Discharge by Frustration

A contract will sometimes be discharged because a change in circumstances has made the contract physically, legally or commercially impossible to perform. Lord Radcliffe stated this in Davis Contractors Ltd v Fareharm U.D.C. where he stated that frustration occurs when the contract comes to an end because performance in such circumstances would render it a thing radically different from what was originally undertaken by the contract.

The former position of the common law was that a person had to perform whatever he had contracted to perform, no matter what happened, or such a person would become liable for breach of contract. The scope of duty was absolute. The rationale for this harsh rule was that parties had the freedom to contract, and so they were free to put in whatever limitations or situations which would operate to discharge the contract. Still, it should be borne in mind that it is impossible for parties to foresee every possible outcome which may change the scope of the contract.

The rigid position of contractual obligations being absolute was maintained until the 19th century, in the case of Taylor v Caldwell. In the case, the plaintiffs had contracted with the defendant to use the defendant’s hall and garden for four consecutive days for concerts. After the contract was concluded, but before the date of performance, the hall caught fire and burnt down. Meanwhile, the plaintiff had spent on advertisements and other preparations ahead of the concerts, and so sued for damages. In holding that the defendants were not liable, Blackburn J stated the new doctrine of frustration. For the contract to be deemed frustrated, it is necessary that an intervening circumstance has occurred which the parties did not provide for while contracting, which changes the entire scope of the contract, and such an intervening circumstance was not cause by either of the parties. And so there would be no frustration in the following circumstances.

Where the intervening circumstance is one which the law would not regard as so fundamental as to destroy the basis of the agreement.
Where the terms of the agreement show that the parties contemplated the possibility of such an intervening circumstance arising.
Where one of the parties had deliberately brought about the supervening event by his own choice.

The basis of the doctrine

Several theories have been preferred to support frustration as a doctrine of law. Most of the theories fall under the philosophy of implied term theory, which states that the continued existence of a state of affairs is an implied term of the contract, and the radical change of obligation theory, which states that the obligations which the party now has to perform is radically different from what was originally contracted to perform.

1. The implied term theory

When Blackburn J creates the doctrine of frustration in Taylor v Caldwell, he based his application of the doctrine on the implied term theory: that a contract based on the continued existence of a thing is frustrated if due to no fault of either party, the thing ceases to exist.

This doctrine has been strongly criticized because parties cannot possibly have impliedly provided for something which they neither expected nor forsake. If they had indeed foreseen it, they would have provided for its consequences. It is also further said that the view is at variance with the principle that frustration occurs by law, and not by the intention of the parties.

2. The radical change of obligation theory

This principle is based on the belief that when the parties entered the contract, what they contracted to do is not what they believed they would have to do after the contract had become frustrated. This view was adopted in Araka v Monier Construction Co. Ltd. The appellant had leased his house to the respondent company for use as residence by the company’s employees. It was established in the evidence that it was understood at all relevant times that the house was to be occupied by the defendants’ expatriate employees. The house became unoccupied when the Biafran authorities expelled all expatriate personnel in the territory under their control in June 1967. The Supreme Court held that the contract had been frustrated because its foundation had disappeared.

It should be stressed that mere hardship, inconvenience, increased cost and material loss originally unexpected in the performance of a contract, cannot constitute frustration. There must be such a fundamental change that if the contract is not brought to an end, the performance would be something fundamentally different from what was contracted to perform.

The operation of the doctrine

Although it is impossible to cover all situations which will amount to frustration, below are some of the situations which the courts have held to amount to frustration.

Subsequent legal changes
Outbreak of war
Destruction of the subject matter of the contract
Government requisition of the subject-matter of the contract
Cancellation of an expected event
Miscellaneous events

a. Subsequent legal changes

A subsequent change in the law or in the legal position which affects the contract is a well-recognized branch of frustration. This could come about by the passage of any law which renders the contract illegal. In Bailey v De Crespigny, a landlord made a covenant that neither he nor his assigns would permit building on a paddock adjoining the land let. Subsequently, the law was taken away from him by law and given to the railway company, which built a station on it. When he was sued for breach of contract, the court held that the contract had been frustrated by law.

b. Outbreak of war

When war breaks out between two states, contracts made by residents of one state with an enemy state and residents of that state become illegal contracts. A company will also be an alien enemy if it is controlled by residents of the enemy state. Several contracts were frustrated by the civil war in Nigeria. One of such cases was Daps Brown v Haco Ltd, where the plaintiff, a former employee of the defendant, brought an action for arrears of salary. The court held that the contract was frustrated by war as the plaintiff was in the Biafran controlled territory of Nigeria.

c. Destruction of the subject matter of the contract

In the event that the subject matter of a contract is destroyed, the contract shall be deemed frustrated. One easy case to cite in support of this principle is Taylor v Caldwell, where the hall rented for the concerts was burnt down by fire. This principle was also supported in the Nigerian case of Bentworth Finance (Nig.) Ltd. v Albania Sami Bakori.

d. Government requisition of the subject matter of the contract

Generally, requisition of the subject matter of a contract will bring the contract to an end if such requisitioning is of a permanent nature, or if the period during which it would remain under the control of the government is extensive in relation to the duration of the contract. When the government has taken away the subject matter of the contract, the contract becomes physically impossible to perform.

e. Cancellation of an expected event

It will sometimes happen that the subject matter of a contract still exists, but the circumstances have been changed in such a way that the subject matter of the contract can no longer be used in the nature which the parties originally intended. In such a situation, the contract shall be regarded as having been frustrated. One of such cases was in Krell v Henry, here the defendant agreed to hire rooms in the plaintiff’s flat to see the coronation processions on two days. The coronation was postponed, and the plaintiff sued for breach by the defendant. The court held that the contract had been frustrated by the cancellation of an expected event, which was the coronation.

f. Miscellaneous events

It is obviously impossible to list all the situations in which a contract would be deemed frustrated. Besides the situations already mentioned, there are some other situations which would make the contract frustrated. The contract shall be deemed frustrated when due to no fault of either party, the performance of the contract has become fundamentally different from what was originally planned under the contract.

The legal consequences of frustration

Once it has been determined that a contract is frustrated, the court must then decide the legal consequences of the frustration, including whether money and property transferred under the frustrated contract are to be returned.

It is important to distinguish a void contract from a frustrated contract, as a frustrated contract is a contract which is valid up until the moment of frustration. Therefore, each party must fulfill all pending obligations which arose before the moment the contract was frustrated, while all subsequent obligations are discharged. In Appleby v Myers, where it had been agreed that payment was to be made only after the plaintiff had completed the erection of the machinery, the court held that the plaintiff was not entitled to payment for work already done when the building and machine were burnt down by fire before being completed. In Chandler v Webster, the plaintiff agreed to hire a room from the defendant to watch a coronation procession at 141 pounds payable immediately. The plaintiff paid 100 pounds, but the coronation was postponed before the plaintiff paid the remains 41 pounds. The plaintiff brought and action to recover the 100 pounds already paid, and the court held that not only was the defendant entitled to hold on to the 100 pounds, but the defendant was also entitled to the balance of 41 pounds because the payment had accrued before the contract was frustrated.

The decision in Chandler v Webster can obviously be seen as a harsh one, with the plaintiff having to pay 141 pounds for a contract under which he could not enjoy the benefit of what he had contracted for. The rule was modified in the Fibrosa case, where the court held that money transferred under a frustrated contract may be gotten back because the consideration from the other party had totally failed. This would often times leave one party in a sticky situation, as a party who might have undergone expenses for the purpose of fulfilling a contractual obligation would be required to pay the initial deposit once the contract is frustrated. The well-known harshness of common law once more comes to light in this regard.

The harshness of the common law as it concerns frustrated contracts has been modified by statutory enactments. In England, this was done through the Law Reform (Frustrated Contracts) Act of 1943, with the southern states in Nigeria having similar laws applicable. The northern states still operate the common law position.

Under the reform by the Lagos state law, the following should be noted.

The law applies only to contracts that have been discharged by frustration.
Where the parties to the city tract have made provisions for the event that has occurred, the law will not apply. The court is to give effect to the said provision.
The law applies equally to contracts to which the government is a party as to those between private parties.

Section 4(2) of the Lagos State Law provides that where the contract is frustrated, all sums paid shall be recoverable, and all sums payable shall cease to be payable. The law also provides for the other party to be paid for expenses incurred before the contract was frustrated, and any benefit conferred by the party.