Contract – Doctrine of Frustration Q1

Q.
'It is a basic common law rule that a party is not discharged from his contractual obligations merely because performance has become more onerous or impossible owing to some unforeseen event.'
Explain the doctrine of frustration as an exception to this rule.

(20 marks, 2012 Q1)

A.
Similar question was asked in:
MIA QE 2010/9 Q1 (a)(ii) Mark rented David's hall.
MIA QE 2012/9 Q1 (b)(ii) Explain how a contract may be ‘discharged by frustration’.
MIA QE 2011/3 Q1 (a)(ii) Mark entered into a contract with David Oil Palm Plantation.
MIA QE 2013/9 Q1 (b) Haron and Aziz purchase of timber but destroyed by flood.
2011 D02 Q2 Discharging obligation under contract.
LPPEH 2012 D02 Q1 Doctrine of frustration.

In Contracts Act 1950, the provision is S.57 Agreement to do impossible act.
(1) An agreement to do an act impossible in itself is void.

In circumstances that the party in contract can apply the doctrine of frustration, it has to prove that there are situations that indeed, due to its effects would be impossible to complete the contract.

It was not until Taylor v Caldwell 1863 that this doctrine of frustration set its course to be recognized in common law as a landmark in terminating a contract without any party to the contract being obligated to carry out the contract.

Frustration is an act outside the contract that makes it completion impossible, a good example of this is in marine contracts where a delivery is specified for a certain date and time but the crossing is so bad that the delivery cannot be made on time. This would be an example of frustration of that part of the contract and no breach would be held as long as the goods were delivered at the nearest possible time. 

In the case of Taylor v Caldwell 1863, Caldwell was owner of a musical hall - Surrey Gardens & Musical Hall. Taylor & Lewis was a performer group which carried out musical performances and entertainment for a living. Taylor came to a contract with Caldwell to make use of the Musical Hall for performances. However, prior to the night of performance, the Musical Hall was burned to the ground. Therefore, Taylor could not proceed with the performance and suffered damage.

Taylor then sued for this damage because it failed to rent the Musical Hall to carry out the performance. The contract was still in effect, and there was no clause within the contract itself which allocated the risk to the underlying facilities, except for the phrase "GOD's will permitting" at the end of the contract.

Judge Blackburn preceded for this case and arrived at the judgment that it was 'Act of GOD' that the Musical Hall was burned to the ground, and nobody was liable. Blackburn J held that both parties were excused from their obligations under their contract, and the contract was discharged.

In English law a frustrating event is an event which: 

1. Occurs after the contract has been formed; 
2. Is so fundamental as to be regarded by the law both as striking at the root of the contract and as being entirely beyond what was contemplated by the parties when they entered into the contract; 
3. Is not due to the fault of either party; and 
4. Renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract. 

Frustration of a contract and what it constitutes is usually seen via exclusion clauses, such as advising that liability will not be held for incomplete contracts or damage due to acts of God, nature etc. Other examples of what may frustrate a particular contract may also be present also, i.e. unforeseen acts, third parties etc. 

To be a valid exclusion clause and under contract law there are only three ways that they can be incorporated which are; 

1. by signature even if they are not read ; 
2. by notice where there has to be sufficient notice ; and 
3. by custom where there has been previous dealings between the parties even if the clause is added in later.

Exclusion clause makes frustration limited to the interpretation of the courts, industry standards and the notion of force majeure. The best definition of force majeure and circumstances that create a state of frustration is under international law, where exclusionary clauses rarely exist but circumstances arise where international contractual obligations owed by one state to another can be frustrated. 

Practical illustrations of frustration

The expression “frustration of contract” refers to the general doctrine of discharge by supervening events, irrespective of the type of event which brings about discharge. Over time the English authorities have addressed a number of events that potentially give rise to frustration. The following is a  non-exhaustive list of such events:^[9]

• destruction or unavailability of the subject matter; e.g. wanted to sell the land, S & P signed but land now acquired by government.
• death, illness or incapacity of a person (in personal contracts); e.g. the tenant passed away.
• dissolution or supervening incapacity of corporation; the company was liquidated.
• frustration of purpose (cancellation of an expected event); business license not approve hence cannot open the outlet for the rented premise.
• supervening illegality or change in law (either English or foreign law^[10]); Tenant is renting for video game centre but now council regulate it as illegal.
• outbreak of war; buy for staying but war breaks out putting life in danger.
• delay sufficiently long to frustrate the parties’ commercial adventure; construction never progress, developer defaulted, contract is null and void due to too long delay.
• method of performance impossible or “radically or fundamentally” different. Land is to be leased for planting orchid. However, the condition of the land does not favour orchid planting.

• inconvenience, hardship or financial loss;
• delay within the commercial risk undertaken by the parties;
• a difference in expense between the expected and the actual performance;
• abandonment of an exchange rate mechanism;
• de-valorisation; (devaluation or loss in value due to diminishing labour productivity) 
• inflation.