Monday, 1 April 2013

Frustration and the Common Law

The general test for frustration arises out of the aforementioned Codelfa. Frustration occurs wherever the law recognises that without default of either party a contracted obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.’ 

Frustration is dependent on the individual circumstances of each case and there are two main factors; 
- The terms of the particular contract 
  • The effect of the supervening event and the effect of the event rather than just the nature of it. 

These factors mean that each individual case of potential frustration or actual frustration that occurs can be different from any other contract previously. Each act needs to be looked at specifically in deciding whether or not there is a frustrating event, as a frustrating event in one contract where time is of the essence may not be the same in another contract when time factors are not essential. Frustration relates to both the express and the implied terms of a contract. 

The underlying principle in most contracts is the allocation of future risk. Each time a contract is made, the risk that something could inadvertently go wrong is the peril that one party generally must take on. This occurs due to an obligation which must be performed regardless of instances which might be considered as a normal commercial difficulty. This is where hardship can be resultant from the common law on frustration. In most cases, the courts will transfer the risk in an event of frustration as the losses must fall somewhere. This can be extremely harsh, especially if the risk allocation is set out in the contract and clearly agreed upon but yet the court’s ruling moves the risk. Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd [1943] is an example of this. Fairbairn was to supply Fibrosa with a number of machines, in which they had to pay £1,000 deposit. This indicates the risk was given to Fibrosa. Frustration was caused due to world war two and hence the transaction could not occur. It was held that Fibrosa was entitled to the deposit back due to total failure of consideration. This meant the risk allocation due to the ruling, was given to Fairbairn. This result is why the Frustrated Contracts Act 1988 SA was introduced. 

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