Chapter 16

Frustration and Termination by Notice

Abstract The central proposition is that mere hardship or difficulty or increased

expense will not form the basis for terminating the contract under general law.
Instead the doctrine of frustration is confined to supervening impossibility, (non-
culpable and non-elective) incapacitation, or illegality. Another topic treated here is
contracts of indefinite duration. These are normally capable of being terminated by
one party giving reasonable notice to the other.

16.1 The Frustration Doctrine

16.01 For reasons of space, the doctrine of frustration will be briefly noted here.
For greater detail the reader is referred to specialist discussion.1
16.02 NARROW SCOPE
(i) The general test for frustration is whether, without default of either party, a
contractual obligation has become incapable of being performed because the
circumstances in which performance is required would render it a thing radi-
cally different from that which was undertaken by the contract. Aggravating
circumstances, even a commercial crisis for the relevant party, will not con-
stitute frustration2 unless Lord Radcliffe’s test in the Davis Contractors Ltd v.
Fareham UDC (1956)3 can be satisfied: ‘frustration occurs whenever the law

1
GH Treitel, Frustration and Force Majeure (3rd edn, London, 2014); E McKendrick (ed), Force
Majeure and Frustration of Contract (2nd edn, London, 1995); Clarke in Neil H Andrews, MA
Clarke, AM Tettenborn, G Virgo, Contractual Duties: Performance, Breach, Termination and
Remedies (London, 2012), Part III, chapters 16 to 18.
2
Pioneer Shipping Ltd v. B T P Tioxide Ltd, ‘The Nema’ [1982] AC 724, 752, HL, per Lord
Roskill; ‘The Super Servant Two’, J Lauritzen AS v. Wijsmuller BV. [1990] 1 Lloyd’s Rep 1, 8, CA,
per Bingham LJ.
3
Davis Contractors Ltd v. Fareham Urban District Council [1956] AC 696, 729, HL, per Lord
Radcliffe; considered in Pioneer Shipping Ltd v. BTP Tioxide Ltd (‘The Nema’) [1982] AC 724,
744, 751–2, HL (at 753, noting the weak chances of a successful appeal if the right test has been
applied; see also ‘The Mary Nour’ [2008] EWCA Civ 856; [2008] 2 Lloyd’s Rep 526, at [11]); The
current approach is to follow the guidance of Rix LJ’s ‘multi-factorial’ approach in ‘The Sea
Angel’ [2007] EWCA Civ 547; [2007] 2 Lloyd’s Rep 517, at [111], see also [110], [112], and [132].
This test focuses on (a) whether the event falls within the scope of the established categories of

© Springer International Publishing Switzerland 2016 273

N. Andrews, Arbitration and Contract Law, Ius Gentium: Comparative
Perspectives on Law and Justice 54, DOI 10.1007/978-3-319-27144-6_16
274 16 Frustration and Termination by Notice

recognises that without default of either party a contractual 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. Non haec in foedera veni. It was not
this which I promised to do.’
(ii) It is now clear that the doctrine of frustration operates as an exceptional
release of both parties, based on a rule of law.4 The earlier theory that the
doctrine rests on an implied term was repudiated in Davis Contractors Ltd v.
Fareham Urban District Council (1956)5 (and this repudiation was confirmed
by Lord Denning MR in ‘The Eugenia’, 1964).6
(iii) Frustration is a narrow doctrine: it is not enough that a contract becomes unex-
pectedly difficult or more expensive to perform.7 In the absence of express
provision, the tribunal under English principles has no power to absolve con-
tracting parties from their obligations on grounds of hardship arising after
formation.8 In the absence of frustration, the courts have no power of ‘equi-
table adjustment’ of the contract Lloyds TSB Foundation for Scotland v. Lloyds
Group plc [2013] UKSC 3; [2013] 1 WLR 366, at [47], per Lord Hope.

frustration (b) whether the risk of the event is allocated, expressly or impliedly, to one of the parties
and (c) whether a finding of frustration would be consistent with commercial conceptions of fair-
ness. This case was cited by Flaux J in Bunge SA v. Kyla Shipping Co Ltd (No 2) [2012] EWHC
3522 (Comm); [2013] 1 Lloyd’s Rep 565, at [39] to [41]; Bunge SA v. Kyla Shipping Co Ltd (No
1) [2013] EWCA Civ 734; [2013] 3 All ER 1006; [2013] 2 All ER (Comm) 577; [2013] 2 Lloyd’s
Rep 463, at [7], per Longmore LJ; Melli Bank plc v. Holbud Ltd [2013] EWHC 1506 (Comm), at
[15], per Deputy High Court judge Robin Knowles QC; Islamic Republic of Iran Shipping Lines v.
Steamship Mutual Underwriting Association (Bermuda) Ltd [2010] EWHC 2661 (Comm); [2011]
1 Lloyd’s Rep 195; [2011] 2 All ER (Comm) 609, at [105], per Beatson J. See also the NZ Supreme
Court’s discussion in Planet Kids Ltd v. Auckland Council [2013] NZSC 147; [2014] 1 NZLR 149,
at [60] to [62]; Mustill LJ in FC Shepherd v. Jerrom [1987] QB 301, 321–2, CA, attractively
chronicled the evolution of the frustration doctrine; there is a careful analysis of the leading author-
ities in Islamic Republic of Iran Shipping Lines v. Steamship Mutual Underwriting Association
(Bermuda) Ltd [2010] EWHC 2661 (Comm); [2011] 1 Lloyd’s Rep 195; [2011] 2 All ER (Comm)
609, at [101] to [107], per Beatson J.
4
GH Treitel, Frustration and Force Majeure (3rd edn, London, 2014), chapter 16.
5
[1956] AC 696, HL.
6
[1964] 2 QB 226, 238, CA.
7
British Movietonews Ltd v. London & District Cinemas Ltd [1952] AC 166, 183–4, 188, HL, per
Viscount Simon and Lord Simonds; ‘The Mary Nour’ [2008] EWCA Civ 856; [2008] 2 Lloyd’s
Rep 526, at [14], [23], [27] (supplier’s duty to procure suppoly of goods; embargo by cartel of
cement producers not an excuse).
8
British Movietonews case [1952] AC 166, 185, HL (repudiating Denning LJ’s unorthodox leni-
ency in the lower court, at [1951] 1 KB 190, 201–2, CA); cf no repentance shown by Lord Denning
MR in his minority judgment in Staffordshire A H A v. S Staffordshire WW Co [1978] 1 WLR 1387,
1397–8, CA.
16.1 The Frustration Doctrine 275

(iv) Frustration operates only if the relevant risk is not allocated to a party9 in
accordance with (1) an express10 term, or (2) a pre-existing rule,11 or (3) an
implied allocation based on the court’s assessment of the particular context.
Rix LJ noted in ‘The Sea Angel’ (2007) that this requires close examination
of the relevant commercial context, always bearing in mind that contractual
excuses on the basis of frustration are not to be handed out like confetti12 (and
see the summary by Beatson J in Islamic Republic of Iran Shipping Lines v.
Steamship Mutual Underwriting Association (Bermuda) Ltd, 2010).13
(v) When determining the issue of whether the relevant supervening event is a
risk borne by a party, the fact that the relevant risk is foreseeable is relevant
but not decisive: foreseeable or foreseen risks can sometimes give rise to
frustration. This was noted by Rix LJ in ‘The Sea Angel’ (200714 and earlier
by Lord Denning MR in ‘The Eugenia’ (1964).15 Although some decisions,
for example, the Privy Council in the Maritime National case (1935), had
adopted the proposition that foreseeability precludes any chance of
frustration,16 the better view, now accepted, is that foresight and foreseeabil-
ity are not free-standing impediments to frustration.17 Instead they are factors
concerning the issue whether one party has impliedly assumed the risk of the
relevant event’s occurrence. This ‘better view’ is traceable to Lord Denning
MR’s discussion in The Eugenia (1964).18 Furthermore, frustration does not
arise if (a) the relevant impediment results from breach or other blameworthy
conduct (b) or the suggested inability to perform is traceable to a choice made
by the party who now invokes frustration as a defence (‘The Superservant
Two’ [1990] 1 Lloyd’s Rep 1, 10, CA; Melli Bank plc v. Holbud [2013]
EWHC 1506 (Comm), at [15] to [21]).
(vi) The modern frustration doctrine concerns three main situations: (1) superven-
ing illegality, that is, performance of the contract becomes illegal because of

9
National Carriers Ltd v. Panalpina (Northern) Ltd [1981] AC 675, 712, HL, per Lord Simon.
10
For cases where express terms were construed not to preclude frustration, see Metropolitan
Water Board v. Dick, Kerr & Co [1918] AC 119, HL; and Bank Line Ltd v. Arthur Capel & Co
[1919] AC 435, HL.
11
‘The Great Peace’ [2002] EWCA Civ 1407; [2003] QB 679, at [74], per Lord Phillips CJ.
12
Edwinton Commercial Corporation v. Tsavliris Russ Ltd (‘The Sea Angel’) [2007] EWCA Civ
547; [2007] 2 Lloyd’s Rep 517, at [111].
13
[2010] EWHC 2661 (Comm); [2011] 1 Lloyd’s Rep 195; [2011] 2 All ER (Comm) 609, at [105];
see also Bunge SA v. Kyla Shipping Ltd [2012] EWHC 3522 (Comm); [2013] 1 Lloyd’s Rep 565,
at [69] per Flaux J.
14
Edwinton Commercial Corporation v. Tsavliris Russ Ltd (‘The Sea Angel’) [2007] EWCA Civ
547; [2007] 2 Lloyd’s Rep 517, at [127].
15
‘The Eugenia’ [1964] 2 QB 226, CA; cf C Hall, (1984) 4 LS 300 (proposing a recklessness
basis).
16
Maritime National Fish Ltd v. Ocean Trawlers Ltd [1935] AC 524, PC.
17
Generally on these factors, GH Treitel, Frustration and Force Majeure (3rd edn, London, 2014),
chapter 13.
18
‘The Eugenia’ [1964] 2 QB 226, CA; C Hall (1984) 4 LS 300 (proposing a recklessness basis).
276 16 Frustration and Termination by Notice

a legal change subsequent to the contract’s formation,19 (2) physical impos-

sibility or (3) severe obstruction of contractual performance ((a) frustrating
delay and (b) ‘frustration of the venture’, referred to as ‘frustration of the
purpose’ by some modern commentators). On delay, category (3)(a), see Lord
Roskill's remarks in ‘The Nema’ [1982] AC 724, 752-3, House of Lords.
However, category (3)(b) is very seldom successfully pleaded (see further
(vii) below).
(vii) As for category (vi)(3)(b), an unusual instance is Krell v. Henry (1903), in
which the hire of a room for 1 day overlooking the ceremonial Coronation
procession of King Edward VII had been frustrated because the event had to
be postponed when the King fell ill.20 It was clear that the hire was for the
specific purpose of witnessing a one-off event on a special occasion: the
licensee could not sensibly be expected to languish in this room if the proces-
sion did not take place that day. The risk that the Coronation would be post-
poned could not fairly be allocated to the licensee. Krell v. Henry (1903) was
distinguished by the Court of Appeal in Herne Bay Steam Boat Co v. Hutton
(1903). In the latter case, the ‘foundation’ of the contract had not wholly dis-
appeared. Indeed, a large part of it remained.21 The Herne Bay Steam Boat
case (1903) concerned the commercial hire of a craft to be offered to mem-
bers of the public so that, on payment, they could inspect the great naval
review at Spithead. These events were to take place after the Coronation of
Edward VII. The Court of Appeal held that his illness, and the postponement
of the Coronation, did not render the contract of hire a ‘complete waste of
time’ (to use modern parlance). And so there was no frustration. The King’s
absence at the review did not destroy the public’s opportunity to see the mag-
nificent array of warships at anchor. This decision is sound. The King’s pres-
ence would have enhanced the sense of occasion (because he would have
been recently crowned). But his absence did not turn the naval review into a
‘non-event’. It would perhaps have been different if the purpose of the hire
had been specifically advertised in these terms: ‘Vessel available for hire dur-
ing King’s review of the Fleet’. However, objectively, this was not the sole or
predominant purpose of the hire on the facts of the case. The risk of slight
public disappointment (and consequently a reduction in the public’s interest
in trips to view the fleet) was rightly allocated to the party who hired the craft.
(viii) The House of Lords in National Carriers Ltd v. Panalpina (Northern) Ltd
(1981) held that leases (of interests in land) could be frustrated (although this
will be quite exceptional).22

19
Section 1(1), Law Reform (Frustrated Contracts) Act 1943 refers to contracts which have become
‘impossible of performance or been otherwise frustrated’.
20
[1903] 2 KB 740, CA (Lord Wright in the Maritime National Fish case, [1935] AC 524, 529, PC,
noting the exceptional nature of Krell v. Henry).
21
[1903] 2 KB 683, CA.
22
[1981] AC 675, HL (e.g., a lease would be terminated if there were a 99 year lease and after only
a couple of years the demised premises, situated on a cliff-top, fell into the sea as a result of coastal
erosion); generally, GH Treitel, Frustration and Force Majeure (3rd edn, London, 2014), chapter 11.
16.2 Termination by Notice: Contracts of Indefinite Duration 277

(ix) If a contract becomes frustrated, money already paid is repayable, and money
owed ceases to be payable, unless the court in its discretion decides to make
an allowance in favour of the payee in respect of the latter’s expenses in per-
formance of the contract: section 1(2), Law Reform (Frustrated Contracts)
Act 1943.23 Secondly, section 1(3) of the same Act enables the court to award
the performing party (‘P’) a sum in respect of the valuable benefit gained by
the other party.24 Such an award will be in respect of party P’s supply of goods
or services, taking into account what is ‘just’ in all the circumstances.25

16.2 Termination by Notice: Contracts of Indefinite

Duration

16.03 INDEFINITE CONTRACTS26

(See also 15.29 on Termination Clauses and Rights)
(i) Indefinite contracts (that is, contracts of indefinite duration) are often, as a mat-
ter of construction, subject to an implied term enabling one party to give rea-
sonable notice to the other that the contract will be terminated. The leading
modern case is Staffordshire Area Health Authority v. South Staffordshire
Waterworks Co (1978). A majority of the Court of Appeal held that a 1929
agreement to supply 5,000 gallons of water a day free of charge, thereafter at
seven old pence per 1,000 gallons ‘at all times hereafter’, was neither a per-
petual contract nor (as was evident) a contract of fixed duration. Since the
contract was of indefinite duration, the Court of Appeal held that, on construc-
tion, it was terminable by the giving of reasonable notice.27 The water company

23
Gamerco SA v. ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226, Garland J.
24
BP Exploration Co (Libya) Ltd v. Hunt (No 2): main discussion by Robert Goff J is at [1979] 1
WLR 783, 799; subsidiary aspects are examined in successive appeals, [1981] 1 WLR 232, CA;
[1982] 2 AC 352, HL.
25
Generally on the 1943 Act, GH Treitel, Frustration and Force Majeure (3rd edn, London, 2014),
chapter 15; E McKendrick (ed), Force Majeure and Frustration of Contract (2nd edn, London,
1995); Goff and Jones, The Law of Unjust Enrichment (8th edn, London, 2011), chapter 15; E
McKendrick, ‘Frustration, Restitution and Loss Adjustment’, in AS Burrows (ed), Essays on
Restitution (Oxford, 1991), 147; GL Williams, Law Reform (Frustrated Contracts) Act 1943
(1944).
26
K Lewison, Interpretation of Contracts (6th edn, London, 2015), 6.18; Malcolm Clarke in Neil
H Andrews, MA Clarke, AM Tettenborn, G Virgo, Contractual Duties: Performance, Breach,
Termination and Remedies (London, 2012), 17–083 ff.
27
[1978] 1 WLR 1387, CA, per (Reginald) Goff and Cumming-Bruce LJJ; at ibid, 1397–8, Lord
Denning MR, in a minority opinion, reached the same conclusion by the heterodox route of finding
frustration to be satisfied by inflation; T A Downes, (1985) 101 LQR 98, 104–8; K Dharmananda
and L Firios (eds), Long Term Contracts (Federeation Press, Sydney, 2013) (collection of com-
parative essays); McKendrick, ‘The Regulation of Long-Term Contracts in English Law’, in J
Beatson and D Friedmann (eds), Good Faith and Fault in Contract Law (Oxford, 1995), 305.
278 16 Frustration and Termination by Notice

was prepared to continue the supply, charging, for daily usage in excess of
5,000 gallons, the 1970s price for commercial supply. Goff LJ, having exam-
ined the authorities, formulated this test28:
‘the [party seeking to establish a right to terminate by giving reasonable notice has] to
show, and the onus is upon them, why, there being no express power to determine this
agreement, one should be inferred, but there is no presumption either way; the onus is not
the heavy one of rebutting a presumption to the contrary. This being so, one has to consider
the surrounding circumstances as well as what the parties have said or left unsaid in the
agreement itself.’

(ii) It was held in ServicePower Asia Pacific Pty Ltd v. ServicePower Business
Solutions Ltd (2009) that the court will not construe a contract as being subject
to an implied termination clause if an express term already covers the giving of
notice.29
(iii) Contracts of Fixed Duration. Where the contract is of a fixed duration, there
will be no implied term that a party can terminate it by giving reasonable
notice, as Jani-King (GB) Ltd v. Pula Enterprises Ltd (2007) shows.30
(iv) ‘Perpetual’ Clause Not Truly Intended to be Permanent. BMS Computer
Solutions Ltd v. AB Agri Ltd (2010)31 shows that a clause purporting to confer
on a licensee a ‘perpetual’ entitlement might be construed as merely creating
an entitlement of no fixed duration; if so, the licensor can give reasonable
notice to terminate the entitlement.32
(v) ‘Perpetual’ Clause Expiring as a Practical Commercial Matter. A clause in
which a soft-ware supplier undertook to provide permanent support for the
user of the product was held to be perpetual, surviving the termination of the
main contract. But the parties’ relationship would in practice end when
advances in technology would render that particular product commercially
obsolete.33

28
[1978] 1 WLR 1387, 1399–1400, CA, per (Reginald) Goff; Goff LJ’s judgment and supporting
authorities were followed by Buxton LJ in Colchester and East Essex Co-Operative Society Ltd v.
The Kelvedon Labour Club and Institute Ltd [2003] EWCA Civ 1671, at [9].
29
[2009] EWHC 179 (Ch); [2010] 1 All ER (Comm) 238, at [25] ff (William Trower QC).
30
[2007] EWHC 2433 (QBD); [2008] 1 Lloyd’s Rep 305, at [60] to [66], per Coulson J.
31
[2010] EWHC 464 (Ch), Sales J.
32
See his cogent articulation of supporting reasons, ibid, at [18].
33
Harbinger UK Ltd v. GE Information Services Ltd [2000] 1 All ER (Comm) 166 (severable
clause, surviving termination of main contract, that company ‘in perpetuity’ would provide support
and maintenance of software supplied to a customer; the reality was that the customer would not
everlastingly be prepared to use this soft-ware; so long as it did, the supplier’s obligation would
endure).