The principle of ‘frustration’ and the nature of commercial contracts are both given equal consideration when a local authority fails to acknowledge or pay costs exceeding the original agreement despite pleas for reasonability by the claimants.
Shortly after World War II the appellants tendered for the construction of a large number of houses over a fixed period, and so due to the economic fragility of the country, their submission included a letter outlining allowances for rising material costs and labour shortages, while after further negotiations the respondents allowed them to perform their contractual obligations until the agreed eight-month period expired.
Upon discovery that only a fraction of the total number of houses had been completed the appellants cited frustration through inclement weather, delays in material deliveries and a shortage of labour, whereupon the local authority expressed no disagreement with their statement and the work continued for another fourteen months, however upon completion the total cost of the work was £115,233 versus the agreed £94,424, which left the appellants facing a loss of around £20,000.
When asked to pay the additional sum on grounds of quantum meruit (payment for services rendered and therefore deserved) the respondents refused to pay and offered only the amount contracted for, before the appellants claimed recovery on grounds that:
1. The letter submitted with the tender was part of the contract.
2. The contract was entered into on the proviso that both materials and labour were available.
3. Because those two elements were absent the contract had ceased to exist thus any subsequent performance was subject to a quantum meruit.
Under arbitration the doctrine of frustration was given considered significance in favour of the appellants on the strength of the letter, while in court the judge also agreed the letter formed part of the contract and so awarded accordingly.
Under challenge the Court of Appeal disagreed and referred the matter back for greater clarification of frustration, and so with the arbitrator remaining resolute on the letter the Court held that the letter was a mere facet of negotiations therefore frustration had not occurred, after which it was put before the House of Lords in order that the appellants could advance their contention that where frustration failed quantum meruit ought to succeed.
To clarify, the nature of frustration relies more upon unforeseen circumstances affecting both parties to a contract as opposed to one at a loss through unexpected events, while in this instance the appellants were aware that labour and material shortages were likely, and neither party had agreed that the original contract had ceased to exist and that another had begun.
With this in mind the House dismissed the appeal on grounds that unless agreed to, the terms of the original contract had remained unaltered despite the increased duration of the project and escalating costs incurred by the appellants, all of which amounted to little more than a seemingly well-drafted plan gone awry, while the House clarified for the parties that:
“[F]rustration occurs whenever the law recognizes 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 that I promised to do.”