A practical guide to ending contracts early: Frustration (Part 1)

It is a fundamental principle of English law that contracts have binding force. English law is a popular choice of governing law for contracts because of the certainty it provides in ensuring that obligations freely entered into will be upheld, or an appropriate remedy will be granted for their breach – save for in exceptional circumstances. 

Driven by recent geopolitical events, we have seen an increase in parties seeking ways to avoid unfavourable contractual terms, or end contracts entirely, without the express right to do so. In this three-part series, we highlight some of the key ways in which parties attempt to do this and examine the current status of English law in each area.

In Part One, we cover the law of frustration.

What is frustration?

Frustration is a common law doctrine which brings a contract to an end if an unforeseen event occurs outside of the control of the contracting parties, and either:

• makes the contract impossible to continue to perform; or 

• transforms the obligation to perform into something so radically different from what was contractually agreed that it has become, in effect, a completely different obligation. 

To determine whether a contract has been frustrated, one must first identify what the parties’ contractual obligations are, as a matter of construction of the contract. The next step is to assess what the impact of the alleged frustrating event is on those obligations including how, if at all, the parties can perform those obligations in the new circumstances. The final question is whether the obligation as intended under the contract, and the obligation as it will be performed now, are fundamentally different. As the House of Lords put it, “the question is whether the contract which [the parties] did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end.”¹

Key to the doctrine is that the frustrating event must not have been contemplated (or foreseeable as a serious possibility) and must be outside the control of any of the contracting parties. Self-induced frustration (i.e. where a party’s own acts render its further performance impossible) will not terminate a contract. As discussed further below, foreseeability and control are often where assertions of frustration fail. 

What is the effect of frustration at common law?

A frustrated contract is automatically discharged, and the parties are relieved of all future obligations. In effect, from the date of frustration, the contract is terminated. Technically, this does not require either party to make a choice or take an action (subject to any specific terms in the contract). In practice, however, the party who believes the contract to be frustrated will often need to notify the counterparty that this is the basis on which they are (not) proceeding.

Frustration does not mean the contract never existed, and the parties will not be restored to their pre-contractual positions. Any obligations or liabilities incurred prior to the frustrating event must still be fulfilled (unless those obligations or liabilities were frustrated themselves). 

Perhaps most significantly, damages are not available for breaches of frustrated contracts after the frustrating event because neither party is considered to be in default. Generally, the approach the courts take to a frustrated contract is that each of the parties must bear their own losses – the party paying for a service, for example, would therefore only pay for the service that has been performed up to the point of frustration. 

This position is subject to both statute (see below) and case law² which provides that if there is a total failure of consideration (i.e. no service under the contract is ever performed), then the party paying for the service may be able to recover any money paid in advance. However, if the services have been even partially performed, then any money paid in advance may not be recoverable, subject to the Law Reform (Frustrated Contracts) Act 1943 (see indent).

Difficulties with establishing frustration

We have seen an increase in parties alleging frustration, seemingly driven by geopolitical events. Clearly, these are events beyond the control of most contracting parties and could potentially frustrate a contract. 

However, whether a particular contract has been frustrated will depend to a great extent on the terms and wider context of that contract. The bar for establishing that there has been a frustrating event is high. 

The following recent cases illustrate some of the difficulties with alleging frustration.

It is also important to note that commercial decisions regarding the deployment of resources to satisfy one contractual obligation over another will not amount to frustrating events, even if the underlying circumstances are not the fault of the party alleging frustration. This is demonstrated in Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] A.C., where the Privy Council considered whether a contract was frustrated because a fishing trawler had not been adequately licensed. The owner of the trawler had only been granted licenses by the government for three of its five vessels. The court held that this was not a frustrating event, because although the provision of licenses was outside of the owner’s control, it had made the commercial decision not to apply one of its three licences to the relevant trawler. It was the manner in which the owner had chosen to conduct its business which had caused the trawler to be unlicensed, and that was clearly something within the owner’s control. Although there may have been logical reasons for its decisions, the owner could not rely on the absence of a licence as a frustrating event. 

Alternative performance

A contract will not be frustrated if it provides for alternative ways in which it can be performed when faced with what may otherwise be a frustrating event, provided such performance is not radically different from that originally contemplated. For example, clauses which oblige the parties to perform insofar as reasonably possible, or which oblige them to take alternative or additional steps to achieve performance, may prevent a contract being frustrated. 

Similarly, before giving notice of a frustrating event, parties should be aware of any other obligations that they may have under the contract to try to overcome the impact of a frustrating event. For example, if a party was contractually obliged to enter discussions with the other party to try to determine an alternative solution, then the court would expect to see evidence of these discussions before accepting that frustration has occurred. 

In the next part of this series, we will consider the common law doctrine of termination for repudiatory breach.