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Practice Problem Question – Frustration:FRUSTRATION: Alf operates a garage and workshop where he restores and sells classic cars. One night a group of youths from a nearby housing estate break in and set fire to the premises. The building and all the vehicles and equipment in it are completely destr...

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Practice Problem Question – Frustration: FRUSTRATION: 1. Alf operates a garage and workshop where he restores and sells classic cars. One night a group of youths from a nearby housing estate break in and set fire to the premises. The building and all the vehicles and equipment in it are completely destroyed. Alf has yet to decide whether to try to rebuild his premises and business. Before the fire, Bob, a builder, had been in the process of repairing the roof of Alf's premises. Alf and Bob had agreed that Bob's £20,000 fee for the work would be payable in full on completion of the work. By the time of the fire, Bob had completed roughly half of the work and had incurred staff costs of £3,000 and expenditure on materials of £4,000. Also in the period leading up to the fire, Alf had been restoring a car for Chris. Chris had recently bought the car at auction for £2,000. In return for Alf's work, Chris had agreed to pay Alf £10,000 at the outset with the balance of £20,000 being due on completion. By the time of the fire, Alf had spent a total of £3,000 on parts for the vehicle and incurred staff costs of £5,000. On the morning after the fire, but before discovering what had happened, Alf agreed online to buy a re-conditioned engine for Chris's car from another dealer for a price of £8,000. The day before the fire, Alf had agreed to buy a car from Dan for £10,000 to be paid in full on collection of the car from Dan's premises in two weeks' time.

Discuss what rights and liabilities Alf has with respect to Bob, Chris and Dan. This question focuses on the discussion of the rights and liabilities that can be obtained as a result of the frustration to a contract between Alf and Bob, Chris and Dan. The doctrine of frustration is that where parties are excused from their contractual obligations to perform, ‘when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely expense or onerousness) of the outstanding contractual rights and obligations from what the parties could have reasonably contemplated at the time of its execution’ (National Carriers Ltd v Panalpina (Northern) Ltd [1981], per Lord Simon. A contract will be frustrated when the intervening event occurs after the contract is made and before the performance has been completed, which so fundamentally changes the circumstances in which the contract is to be performed. The main circumstances include when the performance of contract becomes illegal, impossible or radically different. The 1943 Law Reform (Frustrated contracts) act is the statute that rectified common law rules on the legal effects of frustration and will be wholly relevant for this discussion in resolving what remedies are available for both parties. Alf entered into a contract with Bob in which Bob repairs the roof of the garage, and in return Alf will pay him 20,000 on completion. The intervening event that destroys the whole premises makes the continuation of performance practically impossible considering that Bob was half way through his obligation when the fire occurred. Applying the doctrine of frustration here and the definition as provided by National Carriers Ltd v Panalpina Ltd [1981], the fire event has supervened, which has occurred as far as we know from the facts above, without either party’s influence, and as far as we are aware, Alf and Bob’s contract

had no such provision for this event occurring – we must say that the performance has become impossible, and hence the contract is frustrated. At common law, as a consequence of this frustration, both parties are automatically and immediately discharged from primary contractual obligations (Taylor v Caldwell (1863)). This means that Bob is excused from his performance to fix the roof, and Alf is excused from paying the fee of 20,000. Originally, according to common law (Chandler v Webster [1904]), we let the loss lie where it fell – however, it is unlikely that Bob would be satisfied by this due to the fact he is now 7,000 worse off due to incurred costs prior to frustration, as well as not being paid the 20,000 for completion. Therefore we turn to the 1943 Law Reform act to consider whether Bob can seek to recover anything for his loss. Bob would be unable to apply section 1(2), the party can retain the money in respect of expenditure occurred, applying only where the party owes money to the other prior to frustration, since his contractual payment was agreed upon competition. Further, Bob would be unable to rely on section 1(3) since Alf has not obtained a ‘valuable benefit’ before frustration since his roof remains incomplete, and therefore has nothing to pay. Conclusively, it would be reasonable to suggest that the 1943 act does not help Bob to retain any of his losses from the frustration of the contract. It can be said that he is left in the same position as Appleby v Myers (1867), and that by agreeing on payment after completion, he was assuming the risk of things going wrong prior to completion. And therefore, the loss lies where it falls and neither party owe the other anything. Alf also entered into a contract with Chris, whereby Chris will pay a total of 30,000 (10,000 at the outset, and 20,000 on completion) in return for Alf to restore Chris’s car. During this contract, prior to frustration, Alf had spent 3,000 (staff costs), 4,000 (materials) and a further 8,000 (engine) as incurred costs for the car’s restoration. The event of the fire that destroyed Alf’s garage has intervened the contract, through no fault of either party, and thus frustrated it. Provided that their contract, as far as we know, does not provide a clause for eventuality, then we must assume that the contract has been frustrated. This means that both parties are discharged from their contractual obligations; Alf does not have to deliver the car restored, and Chris does not have to pay the 20,000 balance in return. However, it is likely that neither party will be satisfied by this outcome; Chris will likely want his 10,000 balance back while Alf will want to hold onto it, and possibly Alf will seek to claim more, arguing his total incurred expenditure in performing the contract was an additional 16,000 on repairs. Note that Fibrosa would not apply here as there has not been a total failure of consideration, as Chris cannot argue the money back as arguably he has got some degree of performance of the contract out of Alf’s restoration of the car. Therefore, we must turn to the Law Reform (Frustrated contracts) Act 1943 to calculate the likely consequences of Alf and Chris. Section 1(2) may come into play due to the detail that there was a payment made prior to frustration which can be recovered; therefore Chris can demand repayment of 10,000 paid to Alf before frustration. Further, under 2(1), the party to whom the payment was paid has incurred expenditure; provided parties to whom the sums were paid (Alf), the court may allow him to retain or recover all or part of the sums paid. This amounts to the 3,000 on parts and 5,000 on staff costs, but not the 8,000 on the engine, as this cost was made after frustration - unknowingly once the workshop was destroyed, this cost has become irrelevant and is thus ignored.

This results in Alf receiving 10,000 and incurring an extra 8,000 (under s.1(2) for expenditure), therefore at the very least, he will have to return 2,000 to Chris. This may be seen by the courts as fair, under section 2 of the 1943 act, that Alf has come out even to Chris. It could be suggested that since Chris is now 8,000 worse off, ignoring also the fact he has lost his car under section 1(2) for that to be taken into account. It may be concluded that the court will order Alf to repay total of 6,000 and retain 4,000. If this is the case, he is 4,000 worse off for expenditure under section2 and Chris would be 4,000 worse off. However, it is up to the Court to decide what a just sum would be in these circumstances, but it would be likely to conclude that neither party will walk away satisfied and both will end up worse off after the frustrating event. Dan’s contract with Alf, regarding the sale of a car, whereby the payment of 10,000 will be paid on collection in 2 weeks-time. The contract is unlikely to be frustrated, as the performance has not become impossible, but rather it would benefit Alf more not to continue with the contract. This is not sufficient reasoning to bring the contract into frustration, as it was for the sale of a car, thus the performance of transfer of ownership is still possible. Therefore, the contract remains binding, and if Alf fails to deliver the car, he will be in breach of contract and liable for damages. In conclusion, it is clear to see that Alf’s rights and liabilities with regards to frustrated contracts with Bob, Chris and Dan vary according to their contractual obligations and whether they are still enforceable post-frustrating event, and with respect to remedies for allocation of losses, these also vary from the agreed payment terms in their contracts and through consideration of the Law Reform (Frustrated contracts) act 1943.

On 1st September, Sally, a toy manufacturer, enters into a contract with Bel, a toy retailer, for Sally to supply Bel with 2,000 teddy bears at a total price of £20,000. Half of the teddy bears are to be delivered on 1st October and half on 1st December. Payment of £10,000 is due one week after each delivery. On 1st October, Sally delivers 1,000 bears to Bel. On 2nd October, academic research is published linking the sale of teddy bears with the onset among small children of a condition known as irrational rage syndrome. The following day the government announces that, with effect from 1st November, it shall be an offence to offer for sale any teddy bear. On 3rd October, Bel tells Sally that she will not pay for the teddy bears already delivered and that she cannot accept delivery of the second batch of teddy bears on 1 st December. Advise Sally.

This question involves consideration of the doctrine of frustration of contracts in order to advise Sally on her rights and liabilities. The doctrine of frustration is that where parties are excused from their contractual obligations to perform, ‘when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely expense or onerousness) of the outstanding contractual rights and obligations from what the parties could have reasonably contemplated at the time of its execution’ (National Carriers Ltd v Panalpina (Northern) Ltd [1981], per Lord Simon. A contract will be frustrated when the intervening event occurs after the contract is made and before the performance has been completed, which so fundamentally changes the circumstances in which the contract is to be performed. The main circumstances include when the performance of contract becomes illegal, impossible or radically different. The 1943 Law Reform (Frustrated contracts) act is the statute that rectified common law rules on the legal effects of frustration, and will be wholly relevant for this discussion in resolving what remedies are available for both parties. In the instance above, it is clear that Sally has a contract with Bel, a toy retailer for the sale of teddy bears on two separate occasions, in return for payment of 10,000 a week after each delivery. This contract has been interrupted by the government announcement that ‘from the 1st November, it shall be an offence to offer the sale of any teddy bear’, thus making Bel’s role to sell teddies illegal with future customers. On the one hand we can argue that the contract has become frustrated on the 3rd October, when the government announce the sale of teddy bears is illegal (Fibrosa v Fairbairn Lawson (1943)) and the contract has become radically different (Krell v Henry [1903]). Since frustration operates automatically, this has the effect of immediately releasing parties from their contractual obligations. This is significant, because as of this date, Bel’s obligation to pay for the first delivery had not accrue, since it was specified for the 8th October, and therefore she has no obligation to pay Sally for either delivery of bears. Similarly, Sally is released from her obligation to deliver the bears to Bel in December. At common law, this has the legal consequence to let the loss lie where it fell, meaning that neither party owes the other for any consequential losses. Turning to the Law reform (frustrated contracts) act 1943, under section 1(3), one party may recover from any party that has obtained a valuable

benefit before the time of discharge; this being Bel’s delivery of 1,000 bears with no payment and thus, Sally may be able to receive a form of repayment for these bears for the benefit Bel received. Section 1(2) does not apply as no sums were payable prior to 3rd October. However, while frustration may occur when performance becomes illegal, the contractual performance is not in fact illegal, since Sally is not offering the bears for sale to Bel after the 1st November, just the delivery of them, the contract has not been frustrated on the grounds of illegality, and therefore there is no frustration. Similarly, it may be argued that the relevant conspires to render the performance of the contract more onerous than the parties had expected (Davis Contractors v Fareham (1956), but Sally is still capable of delivering the bears to Bel, abiding to their contract. Now it has simply become a bad bargain for Bel under these unforeseen circumstances, as the risk has now been placed on Bel as she now faces the inability to resell the bears under the changed law. Assuming that frustration has not occurred, we must consider the rights and liabilities of Sally if Bel refuses to pay for the teddy bears already delivered and cannot accept the delivery of the second batch of bears on the 1st December. Both parties remain bound by their contractual obligations and thus, if Sally delivers the bears, Bel will be liable for a breach of contract if she fails to pay for them. In this circumstance, Sally may be able to claim the remedy of damages in respect to the breach. Ultimately, it is up to the court to decide whether the contract has been frustrated and if so, the consequences and allocation of losses. Either way, in conclusion, it is clear to see that Sally may be able to reclaim a form of remedy for her losses from the frustration to the contract from consideration of 1943 Act, or if Bel breaches the contract, to claim damages.

Making appropriate reference to relevant case law and statutory provisions, examine the circumstances in which a contract may be frustrated and describe the consequences which follow frustration....