Fibrosa Societe Anonyme v Fairbairn Lawson Combe Barbour Ltd [1942] UKHL 4 (15 June 1942)

A Polish company paid an advance for machinery from an English company. The contract was frustrated by the outbreak of WWII. The House of Lords held the Polish company could recover its advance payment due to a total failure of consideration.

Facts

In July 1939, the appellants, Fibrosa Spolka Akcyjna (a Polish company), entered into a contract with the respondents, Fairbairn Lawson Combe Barbour, Ltd (an English company), for the purchase of certain machinery for £4,800. Delivery was to be to Gdynia, Poland. Per the contract terms, the appellants made an advance payment of £1,000. However, on 1 September 1939, Germany invaded Poland, and on 3 September, Great Britain declared war on Germany. Gdynia was subsequently occupied by German forces, making performance of the contract illegal as it involved trading with the enemy. The contract was therefore frustrated. The appellants requested the return of their £1,000 prepayment. The respondents refused, arguing that significant work had already been undertaken and expenses incurred. The Court of Appeal, bound by the precedent in Chandler v Webster [1904] 1 K.B. 493, held that the loss lay where it fell, meaning the appellants could not recover their payment.

Issues

The central legal issue for the House of Lords was whether to uphold the established rule in Chandler v Webster. Specifically, could a party who had paid money under a contract that was subsequently frustrated recover that money on the basis that the consideration for the payment had wholly failed? Furthermore, did it make a difference that the recipient of the payment had already incurred expenses in partial performance of the contract?

Judgment

The House of Lords unanimously allowed the appeal, decisively overruling Chandler v Webster. The court held that the appellants were entitled to recover the £1,000 payment. The Law Lords rejected the ‘loss lies where it falls’ principle as unjust. The judgment was grounded not in the frustrated contract itself, but in the separate, quasi-contractual principle of restitution to prevent unjust enrichment.

Reasoning of the Court

Viscount Simon L.C. clarified that the claim was not contractual but was based on a different legal ground:

The claim of a party who has paid money under a contract, to get the money back, on the ground that the consideration for which he paid it has wholly failed, is not based on any provision contained in the contract, but arises because, in the circumstances that have happened, the law gives a remedy in quasi-contract to the party who has not got that for which he bargained.

The key principle applied was that of a ‘total failure of consideration’. Since the appellants had received no part of the machinery, the entire purpose for which they had paid the £1,000 had failed. The respondents’ argument that their own work constituted partial performance was dismissed; the consideration was the delivery of the finished machinery, not the process of manufacturing it. Lord Wright emphasized this point:

It is, in my opinion, plain that the appellants paid their £1,000 on account of the price of the machines. They paid it for the performance of the contract and for nothing else. As the contract has been frustrated, they have not received the consideration, or any part of it. There has been a total failure of consideration. They are accordingly entitled to recover the £1,000, not as on a breach of contract, but in indebitatus assumpsit, on the ground of failure of consideration.

The court acknowledged that the respondents had incurred expenses but concluded that English common law did not permit an apportionment of loss in such circumstances. The remedy was restitution of the full amount upon a total failure of consideration, or nothing if the failure was only partial. This was recognised as a potential defect in the law.

Implications

The Fibrosa case is a landmark decision in the English law of contract, specifically concerning the doctrine of frustration. It corrected what was widely seen as the harsh and arbitrary rule from Chandler v Webster, replacing it with a more equitable principle based on restitution for unjust enrichment. The case firmly established that prepayments made under a contract could be recovered if the contract was later frustrated, provided there had been a total failure of consideration. However, the judgment itself highlighted a new problem: its ‘all or nothing’ approach. It did not allow the payee (like Fairbairn) to set off any legitimate expenses incurred before the frustrating event. This clear deficiency in the common law led directly to a legislative remedy: the Law Reform (Frustrated Contracts) Act 1943. This Act granted courts the discretion to order a ‘just’ outcome, allowing for the retention or recovery of prepayments to cover expenses and for payments to be made for valuable benefits conferred before frustration, thus creating a more flexible framework than the common law rule established in Fibrosa.

Verdict: Appeal allowed. The appellants (Fibrosa S.A.) were entitled to recover the £1,000 which they had paid in advance.

Source: Fibrosa Societe Anonyme v Fairbairn Lawson Combe Barbour Ltd [1942] UKHL 4 (15 June 1942)