7. Discharge by frustration PDF

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These are the precise notes of the whole course, catering for revision and examination purpose. All the notes have covered all the lectures and categorized all the mainpoints covered, with reference to the few books the course required especially with deep cases analysis. ...

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CONTRACT LAW - FRUSTRATION A contract is discharged by frustration when some supervening event makes performance of the contract impossible, illegal or something radically different from what was originally envisaged by the parties. The contract is discharged automatically, regardless of the intentions of the parties.

1. THEORIES OF FRUSTRATION i.

That there is a new term implied into the contract; or

ii.

That the obligation under the contract has changed.

2. TESTS FOR FRUSTRATION There are two alternative tests for frustration: (1) The implied term theory: A contract is discharged because it impliedly provides that it ceases to bind the parties in case any supervening events occur. Taylor v Caldwell (1863) 3 B&S 826 Blackburn J stated: "The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance." Lord Loreburn explained in FA Tamplin v Anglo-Mexican Petroleum [1916] 2 AC 397, that the court: '... can infer from the nature of the contract and the surrounding circumstances that a condition which was not expressed was a foundation on which the parties contracted... Were the altered conditions such that, had they thought of them, the parties would have taken their chance of them, or such that as sensible men they would have said "if that happens of course, it is all over between us".' Advantages (1) The courts were reluctant to interfere in the parties’ contracts but by implying a term the court would be doing no more than simply enforcing the “true” agreement or intentions of the parties. (2) According to Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council, when the parties do not have common view after discharge, the court must be “the spokesman of the fair and reasonable man” to achieve justice. Criticisms (1) At the time of contracting, the parties are unlikely to have had any views as to the effects on the contract of the supervening event.  (2) Once the event is occurred, the parties may have no common view as to the effect. One party may say the contract should be discharged while the other one may say that the contract should continue. (2) The change in contractual obligation test: Davis Contractors v Fareham UDC [1956] AC 696 Lords Reid and Radcliffe stated the 'radical change in the obligation' test required the court to:

1. Construe the contractual terms in the light of the contract and surrounding circumstances at the time of its creation. 2. Examine the new circumstances and decide what would happen if the existing terms are applied to it. 3. Compare the two contractual obligations and see if there is a radical or fundamental change. In National Carriers v Panalpina [1981] AC 675, Lord Wilberforce was reluctant to choose between the theories. He took the view that they merged one into the other and that the choice depends upon "what is most appropriate to the particular contract under consideration".

3. EXAMPLES OF FRUSTRATION

A. IMPOSSIBILITY i)

Destruction of the specific object essential for performance of the contract

The destruction of the specific object essential for performance of the contract will frustrate it. See: Taylor v Caldwell (1863) The claimant hired out a music hall in Surrey for the purpose of holding four grand concerts. The claimant went to great expense and effort in organising the concerts. However, a week before the first concert was due to take place the music hall was destroyed by an accidental fire. The claimant sought to bring an action for breach of contract for failing to provide the hall and claiming damages for the expenses incurred. Held: The claimant's action for breach of contract failed. The contract had been frustrated as the fire meant the contract was impossible to perform. -

Partial destruction can be sufficient

In Taylor v Caldwell, the contract was actually for the hiring of the Surrey Music Hall and the Surrey Gardens. Although the gardens remained useable, the main purpose of the contract has been defeated with the destruction of the music hall. Partial destruction can be enough to frustrate the contract if it defeats the main purpose of contract. -

Subject-matter itself need not be destroyed

Subject matter itself need not be destroyed but there must at least be the destruction of something essential to performance. -

Total destruction of the subject-matter not always sufficient

(A) When the contract is governed by other rules which determine when the “risk of loss” passes from one party to another - s.22 of the Sale of Goods Ordinance (Cap. 26)  

Risk of the goods being destroyed is on sellers before delivery The risk is on the buyers after delivery

- Building contracts Building work  

Unless otherwise agreed, the risk of the work is on the builder until the agreed work is completed No frustration if the work is destroyed before completion.

Work on existing building

 

ii)

In case the builders agree to build and install machinery in a factory The contract will be discharged by frustration if the factory is destroyed before the installation is complete.

Personal incapacity or death

Personal incapacity where the personality of one of the parties is significant may frustrate the contract. See: Condor v The Baron Knights [1966] 1 WLR 87 A 16-year-old agreed by contract to play the drums for the defendant band for 7 nights per week for 5 years. The claimant suffered a mental breakdown and was told by his doctor that he should not perform more than 4 nights per week. The band dismissed him. He brought a claim for wrongful dismissal. Held: The claimant's action was unsuccessful as his medical condition made it impossible for him to perform his contractual obligations and the contract was thus frustrated. It was necessary to engage another drummer who could safely work on seven nights each week. The court held that Condor's contract of employment had been frustrated in a commercial sense. It was impracticable to engage a stand-in for the three nights a week when Condor could not work, since this involved double rehearsals of the group's music and comedy routines.

See: Phillips v Alhambra Palace Co [1901] 1 QB 59 One partner in a firm of music hall proprietors died after a troupe of performers had been engaged. The contract with the performers was held not to be frustrated because the contract was not of a personal nature, and could be enforced against the surviving partners.

See: Graves v Cohen (1929) 46 TLR 121 The court held that the death of a racehorse owner frustrated the contract with his employee, a jockey, because the contract created a relationship of mutual confidence.

iii)

Delay

Inordinate and unexpected delay may frustrate a contract. The problem is to know how long a party must wait before the delay can be said to be frustrating. -

Time is too long

See: Jackson v Union Marine Insurance (1873) LR 10 CP 125 A ship was chartered in November 1871 to proceed with all possible despatch, danger and accidents of navigation excepted, from Liverpool to Newport where it was to load a cargo of iron rails for carriage to San Francisco. She sailed on 2 January, but the next day ran aground in Caernarvon Bay. She was refloated by 18 February and taken to Liverpool, where she underwent extensive repairs, which lasted till August. On 15 February, the charterers repudiated the contract. The court held that such time was so long as to put an end in a commercial sense to the commercial speculation entered upon by the shipowner and the charterers. The express exceptions were not intended to cover an accident causing such extensive damage. The contract was to be considered frustrated.

See: Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] (1) There was a charter-party for six or seven voyages to be made between April and December. (2) However, there was a long strike at the port of loading. Held: The charter-party was frustrated after the first voyage because if the long strike making it impossible to carry out more than a further two journeys.

-

Time is not long enough

See: FA Tamplin Steamship v Anglo-Mexican Petroleum [1916] Fact: There was a five-year charter which would expire in December 1917. There was a wartime requisition of a ship in February 1915. Held: a) The charter-party was not frustrated. b) The courts speculated, at the time, that the war would be over

B. FRUSTRATION OF PURPOSE  It happens when the common purpose for which the contract was entered into can no longer be carried out because of a supervening event.  This is quite difficult to establish as the courts don’t want to provide an easy escape route out of a bad bargain. Compare the leading cases: See: Krell v Henry [1903] 2 KB 740  (1) D hired rooms in Pall Mall for two days in order to see Edward VII’s coronation procession as it passed along Pall Mall.  (2) No reference to the procession was made in the written agreement.  (3) The coronation was postponed because of the king’s illness.  (4) The housekeeper of the premises informed D that P was willing to let his rooms for the purpose of seeing the Royal procession on both days, but not nights.   Held:  (a) The contract was frustrated.  (b) The taking place of the processions was regarded by both parties as being the foundation or basis of the contract, and their postponement prevented performance of the contract.  “...the taking place of those processions on the days proclaimed along the proclaimed route…was regarded by both parties as the foundation of the contract; and I think it cannot reasonably be supposed to have been in the contemplation of the contracting parties, when the contract was made, that the coronation would not be held on the proclaimed days…”   Key Principle  Where a change in circumstances radically affects the purpose of the contract then the contract will be frustrated.

See: Herne Bay Steamboat Co v Hutton [1903] 2 KB 683 (1) D chartered a steamboat from P in order to take paying passengers to see the royal naval review at Spithead and for a day’s cruise round the fleet. (2) The naval review was cancelled because of the king’s illness. Held: (a) The naval review was not the foundation of the contract so the contract was not frustrated when it was cancelled. (b) Hutton’s purpose (taking people to see the Naval Review and on the next day taking them round the fleet) was not the foundation of the contract. (c) Seeing the naval review and the fleet was a matter with which D was alone concerned and not the plaintiffs. (d) It was still possible to realize part of the contract (A cruise round the fleet could still be realized.) Key Principle:  A change in circumstances which only incidentally affects the purpose of the contract will not frustrate the contract.

C. INTERFERENCE BY THE GOVERNMENT Interference by the government may frustrate a contract. See: Metropolitan Water Board v Dick Kerr [1918] AC 119 Kerr agreed to build a reservoir for the Water Board within six years. After two years, Kerr were required by a wartime statute to cease work on the contract and to sell their plant. The contract was held to be frustrated because the interruption was of such a nature as to make the contract, if resumed, a different contract.

See: Re Shipton, Anderson and Harrison Brothers [1915] 3 KB 676 A contract was concluded for the sale of wheat lying in a warehouse. The Government requisitioned the wheat, in pursuance of wartime emergency regulations for the control of food supplies, before it had been delivered, and also before ownership in the goods had passed to the buyer under the terms of the contract. It was held that the seller was excused from further performance of the contract as it was now impossible to deliver the goods due to the Government's lawful requisition.

D. SUPERVENING ILLEGALITY A contract may become frustrated where, although legal at the time of making the contract, the performance of the contract has become illegal.

i)

Outbreak of war

See: Denny, Mott & Dickinson v James Fraser [1944] AC 265 A contract for the sale and purchase of timber contained an option to purchase a timber yard. By a wartime control order, trading under the agreement became illegal. One party wanted to exercise the option. It was held that the order had frustrated the contract so the option could not be exercised.

Fibrosa Spolka Akcynja v Fairbairn Lawson Combe Barbour Ltd [1943] Facts: Fairbairn agreed to manufacture machines for Fibrosa and deliver them to Gdynia, Poland. Yet, before Fairbairn had completed the manufacture, Gdynia was occupied by the German Army at the outbreak of WWII. Held: the contract was frustrated because of the strong public interest against trading with the enemy during war-time. -

Temporary illegality

Where the illegality is only temporary, the contract may only be frustrated if such illegality affects performance in a substantial way. Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] Held: a war-time building restriction did not frustrate a 99-year lease because there was still ample time to build after the war-time restriction were lifted. - Public Authority’s Consent is withheld A refusal of such a licence, after the contract has been entered into will not constitute a frustrating event. HOWEVER, If the refusal of the licence is due to a change in government policy and such licences had previously been issued as a matter of course, then it is possible that the supervening change in government policy may constitute a frustrating event. (Maritime National Ltd v Ocean Trawlers Ltd) If the parties’ obligations cannot be discharged by frustration, the parties may avoid liability for breach for non-performance by making his performance obligations subject to a “condition precedent” that the licence will be obtained. As a result, the party will not be liable in damages if he has taken “reasonable steps” to obtain the licence.

4. LIMITATIONS OF THE DOCTRINE 'The doctrine of frustration must be applied within very narrow limits', per Viscount Simmonds in Tsakiroglou [1961] (below). Lord Roskill said that the doctrine of frustration was 'not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains', in Pioneer Shipping v BTP Tioxide [1982] AC 724. The doctrine of frustration cannot override express contractual provision for the frustrating event.

A. MERE INCREASE IN EXPENSE OR LOSS OF PROFIT The mere increase in expense or loss of profit is not a ground for frustration. See: Davis Contractors v Fareham UDC [1956] AC 696 The plaintiff agreed to build 78 houses in eight months at a fixed price. Due to bad weather, and labour shortages, the work took 22 months and cost £17,000 more than anticipated. The builders said that the weather and labour shortages, which were unforeseen, had frustrated the contract, and that they were entitled to recover £17,000 by way of a quantum meruit. The House of Lords held that the fact that unforeseen events made a contract more onerous than was anticipated did not frustrate it.

B. FRUSTRATION MUST NOT BE SELF-INDUCED

 (a) Self-induced frustration  If it is self-induced, it is not frustration at all.  (i) Burden of proof: The burden of proving that the event in question was self-induced lies on the party who so alleges that it was.  (ii) Deliberate act: Deliberate act cannot be a ground for frustration but the other party may be able to rely on that act as constituting frustration.  (iii) Negligence: See: J. Lauritzen A.S. v Wijsmuller B.V, (The Super Servant Two) [1990]   (1) D decided to allocate Super Servant Two to perform P’s contract while Super Servant One to perform other contracts.  (2) Before the performance of P’s contract, Super Servant Two sank while performing other contracts.  (3) D could not perform P’s contract using Super Servant One as it had been already allocated to perform another contract. (4) Therefore, D performed P’s contract using a more expensive transportation way. (5) P brought an action for damages, alleging that D had breached the contract by failing to perform it in the agreed manner. (6) D denied liability, arguing that the contract had been frustrated due to the sinking of the Super Servant Two. Held: The contract had not been frustrated. Key Principle: (a) Negligence is something which is within the control of the negligent party. Thus, negligence would constitute “self-induced frustration”.  (b) The actual cause of the non-performance was not the supervening event (sinking of the Super Servant Two) but rather the defendants’ choice (to allocate Super Servant One) to perform another contract.  See: Maritime National Fish v Ocean Trawlers [1935] AC 524 (1) D chartered The St Cuthbert from P. (2) D was required to obtained a licence and allocate it on the ship chartered for its intended purpose. (3) D applied for 5 licences for five vessels but were only allocated 3 licences. (4) D allocated the 3 licences to their own ships but not The St Cuthbert. (5) When P sued for the hire fee due unfer the charter, D argued there was no fee due as the contract was frustrated by the failure to obtain a licence, preventing them to realize the purpose of hiring the ship. Held: (1) There was no frustration. (2) The act and election of the D’s charterers was the cause preventing the St Cuthbert from being licensed. “…What matters is that they could have got a licence for the St Cuthbert if they had so minded.”

C.FORESEEABILITY OF THE FRUSTRATING EVENT - The issue of foreseeability is a limitation of invoking the doctrine of frustration. - If the supervening events are foreseen or foreseeable, there is a prima facie inference that the parties have made the contract with reference to that risk.

Walton Harvey Ltd v Walker & Homfrays Ltd [1931] 1 Ch 274 The defendant's granted the plaintiffs the right to display an advertising sign on the defendant's hotel for seven years. Within this period the hotel was compulsorily acquired, and demolished, by a local authority acting under statutory powers. The defendants were held liable in damages. The contract was not frustrated because the defendant's knew, and the plaintiffs did not, of the risk of compulsory acquisition. They could have provided against that risk, but they did not.

- BUT the fact that the risk is foreseen or foreseeable will not automatically disallow the contract frustrated. Many risks are foreseeable though the chances of them occurring is so low that the parties do not provide for such risks. Edwinton Commercial Corporation and Global Tradeways Ltd v Tsavliris Russ (Worldwide Salvage and Towage) Ltd (The "Sea Angel") [2007] Key Principle: “…the less that an event, in its type and its impact, is foreseeable, the more likely it is to be a factor which, depending on other factors in the case, may lead to frustration.”

D. FORCE MAJEURE CLAUSE  A force majeure clause precludes the operation of frustration, except in cases of illegality.   (i) Content of a force majeure clause  (1) a statement of events which trigger the operation of the clause  (2) the reporting obligations of the party who wishes to invoke the protection of the clause  (3) the consequences of the ocuurence of the force majeure event   (ii) Advantages of a force majeure clause  (1) Achieve party-controlled risk allocation and loss apportionment  (2) Certainty (A definite list of events constituting a force majeure is agreed by parties.)  (3) Wider scope (The parties can agree a wider scope of events which will constitute a force majeure such as an ...