Discharge of Contract by Frustration: Meaning, Principles, and Legal Effects

DISCHARGE OF CONTRACT BY FRUSTRATION

1. Introduction

Discharge of contract by frustration occurs where an external event, which is not the fault of either party, fundamentally alters the nature of the contractual obligations or makes performance impossible or radically different from what the parties originally agreed.

Frustration operates automatically by law. It does not depend on the intention of the parties. Once frustration occurs, the contract is brought to an end and the parties are discharged from further performance.

The doctrine is based on fairness. The law recognizes that it would be unjust to compel parties to perform obligations that have become impossible or fundamentally transformed by unforeseen events.

2. Meaning of Frustration

A contract is frustrated when an unforeseen event occurs after the formation of the contract which:

• Makes performance impossible
• Destroys the foundation or subject matter of the contract
• Renders the contractual obligations radically different from what was originally contemplated

The event must be beyond the control of the parties and must not be self induced.

3. Rules Governing Frustration

The following principles determine when frustration will apply.

1. Destruction of the Subject Matter or Core of the Contract

Where the essential subject matter of the contract is destroyed, the contract is frustrated because performance becomes impossible.

Taylor v Caldwell

Facts

The defendants agreed to hire out a music hall to the plaintiffs for the purpose of holding concerts on specified dates. Before the event could take place, the music hall was accidentally destroyed by fire without fault of either party.

Decision

The court held that the contract was frustrated. The continued existence of the music hall was the foundation of the contract. Its destruction made performance impossible.

Principle

Where the subject matter of the contract is destroyed without fault of either party, the contract is automatically discharged by frustration.

Illustration

A caterer is hired to provide food at a wedding reception hall on a specific date. Two days before the event, the hall collapses due to structural failure. The contract is frustrated because the venue which formed the basis of the agreement no longer exists.

4. Fundamental Change in Contractual Obligations

A contract is frustrated where circumstances change so drastically that performance would be radically different from what the parties agreed.

Davis Contractors Ltd v Fareham Urban District Council

Facts

The contractors agreed to build 78 houses for a fixed price within eight months. Due to shortage of skilled labour and increased construction costs after the war, the project took twenty two months to complete and became more expensive. The contractors argued that the contract was frustrated.

Decision

The House of Lords held that the contract was not frustrated. Although performance had become more difficult and expensive, it was still possible to perform the contract. The obligations were not fundamentally different from what was originally undertaken.

Principle

Frustration occurs only where performance becomes radically different, not merely more difficult or more expensive.

Illustration

A contractor agrees to construct a school building. Due to inflation and shortage of materials, the cost of cement doubles. The contract is not frustrated because the work can still be performed even though it has become more expensive.

5. Hardship, Delay and Inconvenience Do Not Amount to Frustration

Mere hardship, inconvenience or delay does not amount to frustration unless the delay defeats the entire commercial purpose of the contract.

The principle was clearly reaffirmed in Davis Contractors v Fareham UDC, where extended time and increased cost were held not to frustrate the contract.

Illustration

A ship carrying goods is delayed at sea for two weeks due to bad weather. The contract is not frustrated because the delay does not destroy the fundamental purpose of the agreement.

6. Frustration by Supervening Illegality

A contract may be frustrated where performance becomes illegal due to a change in the law or government regulation after the contract has been formed.

Illustration Based on Ghanaian Context

A timber supplier receives advance payment and equipment from a buyer to supply timber. After the contract is formed, the government passes regulations banning commercial logging in the relevant forest zone.

Legal Effect: The contract is frustrated because the performance has become illegal. The supplier is not liable for breach.

7. Self Induced Frustration

Frustration cannot be relied upon where the event that prevented performance was caused by the actions or fault of the party seeking to rely on it.

Maritime National Fish Ltd v Ocean Trawlers

A fishing company rents a fishing vessel but fails to obtain the necessary licence required by law to operate the vessel. The company claims that the contract is frustrated because it cannot legally use the boat.

The court held that this was self induced frustration. The inability to perform resulted from the company’s own failure to obtain the licence. The contract was not frustrated and the company remained bound by its obligations.

Illustration

If a contractor deliberately dismisses skilled workers and later claims inability to complete a project due to labour shortage, frustration will not apply because the difficulty was self created.

8. Frustration of Leases

For a long time, the courts held that leases could not be frustrated because of their long term nature. However modern law recognizes that leases are also contracts and may be frustrated where performance becomes fundamentally impossible.

National Carriers Ltd v Panalpina (Northern) Ltd

Facts

A warehouse was leased for ten years. After five years, the local authority closed the only access road to the warehouse for approximately eighteen months. The tenant claimed that the lease had been frustrated.

Decision

The House of Lords held that although leases can in principle be frustrated, the facts of the case did not amount to frustration. The closure merely reduced the effective use period by eighteen months out of a ten year lease. This did not destroy the foundation of the lease.

Principle

A lease will only be frustrated where the interruption or event substantially destroys the entire purpose of the lease. Temporary inconvenience or partial loss of use is insufficient.

Illustration

If farmland leased for ten years is permanently flooded by a dam project making farming impossible, the lease may be frustrated.

If access to the land is blocked for three months, frustration will not apply.

9. Effects of Frustration Under Common Law

Traditional Common Law Position

Originally, the common law held that frustration discharged parties from future obligations only. Any money paid before frustration was not recoverable and any money due remained payable.

Chandler v Webster

Facts

A room was hired to watch a coronation procession. The hirer paid part of the rent in advance. The coronation was cancelled due to illness of the King.

Decision

The court held that the loss lay where it fell. Money already paid could not be recovered and money due remained payable.

10. Modification of the Common Law Rule

Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd

Facts

The plaintiffs paid money in advance for machinery to be supplied by the defendants. Before delivery, war broke out and the contract was frustrated. The defendants had not begun performance.

Decision

The court held that the plaintiffs were entitled to recover the money paid because there had been a total failure of consideration.

Principle

Where there is total failure of consideration, money paid under a frustrated contract is recoverable.

11. Effect of Frustration Under Ghanaian Law

The Ghanaian position is governed by Sections 1 to 3 of the Contracts Act, 1960 (Act 25).

The main effects are as follows:

1. When a contract is frustrated, both parties are discharged from further performance.
2. All sums paid before frustration are recoverable by the paying party.
3. All sums due but unpaid before frustration cease to be payable.
4. A party who has incurred expenses in performance may recover reasonable expenses subject to statutory limits.

R T Briscoe v Essien

Facts

Money had been paid under a contract which was later frustrated. The defendant had incurred expenses in preparation and partial performance.

Decision

The court held that the plaintiff was entitled to recover money paid but the defendant was entitled to deduct reasonable expenses incurred in performance.

Principle

The court aims to achieve fairness by balancing restitution with compensation for expenses legitimately incurred.

12. Illustrations on the Ghanaian Statutory Position

Illustration 1

A company pays advance money for the supply of imported machinery. Before shipment, a trade embargo is imposed. The contract is frustrated. The buyer can recover the advance payment.

Illustration 2

A contractor purchases materials and hires workers for a project that is later stopped by government compulsory acquisition of the land. The contractor may recover reasonable expenses incurred before frustration.

Barclays Bank v Sakari

Facts

The defendant entered into a contract with the plaintiff to secure a loan from the plaintiff to procure two Mercedes trucks and repay the loan from the operation of the trucks. However, the defendant instead procured to buy a Saurer truck which was subsequently ceased by the government of Ghana on the basis that it was unlawful for any person other than the state to operate the trucks. 

The trial court held that the contract had been frustrated. The plaintiff appealed. 

Court Reasoning

The court held that in order for a contract to be frustrated, the courts had to examine the nature of the contract to determine if the contractual obligations had been fundamentally changed. 

In this particular instance, it was the duty of the plaintiff to provide the loan facility and that of the defendant to repay the loan. The seizure of the truck did not by any means alter the obligation. The earlier decision by the trial judge was erroneous. Should someone borrow money to start a business, the collapse of the business through no fault of the person does not discharge them from the obligation to repay the loan facility. 

Indeed, the seizure of the truck made execution of the contract difficult as seen in Davies Contractors but it by no means discharged the obligation on the part of the defendant to repay the loan as set out in the agreement. 

The court stated further that if the agreement was in fact for the operation of the trucks, the defendant cannot rely on frustration either. This is because the agreement was for the purpose of purchasing Mercedes trucks. The defendant by unilaterally purchasing the Saurer truck had induced the frustration and could not be then said to rely on it tol be discharged from his obligation to repay the loan. 

Holding

Frustration had not discharged the contract. 

13. Summary of Key Principles

1. Frustration arises from unforeseen external events.
2. The event must destroy the foundation of the contract or radically alter obligations.
3. Hardship or increased cost does not amount to frustration.
4. Frustration does not apply where the event is self induced.
5. Under Ghanaian law, restitution and compensation are governed by statute.

SUMMARY TABLE

Ground of Frustration	Explanation	Key Authority	Legal Effect
Destruction of subject matter	Core subject matter destroyed	Taylor v Caldwell	Contract discharged
Radical change	Obligations become fundamentally different	Davis Contractors v Fareham UDC	No frustration if only hardship
Delay and inconvenience	Mere difficulty or cost increase	Davis Contractors case	Contract continues
Supervening illegality	Performance becomes unlawful	Timber restriction example	Contract frustrated
Self induced frustration	Party caused impossibility	Fishing licence case	Frustration denied
Leases	Possible but rare	National Carriers v Panalpina	Depends on duration and impact
Common law effect	Loss lies where it falls	Chandler v Webster	No recovery
Modern rule	Total failure of consideration	Fibrosa case	Money recoverable
Ghanaian law	Statutory restitution	R T Briscoe v Essien	Fair compensation