Davis Contractors v Fareham Urban DC [1956] UKHL 3 (19 April 1956)

Contractors agreed to build houses for a fixed price in eight months. Due to an unexpected labour shortage, it took 22 months and cost significantly more. The court ruled the contract was not frustrated, as increased difficulty or expense does not fundamentally change the obligation.

Facts

In July 1946, Davis Contractors Ltd tendered for a contract with Fareham Urban District Council to build 78 houses for a fixed sum of £94,424. The work was scheduled to be completed within 8 months. Included with the tender was a letter stating the bid was subject to adequate supplies of labour and materials being available. The final contract did not incorporate this letter. Due to an unexpected and severe shortage of skilled labour and building materials in the post-war period, the project took 22 months to complete. This delay significantly increased the cost of the project for the contractors, who ultimately incurred costs of £115,233.

The contractors argued that the original contract was frustrated by the unforeseen delay and that they were therefore entitled to be paid on a quantum meruit basis (a reasonable sum for the work done) rather than the fixed contract price.

Issues

The central legal issues before the House of Lords were:

1. Was the contract frustrated due to the lengthy delay and increased expense caused by the unforeseen shortage of labour and materials?
2. If the contract was not frustrated, could a term be implied into the contract providing for additional payment in the event that performance became more onerous than anticipated?

Judgment

The House of Lords unanimously dismissed the appeal, holding that the contract had not been frustrated. The fixed price of £94,424 was therefore binding, and the contractors were not entitled to any additional payment on a quantum meruit basis.

Reasoning of the Court

The Lords rejected the contractors’ argument that the unforeseen circumstances had frustrated the contract. The core of the judgment was that a contract is not frustrated simply because its performance becomes more difficult, more expensive, or less profitable than expected. The event must be so fundamental that it changes the very nature of the contractual obligations.

Lord Reid articulated that the contractors had undertaken the risk of labour and material availability. He stated:

In a contract of this kind the contractor undertakes to do the work for a definite sum and he takes the risk of the cost being greater or less than he expected. If delays occur through no one’s fault that may be in the contemplation of the contract … In this case the appellants’ tender was subject to adequate supplies of labour and materials but that was not embodied in the contract.

Lord Radcliffe provided what has become the definitive modern test for the doctrine of frustration. He moved away from the idea of an implied term and instead focused on the construction of the contract itself. He famously stated:

…frustration 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.

Applying this test, Lord Radcliffe concluded that the delay and extra cost, while significant, did not make the performance ‘radically different’ from what was originally agreed. The obligation was still to build 78 houses. The fact that it became a much worse bargain for the contractor was not sufficient to frustrate it.

It is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.

Implications

The decision in Davis Contractors v Fareham UDC is a landmark case in the English law of contract. It significantly clarified and narrowed the scope of the doctrine of frustration. By establishing the ‘radically different’ test, the House of Lords set a very high threshold for a contract to be discharged by frustration. The case firmly establishes that commercial impracticability, hardship, or unforeseen expense are not, by themselves, frustrating events. It underscores the principle of sanctity of contract and that parties are generally expected to bear the risks they assume, even if events make the contract unprofitable. This decision reinforced the idea that the courts will not intervene to rewrite a bad bargain, ensuring commercial certainty.

Verdict: Appeal dismissed. The contractors’ claim for payment on a quantum meruit basis failed as the contract was not frustrated and remained binding.

Source: Davis Contractors v Fareham Urban DC [1956] UKHL 3 (19 April 1956)