeal had held, a few days earlier, that a commercial charterparty had not been frustrated by postponement of the same Coronation. In the Herne Bay case a two-day commercial charter of a pleasure vessel was not frustrated by the King’s absence at the Spithead naval review. The King’s unavailability did not go to the heart of the transaction. It was a commercial risk borne by the charterer. And so, the contract remained intact.⁹²

26.83 In Herne Bay Steam Boat Co v Hutton (1903) (appeal heard 6 August 1903) a boat had been hired for two days to enable the charterer’s paying passengers to receive entertainment on board and to see the King’s inspection of the Royal Navy Fleet at anchor. It was Hutton’s intention that the vessel would be used to enable the hiring party, on each day, to attract ten paying guests who would enjoy a trip which would include witnessing the great naval review at Spithead. These events were to take place after the coronation of Edward VII. When (p. 582) the coronation was postponed (the King had undergone an emergency operation for appendicitis), the defendant refused to pay for the hire of the vessel.

26.84 The Court of Appeal in Herne Bay Steam Boat Co v Hutton held that there had been no frustration of the contract. The King’s inability to enhance this occasion did not render the whole venture pointless. The Fleet remained at anchor and was a great spectacle. In any event, this commercial disappointment was a risk borne by the charterer rather than the vessel owner. The King’s presence did not form part of the underlying purpose of the contract of hire. His absence was not a complete game-changer as between these parties. And so, the charterer owed the unpaid hire (subject to a deduction in respect of the money made by the vessel’s owner who used the boat for a different voyage when the claimant cancelled). Stirling LJ went to the nub of the matter, as follows:⁹³

This … was the venture of the [charterer] alone, and that although the plaintiffs assisted him by selling tickets and posting notices of what was proposed to be done, yet the risk was entirely that of the defendant … [The] reference in the contract to the naval … was inserted … to define more exactly the nature of the voyage, and I am unable to treat it as being such a reference as to constitute the naval review the foundation of the contract … [Furthermore,] the object of the voyage is not limited to the naval review, but also extends to a cruise round the fleet. (Note: the Fleet remained at anchor and had not removed itself following the postponement of the Coronation.)

Overlapping Appellate Hearings.

26.85 On 11 August 1903, the same three members of the Court of Appeal (Vaughan Williams, Romer, and Stirling LJJ) heard the appeal in Krell v Henry (1903)⁹⁴ where a contract to hire a room to view the coronation procession was frustrated when the event had to be postponed because of Edward VII’s illness. In the Coronation frustration cases, the hearings before the Court of Appeal overlapped, Krell v Henry having been argued on 13 to 15 July, but judgment was not given until 11 August; the Herne Bay case was heard and judgment immediately given on 6 August. Clearly, the Herne Bay case was regarded as straightforward, having been disposed of quickly, whereas Krell v Henry required the Court of Appeal to pause for almost a month after the close of argument in order to feel comfortable with its reasoning. It is remarkable that none of the judges in Krell v Henry (1903) referred to the Herne Bay case but the cases are not in conflict.⁹⁵

Hypothetical Case (1).

26.86 A London law firm hires a twelve-seater van and driver for to take a party to the first day (Thursday) of the test match at Edgbaston, Birmingham. The night before, there is torrential rain and the ground is flooded and remains flooded until the Saturday. The law firm had paid £600 in advance, £400 payable ‘at end of the day of hire’. Is the £600 repayable and the £400 no longer payable by virtue of frustration? If so, are any sums to be allowed in favour of the payee (see the Gamerco case, [26-115] ff)? Or was the (p. 583) risk that the Thursday cricket would be entirely lost, because of adverse weather conditions, a matter borne by the customer?⁹⁶

Hypothetical Case (2).

26.87 A ‘once in a century’ full eclipse of the sun is to occur on 1 April, in a future year. Visibility will be greatest in Cornwall. Thousands of people book Cornish hotel-rooms, and well in advance. The hotels in question have made their rooms available ‘at a special solar eclipse rate’, that is, twice the normal rate for April bookings. One week before the event, a volcanic eruption in Iceland results in a thick pall of dust covering the sky in the United Kingdom. The hotel guests have paid in advance. Are the sums repayable?

Self-Induced Frustration: Breach or Choice Precludes Frustration

Two Segments of Self-inducement.

26.88 We shall see that the proposition that frustration cannot arise if the relevant event was self-induced by one of the parties—so that (i), this being the first segment of the self-inducement doctrine, he brought it on himself as a result of his own culpable default—that is, his contractual breach, or criminal wrongdoing or blameworthiness and criminal misconduct; or (ii) choice, the latter being the second segment of the self-inducement doctrine.

Self-inducement: Segment (1): Absence of Default.

26.89 Frustration operates only where the contract has become radically different as a result of a supervening event and that event must not be attributable to default by a party. And so, the first (and self-evident) segment of the doctrine of ‘self-induced frustration’ is that frustration does not occur if the supervening event is the result a party’s (i) breach of contract or (ii) criminal wrongdoing or (iii) other blameworthy conduct. Each of these involves an element of default which is the antithesis of frustration.

26.90 As for (i), in ‘The Eugenia’ (1964)⁹⁷ the charterer, in breach of contract, took the vessel into a war-zone, the Suez Canal. The ship was to proceed from the Black Sea to India. If the alternative route, via the Cape of Good Hope, had been taken, the journey would have taken longer, but the Court of Appeal held that the additional thirty-eight days required for that longer voyage would not have constituted frustration. The charterer’s unsuccessful argument was, in effect: ‘we know we were in the wrong place at the wrong time (Suez canal, which had become a war-zone), but even if we had not made that error the contract would have been frustrated, because taking the vessel from Europe to India the long-way round, via the Cape of Good Hope, would have been an entirely different venture’.

26.91 And so the charterer failed for these reasons: (i) they had become stuck in the Suez canal because of their own default (having entered a war-zone); (ii) the long-way round argument did not disclose an instance of frustration, because the extra days fell well short of constituting a radically different venture, applying the Davis Contractors test.

(p. 584) 26.92 Noting the radical difference test enunciated in Davis Contractors Ltd v Fareham UDC (1956) [26.41], Lord Denning MR In ‘The Eugenia’ said:⁹⁸

Applying these principles to this case, I have come to the conclusion that the blockage of the canal did not bring about a ‘fundamentally different situation’ such as to frustrate the venture. My reasons are these: (1) The venture was the whole trip from delivery at Genoa, out to the Black Sea, there load cargo, thence to India, unload cargo, and redelivery… We were told that the time for the whole venture via the Suez Canal would be 108 days and via the Cape 138 days. The difference over the whole voyage is not so radical as to produce a frustration. (2) The cargo was iron and steel goods which would not be adversely affected by the longer voyage, and there was no special reason for early arrival. The vessel and crew were at all times fit and sufficient to proceed via the Cape. (3) The cargo was loaded on board at the time of the blockage of the canal. If the contract was frustrated, it would mean, I suppose, that the ship could throw up the charter and unload the cargo wherever she was, without any breach of contract. (4) The voyage round the Cape made no great difference except that it took a good deal longer and was more expensive for the charterers than a voyage through the canal.

Other Instances of Default Constituting Self-induced Frustration.

26.93 In addition to (i) breach of contract, just treated, frustration does not occur if the supervening event is the result of a party’s (ii) criminal wrongdoing or (iii) other blameworthy conduct. Each of these involves an element of default (not confined to technical breach). Default in this broad sense is the antithesis of frustration.

26.94 As for (ii) and (iii), in FC Shepherd (FC) & Co Ltd v Jerrom (1987)⁹⁹ the Court of Appeal rejected an apprentice’s counter-intuitive attempt to plead his own self-induced frustration to promote his overall legal strategy. His (unsuccessful) contention was that his contract of apprenticeship had not been frustrated by reason of his incarceration. Instead he argued that the contract had remained alive, and that termination had been the result of the employer’s decision to fire him. This submission was a tactical attempt by the apprentice to preserve the contract and to argue that the apprentice had been unfairly dismissed. The Court of Appeal held that the contract had been frustrated by virtue of his imprisonment.

26.95 Bingham LJ said in ‘The Super Servant Two’ (1990) (on that case’s discussion of `choice’, [26.101] ff below) that the concept of breach of a duty by the defendant should not be placed in a legal ‘straitjacket’ and that a party’s fault or culpable responsibility (broadly applied) will normally preclude frustration:¹⁰⁰

A fine test of legal duty is inappropriate; what is needed is a pragmatic judgment whether a party seeking to rely on an event as discharging him from a contractual promise was himself responsible for the occurrence of that event. (See below for the treatment of the issue of choice).

(p. 585) 26.96 There are dicta in Joseph Constantine SS Co. v Imperial Smelting Corporation Ltd (1942)¹⁰¹ concerning the hypothetical prima donna who catches a cold through neglect of her health, but this discussion was inconclusive. It is possible that, at least in some contexts, a party who has hired someone’s services might contend that a contract for personal services should be treated as containing a term ‘implied in fact’ that the performer will take reasonable steps, and avoid obvious risks, to keep open the possibility that he or she will be physically able to perform his contract. Breach of such an implied term will involve ‘self-induced frustration’ and render him liable to pay damages. But the courts will be slow to recognize such an implied duty, for three connected reasons: first, such a term might be regarded as by no means ‘obvious’; secondly, imposing such a term would be problematic because it might be perceived as unduly fettering the performer’s scope to conduct his or her leisure time free from legal constraint; thirdly, a hiring party who is jittery might be expected to discuss the matter explicitly with the relevant performer and seek to include an express term to cover this risk.

Self-inducement: Segment (2): Choice Precludes Frustration.

26.97 We turn to the further segment of the ‘self-induced frustration’ doctrine: preclusion of frustration because the alleged frustration involved ‘choice’ on the part of the party invoking the frustration doctrine.

26.98 Choice impinges as follows. Frustration will not arise if it remained physically possible for a party to have performed his contract, but he chose not to do so, either (i) because he failed, or chose not, to take steps which would have enabled him to keep the contract alive for performance (in the case of (i), such a failure or choice might arise even in the absence of breach of an express or implied term that such steps must be taken); or (ii) because it was his choice which led to non-performance, because he preferred (either before or after the potentially frustrating event) to advance his own interests, for example, he had already chosen to make arrangements with third parties which (in combination with the supervening event) preclude him from satisfying his contractual obligation to the other party, thereby taking the risk of a clear, or at least potential, ‘double-booking’. Element (ii) is illustrated by the Maritime National case (1935) and by ‘The Super Servant Two’ (1990). These cases will be considered in turn below.

26.99 As for failure to step appropriate steps, element (i) (see preceding paragraph), a plea of frustration failed in Melli Bank plc v Holbud Ltd (2013) for that reason.¹⁰² A bank customer alleged that the reason why a letter of credit facility had not been used is that the UK Government had imposed restrictions on trading with designated Iranian entities or persons, including the claimant Iranian bank offering the credit facility. But the frustration plea failed because the bank customer had not bothered to apply for relaxation of this UK Government restriction. Such a licence would have been forthcoming. And so, the judge upheld a claim for the fees due for having provided the credit facility.¹⁰³

(p. 586) 26.100 As for element (ii) (see [26.98]), ie a choice is made not to arrange matters so that performance remains possible, where the relevant choice occurs after the potentially frustrating event, the party seeking to invoke the frustration doctrine will have forfeited that possibility because he preferred to advance his own interests. That was, in essence, the position in the leading case, Maritime National Fish Ltd v Ocean Trawlers Ltd (1935).¹⁰⁴ The Privy Council held that a charterer could not invoke frustration because the facts disclosed an example of self-induced incapacity. The defendant (‘the charterer’) hired a trawler, the ‘St Cuthbert’, from the claimant (‘the owner’). The charterer already had four other trawlers. As the parties foresaw, the trawlers could only operate under government licence. The charterer received only three licences, although he had applied for five. He then chose to use these licences against three of his vessels, electing not to license the ‘St Cuthbert’. When the owner sued him for the hire charges, the charterer unsuccessfully argued that the contract of hire had been frustrated by his inability to obtain sufficient licences. The Privy Council held that the charterer’s decision to allocate the three licences to ships other than the present chartered vessel was an act of self-induced frustration.

26.101 Similarly, self-inducement by choice can occur by reason of decisions made before the impact of the potentially frustrating event. For example, the relevant party might have already made arrangements in its own interest which led to the inability to perform. The Court of Appeal’s decision in J Lauritzen v Wijsmuller BV (‘The Super Servant Two’) (1990) provides convincing authority for this proposition.¹⁰⁵ In that case, L hired from W a giant barge (‘The Super Servant One’) ‘SS1’ or (‘The Super Servant Two’) ‘SS2’ to transport L’s oil rig. The charterparty provided that either giant barge SS1 or SS2 could be supplied by the owner. SS2 sank (or, rather, it became marooned, having become stuck in the bed of the River Zaire) and was unavailable. SS1 had been allocated to another customer. It was held that frustration was precluded by the owner’s commercial self-interested choice in making the allocation of SS1 to a third party customer.

26.102 In greater detail, the defendant had contracted to carry the claimant’s drilling rig from Japan to Rotterdam on either of his two giant barges, ‘The Super Servant One’ or ‘The Super Servant Two’. The terms stated that the contract could be performed by use of either of two named vessels: the contract did not restrict performance to the vessel which, on these facts, later became unavailable through no fault of the owner. The fact that the contract could be performed using alternative vessels could work to the rig-owner’s advantage (increasing the chances of a barge remaining available) and to the barge-owner’s advantage (enabling him to avoid the other party’s potentially problematic objection that only a single nominated vessel could be used for the job). After the contract’s formation, the defendant decided to allocate ‘The Super Servant Two’ for this job, using ‘The Super Servant One’ for another job with a third party (these giant barges seem to have been commercially interchangeable, possessing the same dimensions, etc). But ‘The Super Servant Two’ became stuck in the Zaire River (not submerged, just stuck in the river bed) before it could be moved to commence work in performance of the claimant’s contract of hire.

(p. 587) 26.103 The Court of Appeal held that the physical unavailability of ‘The Super Servant Two’ did not exonerate the defendant. The contract with the claimant had stipulated that either ‘The Super Servant One’ or ‘The Super Servant Two’ would be used. The defendant could not hide behind its own commercial decision to use ‘The Super Servant One’ for the parallel contract with the third party. There was no reason why the claimant should suffer as a result of the defendant’s commercial deployment of his remaining vessel. That deployment had been made to suit the defendant, and he had earned extra revenue from it. In fact the decision involved three points: (i) frustration attributable to physical unavailability of ‘The Super Servant Two’ had not arisen because it had been W’s prior choice not to make available to the claimant the alternative vessel, ‘The Super Servant One’; and (ii) frustration would also be precluded if it was W’s fault which caused the relevant obstacle to performance; (iii) a cancellation clause (clause 17.1) inserted by W, but which was construed against W as the proferens, would only avail W if the sinking of ‘The Super Servant Two’ was not due to W’s negligence.

26.104 As for point (i), the decision boils down to this: if Y hires out to X either ‘The Super Servant One’ or ‘The Super Servant Two’, and Y, for its own private and commercial purposes, decides to allocate the allocation for actual performance being left to suit Y, allocate one of these vessels to a third party, another customer, the supervening and excused unavailability of ‘The Super Servant Two’ does not also excuse Y from his duty to provide ‘The Super Servant One’, which is the back-up vessel. It is of no relevance to X that Y has double-booked ‘The Super Servant One’, having decided (whether prior to or after the contract with X) to use it to make money in a contract with a different customer.

26.105 The decision in ‘The Super Servant Two’ is sound. As Bingham LJ observed, the defendant’s option to use ‘The Super Servant One’ or ‘The Super Servant Two’ had been inserted by the defendant for its commercial convenience.¹⁰⁶ Similarly, Dillon LJ noted that the defendant had extracted extra revenue from its ‘The Super Servant One’ customers before finally allocating ‘The Super Servant Two’ to the contract with the claimant.¹⁰⁷ As mentioned in Dillon LJ’s judgment, the decision in ‘The Super Servant Two’ is consistent with the Privy Council’s decision in Maritime National Fish Ltd v Ocean Trawlers Ltd (1935)¹⁰⁸ where choice similarly precluded resort by a non-performing party to frustration as a round of excuse.

26.106 As Bingham LJ observed,¹⁰⁹ it would have been different if the vessel which sank had been the only vessel mentioned in the charterparty (assuming, of course, that its subsequent sinking was not attributable to the defendant’s default). That would have sent the clear message: ‘everything depends on the physical availability of “The Super Servant Two”; if it sinks etc, without my fault, you cannot sue me for non-supply’.

(p. 588) The Impact and Aftermath of Frustration

Frustration’s Impact on the Contract: the Position at Common Law.

26.107 In Hirji Mulji v Cheong Yue Steamship Co Ltd (1926), Lord Sumner said:¹¹⁰ ‘frustration brings the contract to an end forthwith, without more and automatically’. At Common Law, discharge for frustration operates as follows:

(1) the frustrating event terminates the contract prospectively (as distinct from the contract having become voidable);
(2) neither party need be aware that the event has occurred and has had this effect;
(3) no notice is required from either party to the other;
(4) pre-existing causes of action are not eradicated but remain exigible or capable of being taken into account.

26.108 In the Hirji Mulji case (1926) Lord Sumner explained that frustration terminates the contract without the need for the parties to be aware that it has occurred. It releases the parties from their unperformed obligations:¹¹¹

Throughout the line of cases, now a long one, in which it has been held that certain events frustrate the commercial adventure contemplated by the parties when they made the contract, there runs an almost continuous series of expressions to the effect that such a frustration brings the contract to an end forthwith, without more and automatically.

26.109 Lord Sumner concluded:¹¹² ‘[Frustration’s] legal effect does not depend on their intention or their opinions, or even knowledge, as to the event, which has brought this about, but on its occurrence in such circumstances as show it to be inconsistent with further prosecution of the adventure.’

26.110 Although the Hirji case directly concerned the issue whether an arbitration clause ‘survives’ frustration of the main contact (on which point, the law has changed),¹¹³ Lord Sumner’s observations on the automatic¹¹⁴ Common Law operation of frustration remain seminal: (i) the frustrating event terminates the contract in futuro; (ii) neither party need be aware; (iii) no notice is required from either party; (iv) pre-existing causes of action are not eradicated but remain exigible or capable of being taken into account.

Recovery or Cancellation of Payment (section 1(2)).

26.111 Section 1(2) of the Law Reform (Frustrated Contracts) Act 1943 concerns sums paid or payable under the contract before the frustration occurred. That provision overrides the Common Law regime of total failure of consideration but this provision is confined to the context of frustration. The Common (p. 589) Law doctrine of failure of consideration had operated in this context before implementation of the 1943 Act (see the Fibrosa case (1943) [3.36]).

26.112 Section 1(2) of the Law Reform (Frustrated Contracts) Act 1943 states:¹¹⁵

All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as ‘the time of discharge’) shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable: Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in, or for the purpose of, the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.

Operation of the Provision.

26.113 This provision has the following effect. A party can reclaim money paid before the frustrating event, even if there has been partial performance by the recipient. But an order for repayment is subject to a possible (partial or complete) allowance in respect of the recipient’s expenditure. The issue whether such an allowance is granted (and, if so, its extent) is subject to the court’s discretion, as prescribed by this provision. Furthermore, prima facie a sum payable before frustration but not yet paid will no longer be owed, but this cancellation can be reversed, in whole or in part, if, in exercise of its discretion, the court decides that the intended payee should receive money to cover his expenditure.

26.114 And thus the upshot of section 1(2) is that, in general, the payee must repay money paid and forget money payable but not yet paid unless he can persuade the court that (i) the paid and (ii) payable but unpaid sums should be used as a ‘kitty’ out of which it would be fair to reimburse his expenses, in full or at least in part. The ‘kitty’ (comprising (i) and (ii)) is the maximum fund available under section 1(2) for this purpose. Under section 1(2) of the 1943 Act, the court possesses a twofold discretion: whether to order repayment and, if so, in full or only in part; and whether to reverse cancellation of debts already accrued or instead to order that the intended payee should in fact receive that sum, in whole or in part.

Solitary Reported Case.

26.115 Garland J’s decision in Gamerco SA v ICM/Fair Warning (Agency) Ltd (1995)¹¹⁶ is the only reported judicial examination of this provision. In this case a contract for the defendant rock band’s performance in Madrid (the band is ‘Guns N’ Roses’) was frustrated when the chosen venue was declared legally unfit and there was no alternative venue. Spanish authorities issued a prohibition on use of the chosen venue because of fears that it had become structurally unsafe and so had become a ‘death-trap’.

26.116 The mandatory cancellation, which was the frustrating event, meant that the claimant promoter had wasted a large sum in preparation for this particular concert. The promoter had also paid upfront a substantial sum to the defendant, the performers. Both parties had insured against the risk of cancellation but section 1(5) requires the court to ignore the fact of (p. 590) insurance. It appears that the sum payable but not yet paid by the promoter to the defendant was simply held to have been cancelled by section 1(2) and did not come into the reckoning.

26.117 Garland J’s major point of decision was that the court’s discretion is not subject to fixed rules, nor even rules of thumb, such as a presumption of ‘total retention’ of sums paid or payable, or a presumption that the losses suffered by both parties should be cumulated and then split equally, by adjustment of the award under this sub-section.¹¹⁷ Instead Garland J held that the court has a (virtually) unfettered discretion under section 1(2) of the 1943 Act when determining whether a payee should be allowed to retain all, some, or none of a pre-frustration payment in respect of the payee’s expenses. This discretion is subject only to the constraints that, first, the court has not acted irrationally nor, secondly, has it taken into account irrelevant considerations. Subject to this, the adjudicator has a free hand whether to order complete or partial repayment to the payor. He also held that the payee has the onus of establishing that there should be some ‘discretionary retention’.¹¹⁸ But, in this case, the defendant had not adduced clear evidence of its expenditure in preparation for the concert.

26.118 Applying this test, Garland J held on the present facts that the appropriate response was that the court should order the rock band to repay in full the promoter’s pre-payment. It is possible, reading between the lines of the judgment, that the scale of the promoter’s loss ($450,000), irrespective of the payment ($412,500) made to the band, was so great that the judge considered the fairer approach was to require the band to return the whole of the $412,500 to the promoter. This meant that the band’s own loss, which was relatively small ($50,000), should be wholly borne by the band.

No Fixed Rules: No Rules of Thumb.

26.119 On the discretion whether to allow the defendant payee to retain any of the sums paid (or to recover sums payable or not yet paid), Garland J said, adopting the view that the court has a complete and unfettered discretion, and rejecting both the rival approaches (total retention and equal division, see below):¹¹⁹

Various views have been advanced as to how the court should exercise its discretion and these can be categorised as follows.

(1) Total retention. This view was advanced by the Law Revision Committee in 1939 (Cmd. 6009) on the questionable ground ‘that it is reasonable to assume that in stipulating for prepayment the payee intended to protect himself from loss under the contract.’ As the editor of [now Chitty [(2018), 23-081 fn 373, Professor EG McKendrick)] comments: ‘He [the payee] probably [instead] intends to protect himself against the possibility of the other party’s insolvency or default in payment.’ To this, one can add: ‘and secure his own cash flow.’ …
(2) Equal division. This was discussed by Professor Treitel in Frustration and Force Majeure … [The objection to this is that the parties’ respective] losses may, as in the present case, be very unequal. Professor Treitel therefore favours the third view [see below].
(3) Broad discretion. It is self-evident that any rigid rule is liable to produce injustice. The words, ‘if it considers it just to do so having regard to all the circumstances of (p. 591) the case,’ clearly confer a very broad discretion. Obviously the court must not take into account anything which is not ‘a circumstance of the case’ or fail to take into account anything that is and then exercise its discretion rationally. I see no indication in the Act, the authorities or the relevant literature that the court is obliged to incline towards either total retention or equal division. Its task is 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.

I have not found my task easy. As I have made clear, I would have welcomed assistance on the true measure of the defendants’ loss and the proper treatment of overhead and non-specific expenditure. Because the defendants have plainly suffered some loss, I have made a robust assumption. In all the circumstances, and having particular regard to the plaintiffs’ loss, I consider that justice is done by making no deduction under the proviso.

Allowance for Goods or Services Supplied (section 1(3) of the 1943 Act).

26.120 Under section 1(3) of the Law Reform (Frustrated Contracts) Act 1943, the court has a discretion to award a ‘just sum’ to the party whose work or provision of goods has conferred, before the date when frustration occurred, a ‘valuable benefit’ on the defendant.

26.121 Section 1(3) of Law Reform (Frustrated Contracts) Act 1943 provides:¹²⁰

Where any party to the contract has, by reason of anything done by any other party thereto in, or for the purpose of, the performance of the contract, obtained a valuable benefit (other than a payment of money to which the last foregoing sub-se

ction applies) before the time of discharge, there shall be recoverable from him by the said other party such sum (if any), not exceeding the value of the said benefit to the party obtaining it, as the court considers just, having regard to all the circumstances of the case and, in particular—(a) the amount of any expenses incurred before the time of discharge by the benefited party in, or for the purpose of, the performance of the contract, including any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under the last foregoing sub-section, and (b) the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract.

Solitary Reported Case: ‘End Product’ Analysis.

26.122 The provision was considered in BP Exploration Co (Libya) Ltd v Hunt (No 2) by Robert Goff J. This is the only reported English decision on this provision (the Court of Appeal and House of Lords heard appeals on relatively minor aspects of the case).¹²¹ The main discussion, therefore, is in Goff J’s first instance judgment.¹²²

(p. 592) 26.123 Goff J noted that section 1(3) of the 1943 Act involves a two-stage operation: (i) the pre-frustration ‘valuable benefit’ obtained by the defendant must be identified and valued; (ii) a ‘just sum’ in favour of the performing party, the claimant, not exceeding the amount fixed at stage (i), must then be considered.

26.124 The claimant, British Petroleum, had entered into a complicated joint venture with the defendant, Hunt. The parties had agreed to exploit an oil field in Libya. Hunt owned the oil concession. The contract gave BP a right to ‘reimbursement oil’. Once BP had been reimbursed for its expenditure in developing the oil field, the oil revenue from the field would be divided equally between the two parties. BP expended large sums on the project. As a result, the parties succeeded in extracting oil. The contract had operated successfully for almost five years. But then the Libyan government decided to expropriate the oil field, first BP’s seizing part (1971), then Hunt’s (1973).

26.125 Robert Goff J, a specialist on the law of restitution (now known as the law of unjust enrichment), and co-author of the pioneering English textbook,¹²³ held that, in principle, the valuable benefit obtained by Hunt on these facts was the enhancement of the value of his oil rights (that enhancement had become considerable once oil had started to come on stream). He valued that benefit at approximately US $85 million. He then awarded a ‘just sum’ to BP of approximately US $35 million, which took account of: (i) the fact that the field had been expropriated; (ii) Hunt’s receipts under the contract; and (iii) the fact that Hunt had received only modest compensation from the Libyan government.

26.126 In the following passage, Goff J explained why he regarded the end-product of services, as distinct from the contractual pro-rated value of services, as central to the valuation of the benefit under section 1(3) and thus, crucially, forming the ceiling upon the award of a ‘just sum’ under that provision:¹²⁴

In the case of an award under section 1 (3) there are, therefore, two distinct stages—the identification and valuation of the benefit, and the award of the just sum… Identification of the defendant’s benefit. In the course of the argument before me, there was much dispute whether, in the case of services, the benefit should be identified as the services themselves, or as the end product of the services … I am satisfied that it was the intention of the legislature, to be derived from section 1(3) as a matter of construction, that the benefit should in an appropriate case be identified as the end product of the services. This appears, in my judgment, not only from the fact that section 1(3) distinguishes between the plaintiff’s performance and the defendant’s benefit, but also from section 1(3) (b) which clearly relates to the product of the plaintiff’s performance.

26.127 Goff J added:¹²⁵

Let me take the example of a building contract. Suppose that a contract for work on a building is frustrated by a fire which destroys the building and which, therefore, also destroys a substantial amount of work already done by the plaintiff. Although it might be thought just to award the plaintiff a sum assessed on a quantum meruit basis, probably a (p. 593) rateable part of the contract price, in respect of the work he has done, the effect of section 1(3)(b) will be to reduce the award to nil, because of the effect, in relation to the defendant’s benefit, of the circumstances giving rise to the frustration of the contract. It is quite plain that, in section 1(3)(b), the word ‘benefit’ is intended to refer, in the example I have given, to the actual improvement to the building, because that is what will be affected by the frustrating event; the sub-section therefore contemplates that, in such a case, the benefit is the end product of the plaintiff’s [802] services, not the services themselves. This will not be so in every case, since in some cases the services will have no end product; for example, where the services consist of doing such work as surveying, or transporting goods. In each case, it is necessary to ask the question: what benefit has the defendant obtained by reason of the plaintiff’s contractual performance? But it must not be forgotten that in section 1(3) the relevance of the value of the benefit is to fix a ceiling to the award. …

26.128 Goff J further commented:¹²⁶

… all these difficulties would have been avoided if the legislature had thought it right to treat the services themselves as the benefit. In the opinion of many commentators, it would be more just to do so; after all, the services in question have been requested by the defendant, who normally takes the risk that they may prove worthless, from whatever cause. In the example I have given of the building destroyed by fire, there is much to be said for the view that the builder should be paid for the work he has done, unless he has (for example by agreeing to insure the works) taken upon himself the risk of destruction by fire. But my task is to construe the Act as it stands. On the true construction of the Act, it is in my judgment clear that the defendant’s benefit must, in an appropriate case, be identified as the end product of the plaintiff’s services, despite the difficulties which this construction creates, difficulties which are met again when one comes to value the benefit. (Emphasis added.)

End-Product Not Mentioned in Statute.

26.129 Goff J’s slavish, mystifying, and unhelpful commitment to ‘end-product’ analysis (see the preceding passages) cannot go unchallenged. Consider the following example. Suppose A agrees with B to build a factory for £20 million. Halfway through the job, the factory is destroyed in a fire caused by vandals and the contract is frustrated. At that point, A had spent £12 million. No money was yet owed by B to A. Goff J’s suggestion in a dictum in British Petroleum v Hunt (No 2) (quoted above) is that the valuable benefit under section 1(3) in this context would be the scrap value of A’s ruined work.¹²⁷

26.130 His dictum involves a (palpable) misconstruction of this provision, as Treitel contends,¹²⁸ discussing the facts of Appleby v Myers (1867),¹²⁹ where a factory was consumed by fire, causing destruction of, among other things, machinery installed by one of the parties. Treitel notes that section 1(3) requires the court to identify a ‘valuable benefit’ obtained ‘before’ the contract’s termination. The relevant ‘valuable benefit’, therefore, would be the value of the building before the conflagration. As Treitel observes, the court, when assessing the ‘just sum’, must take into account all the factors, including, as directed by section 1(3)(b) of (p. 594) the 1943 Act, the impact on the valuable benefit of the events giving rise to the frustration. On the present imaginary facts, the fire destroyed the building. On this basis, it seems likely that the court would fix the valuable benefit at either £10 million (reflecting the mid-point in the project) or £12 million (the total amount of A’s, the builder’s, expenditure). It might (or might not) then split this loss between A and B. But the court has a complete discretion whether to give A full protection, zero protection or a partial award. The court cannot award more than the valuable benefit.

Footnotes:

¹ Force majeure clauses: for literature, Bibliography, Part II, section (20), sub-section A.

² For the converse situation, where the doctrine of frustration is excluded by express contractual provision: GH Treitel, Frustration and Force Majeure (3rd edn, Sweet and Maxwell 2014) ch 12.

³ For comment on the force majeure/exclusion clause division, Benjamin’s Sale of Goods (MG Bridge ed, 11th edn, Sweet and Maxwell 2020) 8-074 (sentence 4) (expressing scepticism whether there is any real distinction); Chitty on Contracts (HG Beale gen ed, 33rd edn, Sweet and Maxwell 2018) 15-152 (final sentence); M Furmston (gen ed), The Law of Contract (6th edn, LexisNexis, 2017) 7–67 (‘analogous’ to an exclusion clause); K Lewison, Interpretation of Contracts (7th edn, Sweet and Maxwell 2020) 13-02; G McMeel, The Construction of Contracts: Interpretation, Implication and Rectification (3rd edn, OUP 2017) 22-35 ff; it might be that the distinction between ‘exceptions’ clauses and ‘exclusion’ clauses has caused some confusion—an exceptions clause is certainly a broader category than an exclusion clause, as the following case demonstrates: Impact Funding Solutions Ltd v Barrington Support Services Ltd [2016] UKSC 57, [2017] AC 73, examined at [22.34].

⁴ As for modalities (2)(a) and (b), Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem PVBA [1978] 2 Lloyd’s Rep 109 (HL), discussed in Classic Maritime v Limbungan Makmur Sdn Bhd [2019] EWCA Civ 1102, [2019] 2 All ER (Comm) 592, [2019] Bus LR 2854 at [52] ff; noted, MG Bridge (2020) 136 LQR 1.

⁵ J Lauritzen v Wijsmuller BV (‘The Super Servant Two’) [1990] 1 Lloyd’s Rep 1 (CA).

⁶ Of the many reasons given by Bingham LJ in support of his decision on the present point, reasons 4–8 and 12 are the most compelling; Dillon LJ gave a concurring judgment.

⁷ [2013] EWCA Civ 905, [2013] 2 All ER (Comm) 992, [2014] 1 Lloyd’s Rep 1.

⁸ ibid, at [25]; on the process of construction, S Tofaris, ‘Commercial Construction of Exemption Clauses’ [2019] LMCLQ 270.

⁹ [1917] AC 495 (HL) (Lord Finlay LC dissenting); considered by Treitel, Frustration and Force Majeure, 12-028.

¹⁰ [2010] EWHC 40 (Comm), [2010] 2 Lloyd’s Rep 668 at [40]; considered by GH Treitel, ibid, 6-36.

¹¹ ibid, at [50].

¹² [2015] EWHC 2208 (Comm); (2006) 22 Const LJ 591, [2006] 1 Lloyd’s Rep 441 at [50].

¹³ [2018] EWHC 1640, [2019] 1 All ER (Comm) 34, [2018] 2 Lloyd’s Rep 628, [2019] BLR 61 at [131].

¹⁴ ibid, at [282].

¹⁵ [2015] EWHC 2658 (Comm), [2016] 1 All ER (Comm) 536 at [194] ff (affirmed [2016] EWCA Civ 1043).

¹⁶ Notably Bremer Handels GmbH v Vanden-Avenne Izegem PVBA [1978] 2 Lloyd’s Rep 109 (HL).

¹⁷ [2019] EWCA Civ 1102, [2019] 2 All ER (Comm) 592, [2019] Bus LR 2954; noted, MG Bridge (2020) 136 LQR 1.

¹⁸ ibid, at [44].

¹⁹ ibid, at [61].

²⁰ MG Bridge (2020) 136 LQR 1.

²¹ [2018] EWHC 3938 (Comm) at [4], [12], [18].

²² The leading treatment of the frustration doctrine is: Treitel, Frustration and Force Majeure; this and other monographs are listed at Bibliography, Part II, section 20, sub-section B; see also J Beatson, ‘Increased Expense and Frustration’ in FD Rose (ed), Consensus ad Idem: Essays in the Law of Contract in Honour of Guenter Treitel (Sweet and Maxwell 1996) 121; D Ibbetson, ‘Absolute Liability in Contract: the Antecedents of Paradine v Jayne’ in FD Rose (ed), Consensus ad Idem: Essays in the Law of Contract in Honour of Guenter Treitel ch 1; E McKendrick, ‘Frustration, Restitution and Loss Adjustment’ in AS Burrows (ed), Essays on Restitution (OUP 1991) 147; E McKendrick, ‘The Regulation of Long-Term Contracts in English Law’ in J Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law (OUP 1995) 305, 323 ff; J Morgan, Great Debates in Contract Law (3rd edn, Palgrave Publishing 2020) ch 6; AWB Simpson, ‘Innovation in Nineteenth Century Contract Law’ (1975) 91 LQR 247, 269–73.

²³ As for partial frustration, see Treitel, Frustration and Force Majeure, ch 5.

²⁴ (1863) 3 B & S 826; 122 ER 309.

²⁵ (1647) Al 26; 82 ER 897; Ibbetson, ‘Absolute Liability in Contract: the Antecedents of Paradine v Jayne’ in Rose (ed), Consensus ad Idem: Essays in the Law of Contract in Honour of Guenter Treitel , ch 1.

²⁶ On the exceptional possibility, only recognized in the late twentieth century, that a lease might become frustrated, National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 (HL); for example, the relevant land might fall into the sea, or perhaps a new canyon might swallow it up, or a new and permanent mass of water might permanently submerge it, or a nuclear accident might render it unusable.

²⁷ ibid, 687–88 (HL); see also for a helpful review of the various theories which have historically been suggested as the foundation of the frustration doctrine, Canary Wharf case [2019] EWHC 335 (Ch), 183 Con LR 167 at [26], [27] (Marcus Smith J).

²⁸ [1964] 2 QB 226, 238 (CA).

²⁹ Davis Contractors Ltd v Fareham UDC [1956] AC 696, 728 (HL).

³⁰ ibid, 728–29; this statement was considered in Pioneer Shipping Ltd v BTP Tioxide Ltd (‘The Nema’) [1982] AC 724, 744, 751–52 (HL), and in ‘The Great Peace’ [2002] EWCA Civ 1407, [2003] QB 679 at [70]; the result of the latter case is that, in the parallel context of common mistake, the implied term theory has also been rejected. However, A Phang presents a subtle rejoinder, suggesting that frustration might be conceptualized as an implied term of law, although he admits that this is merely as a theoretical underpinning and no more: ‘The Challenge of Principled Gap-Filling: A Study of Implied Terms in a Comparative Context’ [2014] JBL 263, 307–11, and conclusion at 312.

³¹ Davis Contractors Ltd v Fareham UDC [1956] AC 696 (HL).

³² ibid, 729; on the radical difference criterion, Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch), 183 Con LR 167 at [26] sub-paragraph (5), [27], and [235] (Marcus Smith J).

³³ [1956] AC 696, 731; Viscount Simonds and Lord Reid were also clear that delay on these facts fell well short of constituting a frustrating event: 715–16, and 724, respectively.

³⁴ Rix LJ’s multifactorial test is noted in the following cases: Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch), 183 Con LR 167 at [30] to [33], and [209] and [210] (Marcus Smith J); Bunge SA v Kyla Shipping Co Ltd (No 2) [2012] EWHC 3522 (Comm), [2013] 1 Lloyd’s Rep 565 at [39] to [41] (Flaux J); Bunge SA v Kyla Shipping Co Ltd (No 1) [2013] EWCA Civ 734, [2013] 3 All ER 1006 at [7] (Longmore LJ); Melli Bank plc v Holbud Ltd [2013] EWHC 1506 (Comm) at [15] (Robin Knowles QC); Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Ltd [2010] EWHC 2661 (Comm), [2011] 2 All ER (Comm) 609 at [105] (Beatson J). See also the New Zealand Supreme Court’s discussion in Planet Kids Ltd v Auckland Council [2013] NZSC 147, [2014] 1 NZLR 149 at [60] to [62]; for a succinct summary of the main authorities, The Flying Music Company Ltd v Theater Entertainment SA [2017] EWHC 3192 (QB) at [15] to [20] (Martin Griffiths QC).

³⁵ ‘The Sea Angel’ (Edwinton Commercial Corporation v Tsavliris Russ Ltd) [2007] EWCA Civ 547, [2007] 1 CLC 876, [2007] 2 Lloyd’s Rep 517.

³⁶ ibid, at [110] to [112].

³⁷ On the categories of frustration, see Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch), 183 Con LR 167 at [41] (Marcus Smith J).

³⁸ On factors 4 and 5, see Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch), 183 Con LR 167 at [43] to [46], and [201] to [207] (Marcus Smith J).

³⁹ [2007] EWCA Civ 547 at [132].

⁴⁰ ibid, at [111]; see also [110], [112], [127], [128], [133].

⁴¹ For such references, see ‘The Sea Angel’ [2007] EWCA Civ 547, [2007] 1 CLC 876, [2007] 2 Lloyd’s Rep 517 at [86] to [88], [112]; and see ‘The Super Servant Two’, J Lauritzen A/S v Wijsmuller BV [1990] 1 Lloyd’s Rep 1, 8 (CA), where Bingham LJ said: ‘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, as an expedient to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances.’

⁴² [2007] EWCA Civ 547, [2007] 1 CLC 876, [2007] 2 Lloyd’s Rep 517 at [113] to [116].

⁴³ There is no wide and liberal power to release parties from their obligations, as Rix LJ confirmed in ‘The Sea Angel’, ibid, at [116].

⁴⁴ ibid, at [132].

⁴⁵ ibid. Similarly, as quoted by Rix LJ, ibid, at [114], see also Notcutt v Universal Equipment Co (London) [1986] 1 WLR 641, 647 (CA) (Dillon LJ): ‘these references to justice or injustice [do not] introduce any further factor’.

⁴⁶ [2010] EWHC 40 (Comm), [2010] 2 Lloyd’s Rep 668 at [50].

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