Law Of Contract: Discharge Of A Contract: Frustration: The Effect Of Frustration Under The Law Reform (Frustrated Contracts) Act 1943, S1(2) And S1(3) (Copy)
Law Reform (Frustrated Contracts) Act 1943
Background
Why Was the Act Introduced?
- The common law rules governing frustration were often harsh and unfair.
- Under cases such as Chandler v Webster [1904], money paid before frustration was generally irrecoverable and money due before frustration remained payable.
- Courts criticised these outcomes because they frequently produced unjust results.
Purpose of the Act
- To provide a fairer allocation of losses after frustration.
- To reverse many of the harsh common law consequences.
- To give courts discretionary powers to achieve justice.
Examination Application
Whenever frustration is established:
- Establish that frustration has occurred.
- Apply the Law Reform (Frustrated Contracts) Act 1943.
- Consider Section 1(2).
- Consider Section 1(3).
Scope of the Act
Applies Only After Frustration
Requirement
- A valid frustrating event must first be established.
Application
The Act does not apply where:
- Contract is terminated for breach.
- Contract is void from the beginning.
- Frustration is unavailable because of self-induced frustration.
Important Frustration Cases Leading to Application
Taylor v Caldwell (1863)
- Destruction of subject matter.
Krell v Henry [1903]
- Frustration of common purpose.
Fibrosa v Fairbairn Lawson [1943]
- Supervening illegality.
Application
- Once frustration is established, the Act determines financial consequences.
Section 1(2)
Statutory Provision
Core Rule
Money:
- Paid before frustration is recoverable.
- Payable before frustration ceases to be payable.
Effect
- Reverses the common law rule in Chandler v Webster.
Examination Importance
- Most important provision in the Act.
Chandler v Webster [1904] 1 KB 493
Facts
- Room hired to view King Edward VII’s coronation procession.
- Procession cancelled.
- Money had already been paid and further money remained due.
Common Law Result
- Money paid could not be recovered.
- Money due remained payable.
Importance
- Demonstrates the unfair rule replaced by Section 1(2).
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32
Facts
- Polish company paid £1000 deposit for machinery.
- World War II made performance illegal.
- Machinery never supplied.
Judgment
- Deposit recoverable.
Legal Principle
- Recovery possible where total failure of consideration occurred.
Importance
- Highlighted defects in common law.
- Major reason for statutory reform.
Effect of Section 1(2)
Money Already Paid
Rule
- Recoverable.
Example
- £20 000 paid before frustration.
- Contract frustrated.
- Money may be recovered.
Money Due But Unpaid
Rule
- No longer payable.
Example
- £10 000 due after frustration.
- Obligation automatically extinguished.
Court’s Discretion Regarding Expenses
Section 1(2) Qualification
The court may allow the payee to retain part or all of the money received if expenses have been incurred.
Purpose
- Prevent unfairness to the party who has already spent money in preparation for performance.
Examination Application
- Frequently overlooked by students.
Gamerco SA v ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226
Facts
- Concert promotion contract.
- Concert cancelled due to safety concerns.
- Money had been paid in advance.
Judgment
- Court considered expenses under Section 1(2).
Legal Principle
- Recovery is subject to judicial discretion concerning expenses incurred.
Application
- Leading authority on Section 1(2).
BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783
Facts
- Complex commercial agreement frustrated.
Judgment
- Court examined expenditure incurred before frustration.
Legal Principle
- Section 1(2) seeks fairness rather than automatic recovery.
Application
- Important authority.
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total Personal A Grades, 7 Distinctions and 11 World Records For Educate A Change A Level Law Full Scale Course
Section 1(3)
Statutory Provision
Core Rule
Where one party has obtained a valuable benefit before frustration:
- The court may require payment of a just sum.
Purpose
- Prevent unjust enrichment.
- Ensure benefits received before frustration are compensated.
Examination Application
Section 1(3) applies where:
- A valuable benefit has been obtained.
- Frustration occurs before full performance.
- The court considers compensation appropriate.
Meaning of Valuable Benefit
General Principle
Benefit Must Be Real
Examples:
- Construction work completed.
- Services rendered.
- Improvements to property.
- Valuable preparatory work.
Application
- Court focuses on actual benefit received.
BP Exploration Co (Libya) Ltd v Hunt (No 2) [1979] 1 WLR 783
Facts
- Oil exploration agreement frustrated following political events.
- Significant work had already been completed.
Judgment
- Court undertook detailed analysis of Section 1(3).
Legal Principle
- Valuable benefit means a measurable benefit actually received.
Importance
- Leading authority on Section 1(3).
Application
- Most important examination case.
Goff J’s Approach in BP Exploration
Factors Considered
- Value of benefit received.
- Expenses incurred.
- Overall justice.
- Circumstances of frustration.
Application
- Court possesses wide discretion.
Clarkson Ltd v Bowring [1964] AC 480
Application
- Supports the principle that benefits received before frustration may justify compensation.
Calculation of a Just Sum
General Principle
Not Automatically Equal To
- Contract price.
- Cost incurred.
Court Examines
- Actual value of benefit.
- Fairness between parties.
- Expenses already incurred.
Application
- Broad judicial discretion.
BP Exploration v Hunt
Legal Principle
- Court values the benefit actually received rather than mechanically applying contractual figures.
Application
- Essential examination authority.
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total Personal A Grades, 7 Distinctions and 11 World Records For Educate A Change A Level Law Full Scale Course
Relationship Between Sections 1(2) and 1(3)
| Section 1(2) | Section 1(3) |
|---|---|
| Deals with money paid or payable | Deals with valuable benefits received |
| Recovery of advance payments | Compensation for benefits obtained |
| Focus on financial transfers | Focus on enrichment |
| Court may allow retention of expenses | Court may award a just sum |
| Reverses Chandler v Webster | Prevents unjust enrichment |
Examination Comparison
Common Law Position
Chandler v Webster
- Money paid generally irrecoverable.
- Money due remained payable.
Fibrosa
- Recovery only where total failure of consideration existed.
Statutory Position
Section 1(2)
- Money paid recoverable.
- Money payable ceases to be payable.
- Expenses may be retained.
Section 1(3)
- Valuable benefits may attract compensation.
Key Cases
Chandler v Webster [1904]
Principle
- Harsh common law position.
Importance
- Rule overturned by Section 1(2).
Fibrosa v Fairbairn [1943]
Principle
- Total failure of consideration.
Importance
- Influenced statutory reform.
Gamerco SA v ICM/Fair Warning [1995]
Principle
- Expenses under Section 1(2).
Importance
- Leading modern authority.
BP Exploration v Hunt [1979]
Principle
- Meaning of valuable benefit.
- Assessment of just sum.
Importance
- Leading Section 1(3) authority.
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total Personal A Grades, 7 Distinctions and 11 World Records For Educate A Change A Level Law Full Scale Course
Essential Examination Cases
| Case | Principle | Relevant Provision |
|---|---|---|
| Chandler v Webster | Money paid irrecoverable at common law | Background |
| Fibrosa v Fairbairn | Total failure of consideration | Background |
| Gamerco v ICM/Fair Warning | Recovery and expenses | s1(2) |
| BP Exploration v Hunt | Valuable benefit and just sum | s1(3) |
| Taylor v Caldwell | Frustration prerequisite | General |
| Krell v Henry | Frustration prerequisite | General |
Essential Statutory Provisions
| Provision | Rule |
|---|---|
| Law Reform (Frustrated Contracts) Act 1943 s1(2) | Money paid recoverable; money payable ceases to be payable; expenses may be retained |
| Law Reform (Frustrated Contracts) Act 1943 s1(3) | Court may award a just sum for valuable benefits received before frustration |
Examination Summary
| Issue | Common Law | 1943 Act |
|---|---|---|
| Money paid before frustration | Usually irrecoverable | Recoverable under s1(2) |
| Money payable before frustration | Remained payable | Ceases to be payable under s1(2) |
| Expenses incurred | Generally ignored | Court may allow retention under s1(2) |
| Valuable benefits received | No satisfactory solution | Just sum available under s1(3) |
| Overall approach | Loss lies where it falls | Fair allocation of losses |
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total Personal A Grades, 7 Distinctions and 11 World Records For Educate A Change A Level Law Full Scale Course
Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total Personal A Grades, 7 Distinctions and 11 World Records For Educate A Change A Level Law Full Scale Course