UK: Can Frustration Really Help You To Avoid Contractual Obligations Without Paying A Penalty?

How often can a party really use frustration successfully to avoid its contractual liabilities? The answer in reality is not very often! Cases involving allegations of frustration are not often litigated, so we have taken the opportunity to look at how the court considered the issue in a recent judgment: The Flying Music Company Limited v Theater Entertainment.

The doctrine of frustration will allow a contract to be discharged if something occurs which means it is impossible or will be illegal for one or both parties to perform the contract, or if the obligation to perform is changed into something entirely different to that which was intended.

The frustrating event must occur after the contract has been concluded and be beyond what was contemplated by the parties at the outset. Furthermore, it must not be due to the fault of any party. If all elements of the doctrine are present, the contract may be able to be discharged and all of the parties released from their obligations with no further liabilities.

In The Flying Music Company Limited v Theater Entertainment, the court was required to rule on the question of frustration, as well as a number of other issues. We take a look at the frustration issue in this article.

Background

The claim arose out of a contract entered into on 21 May 2010 between the claimant (Flying Music, FM) and the defendant (Theater Entertainment, TE) under which terms TE agreed to put on FM's West End production of the show "Thriller Live" in Greece that summer.

Austerity measures imposed in Greece in early 2010 had however resulted in a period of civil unrest and disturbance, in particular through the months of May and June. This unrest was referred to in correspondence between the parties when they first started discussing the potential for a tour to Greece in the late spring, so even before the contract was signed.

It was intended that between 1 and 28 June there would be eight performances of "Thriller Live" in Thessaloniki, and 24 performances in Athens. Ticket sales and marketing commenced before the contract was signed. However both early ticket sales and those concluded once the contract was in place were well below expectations.

TE argued that the level of tickets sold was so poor because of the civil unrest. Only three performances subsequently took place in Thessaloniki and only 16 in Athens. FM claimed for outstanding sums due under the contract and TE argued that the contract had been frustrated.

Decision

The Court was not persuaded that the contract had been frustrated.

By the time the contract was signed there was already unrest throughout the country and it was not clear how long it would last. There were already road closures in place, and demonstrations and violence occurring. Ticket sales had already begun and were low.

The parties both knew enough about the risks the unrest posed to the success of the production when the contract was concluded. It would, therefore, be wrong to use the benefit of hindsight to re-allocate those risks by releasing TE from its contract obligations now.

TE had hoped and expected that the position would improve and was disappointed when it did not. However this was not enough. Things did not improve, but that was not to say that they changed for the worse. The judge accepted that if a bad situation becomes protracted, the consequences may be increased by the passage of time. But that would not mean there has been a frustrating event.

In any event, in this matter there had been no change, and therefore no increase, in the consequences of an existing state of affairs. The trouble might have lasted longer than TE had hoped, but the fact the troubles continued throughout May and June 2010 was clearly a possibility when the contract was signed.

No new event had occurred after the contract had been signed which meant that the obligations were impossible to perform or that they were radically different to what was intended. The civil unrest had started in early May and both parties must have contemplated that ticket sales would be affected - indeed the evidence showed that they had. It would therefore be unjust to allow the defence to succeed because the troubles lasted longer and consequently impacted on ticket sales for longer. The contract had not been frustrated and damages were payable.

Comment

This decision confirms that a defence of frustration will not succeed unless all elements of the doctrine are in place. It will not be enough to say that performance is more difficult or that the contract is no longer profitable. Frustration will not help if a party has simply agreed a bad bargain or would do something different with the benefit of hindsight. A frustrating event has to alter the bargain between the parties - so frustration will only succeed if the event in question clearly takes the situation outside the reasonable contemplation of the parties at the time the contract was concluded. Only then will it be just to allow the contract to be discharged without allocating blame.

The defence may sound good, but successfully arguing that contractual obligations do not have to be fulfilled because the contract has been frustrated will be very difficult.

This decision is therefore neither unusual nor unexpected, but it is a useful reminder that successful claims of frustration are very rare indeed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.