Metropolitan Water Board v Dick Kerr & Co Ltd [1917] UKHL 2 (26 November 1917)

A contract to build a reservoir was halted by a government order during WWI. The contractors argued this 'frustrated' the contract, terminating it. The House of Lords agreed, finding the indefinite government intervention fundamentally altered the original contractual obligations, rendering it void.

Facts

In July 1914, the respondents, Dick, Kerr & Co. Ltd., entered into a contract with the appellants, the Metropolitan Water Board, to construct a reservoir and associated works at Staines within a period of six years for approximately £673,000. Work commenced but was disrupted by the outbreak of the First World War. On 21 February 1916, the Minister of Munitions, acting under powers conferred by the Defence of the Realm Acts, ordered the contractors to cease work on their contract and to remove and sell their plant. The contractors complied. The Metropolitan Water Board contended that the contract was still valid, arguing that a contractual clause (Condition 32) providing for an extension of time in the event of delays or impediments meant the stoppage was a foreseen event which merely suspended, rather than terminated, the contract. The Water Board sought a declaration that the contract remained in force.

Issues

The principal legal issue before the House of Lords was whether the indefinite prohibition on continuing the work by order of the Minister of Munitions frustrated the contract, thereby terminating it. A crucial sub-issue was whether the contract’s express provision for an extension of time in case of delays prevented the doctrine of frustration from applying, on the basis that the parties had already allocated the risk of such an interruption.

Judgment

The House of Lords unanimously dismissed the appeal, holding that the contract had been frustrated and was therefore terminated. The court reasoned that the government’s intervention was not merely a temporary delay but an interruption of such a character and indefinite duration that it fundamentally destroyed the identity of the contract and the foundation upon which it was made.

Lord Finlay L.C.

The Lord Chancellor distinguished between a temporary stoppage and an event that fundamentally changes the nature of the contract. He found the government’s order fell into the latter category, as it created an interruption of uncertain and potentially vast duration. Regarding the extension of time clause, he stated:

This clause does not cover the case in which the interruption is of such a character and duration that it vitally and fundamentally changes the conditions of the contract, and could not possibly have been in the contemplation of the parties to the contract when it was made.

Lord Dunedin

Lord Dunedin agreed, emphasising that the interruption made the performance of the contract, when and if resumed, a different undertaking entirely from what was originally agreed. He noted that the order not only stopped the work but also required the dispersal of the plant, which was critical to performance.

An interruption may be of such a character and duration as to make the contract when resumed a different contract from the contract when broken off… I am of opinion that the interruption is of such a character and duration as to make the contract when resumed a different contract from the contract when broken off.

He dismissed the argument that the delay clause applied, viewing it as intended for ordinary delays and not a ‘cataclysmic’ event like a complete and indefinite cessation of work under government order.

Lord Atkinson

Lord Atkinson focused on the effect of the supervening illegality and the radical change in circumstances. He argued that to hold the parties to the contract would be to bind them to a new agreement they never made, given the inevitable changes in labour and material costs post-war.

…the contract, if resumed, would be a different contract from that which was interrupted… Not only is the physical performance of the contract, as originally contemplated, now impossible, but the conditions of labour and the prices of material will have, it is morally certain, so completely changed that the contract, if resumed, would be a different thing from the contract which was interrupted in February 1916.

Implications

This case is a leading authority on the doctrine of frustration in English contract law. It powerfully affirmed that a contract is frustrated when a supervening event, such as a government order making performance illegal, is so fundamental that it changes the very nature of the outstanding contractual obligations. Crucially, it established that even a comprehensive force majeure or extension clause may not prevent frustration if the event is of a kind beyond what the parties could have reasonably contemplated. The decision underscores that the doctrine applies where the commercial purpose of the contract has been destroyed, and performance in the new circumstances would be a fundamentally different thing from that originally undertaken.

Verdict: The appeal was dismissed with costs; the decision of the Court of Appeal, which held that the contract was frustrated, was affirmed.

Source: Metropolitan Water Board v Dick Kerr & Co Ltd [1917] UKHL 2 (26 November 1917)