Thus came in the Law Reform (Frustrated Contracts) Act 1943 to remedy the unsatisfactory under common law. The main principle in this act is to prevent unjust enrichment of either party at the expense of others under discharge of frustration. The statute alters the legal consequences of frustration of the contract under the common law.
The act basically deals with specific areas in recovery of money payable or paid in advance of the contract, performance conferring a valuable benefit and the award of a just sum, and the scope of contract covered under this act.
S1(2) of the act stated:
“All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as 'the time of discharge') shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable:
Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in, or for the purpose of, the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.”
This subsection reaffirmed the principle laid down in Fibrosa case, where part of all sum paid in advance is recoverable after frustration, and further remedy the defect of needing to provide total failure of consideration. Instead, it works even upon partial failure of consideration rather than total failure of consideration.
S1(2) also relieved party from paying money payable in advance prior to the frustrating event, remedying the defect in Chandler v. Webster where the claim which is due before frustration is now not payable under this provision.
Apart from that, it provided that courts have the discretion to allow payee to retain or recover the incurred expense or for the purposes of performing the contract before the frustrating event, provided that it was paid or payable before the discharge of the contract. The discretion of the court is however limited where the recipient’s claim to retain from the advance payment may not exceed the total sum payable under the contract. Also the sum permitted by the court to cover the expenses may not exceed the value of the actual expenses incurred. Question arise to those who claim for expenses incurred before frustration, where there was no amount paid or payable before the happening of the supervening event, as under s1(2) they have no right to claim. This however could be remedy under s1(3) by award from the court for providing benefit.
S1(3) stated that where a party has obtained a valuable benefit before the time of the discharge, the other party may recover from him such sum; however it is up to the court’s discretion to award a ‘just’ amount. It must be noted that the sum must not exceed the value of the benefit. The court must consider the expenses incurred by the benefited party while assessing the ‘just’ sum to be awarded. This must be look inline in whether there was advance payment and whether the party conferring the benefit was allowed to retain some or all of this to cover the expenses incurred under s1(2). Also the fact that effect of the event of frustration on the benefit received
Robert Goff J. in B.P. Exploration Co. (Libya) Ltd. v. Hunt (No. 2) stated the subsection should be applied in two distinct stages. First, is to identify and value the benefit given. Second, is to assess the ‘just’ amount to award the party conferring the benefit, but the amount must not exceed the value of the benefit.
In B.P. Exploration Co. (Libya) Ltd. v. Hunt (No. 2), plaintiff who only recovered small part of expenses sued under s1(3) to recover expenses incurred. Court held the awarded sum should not be base on what the plaintiff have expense but rather on the benefit enjoyed by the defendant to prevent the defendant’s ‘unjust enrichment’ at the plaintiff’s expense. It was held that the ‘benefit’ was not the work of exploration and development, but rather the end-product of the effort, which were the oil already drilled and the compensation from the Libyan Government in which was obtain from the plaintiff’s exploration and development.
However, the operation for the Law Reform (Frustrated Contracts) Act 1943 excluded circumstances under s2(5), such as:
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Contracts for the carriage of goods by sea;
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Contracts of insurance;
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Contracts of sales specific goods (under the Sale of Goods Act 1979) which perish and
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Contract of charterparty (except a time charterparty or a charterparty by way of demise).
The objective of the Law Reform (Frustrated Contract) Act 1943 to rectify the problem in the common law which allowed a party to obtain unjust enrichment at the expense of other is undeniable a good one, however it present two fundamental difficulties. First, the act does not define a frustrating event. This leave uncertainty as the effect of the parties may be unpredictable since similar event may not have the same decision. As per F.A. Tamplin Steamship Co. Ltd v. Anglo-Mexican Petroleum Products Co. Ltd and Bank Line Ltd. v. Capel (A.) & Co., where the facts are similar yet only the latter was held to be frustrated.
S1(1) state that “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, the following provisions of this section shall, subject to the provisions of section two of this Act, have effect in relation thereto.” The general expression of ‘frustration’ is most likely to include contract discharged by supervening illegality. This act is not applicable on discharge by subsequent agreement or breach, or agreement where the performance was initially impossible. Also it is non-applicable for contract discharged under an express provision which provide automatic void at the happening of certain event in the contract.
The imperfection of the act is however sufficiently covered by the common law. The court has developed the rule of deciding the event of frustration, improving from the 19th century until today to cover the circumstances amounting to frustration. As discuss previously, frustrating event included impossibility and illegality of the performance of the contract, when the performance of the contract become fundamental different under the original agreement when the frustration occurred, and other event. The responsible of the court or jury is to “...decides the question in accordance with what seems just and reasonable in its eyes”. Although sometime the facts of the case are rather similar, different decision will be reach judging by reasonability and circumstances of case in order to prevent injustice. As per F.A. Tamplin Steamship Co. Ltd v. Anglo-Mexican Petroleum Products Co. Ltd and Bank Line Ltd. v. Capel (A.) & Co., court held the requisition of the ships frustrated the latter case but not the first case. This decision was reached base on the duration left to operate the ship under the charterparty agreement and the duration of the interruption by requisition of ship. In the first case, the duration of interruption was short compare to the availability to use the ship, and there might still be many months to use the ship before the agreed 5 years expired. Where in the latter case, the duration of agreement was 12 months, and the delay of delivery of the ship and requisition by the government has frustrated the contract.
The second difficulty present under this statute is under what circumstance benefit will be restored by one party to another. These arise under the imperfection of s1(2) and s1(3). As mentioned in s1(2), expenses incurred could be retain or claim if there is money paid or payable before frustration, however not exceeding the amount paid or payable. It means, example, if A incurred expenses £3000 before frustration, he could claim or retain from the £10000 which was suppose to be paid or already paid before the contract discharged. But difficulties arise if the situation become like this, example, if the incurred expenses before frustration was £13000, A could only claim £10000 instead the actual amount of expenses, leaving him loss with £3000.
Garland J. considered 3 methods n how court should exercise its discretion power if situation as above arises. First is to allow the payee to retain all the expenses incurred. Second, is to divide equally the loss cause by the frustrating event. Third, is to allow a board discretion ‘having regard to all the circumstances of the case’ to do what the court consider just.
Another problem, as mentioned previously, when there is no amount pay or payable before discharge of contract, if there are expenses incurred, the party will be left with lost as he has no right to claim under s1(2). Although this could be remedy by s1(3) where a party has confer a valuable benefit before the time of the discharge, he may recover such sum (the amount under the court’s discretion), whenever there is no benefit being confer, one is unable to claim money to cover the expenses incurred where there is no amount paid or payable before frustration. The difficulty arise on the interpretation of the word ‘benefit’, where Robert Goff J. stated that it refers to the end-product of the services rather than the services themselves. This would mean if the service is not finish before the frustrating event, it constitutes no benefit and no award could be granted. If this is true, most of the frustrating event happened before the completion of the service, which mean basically there is no benefit at all, this would radically make this provision inapplicable. Another situation is where the service is destructed or depreciated by the frustrating event, there will be no benefit being conferred and thus no award. As per Appleby v. Myers, the original decision where the payee could not claim for expenses incurred as there was not amount paid or payable before frustration, was base on common law. The decision will be still unjust even if it applies Law Reform (Frustrated Contracts) Act 1943 as the fire destroyed the work, conferring no benefit to the payer, thus there would be no award for the payee. The act had overlooked this situation.
Another difficulty also arises under s1(3) on calculating the ‘value’ of the benefit to assessing ‘just’ sum, and whether expenses should be deducted from just sum or benefit. Under s1(3) it was stated that expenses should be deducted from the just sum. However Robert Goff J. contradicting to s1(3) held that expenses were to be deduct from the value of the benefit rather than the just sum. This has arise question on the act and the decision of the judge. There is no provision in assessing what is a ‘just’ amount, it is under the court’s discretion decide it in accordance of what it is reasonable in its eye. The court may have opinion that certain benefit may worth, example £100, where in fact the expenses cost to construct this benefit may cost more than £100, it will still the party in loss. Also the ‘value’ of the benefit is easy to assess if it is in form of money, as per B.P. Exploration Co. (Libya) Ltd. v. Hunt (No. 2) where the benefit involve compensation worth $85 million, however it poses problem when the benefit cannot be value with money.
The act has also overlooked situation such as in Gamerco SA v. ICM/Fair Warning (Agency) Ltd. The plaintiff paid $412500 in advance to defendant. The contract was frustrated afterwards, both parties had incurred expenses before it and it was wholly wasted. Neither was left with residual benefit or advantage. Robert Goff J. ordered the $412500 to be return to the plaintiff without deduction as losses suffered by defendant was smaller. Although the judge felt that the decision was the best way to mitigate the harshness of allowing the lose lie where it has fallen, to minimize the losses for both party, in reality it left both party at loss. It may be reasonable for the plaintiff as it minimize the losses, however unfair to the defendant as they have to bear the losses all alone.
It can be observed that The Law Reform (Frustrated Contracts) Act 1943 did remedy defect which allow a party to gain unjust enrichment in the expense of others, by creating provision for payee to cover expenses by claiming award under conference of benefit. However not entirely as the act overlooked circumstances regarding claimant under no conference of benefit and novel situation. The lack of provision in defining event of frustration does not constitute to much problem as it can be endorse by common law. Thus in conclusion, it would be best to exercise the statute in line with the common law, with the discretion of the court to develop fairness among judicial critism to ensure justice.
(1863) 3 B. & S. 826, 839.
Taylor v. Caldwell (1863) 3 B. & S. 826.
Robinson v. Davison (1871) L.R. 6 Ex. 269.
Stubbs v. Holywell Railway Co. (1867) L.R. 2 Ex. 311.
Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd [1943] A.C. 32.
Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd [1943] A.C. 32.
Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd [1943] A.C. 32.
Law Reform (Frustrated Contracts) Act 1943, s2(5)(a).
Law Reform (Frustrated Contracts) Act 1943, s2(5)(b).
Law Reform (Frustrated Contracts) Act 1943, s2(5)(c).
Law Reform (Frustrated Contracts) Act 1943, s2(5)(a).
Legal Essays and Addresses (1939), at p. 259.
Gamerco SA v. ICM/Fair Warning (Agency) Ltd [1995] 1 W.L.R. 1226.
This was favoured by the Law Revision Committee (Cmd. 60009, 1939), p. 7.
As suggested in B.P. Exploration Co. (Libya) Ltd. v. Hunt (No. 2) [1979] 1 W.L.R 783, 800. Note that this decision was substantially approved by the House of Lord: [1983] 2 A.C. 352.
Treitel, ‘Frustration and Force Majeure’ (1994), §§15-059-15-060.
B.P. Exploration Co. (Libya) Ltd. v. Hunt (No. 2) [1979] 1 W.L.R. 783, 803.