A Legal X-Ray Of The Doctrine Of Frustration

By Qosim Muhibudeen A.

• 1.0 .Introduction

The underlying principle of the law of contract or contractual agreement—laissez faire (the freedom to contract)—implies nothing but that parties are at liberty to contract and agree to the terms of contract they so mutually agreed upon. Hence, the fact that parties enjoy their freedom of contract carries with it the inevitable implication of the sanctity of their contracts.[1] However, notwithstanding the sanctity of a contractual agreement between parties to it, there are circumstances in which contractual obligations come to an end, wilfully or otherwise. This is termed “discharge of contracts”.

Discharge of contract connotes, in general, that the contractual relationship between parties to an agreement has come to an end and that the parties are freed from their obligations to each other thereafter.[2] It equally means the termination of the contractual relationship between the parties. There is a consensus of opinion backed by a legion of judicial authorities that a contractual agreement could come to an end and parties to such an agreement could be discharged in any of four instances: (a) at instance of performance (b) at instance of breach (c) at instance of an agreement (d) at instance of the doctrine of frustration.[3]

Frustration is, categorically, one of the four ways in which contractual agreements could be discharged and the parties relieved of their contractual obligations. In this interest, this piece seeks to give a legal x-ray of the doctrine of frustration as it affects the existence or continuity of a contractual agreement. To succinctly fulfil the focus of this piece, the work is divided into segments and sub-segments spanning the understanding of frustration, the circumstances of frustration, the limitations of frustration, the effect of frustration, and the reform.

2.0 Meaning and Evolution of the Doctrine of Frustration

The doctrine of Frustration was fully recognised in the case of Taylor v Caldwell.[4] However, prior to this time, the rule of ‘absolute contracts’ was strictly applied and upheld. That is, a person is strictly bound by his contract, and in the absence of an express limitation of his liability, a person must accept the consequences of being unable to perform his obligation in changed circumstances beyond his control that he has not contemplated. The rationale for the rule seems to be that parties to an agreement can always provide for unforeseen contingencies, and if they fail to do so, then they must be taken to have assumed the risk involved in such a situation.[5] Thus, in Paradine v Jane,[6] before the rule was abolished in Taylor v Caldwell,[7] the court took the line that obligations were not discharged by a ‘frustrating’ event, and that a party who failed to perform as a result of such an event would still be in breach of contract.[8]

Frustration is concerned with the situation where, following the formation of a valid and enforceable contract, an event occurs that arises not due to the fault of either party but has a significant impact on the obligations contained in the contract.[9] The doctrine makes provisions for the discharge of a contract where subsequent to its formation, a change of circumstances makes it legally, physically or commercially impossible to fulfill the contract.[10] See also the holding of Lord Radcliffe in Davies Contractors Ltd v. Fareham N.D.C.[11] In such a situation, parties may be discharged automatically from further liability under their contractual agreement by the operation of law, irrespective of the wishes of the parties.[12] Furthermore, the Nigerian Courts have also made an effort to define and explain what frustration connotes. In Diamond Bank Ltd. v. Ugochukwu,[13] frustration was defined thus:

Frustration would occur where it is established to the satisfaction of the court that due to a subsequent change in circumstances which was clearly not in the contemplation of the parties, the contract has become impossible to perform.

On the strength of the effect ‘frustration’ could have on a contractual agreement, which may be similar to the effects of ‘vitiating elements’, it becomes pertinent to distinguish between the two. The thin line of difference between what vitiating elements connote and frustration is that, while vitiating elements generally relate to things that have happened or states of affairs that exist at or before the time when the contract is made, frustration deals with events that occur subsequent to the contract coming into existence.[14]

3.0 Operation of the Doctrine of Frustration: Frustrating Events

Having explained what the doctrine of frustration connotes, it would be necessary to look at circumstances which could amount or give rise to frustration. Starting with, frustration only occurs under conditions that are totally out of the control of the parties.[15] Hence, there must be an event which significantly changes the nature of the contractual rights of the parties that it would be unjust to expect the parties to perform those rights.[16] In A.G. Cross River State V. A.G. Federation & Anor ,[17] the learned wise men of the Apex Court held, inter alia, that:

The courts have recognized certain situations or events as listed below that constitute frustration – a. Subsequent legal changes b. Outbreak of war. c. Destruction of the subject matter of contract. d. Government requisition of the subject matter of the contract. e. Cancellation of an expected event…

This, summarily, frustrating events which has been explicitly enunciated and recognised by the Court include, inter alia, subject legal change;[18] destruction of the subject-matter (totally or partially, notwithstanding);[19] cancellation/non-occurrence of an expected event;[20] government intervention/requisition of the subject-matter (where the requisition is permanent in nature or the period of such requisition is extensive in relation to the duration of the contract),[21] cancellation by an unexpected event,[22] and outbreak of war.[23]

4.0 Limitations to the operation of the doctrine of Frustration

As a matter of fact, the operation of the doctrine of frustration is not without limitations. There are circumstances which will prevent the parties hiding under the blanket of frustration. Instances that does not give rise to frustration are as follows:

1. Self-induced Frustration

A party to a contract cannot rely on self-induced frustration. It is an event that, although it could ordinarily amount to frustration, was caused by one party’s fault, act, or design. It is a situation where the behaviour or act of one of the parties brought about the circumstances that are alleged to frustrate the contract, the implication of which will not discharge the contract. In Maritime National Fish Ltd v Ocean Trawlers Ltd[24] where appellants chartered a trawler from the respondents in which it is required that licence be acquired to operate the otter trawl fixed into it. The appellants applied for five licences to operate the otter trawls, but were only granted three. The Appellants thus decided to use these for boats other than the one chartered from the respondents. Consequently, they claimed that this contract was therefore frustrated, since the trawler could not legally be used. However, the Privy Council held that the appellants were not discharged as it was their own election to use the licences with the other boats excluding the one chartered from the Respondent. Similarly, the Nigerian Court of Appeal in Jacob v. Afaha[25] also reiterated that the trite position of the law is that “self-induced frustration is no frustration”.

1. Events foreseen and provided for (force majeure)

One of the limitations to the operation and application of frustration is in instances where parties to a contract, during the formation of the contract, foresee and provide provisions that cover situations that could frustrate the contract. Frustration cannot operate in such circumstances because the parties included specific provisions in the contract to deal with circumstances that could frustrate the contract. This is otherwise referred to as a “force majeure” or “force majeure clause”.

A force majeure clause is one that the parties have inserted to cover various eventualities outside their control that may affect the contract. It provides the way in which risks and consequential losses are to be distributed in such circumstances.

The existence of such a clause, covering the situation that have arisen, will often prevent the contract from being frustrated.[26] In other words, force majeure is a common clause in contracts which provides that one or both parties can cancel a contract or be excused from either part or complete performance of the contract on the occurrence of a certain specified event or events beyond the parties’ control.[27] In a coda, it is a clause inserted in a contract intended by parties to deal with circumstances which would otherwise amount to frustration.[28] The consequence or effect of this is that a party to a contract that includes a force that foresaw and provided provisions that cover situations that could frustrate the contract cannot invoke the defence of frustration to have the contract discharged.

5.0 The Legal Consequences of Frustration

The effects of a frustrating event are dealt with both by common law rules and the provisions of the Law Reform (Frustrated Contracts) Act 1943. These are further discussed hereunder.

5.1 Common Law Effect

At common law, frustration has basically two effects. They are:

1. Automatic termination

The common law regards frustrating events as automatically bringing a contractual agreement to an end and discharged both parties from their obligations. See Hirji Mulji v Cheong Yue Steamship.[29]

1. Release/Discharge from future or further Obligation

In addition to the automatic termination of the contractual obligations, it equally has the effect of discharging the parties from further obligation. However, unlike an operative common law mistake, frustration does not render a contract void ab initio. Although, its effect is to bring the contract to an early end but all existing obligations at the time of the contract remain unaffected as far as the common law is concerned. For instance, if money has been paid or property transferred, it cannot generally be recovered, and if valuable services have been provided, compensation cannot be claimed.[30] This has been illustrated in two cases.

In the first case, Chandler v Webster,[31] in which under the terms of the contract, an obligation to pay arose before the frustrating event occurred. The Plaintiff paid part of the money and thus sued for the recovery of the part payment. It was thus held that not only could money paid not be recovered, but the obligation to pay money due before the event was cancelled remained. Because, frustration only discharge the contract from the point when the event occurred.

However, following the hardship of the rule laid down in Chandler v Webster, it was overruled by the House of Lords in Fibrosa Spolka Ackyjna v Fairbairn Lawson Combe Barbour Ltd,[32] where it was held that a frustrated contract could in some situations lead to a claim for recovery of money paid, on the basis of a total failure of consideration. The fact of the case being that an English company (the respondents) had made a contract to supply machinery to a Polish company (the appellants). The appellants had paid £1,000 towards this contract. It was then frustrated by the German invasion of Poland in 1939. The appellants sought to recover the £1,000. The House of Lords held that, since they had received nothing at all under the contract, there had been a total failure of consideration, and recovery was therefore possible.

Notwithstanding that the decision in Fibrosa’s case is an improvement on Chandler v Webster,[33] but then, it still leaves two areas of difficulty and potential injustice.

• First, it can only apply where the failure of consideration is total. That is, if the other party has provided something, no matter how little, no recovery will be possible.
• Secondly, it takes no account of the fact that the party who has received the money may well have incurred expenses in relation to the contract, and so will end up out of pocket if the entire sum has to be refunded.

Thus, the birth of the Law Reform (Frustrated Contracts) Act 1943. Both of these difficulties are addressed under the Act.

5.2 The Law Reform (Frustrated Contracts) Act 1943

The quest to clear the problem still present in the Common law in regards to the consequence of Frustration led to the enactment of the Law Reform (Frustration Contract) Act 1943 in Britain. The provision of the Act has been adopted in some parts of Nigeria through enactment with some modifications. In summary, with the coming into force, the enactment of the Law Reform (Frustration Contract) Act, the courts now have the discretion and the latitude to take into cognizance, the surrounding circumstance of each case to arrive at just and fair decision among which is the examination of valuable loss or expenses incurred by parties as enumerated in BP Exploration Co (Libya) Ltd v Hunt.[34]

5.0 Conclusion

In conclusion, the occurrence of a frustrating event without more does not ipso facto discharge a party from his obligations under a contract, as such a circumstance must be treated on its merits. Parties to a contract therefore need to exercise caution before reneging on their contractual obligations due to a perceived frustrating event. Otherwise, they may be exposed to the liabilities associated with a breach of contract. This is because it is only the courts that can declare if a contract has indeed been frustrated by the occurrence of circumstances not contemplated by the parties and which are beyond their control.[35]  There is thus a need for commercial contracts to be properly examined before contracting parties renege on obligations to which they are contractually bound on the grounds of frustration.[36] In essence, before the court will allow defendant to successfully rely on frustration, it must be satisfied that: (a) the supervening event indeed happened (b) the event was not a priori contemplated by parties (c) the event was not as a result of either party’s fault (d) the event has fundamentally changed the contract and, (e) the event has made the terms of t contract impracticable.[37]

Qosim Muhibudeen A. is a year-three pupil of law at the Faculty of Law, Bayero University, Kano, where he is currently the Deputy Director of Research and Litigation of Solace Chambers, B.U.K.

He can be reached via: 09037074761 or www.alqosim.sgm.ng  or muhibqosim@gmail.com

[1] Ukelere v. FBN PLC (2011) LPELR-CA/J/1/2004

[2] I.E Sagay, Nigerian Law of Contract, (2nd Edn., 2000) p. 518.

[3] Adedeji v. Obajimi (2018) LPELR-SC.154/2009: “A valid contract between parties may be discharged in one of four ways known to law, namely: a) by performance b) by express agreement c) by the doctrine of frustration; or d) by breach”

[4] (1863) 3 B & S 826

[5] I.E Sagay, op.cit

[6] 82 ER 897.

[7] Supra

[8] Richard Stone, The Modern Law Of Contract, (5th Edn, 2002) p. 385

[9] Ibid

[10] I.E. Sagay, op.cit.

[11] (1956) AC 696. See also: Nwaolisah v. Nwabufoh (2011) LPELR-SC.211/2003

[12] AG Cross River State v. AG Federation & Anor (2012) LPELR-SC.250/2009

[13] (2008) 1 NWLR (Pt. 1067) 1 at P. 28, paras. B – F.

[14] Richard Stone, op.cit

[15] Standard (Nigeria) Engineering Company LTD & Anor. V. NBCI (2006) LPELR-SC.252/2001.

[16] Diamond Bank Ltd. v. Ugochukwu (2008) 1 NWLR (Pt. 1067) 1 at P. 28, paras. B – F.

[17] (2012) LPELR-SC.250/2009

[18] Reily v The King (1934) A.C 176

[19] See Taylor v Caldwell (supra) where the subject matter was destroyed not due to the fault of neither party.

[20] Krell v. Henry [1903] 2 KB 740

[21] I.E Sagay, op.cit. See also: Metropolitan Water Board v Dick Kerr [1918] AC 119.

[22] Nwaolisah V. Nwabufoh  (2011) LPELR-SC.211/2003

[23] Ibid

[24] Supra

[25] (2012) LPELR-CA/C/147/2008.

[26] Richard Stone, op.cit

[27] Globe Spinning Mills Nigeria PLC v. Reliance Textile Indutries Limited (2017) LPELR-CA/L/732/2013.

[28] Richard Stone, op.cit

[29] [1926] AC 497.

[30] Richard Stone, op.cit

[31] [1904] 1 KB 493.

[32] [1943] AC 32

[33] Supra

[34] [1982] 1 All ER 925.

[35] AG Cross River State V. AG Federation & Anor (supra)

[36] Jackson, Etti & Edu, ‘Frustration of Contract in Nigeria’, available at <https://www.jacksonettiandedu.com/wp-content/uploads/2020/04/Frustration-of-Contract-in-Nigeria.pdf> accessed 1 April 2023.

[37] O.M. Atoyebi, ‘The Doctrine of Frustration and its Applicability in Contracts in Nigeria’, available at < https://omaplex.com.ng/the-doctrine-of-frustration-and-its-applicability-in-contracts-in-nigeria/> accessed 3 April 2023.

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