Contract Law: Frustration Essay

Question Martina owns two houses in Loughchester. In May, she entered into a contract with Loughchester University for it to rent the houses for the coming academic year for use as student accommodation. The University paid Martina  £750 straight away, with the rent to be paid to Martina by the University monthly in arrears. Martina then engaged Roger Roofers Ltd to carry out repairs on the roofs of the houses, to be completed by 23 September, in time for the arrival of the students. She paid Roger Roofers  £1,000, with the balance of  £3,000 to be paid on completion of the work. Consider the effect on Martina’s contracts of the following events. (a) On 1 September, when Roger Roofers had completed work on the first house, but not started on the second, the second house was struck by lightning, causing a fire that destroyed both houses. (b) As in (a), but only the second house was destroyed. The first house escaped damage. (c) As a consequence of an unexpected restriction on student numbers imposed by the government, Loughchester University recruited fewer students for its courses than it had expected and had a surplus of accommodation. It told Martina on 20 September that it would not need to use her houses, and regarded their contract as at an end. It also requested the repayment of the  £750 already paid. ANSWER The doctrine of frustration applies when there is a change of circumstances, after the conclusion of a contract; consequently rendering the contract impossible to perform or depriving the contract of its commercial purpose by the occurrence of an unexpected event not due to the act or default of either party. In the event of a contact being frustrated the contract is discharged at that date. Examples of some of the unforeseen events that have been acknowledged as giving rise to frustration are destruction of the subject matter (Taylor v Caldwell (1863)), government interference (BP Exploration v Hunt (1982)), supervening illegality (Denny, Mott and Dickson v James Fraser (1944)), strikes (The Nema (1982)) and ill health (Condor v Barron Knights (1966)). The Law Reform (Frustrated Contracts) Act 1943 was passed to provide a fair appointment of losses where a contract is discharged by frustration. The main provisions in the 1943 Act are s.1(2), which deals with recovery of money paid or payable prior to the frustrating event (Gamerco SA v ICM/Fair Warning Agency (1995)), and s.1(3), which deals  with benefits given prior to that event. However, although in certain circumstances s 2(3) of the Act allows recovery for benefits conferred prior to the frustrating event, in BP Exploration v Hunt (1979), it was held that the frustrating event has had an effect of destroying the benefit, nothing will be recoverable under s.1(3). Situation (a) In the first situation, the two houses have been destroyed. According to the Implied Term Theory Test in Taylor v Caldwell (1863), the complete destruction of the specific objects necessary for performance of the contract will frustrate it. As regards the contract with the University, for many years it was thought that the doctrine of frustration could not apply to a lease for the reason that a lease created an interest in land and that interest in land was unaffected by the alleged frustrating event – Cricklewood Property Investment Trust v Leighton’s Investment Trusts Ltd (1945). However, this view was rejected by the House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd (1981), it was held that a lease could be frustrated if intended use of the land became impossible. Therefore in line with this, the use of the land for the accommodation of the students was impossible to use again. Consequently the University’s obligation to pay rent will be disch arged. However can it recover the  £750 that it has already paid? According to S.1(2) allows money paid prior to the frustrating event to be returned, whether or not there is a total failure of consideration, and monies due prior to the date of frustration cease to be payable. S.1 (2) also allows for the recovery or retention of money to cover expenses incurred in relation to the contract. The extent of such an award is at the discretion of the court and is limited to the amount paid or due to be paid before the frustrating event. On the other hand, Martina will argue that she has spent money preparing the houses for student accommodation, and that she should therefore be able to retain the  £750. However in Gamerco SA v ICM/Fair Warning Agency (1995), it was made clear that just because expenses have been incurred this does not automatically mean that retention of money paid will be allowed. Hence, the court will consider all of the circumstances, before deciding what a just result is. Therefore, on the facts given, Martina may be allowed to retain some or all of the  £500 towards her expenses. Nevertheless, it should be noted that s 1(2) does not  allow her to be awarded more than the  £750 that has already been paid, even if her expenses exceed this amount. The contract between Martina and Roger Roofers will be frustrated, as the work cannot be completed. S.1 (2) provides that money paid prior to the frustrating event is recoverable; therefore allowing Martina to recover the  £1,000. However Roger Roofers may argue that its expenses far exceed the  £1,000 and that the full amount should be retained. Under s.1 (3) a just sum can be awarded by the court to Roger Roofers for the work done on the first house to compensate for this. Yet, under the common law, this would have been impossible, since the decision in Appleby v Myers (1867) established that where the obligation to pay for work does not arise until after the frustrating event, no compensation for work done is recoverable. Thus, Roger Roofers will not be able to recover anything under s 1(3), regardless of the fact that it has done half the work under the contract. Situation (b) Here it involves one house being destroyed, that is, the contract may be frustrated. As per the contract between Martina and the University, the contract can still accommodate students. It was only one house that was destroyed. However, the main issue here will be whether the contract has become ‘radically different’ from what was intended by the parties. The frustrating event rendered the contract impossible, illegal, or radically different from that which was originally agreed to (Davis Contractors Ltd v Fareham (1956)). Reference to cases such as Krell v Henry (1903) and Herne Bay Steam Boat Company v Hutton (1903), the trips round the bay could still be made. Fewer visitors were likely to avail themselves of the opportunity, and therefore the contract to hire the boat for prospective tours was likely to be less lucrative but not impossible nor fundamentally different from the performance agreed. Similarly, the contract between Martina and the University is less beneficial but there is no reason as to why it may be frustrated. Martina could argue that the contract was actually frustrated since otherwise she may be liable for breach in providing only one house, rather than two. Hence, the contract is in fact ‘radically different’, since only half of it can be performed. Thus, the 1943 Act will be applied same as in situation (a). The contract with Roger Roofers is frustrated, since the completion of its work is impossible. However the house on which the  roofing work has been done did survived the frustrating event. Consequently, Roger Roofers will use this to get compensation under s 1(3) of the 1943 Act. As Martina obtained a valuable benefit in that she now has a house with a repaired roof. Therefore, the court will consider the fact that Martina has to something to roger Roofers in addition to the  £1,000 already paid. Given that about half the work has been done, therefore a further  £1,000 might be given to him, to bring her payment up to half the contract price. Situation (c) In this situation, it was the government’s restriction on student numbers that may be regarded as the frustrating event. Therefore, this clearly affects the contract between Martina and the University; hence the contract with Roger Roofers should be disregarded. The government’s intervention can lead to the frustration of a contract. In Metropolitan Water Board v Dick Kerr (1918) involved the requisitioning of property in war time. The issue with the University is that, some students were requesting accommodation, but they allocated them to premises other than Martina’s houses. However, the doctrine of frustration will not operate if the frustrating event was self-induced (Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524). This limitation to the doctrine will apply even where the choice is simply, as to which contract to breach, as in the Super Servant Two [1990]. In allocating students accommodation other than Martina, the University exercised choice. Therefore the contract is not frustrated. The University has breached their contract with Martina. Consequently she will be allowed to retain the  £750 already paid. Any other losses would be recoverable, subject to the usual rules on remoteness and causation. On the contrary, under s.1(2) which allows money paid prior to the frustrating event to be returned, whether or not there is a total failure of consideration, and monies due prior to the date of frustration cease to be payable; the university might argue that they ought to recover money to cover expenses incurred in relation to the contract. The extent of such an award is at the discretion of the court and is limited to the amount paid or due to be paid before the frustrating event.