Davis Contractors Ltd v Fareham Urban District Council

Frustration discharges a contract only where, without either party's default, a supervening change makes performance radically different from the obligation undertaken. The court compares the contract, construed in its original circumstances, with the situation that emerged. Hardship, inconvenience, material loss or increased expense does not suffice. A fixed-price contractor ordinarily bears the risk that delay will increase the cost of completing the same work.

A term stated during negotiations does not form part of a later formal agreement merely because it accompanied the tender. The final agreement must incorporate it expressly or by a contractual reference which bears that meaning.

Davis Contractors Ltd v Fareham Urban District Council concerned a fixed-price contract to build 78 houses within eight months. Shortages of skilled labour and materials extended the work to 22 months and substantially increased the contractor's cost. The contractor nevertheless completed the same houses without interruption.

The contractor claimed additional payment on two alternative grounds. It argued that a covering letter made the tender conditional upon adequate labour and materials being available. It also contended that the shortages had frustrated the contract, so that the completed work should be valued on a quantum meruit.

The Lord Chief Justice initially accepted the contractual effect of the letter. Following a Court of Appeal reference back, the arbitrator made a supplemental award accepting that the footing of the contract had disappeared. A reconstituted Court of Appeal unanimously rejected both grounds. The issues before the House were whether the letter was incorporated and whether the delay and increased cost had frustrated the building contract.

1. Appeal dismissed unanimously. All five Law Lords concluded that the contractors remained bound by the fixed-price contract and had no entitlement to additional payment on a quantum meruit. Viscount Simonds formally proposed dismissal with costs.

2. Pre-contractual letter not incorporated. Lord Radcliffe gave the fullest reasoning, with which the other Law Lords agreed. The formal agreement identified the documents forming the contract but did not incorporate the covering letter as a whole. The tender appendix referred to that letter only in the context of price variations. It could not import the separate statement about the availability of labour and materials.

3. Frustration requires a radical change in the obligation. Lord Radcliffe explained that frustration operates where, without default, the circumstances of performance would make the obligation radically different from that undertaken. Hardship, inconvenience or material loss alone is insufficient. Lord Reid approached the issue through the true construction of the contract in its original circumstances and asked whether the contract extended to the situation which emerged. Lord Somervell expressly agreed with Lord Reid's preferred basis. Viscount Simonds emphasised that the doctrine must remain within narrow limits.

4. The building contract continued to govern. Lord Reid held that the delay increased the degree of difficulty but did not transform the work into a different kind of job. Lord Radcliffe and Lord Somervell reasoned that a fixed-price contractor bore the risk that foreseeable shortages and delay would increase its costs unless it secured an express protective term. The contract addressed time, extensions, liquidated damages, wages and material prices, but did not transfer the cost of labour shortages to the council. The inability to identify any point when the contract ceased to bind further contradicted the frustration claim.

5. Earlier building authority confined. The House treated Bush v Whitehaven Trustees as a decision on special facts which did not govern this case. Lord Radcliffe considered its supposed application of frustration mistaken and its general exposition valueless. Lord Somervell likewise considered that it should not be treated as a frustration precedent. The later and higher authorities supplied the governing principles.

• House of Lords: In [1956] UKHL 3, the House unanimously dismissed the contractors' appeal and left the Court of Appeal's rejection of the claim undisturbed.
• Court of Appeal, second hearing: A reconstituted court unanimously rejected both the alleged incorporation of the covering letter and the frustration claim.
• Arbitration following remittal: The arbitrator made a supplemental award finding that the footing of the contract had disappeared and awarded a further £17,258 13s 1d.
• Court of Appeal, first hearing: The court expressed a view adverse to incorporation and remitted the special case for further findings concerning frustration.
• Queen's Bench Division: The Lord Chief Justice treated the covering letter as incorporated and found an implied promise to pay a further reasonable sum.
• Arbitration: The dispute began with a special case arising from the contractor's claim for payment beyond the adjusted contract price.