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Tom, a manufacturer, receives an order to produce 1,000 widgets. Before starting production, he needs his widget machine serviced. Tom contracts with Sarah, a service engineer, to service the widget machine for a fee of £6,000, with £1,500 to be paid seven days in advance and £4,500 on completion. Sarah spends £750 on planning and organising the overhaul. Unfortunately, Sarah suffers an injury the day before the service was due and is unable to perform the service. Tom has not paid any money according to the contract. 


Assuming the contract between Tom and Sarah has been frustrated, what is the maximum amount Sarah can recover under the Law Reform (Frustrated Contracts) Act 1943?

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Assuming the contract between Tom and Sarah to have been frustrated, Sarah can expect to recover £750. According to the Law Reform (Frustrated Contracts) Act 1943, s.1(2), money paid prior to the frustrating event is recoverable (or money still owed ceases to be due), subject to the discretion of the court to allow the payee to retain money paid, or recover money payable, up to the amount of expenses incurred for the purpose of performance of the contract. Tom has not paid the advance payment of £1,500 agreed to before the frustrating event occurred, but Sarah, while planning the service, has incurred expenses of £750. Therefore, Sarah, as payee, may recover up to £750, subject to court discretion. Under the approach adopted in the case of Gamerco SA v ICM/Fair Warning Ltd [1995] 1 WLR 1226, the court has broad discretion to mitigate the unfairness of letting the payor absorb the loss. 


Key Point: The Law Reform (Frustrated Contracts) Act 1943 allows for the recovery of expenses incurred before the frustrating event, subject to court discretion.

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