Law Reform (Frustrated Contracts) Act 1943

Background

In English contract law, a contract which is found to be frustrated will halt all performance of duties thereafter, and end all contractual obligations. Such a result could bring about inequitable results for parties making pre-payments or deposits. An example can be found in the case of Chandler v Webster. Mr Webster contracted to rent a room to Mr Chandler, for the purpose of witnessing Edward VII's coronation, with the understanding that the money for the room would be paid before the procession. Mr Chandler paid £100 prior to the procession, and subsequently the King fell ill. The Court of Appeal not only struck out Mr Chandler's claim to recover the pre-payment, but that Mr Webster was entitled to the remainder of the balance (£41 15s). This common law position was not improved upon until Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd, where the House of Lords, overruling Chandler v Webster, decided that pre-payments could be recoverable where that had been a 'total failure' of consideration from the recipient of such a payment (where nothing had been given in return for the payment, prior to the frustrating event).

This result was unsatisfactory however, in that the common law could still produce inequitable results in several instances. For example, where there had indeed been some form of consideration given in return for a pre-payment, or even a complete payment, none would be recoverable following a frustrating event. This principle is exemplified in Whincup v Hughes, where Brett J explained the common law position:

Formation of the Act

Whilst the common law rules on pre-payments and their retrieval were generally considered to be unjust, the rule of Chandler v Webster stood for over thirty years before it was addressed by the Law Revision Committee, in their Seventh Interim Report. The suggestions of the Committee are reflected in the construction and ambit of the Act:

A less arbitrary rule should be adopted, whereby the payer should be entitled to return of all monies paid under the contract less the whole of any direct losses incurred by the payee. Where part of a contract could be considered severable, the rule should only apply to the remaining part. No account should be taken of amounts recoverable under insurance, and the law of freight pro rata itineris or of advance freight should remain unaffected except where a frustrated contract was established.

Following this proposal, a bill was introduced, and received royal assent on August 5, 1943.

Section 1: Adjustment of rights and liabilities of parties to frustrated contracts

The first section of the Act changes the rights of parties, subject to frustrated contracts, to claim payments or damages. Section 1(1) states that the Act applies, subject to following subsections, as follows.

Where a contract governed by English law has become impossible of performance or been otherwise frustrated, and the parties thereto have for that reason been discharged from the further performance of the contract...

It therefore does not modify any previous common law developments on when contracts are frustrated, merely the legal consequences that may follow.

Section 1(2) of the Act regards payments already made, or financial obligations which fell before the frustrating event. Pre-payments can be returned in part, or in full, where it is deemed "just to do so having regard to all the circumstances." It is not mandatory now implied the courts will necessarily award any remuneration for expenses or other payments. However, such a provision differs from the previous system of reimbursement established in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd, where pre-payments could only be recovered where that had been a total lack of consideration. With regard to the second situation, any financial obligation due (as in Chandler v Webster) is excused, subject to where expenses have been incurred by the payee. In this instance, the courts may award an amount up to what was payable prior to the frustrating event. Gamerco SA v ICM/Fair Warning (Agency) Ltd demonstrates the application of this section. Here, a large pre-payment of $412,500 was returned to Gamerco SA, where they had incurred expenses prior to a frustrated contract for a series of concerts, despite both sides having begun performance (in the form of advertising).

Section 1(3) covers instances where one party has obtained a "valuable benefit", other than a payment of money, prior to a frustrating event. The Act in such a situation provides that some, or even all of such a benefit can be recovered from the benefited party, where it is considered just. An example of proceedings involving this section can be found in BP Exploration Co (Libya) Ltd v Hunt (No. 2). Mr Hunt had entered into an agreement with BP Exploration to exploit an oil concession in Libya; BP agreed to fund exploration and development, in order to establish an oil field. In exchange for this, they would receive reimbursement payments - in oil - from Hunt. Prior to the repayment of such reimbursement in full, a new Libyan government assumed total control over the field. Noting that Hunt had gained valuable benefits, from the farmed oil, Goff LJ identified several steps to be taken in applying the section. The first steps are to identify and value the benefit. In the instant case, this was the end product received by Hunt, in the form of oil. In any case, there must be a tangible benefit; the situation of Appleby v Myers, where any benefit was destroyed by fire, would not give rise to recovery under this subsection. When valuing the benefit, the influence of the claimant upon the benefit received is of importance; Goff J stated that the principal purpose of the subsection was to prevent the unjust enrichment of one party at another's expense. Following evaluation and identification of any conferred benefit, it is at the discretion of the courts to fix a 'just' sum. Factors such as apportionment of risk and expenses are important in concluding such a sum.

Section 2: Provision as to application of this Act

The second section of the Act provides for various instances where the active provisions may be applied differently, or not at all.

Section 2(3) establishes that parties may contract out of the Act, and that if under a true construction of the contract, this is the case, then the section may only apply if it is consistent with such a construction. Goff LJ however commented that:

Section 2(4) deals with the issue of severing parts of frustrated contracts. Where a contract contains multiple obligations, the Act does not apply to obligations which were completed prior to a frustrating event, only to those still in performance.

Section 2(5) excludes certain types of contract from being subject to the Act. Charter contracts - except a time charter - or carriage of goods by sea; contracts for insurance; contracts involving Section 7 of the Sale of Goods Act 1979 applies (regarding the perishing of goods).