In Paradine v. Jane, the court adhered to the theory of ‘absolute contracts’, and it was said that if the parties wanted to avoid liability, then they will have to state this in the contract. Later, in Taylor v. Caldwell, it was said that a contract can be discharged if the contract became impossible to perform, due to some external cause that neither party was responsible for.
The modern test was enunciated by Lord Simon in National Carriers v. Palpina, where frustration arises when ‘there supervenes an event (without default of either party, and for which the contract makes no sufficient provision), which so significantly changes the nature of the outstanding contractual rights/ obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of stipulation in the new circumstances.’
In Davis Contractors v. Fareham UDC, Lord Radcliff stated that frustration occurs where to require performance would be to render the obligation something ‘radically different’ from what was undertaken by the contract. In this case, the contract was not frustrated, and the problems sustained by the builder made his job more difficult, but did not alter his job specification.
b) The doctrine of frustration may be misused, as it is very accommodating. It can be used to prevent liability for frustration, as one may not need to take the blame by just rendering the contract frustrated. In 1943, The Law Reform (Frustrated Contracts) Act was passed to remedy any shortcomings of the doctrine of Frustration. It provided that “all sums paid are recoverable and all sums payable cease to be payable, but if any costs were incurred for the purpose of performing the contract, the money shall be returned or payable,” in Section 1(2) and “where one party has obtained a valuable benefit, before the time of discharge, the other party may recover from him such sums as the court considers just,” in Section 1(3). Section 1(3) was applied in BP Exploration v Hunt in 1982, where it was held that the court must identify and value the ‘benefit’ obtained, and access the ‘just sum’ which it is proper to award.
This section was devised to prevent unjust enrichment, but has its limits. The Law Reform (Frustrated Contracts) Act does not apply to charter parties, contracts for the sale of specific goods which have perished and contracts of insurance.
