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Frustration Scenario

Sasha is an entrepreneur and is experimenting with a number of different business ideas. She has had some awful luck and there has been a number of events which may leave her in a difficult position as far as her contractual obligations are concerned.

Contract one is with an artisan cheese shop. She has contracted to sell them £10,000 worth of Swedish cheese. There is only one supplier of Swedish Cheese, who is located in Sweden. Unfortunately, before the delivery of the cheese, a war has broken out between Sweden and England. All trading between the countries is to be ceased and is now illegal.

Can Sarah use the doctrine of frustration to release herself from the contract?

Contract two is a contract for the hire of a large wooden market stand in the centre of the towns market. Subsequent to the making of the contract, the owner of the market stand was cleaning it. After taking a break for a cigarette, he accidently dropped the still lit cigarette, resulting in the market stand being destroyed by a fire.

Would the destruction of the stall mean the contract for the rental of the stall is frustrated?

Contract three is made with Joe, who is paying Sasha £3000 for her to build his business a website. Sasha was concerned he may not pay her, so took an advance payment of £1,500. The contract has now been frustrated due to a law which renders the creation of this particular type of website illegal. Joe is now trying to claim his advance payment back. Sasha has spent over fifty hours working on the website, and her usual hourly rate is £20.

Following the frustration of the contract, can Joe claim the advance payment back? If so, will he be entitled to the entire £1,500 or just part of it?

  1. The subsequent illegality of a contract may render a contract frustrated dependent on the length of time the contract would be illegal. In this case, it would be uncertain how long the war will last, therefore it is more likely that frustration would be able to be successfully argued.

However, in this case, the contract between Sasha and the artisan cheese shop is not illegal, only Sasha’s supply contract for the Swedish cheese is illegal. This is similar to the case of Blackburn Bobbin Co Ltd v Allen (TW) & Sons Ltd [1918] 1 KB 540. In that case it was held that the original contract was not frustrated just because of the impossibility of the one party. Only one party, Sasha, had made the assumption that the supply of cheese would be legal. In order for frustration to operate, both parties must make the assumption, which is not the case here. Therefore, the contract would not be frustrated.

  1. The second contractual issue relates to the destruction of the subject matter. In Taylor v Caldwell(1863) 3 B & S 826 it was confirmed that where the subject matter of a contract is destroyed, the contract will be frustrated. However, in this case there is an element of fault. It was the owner of the stalls fault the subject matter was destroyed, due to their negligent act of dropping a lit cigarette on the wooden stand. Where one party is at fault, the contract will not be frustrated (Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524).  Taylor v Caldwell confirms a negligent act will be sufficient to amount to fault.
  1. The Law Reform (Frustrated Contracts) act gives guidance what happens in the event that there has been an advance payment made for a contract that is subsequently frustrated. Section 1(2) of the act rules that an advance payment may be retained, so long as the amount does not exceed the specified advance payment under the contract, and does not exceed the expenditure of the party who has received the payment.

In this case, Sasha’s expenditure can be calculated by multiplying her hourly rate, £20, by the number of hours she spent creating the website. Therefore, Sasha’s expenditure amounts to £1,000. This means Sasha can retain a maximum of £1,000 from the advance payment, meaning Joe will be entitled to a return of the remaining £500

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