Frustration - notes on week 1 PDF

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notes on week 1...

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Subject 1 - Frustration. Readings      

Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Brisbane City Council v Group Projects Pty Ltd (1979) 145 CLR 143 Meriton Apartments Pty Ltd v McLaurin & Tait (Developments) Pty Ltd (1979) 145 CLR 143 oOh! Media Roadside Pty Ltd (formerly Power Panels Pty Ltd) v Diamond Wheels Pty Ltd & Anor [2011] VSCA 116 (not in CB) Frustrated Contracts Act 1978 (NSW) Beaton v McDivitt (1987) 13 NSWLR 162

Checklist for Problem Solving in relation to frustration 1. What was the basis for contracting ie. What was the performance expected by both partes with their knowledge at that time? 2. What is the effect of the supervening event? 3. Does it make it impossible to perform? (Taylor v Caldwell) 4. Does it require the imposition of further obligations on the parties so that what is expected is now radically different from what was originally contemplated? (Codelfa) 5. Does it give rise to a fundamentally different situation? (BCC v Group Projects)

A contract will be 'frustrated' when an event (unprovided for in the contract) renders the contract practically incapable of being performed, not by fault of either of the parties. The test for frustration is: “If an event occurs, by fault of neither party and unprovided for in the contract, which completely changes the state of things, making the performance of the contract impossible or impracticable because the situation or performance are now radically or fundamentally different to was what originally contemplated, a contract will be frustrated. (Codelfa)

however, frustration will not be recognised when:

1. The event was provided for in the contract.[2] 2. The event should have been reasonably foreseeable. [3] 3. The event occurred by fault of the party seeking frustration. [4] If a contract is determined to be 'frustrated', it means that the contract immediately ended as the frustrating event occurred: 

This means that all rights and liabilities which have accrued unconditionally prior to the time of the frustrating event remain in place, while the parties will be discharged from future obligations. - case reference needed.(contracts act)

The development of frustration Originally, frustration could only occur when the performance was rendered absolutely impossible. 

For example, A and B enter into a contract for A to paint B's house.

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A dies before performance.

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It is now absolutely impossible for A to perform the contract. The contract is frustrated.

An absolute impossibility thus rises from the destruction of the subject matter of the contract. This was discussed in Taylor v Caldwell. Not actually referred to as Frustration yet rather Taylor v Caldwell is an example of the early approach of the court. The parties could only be excused from performance if the subject matter was destroyed and performance was rendered absolutely impossible.

However, this strict view was relaxed in Krell v Henry, where the court discussed how contract may be frustrated if the assumption or foundation under which the contract was entered into ceases to exist: 

I think that you first have to ascertain, not necessarily from the terms of the contract, but, if required, from necessary inferences, drawn from surrounding circumstances recgonised by both contracting parties, what is the substance of the contract, and then ask the question whether that substantial contract needs for its foundation the assumption of the existence of a particular state of things[6]."

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"If the contract becomes impossible of performance by reason of the non-existence of the state of things assumed by both contracting parties as the foundation of the contract, there will be no breach of the contract thus limited[7]."

Effectively, this means that absolute impossibility of performance is not a requirement any more. If the unforeseen events brought about a new situation where the purpose to which the contract was entered into ceased to exist, a contract will be frustrated. This can also be seen as performance being rendered impractical. This was also discussed in Brisbane City Council v Group Project Pty Ltd, in which the commercial purpose behind the defendant's agreement ceased to exist: 

A comparison needs to be made between the contemplated situation, as revealed by construction, and the situation in fact resulting from the frustrating event.

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In this case, "There has arisen, as a result of the compulsory acquisition of the land by the Crown for a school site, such a fundamentally different situation from that contemplated when the contract was entered into that it is properly to be regarded as having come to an end at the date of acquisition by the Crown[8]."

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Thus, if a frustrating event completely changes the situation which was originally contemplated by the parties, a contract may be frustrated.

The doctrine was expanded further in Codelfa Construction v State Rail Authority of New South Wales, which is now the modern approach:

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If an event occurs, by fault of neither party and unprovided for in the contract, which completely changes the state of things, making the performance of the contract impossible or impracticable because the situation or performance are now radically or fundamentally different to was what originally contemplated, a contract will be frustrated.



The 'implied term' way should not be used anymore, although previous decisions are still valid.

Frustration will not be recognised when:

1. The event was provided for in the contract.[10] 2. The event should have been reasonably foreseeable. [11] 3. The event occurred by fault of the party seeking frustration. [12]

Elements: a. Supervening event - Examples: natural disaster, supply contract, injunction, land rezoning (Brisbane City Council), non-occurrence of essential event (Krell), futility (Brisbane City Council), delay (Codelfa) - Non-frustrating events include: 

Supervening event is reasonably foreseeable, so risk is assumed (Ooh

Media)   

Disappointment Event induced by one party Where there is a special provision made in the contract to deal with this

(contingent condition) b. Without fault of either party -

As above, self-induced frustration = no frustration

c. Performance is impossible or is fundamentally or radically different from that contemplated by the parties - Onus on the party asserting frustration to prove on the balance of probabilities - Codelfa – if purpose for which contract is entered into ceases to exist, this will be Sufficient for frustration - not sufficient if it makes the contract more expensive (Ooh Media)

Cases on point

Beaton v McDevitt –

McDivitt undertook to transfer a portion of his land to Beaton after a proposed rezoning (expected 2 years) on the condition that in the meantime B worked the land using permaculture.

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B occupied the land and worked it as required. Made improvements including an illegal structure.

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7 years later a dispute arose. Council ordered structure removed. McD ordered B from the land.

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One issue concerned whether there was consideration for the promise (NSWCA 2:1 – yes).

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Was the contract frustrated because land not rezoned?

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Finding:

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Mahoney JA: No provision for what would happen if land not rezoned. Doctrine of frustration not prevented by fact that parties have contracted on basis of an expressed assumption which proves false. Possibility of rezoning but no present prospect. Frustrated.

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McHugh JA: Not frustrated. Present zoning did not prevent subdivision. Contract not made subject to rezoning & subdivision not a legal impossibility. McD have to do all in their power to have the land subdivided. If application fails then possible to conclude frustration – time has not yet come.

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(Kirby P did not find contract – no consideration; no basis to enforce equity of part performance)

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Taylor v Caldwell- contract for hire of concert hall. Owner agreed. After contract as complete but before performance concert hall burnt down. Court said contract was frustrated.

Krell v Henry- king was going to be crowned. Going to be a parade. Person wished to rent flat above parade. Parade was cancelled and court found the contract frustrated. Meriton apartments- several blocks of land. Someone selling someone buying. Condition in contract for council approval. Council needed to approve development eg wanted to buy to make money and sell

propertys. Between the contract and approval the builders(maybe council) decided they weren’t going to build the buildings on that land. Seller still wants money purchaser does not as can’t build. The green ban was a supervening event however a change in value is not enough.

Brisbane city council – group project already owned the land. They wanted to develop but need approval from minister. They ask council for help to get yes. They agreed if they paid 200k bond. And invest in council stuff. The land that group projects owned was purchased by the crown. Brisbane council tries to enforce contract. Contract was frustrated. The situation was fundamentally different. Brisbane City Council v Group Projects Pty Ltd (1979) Facts: –

GP owned land on outskirts of Brisbane and wished to develop it.

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Council agreed to apply to Minister to rezone in return Co agreed to provide water, sewerage and electricity works on the land & land abutting its own. Before the land was rezoned, the Government resumed part.

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Issue: was Co obliged to continue to provide the services on adjacent land or was the contract frustrated?

Sup Ct said frustrated; confirmed Full Court; HC appeal Held- Unanimous HC decision (denying appeal), but only 2 judges (Stephen & Murphy JJ) dealt with frustration. (Others – breach by Council.) Strictly performance was not impossible nor even more onerous, but Stephen J said not a case of looking to the words the parties used but to the "factual matrix", ie purpose for which parties contracted in first place. Council concerned to see residential development done properly, once this no longer possible, Council's concern to an end. –

According to Stephen J test was to look at the contract and the situation contemplated by the parties at time of entry into contract and compare with situation after land was resumed.

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Had this change rendered performance ‘radically different’ from that which was contemplated? Stephen J said it had.

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Stephen J’s emphasis on purpose of contract not on the obligations themselves was a shift in direction.

Codelfa- construction authority ends construction and refuses to pay Codelfa. Codelfa wants contract frustrated as it helps them continue working and be payed for work they have done. Argument that

codelfa has assumed the risk but court decided that they did not. Contract said they would perform regardless of any delay. In codelfa it was found the contract was frustrated. Radically different obligation. In descent they said there was no supervening event therefore no frustration. •

Facts: (Covered in Week 11 Sem 1, Implied Terms) –

Review: Codelfa contracted to excavate tunnels for Eastern Suburbs rail in Sydney

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Assumed this could be done round the clock and would not be affected by noise restrictions because contract with govt.

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Did not have immunity

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Injunction from residents meant only 2 shifts allowed & none on Sundays

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Significant impact on costs (extensive delay)

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Performance would be substantially different from that contemplated when the parties entered into the contract.

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On the true construction of the terms in the contract, taking into account surrounding circumstances, were they wide enough to cover the new situation – if not, the contract is at an end?

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Here there was a "fundamental or radical change in the surrounding circumstances and in the significance of the obligations supplied".

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The contract was, therefore, remitted to the Arbitrator for a decision re frustration.

Held:

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Majority adopted Stephen J’s approach to frustration from Group Projects. Mason J cited definition of frustration from Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council (1956) AC 696.

". . . 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. . . . It was not this that I promised to do. … even so, 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." •

Mason J in Codelfa: –

identified a close relationship between the doctrine of frustration and the concepts of common contractual assumption and mutual mistake •

Common contractual assumption as to a future fact is basis for doctrine of frustration

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Common contractual assumption as to present fact – doctrine of mutual mistake

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Ooh media- contract to have a billboard on building. Something was built which obstructs view of billboard(86% of sign)(this happened 3 years in). 5-year contract. Ooh media wishes to end the contract and not pay for last 2 years and frustration is an argument for this. There is a supervening event. Ooh media should have put in a clause insisting that if new building is placed that blocks signs effectiveness then contract should be ended or payment reduced. Issue is that it is potentially foreseeable that in the Melbourne cbd that new buildings could be built.it was found there was no frustration. Nettle JA in oOh! Media says ‘In the case of foreseeable but unforeseen events, the nature and extent of foreseeability is critical’.

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Issue: •

Was contract for hire of outdoor advertising space frustrated because high rise building built on opposite corner impeded view? Was that a fundamental change? Billboard 1967; new 5 year licence commence 2006.

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Foreseeable that high rise buildings would be built – Melbourne CBD.

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Appellant had not sought clause in contract to account for reduction in line of sight.

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Appellant claimed ‘unexpressed common assumption’ that motorists travelling north on King St would have uninterrupted view.

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Nettle JA: ‘Parties to a contract will not ordinarily be taken to have assumed the risk of an event occurring during the life of the contract unless the degree of foreseeability of that event is very substantial. [74]

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[77] The possibility of a site being built out in a CBD location was well understood in the advertising industry. [80] It seems to me that it was plainly foreseeable at the time of entry into the licence agreement in 2005 that the line of sight … was at risk of being partially or completely obstructed during the course of the licence agreement.

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Redlich JA: Risk that visibility would be reduced in future was plainly foreseeable. Therefore must be regarded as having assumed risk of its occurrence. [114]

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Weinberg JA: It seems extraordinary to me that, where unimpeded and long range visibility is critical to the financial viability of an agreement to license a billboard site for outdoor advertising and promotional display purposes, the relevant agreement would not deal specifically, and in terms, with the consequences that should flow from a material reduction in visibility, such as that which may occur with a significant build out. [121]

(CRITICAL THINKING) The more protections a client wants the more money a seller will want eg refer to Meriton

Doctrine of frustration is not about protecting people from stupid business but from outside events. Test  

Supervening event Change

Lord Reid: fundamentally different situation Lord Radcliffe: radically different obligation  

Change not caused by default of either party LOOK AT THE CONTRACT! Was the change foreseeable/did either party assume the risk

Void ab initio- void from the beginning ( sometimes a contract will be void ab initio and sometimes it will be ending at a certain point)

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When is frustration relied upon? –

As a defence •

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As a basis for a claim •

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To avoid liability for breach of contract

To avoid performance due under a contract and secure greater recompense: Codelfa

Limits to frustration Fact that circumstances must be ‘fundamentally’ or ‘radically’ different narrowly confines the operation. What are the other limitations? 1. Risk of the frustrating event must not have been provided for in the contract. Is there a force majeure clause (next slide)? Is it clear from the construction of the contract that one side has assumed the risk of a specified event occurring. Codelfa & Meriton 2. Event must not be foreseeable at the time of making the contract. See Beaton v McDivit & oOh! Media. 3. Not ‘self-induced’ – no fault by ether side.

Some reasons for frustration •

- Group Projects illustrates how a change in very basis of the contract may bring the contract to an end.

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Illegality or change in the law perhaps the most common reason, eg war.

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Codelfa – change in the essential state of affairs & delay.

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Delay was the argument in National Carriers v Panalpina (Northern) Ltd [1985] - lessee denied access to leased premises for 20-months out of 10-years. H of L held not sufficient. Test – look at term of delay v remaining term of contract.

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Destruction in Taylor v Caldwell. See also s 12 Sale of Goods Act (destruction of specific goods before risk passes).

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Non-occurrence of essential event: Krell v Henry

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Death or incapacity will frustrate if, eg, contract for personal service. But contract may make provision for incapacity to exclude frustration.

Force majeure •

If parties wish to provide for an event that might otherwise lead to frustration, they may put in a force majeure clause to suspend or relieve performance. Particularly common in contracts contemplated to last for a long time, eg, construction contracts.

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Excludes liability for performance where failure is due to events beyond control of parties but where such an event might be foreseeable eg weather interruptions in construction contracts; outbreak of civil unrest; strikes not under control of either party.

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Should make provision for effect of an occurrence of relevant event, eg extension of time.

Has risk been assumed? •

If there is a clause that provides for certain disruptive events – then does it fol...