Chapter 10 Guidance for end of chapter questions

Frustration

Question

Larry agrees to ride Speed Ltd's bike in the Tour de France in return for a sponsorship fee of £10,000 to be paid in advance. Speed spent £5,000 designing and building Larry's bike. The Tour is cancelled when yet another cyclist tests positive for performance enhancing drugs and Larry has only been paid £5,000 of the sponsorship fee.

Advise both parties.

Would your advice be any different if Larry had been the cyclist who had tested positive for drugs? What if the Tour was not cancelled but Speed had sponsored five cyclists and, because lightning had hit their manufacturing plant, they could only supply bikes to four of their riders, and because Larry was the least likely to win the Tour, they refused to provide him with a bike?

Answer

Paragraph 1 - Frustrating event

  • Performance of Larry's obligation to ride in the Tour de France has become impossible because the Tour has been cancelled.
  • Performance was possible at the time of the contract because the Tour had not been cancelled at that stage and so this is not a mistake case.

Paragraph 2 - Consequences of frustration

  • s.1(2) Law Reform (Frustrated Contracts) Act 1934 provides that sums paid are recoverable and sums to be paid no longer have to be paid - therefore Speed Ltd. may recover the £5,000 paid to Larry and are released from their obligation to pay a further £5,000.
  • This is subject to the court's discretion to allow for any expenses incurred by Larry. However, there are no such expenses (the expenses in this case are incurred by the payor, Speed Ltd) and so the court has no discretion to interfere with the repayment of £5,000 and release of Speed's obligation to pay a further £5,000.
  • Larry had not received any benefit (other than money) under the contract at the time of discharge and so there can be no award under s.1(3) of the Act.

Paragraph 3 - Alternative 1

  • If Larry had tested positive for drugs then Speed Ltd. could argue that Larry is not entitled to rely upon frustration to release him from his obligation to ride on the tour.
  • The burden of proving that the frustrating event (cancellation of the Tour) was caused by Larry is on Speed Ltd.(Joseph Constantine Steamship Line Ltd v Imperial Smelting Corporation Ltd). 
  • If the contract continues then Larry will be liable for breach of contract as he will be unable to compete in the Tour and will have to compensate Speed Ltd. by paying damages. You may briefly whether the difficulty of proving expectation damages (lost exposure, potential profits?) would allow Speed Ltd. to claim its reliance loss instead; i.e. the money spent on designing and building Larry's bike (see Anglia Television Ltd v Reed).

Paragraph 4 - Alternative 2

  • Speed Ltd are compelled to 'frustrate' one of their rider contracts because they do not have enough bikes for each rider. The situation is therefore different from Maritime National Fish Ltd v Ocean Trawlers Ltd where it was possible to allocate one of the three licences and allow the contract to continue.
  • Following the Super Servant Two case, Speed Ltd will not be able to rely upon frustration of the contract because they self-induced the frustrating event by choosing not to provide Larry with a bike. However, you could question whether the bikes had been set aside for a particular rider or whether Speed Ltd was permitted to supply any bike from a pool of five.
  • If each bike was made for a particular rider and Speed Ltd were obliged to provide only that bike then the contract with Larry would be frustrated if the lightning had destroyed Larry's bike; it would then probably be impossible for Speed Ltd. to perform the contract (assuming another bike could not be made in time).