Frustration and Contractual Certainty

Question 1

Which ONE of the following statements is WRONG?

If a contract is frustrated it is voidable.

If a contract is frustrated neither party will be in breach.

If a contract is frustrated it terminates automatically at the time of the frustrating event.

If a contract is frustrated neither party need perform any future obligations.

Answer 1

That’s not the right answer. Did you appreciate that the question asked for the “ WRONG ” statement? A is the only incorrect statement. A frustrated contract is not voidable - it comes to an end automatically at the time of the frustrating event and neither party need perform future obligations.

Question 2

Which ONE of the following cases illustrates that a party cannot rely on ‘self-induced’ frustration?

Krell v Henry

Herne Bay v Hutton

Davis Contractors v Fareham UDC

The Super Servant Two

Answer 2

Well done, the correct answer is D. Here the contract was not frustrated because the court said that the defendants had a choice.

Question 3

s the following statement TRUE or FALSE?

In the case of Metropolitan Water Board v Dick Kerr the contract was not frustrated by the government intervention because the parties had put a ‘force majeure’ clause in their contract.

True
False

Answer 3

The statement is false. Although the parties had put a force majeure clause in their contract dealing with delay, the court decided that the clause was not intended to cover the event that had occurred.

Question 4

Which ONE of the following statements is CORRECT?

A lease of land can never be frustrated.

A lease of land for less than two years can never be frustrated

A lease of land for any period may be frustrated.

A lease of land can only be frustrated if there are at least 3 years left to run on the lease.

Answer 4

Well done - C is the correct answer. The House of Lords case of National Carriers Ltd v Panalpina Ltd (1981) established that a lease of land could be frustrated but that this would not be a common occurrence.

Question 5

Julie hired a holiday cottage, ‘Field View’, from Holiday Letts Ltd. for the month of August for £2,000. Julie paid £200 immediately and agreed to pay the balance of £1,800 on 31 August. Holiday Letts agreed to put locks on all of the cottage windows. On 5 August the cottage was destroyed by fire. Holiday Letts had spent £250 on fitting the window locks.

Assuming that the contract is frustrated and the Law Reform (Frustrated Contracts) Act (LR(FC)A) 1943 applies, which ONE of the following is CORRECT?
Hide answer choices

Julie will still have to pay the £1,800 due on the 31 August.

Under s1(2) of the LR(FC)A Holiday Letts can keep the £200 Julie paid on the making of the contract and Julie will have to pay a further £50 to cover the expenses incurred by Holiday Letts.

Under s1(2) of the LR(FC)A Julie could get back the £200 she paid on making the contract and would not have to pay anything to Holiday Letts for the expenses they incurred.

As Holiday Letts incurred expenses in performing the contract then under s1(2) of the LR(FC)A the court may allow Holiday Letts to retain some or all of the £200 Julie paid on making the contract

Answer 5

That’s not quite right. If a contract is frustrated the parties are discharged from future obligations so Julie does not have to pay the £1,800. Section 1(2) of the LR(FC)A 1943 provides that a court may allow a party who has incurred expenses in performing the contract to recover some or all of these but only out of money paid or payable before the frustrating event. So here the court may allow Holiday Letts to retain some or all of the £200 but this is the maximum they can get.

Question 6

Look again at the facts of the previous question. Is the following statement TRUE or FALSE?

Under s1(3) of the LR(FC)A the court could order Julie to pay a just sum for the period she has had the cottage if it amounts to a valuable benefit.

True

False

Answer 6

You are right. The statement is true.

Question 7

Section 1(2) of the LR(FC)A 1943 gives the court a discretion to allow a party who has incurred expenses in the performance of the contract to retain or recover all or some of these expenses out of money paid or payable to him before the frustrating event.

Which ONE of the following statements is CORRECT?

When exercising its discretion under s.1(2) the court should order total retention of expenses incurred provided these do not exceed the amounts paid or payable before the frustrating event.

When exercising its discretion under s.1(2) the court has a broad discretion to do what is just in the circumstances.

When exercising its discretion under s.1(2) the court should split the loss between the parties so that there is equal division.

Answer 7

Well done, you are right. The correct answer is B - the court has a broad discretion. The different ways of exercising the discretion were discussed in the case of Gamerco (1995).

Question 8

Is the following statement TRUE or FALSE?

When assessing whether or not a valuable benefit has been conferred for the purposes of s1(3) LR(FC)A the court is not concerned with the end product so much as the time and expense involved in producing it.

True

False

Answer 8

Correct. BP Exploration v Hunt is authority for the principle that the court has to consider the end product

Question 9

Is the following statement TRUE or FALSE?

It is possible for the parties to a contract to exclude the LR(FC)A and to make their own provision about the effects of frustration on their contract.

True
False

Answer 9

You are right - the answer is true - s2(3) LR(FC)A

Question 10

Which ONE of the following statements is WRONG?
Hide answer choices

If the terms of an agreement are uncertain the contract will be terminated and the parties will be released from any future obligations.

The terms of an agreement must be certain in order for there to be a binding contract.

An agreement can be sufficiently certain if it lays down how the terms can be clarified.

Where parties have had dealings in the past, their previous agreements may be used to clarify seemingly uncertain terms.

Answer 10

Statement A is wrong. If the terms of an agreement are uncertain there cannot be a binding contract: the contract will be void.

All the other statements are correct. Statement B - a case in which a contract was held to be void for uncertainty is Scammell v Ouston. Foley v Classique Coaches is authority for Statement C and Hillas v Arcos is authority for Statement D

Question 11

A client, a music festival organiser, entered into a contract with a famous rock star to perform on the opening day of a particular festival. The agreed fee was £60,000, including £10,000 payable in advance. A week before the festival the rock star was strongly advised on medical grounds to cancel all imminent engagements. The rock star felt well enough to perform but was finally persuaded by his partner to follow the medical advice and terminated the contract with the client. At such short notice the client could not find a comparable replacement performer for the festival and is demanding compensation for breach. The rock star alleges the contract was frustrated.

Which one of the following statements best describes the common law position as between the rock star and the client?

It was the rock star’s decision not to perform so the client will be entitled to return of the advance payment in restitution and damages for breach of contract.

Their contract was frustrated and so the advance payment should be returned and the balance of the fee does not have to be paid.

Illness did not make performance of the contract impossible: the rock star can keep the advance payment but is not entitled to be paid the balance.

The contract was automatically terminated by the illness and so the client is relieved from paying the balance of the fee; but cannot recover £10,000 paid.

The contract was frustrated by the rock star’s illness and is therefore void.

Answer 11

Statement B best describes the common law position. The contract is likely to have been frustrated by the illness being unforeseen, without fault and making performance impossible (Condor v The Barron Knights). The advance payment would be repayable as there appears to have been a total failure of consideration and the balance payable would cease to be payable. This also explains why Statement C is wrong.
Statement A – as the client had been strongly advised to cancel the performance the decision not to perform is unlikely to be regarded as a breach.
Statement D – frustration does automatically terminate the future performance of the contract and so the client would be relieved from paying the balance of the fee. However, the client would be able to recover the advance payment if, as there appears, there has been a total failure of consideration by the rock star.
Statement E is wrong as frustration does not make a contract void.

Question 12

A client owns a warehouse and agreed to let it on terms including the following:
RENT : £200 per month payable in advance on the first day of each month
TERM : One year from and including 1 March
ROOF : Landlord to repair the roof within first two weeks of the Term

The tenant paid the rent on 1 March and the client carried out the repairs to the roof at a cost of £500. Then on 2 April the warehouse was completely destroyed by an accidental fire and will take at least 10 months to repair. The tenant had not paid the rent due on 1 April.

Which of the following statements describes the most likely legal position?

The tenant will be liable to pay the rent for the full term as a lease of land cannot be frustrated.

The lease will come to an end as a matter of law but the tenant will be liable for breach of contract if he does not pay the rent that was due on 1 April.

If the client sues the tenant for non-payment of rent the tenant may claim the contract is frustrated.

If the contract is frustrated the tenant must be refunded £200 rent paid in March and the client will be entitled to £500 to cover the cost of repairing the roof.

If the contract is frustrated neither party will be in breach and they can elect to treat the contract as at an end.

Answer 12

C is correct. Whether the contract is in fact frustrated would depend on whether there was a valid force majeure clause or the lease otherwise including an express provision on the matter.
A is wrong as a lease of land may be frustrated eg if the event/change of circumstances makes performance totally different.
B is wrong. If a contract is frustrated both parties are released from future obligations as a matter of law and neither party will be liable for breach.
D is wrong. Repayment of expenses incurred is at the discretion of the court and the most the landlord would be entitled to here is £400 (ie the total paid and payable by the tenant at the time of the frustrating event.
E is wrong because if a contract is frustrated the contract automatically comes to an end.

Question 13

A client hired a holiday cottage from a company for the month of August for £2,000. The client paid £200 immediately and agreed to pay the balance of £1,800 on 31 August. The company agreed to put locks on all of the cottage windows. On 8 August the cottage was destroyed by fire. The company had spent £250 on fitting the window locks.

Assuming that the contract is frustrated, which one of the following best describes the client’s legal position?

The company can keep £200 paid in advance and the client will have to pay the £1,800 due on the 31 August or otherwise be in breach of contract.

The company can keep the £200 the client paid on the making of the contract and the client will have to pay a further £50 to cover the expenses incurred by the company.

The client can get back the £200 she paid on making the contract and would not have to pay anything else to the company.

The court may allow the company to retain some or all of the £200 the client paid on making the contract and award a just sum for the use of the cottage.

The client will have to pay £500 for the benefit of having used the cottage and contribute a reasonable sum towards the expenses incurred by the company.

E is wrong. A just sum for the use of the cottage may not be £500 and in relation to the expenses incurred the most the court could award would be £200 but up to that sum the court would have complete discretion.

Answer 13

D is correct. Under s1(2) of the Law Reform (Frustrated Contracts) Act 1943 (there is nothing in the facts to suggest that this Act does not apply) a court may allow a party who has incurred expenses in performing the contract to recover some or all of these out of the total money paid and payable before the frustrating event. Also under s1(3) a court should award a ‘just sum’ for any benefit incurred taking into account any money forfeited under s1(2) and the effect the frustrating event had on the benefit. The client had enjoyed 7 days full use of the cottage.
A is wrong because if a contract is frustrated the parties are discharged from future obligations so the client does not have to pay the £1,800.
B and C are wrong. Section 1(2) of the Law Reform (Frustrated Contracts) Act 1943 provides that a court may allow a party who has incurred expenses in performing the contract to recover some or all of these but only out of money paid and payable before the frustrating event. So here the court may allow the company to retain some or all of the £200 but this is the maximum they can get.

Question 14

A company regularly supplies specialist industrial equipment to a power station on the north west coast of the UK. All deliveries are made by rail for reasons of safety. Prolonged heavy rainfall and sudden flooding has collapsed the railway bridge nearest the power station and the railway is closed for repairs. No other road or rail access is available but delivery by sea might be possible. The company wants to know if it can avoid being liable for ending the contract as a result of the closure.

Which of the following options best describes whether or not the defence of frustration will be available?

Closure of the railway was not a foreseeable event that a supplier should have in mind when contracting for the supply of goods. The defence of frustration is therefore available.

Prolonged rainfall and flooding are not predictable or common events which parties should consider before entering a contract for the supply of goods. The defence of frustration is therefore available.

Closure of the railway was a foreseeable event of the sort that a supplier should have in mind when entering a contract for supply of goods. The defence of frustration is not therefore available.

Whether or not closure of the railway was foreseeable, using sea transport is radically different from what was agreed. The defence of frustration is available.

Whether or not closure of the railway was foreseeable, using sea transport means performance of the contract is possible. The defence of frustration will not be available.

Answer 14

Option D is correct because performance of the contract has been rendered radically different (by sea not rail).

Option A is wrong because closures or interruptions of the railway network are foreseeable just as they are for the road network.

Option B is wrong because rainfall and floods are not uncommon events which could affect delivery of goods.

Option C is wrong because the defence of frustration may still be available where an event is foreseeable but was not in fact foreseen by the parties.

Option E is wrong because even if performance is possible using sea transport it is radically different from rail transport.

Question 15

A contract is made between a seller and a buyer for the sale of a cargo of cement for the sum of £20,000. Both the seller and the buyer are in business. Following delivery by the seller, the buyer purported to terminate the contract and refused to pay the price. The seller sued and the buyer relied in its defence on a severe economic downturn that affected its ability to make the necessary financing arrangements and (in the alternative) on a Force Majeure clause in the contract that provided

“Neither party shall be liable to the other as a result of any failure to perform its obligations due to industrial disputes, government action, default by suppliers, acts of God, and/or national or international calamity.”

Will the buyer succeed in its defence?

Yes, because the buyer is able to rely on the doctrine of frustration and the Force Majeure clause applies here whether or not it is reasonable.

Yes, because the buyer is able to rely on the provisions of the Force Majeure clause and the clause is reasonable.

Yes, because the seller is unable to prove that the Force Majeure clause cannot be construed in favour of the buyer.

No, because the buyer is unable to rely on the doctrine of frustration or on the Force Majeure clause, whether or not the clause is reasonable.

No, because although the buyer is able to rely on the Force Majeure clause, the buyer cannot rely on the doctrine of frustration.

Answer 15

Option D is correct. The buyer is unlikely to succeed in its defence on the facts because a change in economic circumstances is not generally regarded as an event which gives rise to the doctrine of frustration and it does not fall within the terms of the Force Majeure clause. It does not fall within any of the specific events provided for.

As a result, the other Options are wrong. There has been no event which gives rise to the doctrine of frustration and the buyer is unable to rely on the Force Majeure clause. (The party who wants to rely on a force majeure clause has the onus of proving that it works as a matter of construction and is reasonable – Option C therefore is also wrong for this reason.)

Question 16

A woman agreed to hire a caravan from a man for four months beginning on 1 July to travel around the United Kingdom. The total cost of hire is £2,000. The woman paid a deposit of £500 and agreed to pay a further £500 on 1 August and the remaining £1,000 on 1 October. They agreed that the man would partly furnish the inside area of the caravan to suit the woman’s needs. The man spent £500 on adapting the kitchenette area and a new mattress. On 20 July the caravan was completely destroyed by fire. As a result of the fire the contract between the woman and the man is frustrated.

Which of the following best describes the financial consequences of that frustrating event?

The woman does not have to pay the remaining £1,500, but she cannot claim back anything she has already paid as the frustration of contract only discharges future obligations.

The woman does not have to pay the remaining £1,500, and she can claim back the money that she paid before the frustrating event in full, being the £500 deposit with no deductions.

The man can claim compensation for the expenses he incurred on furnishing the caravan which means he can recover £500.

The woman does not have to pay the remaining £1,500, and she can in theory claim back the money that she paid before the frustrating event in full, but the court is likely to deduct the man’s expenses in furnishing the caravan, with the result that neither party receives anything.

As the woman had a use of the caravan for approximately 20 days the court could decide that this usage constituted a valuable benefit for which the woman should pay a just sum. It is likely that this just sum will be calculated by reference to the daily hire rate for the caravan.

Answer 16

Option E is the best answer.

As the contract has been frustrated, the Law Reform (Frustrated Contracts) Act 1943 will likely govern the financial consequences as follows:
The woman can recover any money already paid under the contract and (as a matter of common law) is discharged from paying any further monies. Option A therefore is wrong.
However, the man may be entitled to recover his expenses in furnishing the caravan up the value of any monies paid and payable by the woman (which in this case is £500). Practically, therefore, the man is likely to deduct his expenses of £500 from the money he would otherwise have to refund to the woman, with the result that (so far) neither party has to pay any money to the other. Option B therefore is wrong in failing to address the man’s likely ability to recover his expenses; option C is wrong in failing to address the fact that the money already paid by the woman has to be set off against any compensation the man might receive.
The reason why option D is not the best answer is that the woman’s usage of the caravan for 20 days before the frustrating event is arguably a valuable benefit in respect of which the court can (in its discretion) award a just sum. That sum is likely to be calculated by reference to the daily hire rate of the caravan.

Working through the 1943 Act therefore means that practically the woman’s right to recover money already paid and the man’s potential ability to recover compensation for expenses cancel each other out, with the result that the only item that becomes payable is a possible just sum for the woman’s usage of the caravan.

Question 17

In January a woman agrees with an owner to hire his hotel for her 60th birthday party in June. The woman pays the first instalment of £2,000 immediately. She agrees to pay a further £3,000 eight weeks before the party and a final payment of £5,000 one month before the party. The owner agrees to purchase a temporary indoor water fountain for the party.

Seven weeks before the party the hotel is struck by lightning and the resulting fire destroys the building. It will take 12 months to repair the hotel and therefore the party cannot take place in June.

The woman has not paid the second and third instalments. The owner has paid £800 for the water fountain which was destroyed in the fire.

Assuming the contract has been frustrated by the fire, which of the following statements best describes the powers of the court to do justice between the parties?

The woman will not be required to pay the second and third instalments and the owner must return the first instalment subject to the deduction of a fair sum for purchasing the water fountain.

The owner can keep the first instalment and the woman will be required to pay the second instalment because all of this money was due before the fire happened.

As there has been a total failure of consideration the owner must return the first instalment and the woman does not have to pay the other two instalments.

The woman must pay £800 for the benefit she obtained under the contract and, having retained this sum, the owner must return the balance of the first instalment.

The woman must pay the agreed sum of £10,000 for the hire of the venue. The owner will keep the first instalment and the woman will be required to pay both of the outstanding instalments.

Answer 17

Option A is correct. In the event of frustration of a contract the contract is automatically terminated at common law and the parties are discharged from future obligations. This means that the woman will not have to pay the final instalment.

The Law Reform (Frustrated Contracts) Act 1943 (the Act) regulates what is to happen in relation to money paid or payable before frustration and expenses incurred before the frustrating event:
Under s1(2) of the Act money paid must bereturned. The first instalment must be repaid.
Money payable before frustration, but not yetpaid, need not be paid. The second instalment need not be paid.
If the recipient of that money (the owner)incurred expenses in performance of the contract (£800 for the water fountain)then the court has an absolute discretion to award a fair sum out of the totalof money paid and payable before frustration (£2,000 + £3,000 = £5,000).
The court may order the owner to receive a fair sum (likely no more than the £800 spent on the water fountain). Subject to that he would have to return the balance of the first instalment and the woman would not have to pay the second instalment. The woman does not have to pay the third instalment under the common law.

Option B is not the best answer. Under the 1943 Act, monies paid before the frustrating event are generally returned to the paying party, and monies payable before the frustrating event need not be paid. As the owner’s expenses are only £800 it is not likely that the fair sum the court may order to cover the owner’s expenses will exceed this sum. As a result, that sum can be met by deductions from the first instalment, and it is unlikely that the woman will be ordered to pay any of the second instalment.

Option C is not the best answer. There has been a total failure of consideration but this is due to frustration and the Act provides that there is a possibility that the owner may receive a fair sum for expenses he incurred under the contract. The court may order a fair sum to be paid to the owner out of the first instalment (and possibly, but unlikely, out of the second instalment).

Option D is wrong. Under s1(3) of the Act a court can order someone who has received a benefit under the contract to pay a fair sum for that benefit. However, the woman has not received any benefit as the hotel was destroyed before the wedding.

Option E is wrong. Given the contract has been frustrated, the second and third instalment will not need to be paid and the first instalment will be returned (subject to the award of a fair sum for expenses).

Question 18

A contract for the hire of a fishing boat (‘the Boat’) was entered into between the boat owner and a fishing company. It was an express term of the contract that the Boat could only be used for fishing. The Boat could only operate using a certain type of fishing net, the use of which had to be licensed by the relevant government department. The fishing company owned four similar vessels that it intended to operate using the same type of fishing net.

After entering into the contract, but before the Boat was delivered by the boat owner, the fishing company applied to the government department for five licences. However, the government only granted three licences and the fishing company applied those licences against three of its own vessels. The fishing company now claims that it is no longer bound to take delivery of, and pay hire for, the Boat.

Can the fishing company rightly claim that they are no longer bound to take delivery of the Boat?

Yes, because the government’s refusal to grant five licences has made it impossible to use the Boat.

Yes, because it is fair in all the circumstances for the fishing company to refuse delivery of the Boat.

Yes, because the government’s decision to only grant three licences could not have been foreseen when the contract was entered into.

No, because the fishing company agreed to hire out the Boat and it is irrelevant if the use of the Boat as a fishing vessel is now impossible.

No, because it was the fishing company’s choice not to apply one of the licences against the Boat.

Answer 18

Option E is correct. It is impossible or illegal to use the Boat without a fishing licence. In order for this to be a frustrating event (thereby allowing the fishing company to refuse delivery of the Boat), the fact that the Boat is not licensed must be beyond the control of the parties. However, a party whose own act or election has given rise to the frustrating event cannot rely on the doctrine of frustration. In this case, it was the fishing company that decided to apply the three licences against vessels other than the Boat. It was their act therefore that made it impossible to use the Boat. As a result, their refusal to take delivery of the Boat will put them in breach of contract.

Option A is wrong. It is not the government’s refusal to grant five licences that has made the use of the Boat impossible, but rather the fishing company’s decision to apply the three licences granted against other vessels.

Option B is wrong. Whether or not it would be fair to excuse one party from their obligations is generally irrelevant. If that party has promised to do something, the court will generally enforce that promise.

Option C is wrong. It might be true that the government’s decision to only grant three licences could not have been foreseen. However, given the fishing company’s decision not to apply the licences granted against the Boat, this is irrelevant.

Option D is not the best answer. This option states the original common law rule that parties would still be liable even if the performance of absolute obligations had been rendered impossible by subsequent events. This strict rule has been tempered by the doctrine of frustration. However, frustration does not operate in this particular case.