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144 Chapter 5Discharge of contracts and remedies for breach

Leases of land

A lease can be frustrated only in the most exceptional circumstances. A lease is more than

a contract, it creates an interest in land.

The legal effect of frustration

As soon as the frustrating event happens, the contract comes to an end. The Law Reform

(Frustrated Contracts) Act 1943 then makes the following rules:

(i) Money owing under the contract ceases to be payable.

(ii) Money which has already been paid under the contract can be recovered. However, the

court has a discretion to allow a party who has incurred expenses to be paid for these

expenses. The amount of the expenses cannot be more than the money paid or payable

before the contract was frustrated.

(iii) If one of the parties has received a valuable benefit under the contract, the court can

order that a fair amount is paid to compensate for this.

Example

X Ltd has agreed to supply Y Ltd with 1,000 toy guns. The contract price was £2,000 and

half of this was paid in advance, half was to be paid when all of the goods were delivered.

Parliament passes a statute making the sale of toy guns illegal. The contract is therefore frus-

trated. Y Ltd do not need to pay the £1,000 which has not yet been paid. Y Ltd can recover

the £1,000 already paid. However, the court could allow X Ltd to keep some of this money

to compensate for expenses incurred. If 100 toy guns had already been delivered then the

court could order that Y Ltd make a payment for these. This payment might be 10 per cent

of the contract price (because 10 per cent of the guns have been delivered) but would not

necessarily be so. The amount payable, if anything, is at the court’s discretion.

Difficulties arise when a valuable benefit conferred is destroyed by the frustrating event.

For example, where the contract is to put central heating in a house and shortly before this

work is completed the house is burnt down. When is the valuable benefit to be valued? If

it is valued immediately before the frustrating event the contractor might be paid close to

the whole contract price. If it is valued immediately after the frustrating event it is worth

Maritime National Fish Ltd vOcean Trawlers Ltd (1935) (Privy Council)

The claimants chartered a ship with an otter trawl (a certain type of fishing net) to the

defendants. Both parties knew that it was illegal for a ship to fish with an otter trawl unless

a licence had been gained from the Government. The defendants applied for five licences

because they had four other boats fitted with otter trawls. However, the defendants were

granted only three licences. They assigned these licences to three of their own boats and

claimed that the contract with the claimants was frustrated because it would be illegal to

use the chartered boat for fishing.

HeldThe contract with the claimants was not frustrated. The defendants were the ones

who had caused the chartered boat not to have a licence and so they could not argue that

the absence of a licence frustrated the contract.