Contract Law Doctrine of Frustration - PDF

Doctrine of Frustration (Adapted from Contract Law, Ewan McKendrick, 13th Edn; UOL Subject Guide) Define Frustration: There is an unforeseen event Which occurs after the contract has been formed Without the fault of either party Which makes the performance of the co...

Doctrine of Frustration (Adapted from Contract Law, Ewan McKendrick, 13th Edn; UOL Subject Guide) Define Frustration: There is an unforeseen event Which occurs after the contract has been formed Without the fault of either party Which makes the performance of the contract illegal, impossible or renders the performance fundamentally, radically or significantly different from what was initially intended / contemplated at the time the contract was entered into. Contracts which are frustrated will be discharged / comes to an end automatically irrespective of the parties wishes, when the frustrating event takes place – Hirji Mulji v Cheong Yue SS. Co. (1926) Neither party can sue the other for breach of contract and will not be liable for damages. It is automatically discharged by operation of law and does not require the act of the parties to bring it to an end. Attitude of the courts - Paradine v Jane (1647) Strict Approach Supervening or unforeseen events were not regarded as an excuse for non-performance because the parties could provide against such accidents in their contract. Based on the strict “freedom of contract” doctrine – a party who has undertaken to perform certain obligations has also undertaken the risk that performance of them may become illegal or impossible. Once a party had assumed an obligation he was ‘bound to make it good’; Thus failure to perform should be treated in the same way - whether that failure is due to a deliberate action by the parties or arises from impossibility caused by some supervening event after the contract has been formed. Both situations involve a breach of contract and should be treated as such. Compiled and prepared by Ms. Sharon Page 1 - Taylor v Caldwell (1863) Blackburn J Relaxed Approach The strict approach was gradually relaxed during the latter half of the nineteenth century and, commencing with Taylor v Caldwell (1863) Taylor v Caldwell (1863) The destruction of the music hall brought the contract to an end and discharged both parties from any further obligations under it. The justification for this approach was that there was an ‘implied condition’ in the contract that the main subject matter (the music hall) should continue to exist. When the subject matter ceased to exist, the parties were discharged from further performance. - Davis Contractors Ltd v Fareham Urban District Council (1956) Lord Reid & Viscount Radcliffe The Law Today Builders (Claimants) contracted to erect 78 houses for the defendants within eight (8) months for £94,000 were not allowed to rely on frustration when construction took 22 months and cost the contractors £115,000 due to the lack of availability of the skilled labour. Claimants tried to recover the sum of money in excess of the contract price arguing that the contract has been frustrated Held: Claimant could not claim for the extra money under the doctrine of frustration. This turned out to be a bad bargain and the courts did not wish to allow them an escape route. Their argument was rejected by the House of Lords. Lord Radcliffe stated that it was 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. Lord Radcliffe “… frustration occurs whenever the law recognises 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…”. In situations where, after a contract is entered into, there is an unforeseen change in circumstances (not attributable to the fault of either party) such that performance of the contract would become impossible, illegal or something radically different from what the parties originally intended, justice requires that the courts should treat the contract as having come to an end. Contact will only be frustrated where there is a complete change between what was undertaken in the contract and the circumstances in which it is called upon to be performed. Compiled and prepared by Ms. Sharon Page 2  The courts would have to first determine exactly what obligations were originally undertaken and then decide if the change in circumstances has made those obligations radically different. It is not good enough if the obligations just become more difficult / onerous / expensive - Tsakiroglou & Co v Noblee and Thorl (1962) The closure of the Suez Canal did not frustrate a contract for the carriage of goods from Port Sudan to Hamburg. The contract had not specified the route and the fact that the alternative route, via the Cape of Good Hope, would take much longer was not sufficient to frustrate the contract. The defendant could still have transported the peanuts within the contractually agreed time but this would mean going via the Cape of Good Hope which would have taken four times as long and increased the cost of transport considerably. The Test of multi- factorial approach’ In deciding whether or not a contract has been frustrated, courts apply a ‘multi- factorial approach’ (Edwinton v Tsavliris (The Sea Angel) (2007)). What is important is that there must be a break in identity between what was contemplated and the new performance; courts will not easily conclude that such a break has occurred. CTI Group Inc v Transclear SA (2008) CA Court of Appeal concluded that a contract to sell cement was not frustrated where the contract remained legally and physically possible but where third party suppliers would not sell the necessary cement to the sellers with the result that the sellers could not supply the buyers with the cement Factors which courts should take into account include: Rix LJ, The Sea Angel i. the terms of the contract itself, ii. its matrix or context, iii. the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as to the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then iv. the nature of the supervening event, and v. the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances; This approach has injected a degree of flexibility into the law in the terms of the range of factors which the courts can take into account when deciding whether or not the contract has been frustrated but the doctrine still operates within very narrow limits. MSC Mediterranean Shipping Company SA v Cottonex Anstalt (2016) CA – test may be arbitrary but pragmatic Compiled and prepared by Ms. Sharon Page 3 The doctrine of frustration generally operates on very narrow terms. Why? A. Bad Bargains Doctrine of frustration does not wish to protect a particular party simply when he has made a bad bargain The attitude of the modern courts was summed up by Lord Roskill when he said that the doctrine of frustration was ‘not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent bargains’; The Nema Davis Contractors v Fareham (1956) HL This is a clear example of a BAD BARGAIN and the courts refused to rescue the Claimant. B. Express Provisions in the Contract The future is uncertain and there could be a sudden increase or decrease in prices due to various reasons. The court in such situations does not wish to impose frustration as then a very wide range of contracts would be frustrated. The parties are expected to foresee such possibilities when entering into a contract and guard against them in their contracts. Parties may sometimes make provisions in the contract for what is to happen should the performance of the agreement become impossible, or radically different, as a result of some subsequent event for which neither of them is to blame. It helps prepare the parties for future events This is very common in commercial contracts. a. This provision is known as ‘force majeure’ clauses. Where there is a clause which covers the situation which has occurred, then the courts will give effect to it. (this in essence this means the event was foreseen). Channel Island Ferries Ltd v Sealink UK Ltd , the contract between the parties contained the following force majeure clause: A party shall not be liable in the event of non-fulfilment of any obligation arising under this contract by reason of Act of God, disease, strikes, lock-outs, fire, and any accident or incident of any nature beyond the control of the relevant party. Jackson v Union Marine Insurance Co Ltd (1874) The Super Servant Two (1990) CA Severfield (UK) Ltd v Duro Felguera UK Ltd (2017) b. Hardship Clauses The clause will generally define what constitutes ‘hardship’ (usually of an economic variety) and will lay down a procedure to be adopted by the parties in the event of such hardship occurring. Generally, the clause will purport to impose an obligation on both parties to use best endeavours to renegotiate the contract in good faith in an attempt to alleviate the hardship which has arisen. Compiled and prepared by Ms. Sharon Page 4  c. Intervener Clauses Similar to a ‘hardship clause’ except that it gives to a third party such as an arbitrator (the ‘intervener’) the authority to resolve the dispute which has arisen between the parties and to adjust the terms of their contract in the light of the changed circumstances. Intervener clauses are employed as a sanction to be invoked in the event of the parties themselves failing to negotiate their way out of a hardship event. Commercial area ‘force majeure’ and similar clauses may well replace the common law and statutory rules on frustration. Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd (1942) - Where an express provision has been stated that intervening acts will not affect a contract, the courts have however, been reluctant to use the doctrine of frustration. Severfield (UK) Ltd v Duro Felguera UK Ltd (2017) (obiter dicta) - in modern times the court should avoid recourse to the doctrine of frustration whenever the parties have made contractual provision for the event that has occurred. Advantage of such clauses: McKendrick, 1995 1. Provision of a degree of certainty. It is often difficult to know whether or not a contract has been frustrated. This uncertainty can be reduced by the parties agreeing a list of events which are to constitute force majeure or hardship events. 2. It is much wider than frustration as the parties can stipulate wider range categories of events. Frustration operates within very narrow limits (both in terms of the frustrating events and the limitations to pleading frustration). 3. Parties can make provision for the consequences of the occurrence of a force majeure or hardship event. Parties can stipulate what happens after the event. It is suggested that the ability of contracting parties to make such provision in their contracts has had a significant impact upon the development of the doctrine of frustration. Today, the courts apply a more restrictive approach and it is rare to find frustration being pleaded successfully. For this reason, contracting parties frequently include force majeure and hardship clauses in their contracts so that they can allocate the risk of the occurrence of such unforeseen events. Compiled and prepared by Ms. Sharon Page 5 Recent Issues Some global events in the past 10 years have caused some to question the wisdom of having such a narrow doctrine of frustration. Economic downturn in 2008/2009, Possible consequences of Brexit COVID-19 global pandemic Lord Radcliffe’s test in Davis Contractors Ltd v Fareham UDC above was applied in the context of the UK’s departure from the European Union (‘Brexit’) in Canary Wharf (BP4) T1 Ltd v European Medicines Agency EWHC 335 (Ch) to hold that Brexit did not frustrate the EMA’s lease of London premises. The EMA was not legally required to be located in an EU country and so performance of the lease contract after Brexit was not a ‘radically different’ thing from what was originally undertaken. Covid 19 Contracts likely to be frustrated include those where performance has become illegal or impossible as a result of lockdowns imposed by governments in response to the pandemic. But the fact that performance is delayed, supplies are more difficult to obtain, or performance has become considerably more expensive will not result in the frustration of the contract. In this environment, it is not surprising to find that there have been calls for a more responsive, co-operative approach to the problems created by COVID-19 for contracting parties. These calls include guidance issued by the Cabinet Office (2020) in which it sought to encourage ‘responsible and fair behaviour’ in ‘performing and enforcing contracts where there has been a material impact’ from COVID-19. This responsible and fair behaviour was stated to include ‘making, and responding to…frustration.’ The guidance issued by the Cabinet Office is not legally binding and so will not result in any formal changes to the doctrine of frustration. But it may in time lead to judicial re-consideration of aspects of the scope of the current doctrine, in particular whether contracting parties should be required to co-operate with one another in order to address the problems (and, possibly, share the losses) created by a pandemic of the gravity of the current COVID-19 pandemic. Leases Cricklewood Property investments Trust v Leightons Investment Trusts 99 years lease not frustrated. National Carriers Ltd v Panalpina (Northern) Ltd (1981) HL As a matter of principle, a lease could be frustrated, although, as a matter of practice, it would be rare for a court to conclude that a lease had been frustrated. Long Leases Short Leases Compiled and prepared by Ms. Sharon Page 6 Situation of Frustration There are certain situations where the courts have been willing to use the doctrine. The courts are not concerned with the particular ACT / EVENT but rather the EFFECT of the act. There is no comprehensive list of Frustrating Events. But they would look at the event and see if it satisfies the requirement laid down by Lord Radcliffe in Davies Contractors v Fareham UDC Courts have consistently indicated that a contract will be frustrated only where there is a complete change between what was undertaken in the contract and the circumstances in which it is called upon to be performed. A contract which has become impossible of performance is frustrated i. Destruction of Subject matter Taylor v Caldwell (1863) Facts: o Licence to use the “Surrey Gardens and Music Hall” for a series of concerts o After the contract was formed but before the first concert was performed, the music hall accidently burnt down and it was impossible to stage the concert o The claimants argued that the defendants were in breach of contract in failing to supply the hall and sued to recover their wasted advertising expenditure Held: Contract was frustrated as the destruction of the music hall rendered the performance of the contract impossible. Both parties were released from their obligations. Asfar v Blundell (1896) – full destruction may not be necessary ii. Personal Incapacity. Contracts for personal services are frustrated by the death of either party or ill health of the person who is supposed to render the service Contract to be carried by a certain individual – Condor v Barron Knights (1966) Drummer engaged to play in a pop group was contractually bound to work on seven nights a week. After an illness, his doctor advised that it was only safe for him to play on four nights a week, although Condor himself was willing to work every night. It was necessary to engage another drummer who could safely work on seven nights each week. Held contract of employment had been frustrated. Compiled and prepared by Ms. Sharon Page 7  iii. Availability of the subject matter Bank Line Ltd v Arthur Capel & Co Ltd AC, a charterparty was held to be frustrated when the ship was requisitioned and so was unavailable to the charterer. If the Performance (availability) is only temporarily impaired, the contract could still be frustrated as was the case in Jackson v Union Marine Insurance Co. where even a temporary unavailability of the ship frustrated the contract. Where the contract is one of fixed duration and the unavailability of the subject-- matter is only temporary, the court must, in deciding whether the contract has been frustrated, consider the ratio of the likely interruption in contractual performance to the duration of the contract. The higher the ratio, the more likely it is that the contract will be frustrated. Jackson v Union Marine Insurance Co Ltd (1874) Facts: o A charter made in November 1871, required a ship to sail ‘with all possible dispatch’ from Liverpool to Newport, there to load a cargo for carriage to San Francisco. o The ship ran aground off the coast of Newport, early January 1872, was damaged, and not fully repaired for some seven months (end August 1872). o The charterer in the meantime used another ship to carry the cargo, on the basis that the contract had been frustrated. o The ship owner, however, sued for breach of contract, on the basis that the charter contained a clause stating ‘damages and accidents of navigation excepted’. Held: The contract had been frustrated because the ship was not available for the voyage which it was chartered. The voyage the San Francisco in late August 1872 was performance which was radically different from that originally contemplated The court held that this clause could not have been intended to apply in relation to a delay of the length which had occurred. The Nema (1982) The contract (charterparty) was frustrated when a long strike closed the port at which the ship was due to load. Out of six to seven voyages contracted to be made between April and December, only two could be completed. Compiled and prepared by Ms. Sharon Page 8  This is where the common purpose for which the contract was entered into can no longer be carried out because of some supervening event. Such cases are very rare – courts do not want the parties to get out of a bad bargain Krell v Henry (1903) Facts: o Room hired for two days in Pall Mall to view the coronation procession of King Edward VII o This purpose was not actually expressed in the contact o After the contract was concluded, the coronation procession was postponed due to the illness of the king Held: Contract is Frustrated Chandler v Webster (1904) Cf Herne Bay Steam Boat Co. v Hutton (1904) Facts: o Boat hired ‘for the purpose of viewing the naval review and for a day’s cruise around the fleet’. o The naval review was cancelled due to the Kings illness Held: Not Frustrated The difference that the courts found between Krell and Hutton was in Krell, the foundation of the contract was on the basis of the coronation whereas in Hutton, the naval review was not the sole reason for the contract. The contract in Krell was an extremely unusual one – the room was hired out by day only and the night was excluded and the ONLY purpose that BOTH parties would enter such an unusual contract was for the purposes of viewing the coronation procession. Marcus Smith J in Canary Wharf (BP4) T1 Ltd v European Medicines Agency EWHC, the common purpose of the parties was the buying and selling of ‘a room with a view’. Therefore, the only purpose which both parties had in entering into such an unusual contract was to hire the rooms for the purpose of viewing the coronation. Thus the contract was frustrated. In Herne Bay, the defendant could still see the fleet. Although his motive of entering into the contract might have been to see the naval review, it could not be said to be the common foundation of the contract Compiled and prepared by Ms. Sharon Page 9  Fibrose Spolka v Fairbairn (1943) Respondents agreed to manufacture machines for the appellants and to deliver them to Gdynia in Poland. Before the respondents had completed the manufacture of the machines, Gdynia was occupied by the German army. Held that the contract was frustrated because in time of war it is against the law to trade with the enemy. Finelvet AG v Vinava Shipping Co. Ltd(19830 - the continuing war between Iran and Iraq trapped certain ships in the Gulf for a lengthy period. Any contract relating to the charter of these ships were held to be frustrated. FA Tamplin v Anglo-American Petroleum (1916) - the requisitioning of a ship as a troop ship was held not to have frustrated a charter of it. Reason being the requisitioning was not of sufficient length to defeat the whole purpose of the contract. Metropolitan Water Board v Dick Kerr (1918) requisitioning of property which had been allocated to a contract Gamerco SA v ICM/ Fair Warning Agency (1995)- a stadium which had been booked for a pop concert was closed for reasons of health and safety. It was held that the contract for the hire of the stadium was frustrated. Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd (1976) - the listing of a building as being of architectural and historical interest (thus limiting the possibilities for its development) could frustrate a contract for its sale (though on the facts it did not). Industrial actions – The Nema (1981) Strikes Lockdowns Global pandemic Running aground of a ship – Jackson v UMI Compiled and prepared by Ms. Sharon Page 10 Limitation to the Doctrine of Frustration This is where the party imposes the frustration upon himself. This is known as Self- Induced Frustration. Frustration is generally raised by the Defendant who had not performed his contractual obligations. He would raise this up as a defence when sued for Breach of Contract. A party cannot invoke the doctrine of frustration if the alleged frustrating event was brought about by his own conduct or by the conduct of those for whom he is responsible for. Therefore if the Frustration is held to be Self Induced, then the consequence would be that the Defendant will not be able to rely on frustration and will be found to be in Breach of Contract The courts have interpreted the concept of ‘fault’ widely in this context: in fact it may be more accurate to say that wherever the alleged frustrating event is attributable to the actions of one of the parties – regardless of whether there is “fault” or not. The Super Servant Two (1989) – Hobhouse J – defined Self Induced Frustration as a “label” which has been used by the courts to describe “those situations where one party has been held by the courts not to be entitled to treat himself as discharged from his contractual obligations”. This would mean that if the alleged frustrating event was caused by the breach or Anticipatory Breach by the party claiming frustration, then it would be SIF. It will not be a Supervening Event – “something altogether outside the control of the parties”. Therefore a negligent act by the defendant will be self-induced frustration Maritime National Fish v Ocean Trawlers (1935) Facts: - Defendants chartered a boat from the Claimants, but it could only be used for its intended purpose if it was fitted with an otter trawl. - An otter trawl could only be used under licence. - The Defendant applied for 5 licences for the 5 vessels that they operated. They were only given 3 licences. - They elected / chose to apply the licences to the vessels that they owned rather than the vessel chartered from the Claimants. - The Claimants sure for the hire of the vessel under the terms of the contract but the Defendants denied liability on the grounds that the contract had been frustrated as a result of the failure to obtain the licences. Compiled and prepared by Ms. Sharon Page 11  Held PC: It was held that their contract with the Claimant was not frustrated. It was the defendants’ choice as to which boats they used the licences for. The ‘frustration’ of the contract with the plaintiffs was therefore ‘self-induced’ and ineffective to relieve the defendants of liability to the plaintiffs under the contract. Ratio of the decision remains unclear. It could be stated that the contract was frustrated because: i. It was the fact that the defendant ELECTED / CHOSE to allocate the licence to their own vessels which led the court to conclude that this was SIF Or ii. The mere fact that the defendant had a choice as to the distribution of the licences was sufficient to constitute SIF The Super Servant Two (1990) CA was of more significance to the issue of self- induced frustration. The CA adopted the latter of the 2 possible interpretations of the above case. Facts: o Defendant agreed to transport the Claimants oil rig – either using SS One or SS Two. o Prior to the time of the performance of the contract, the D made a decision (Not an irrevocable decision) to allocate SS Two to the performance of the contract with the C and to allocate SS One to the other concluded contracts. o However, after the contract was concluded but before the fixed time for performance, SS Two sank while transporting another rig. o They couldn’t use SS One to transport the C’s rig as it was already allocated for the performance of other contracts. o The Claimant brought an action for damages for breach of contract for failing to transport their oil rig. The D denied liability on 2 grounds: i. Frustration – the sinking of SS Two This was rejected. The CA held that the cause of the non-performance of the contract was not the sinking of SS Two but the CHOICE of the D to allocate SS One to the performance of other contracts. The existence of such a choice was held to be sufficient to amount to SIF. There is a difficulty with this analysis because the D had No Real Choice as to the allocation of SS One. This decision leaves suppliers in an impossible position where his source of supply fails due to an unforeseen event. ii. Force Majeure Clause in the contract Effective defence One of the events listed in the force majeure clause was “perils or dangers and accidents of the sea”. The CA held that this phrase was apt to cover the sinking of SS Two provided that its sinking was not attributable to the negligence of the D Compiled and prepared by Ms. Sharon Page 12  The Super Servant Two – an important case. It gives us an example how the doctrine of frustration operates in narrow confines and also the advantage of having a well drafted Farce Majeure clause. Hobhouse J at First Instance made this very clear when he said that if a Promisor wished protection in the event of a partial failure of supplies “he must bargain for the inclusion of a suitable Force Majeure clause in the contract”. The responsibility to adjust and regulate the bargains is allocated to the parties and not the courts. Looking at the narrow confines in which Frustration operates, if the parties wished to be released from their obligations in a wider range of circumstances, the burden is upon to bargain for the inclusion of a Force Majeure Clause. Compiled and prepared by Ms. Sharon Page 13  The essence of frustration is the fact that the event which occurred was a surprise – supervening event unforeseen event. Thus if the parties have clearly foreseen the possibility of a frustrating event occurring and have made provision for what is to happen in their contract, there will be no room for the doctrine of frustration. Walton Harvey Ltd. V Walker & Homfray’s Ltd (1931) Facts: o The defendant granted the claimant the right to advertise for seven years in his hotel o Before the seven years were up, the local authority compulsorily purchased the hotel and demolished it Held: The contract between the parties were NOT frustrated by the compulsory purchase and demolition. The reason being at the time when the contract was entered into, it was within the contemplation of the defendant that the property might be under a compulsory purchase order. Test : Treitel – an event is foreseeable if any person of ordinary intelligence would regard it as likely to occur. It is a question of fact – the degree and extent to which the event was foreseeable by the parties to be looked at on the facts of the individual case. As Rix LJ stated in The Sea Angel EWCA, ‘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 on to frustration’. It would depend on the facts of individual cases. Note: Could a war be foreseeable? Gold Corp Properties v BDW Trading Ltd (2010) - An argument that a contract for the development of property was frustrated when there was a ‘crash’ in property values was unsuccessful as the risk was both foreseen and provided for by a clause that permitted the renegotiation of minimum prices in such circumstances Compiled and prepared by Ms. Sharon Page 14 Effects of Frustration A contract is valid until it is discharged / ends / terminated automatically through the doctrine of Frustration. Discharged regardless of the parties intentions (they cannot affirm a frustrated contracted) and without need for any actions by them - Hirji Mulji v Cheong Yeong Steamship Co Ltd (1926). Any attempt to affirm the contract following frustration will be ineffective. Discharged at the time of the frustrating event All future obligations automatically come to an end – it releases both parties of their obligations under the contract and the parties are not in breach of the contract The parties cannot be sued for breach of contract if the contract is not performed Distribution / Allocation of losses 2 sets of rules apply A. Common Law B. Statute – Law Reform (Frustrated Contracts) Act 1943 COMMON LAW Obligations incurred prior to the frustrating event survived and must be fulfilled. Contract Starts Frustrating Event Contract to be performed Any obligation Any obligation after before the FE must the FE need NOT be be fulfilled performed Where the loss fell would therefore depend entirely on what the contract said about when payment was to be made, or when work was to be done - Chandler v Webster (1904) Compiled and prepared by Ms. Sharon Page 15 Chandler v Webster (1904) – contract stated that the full obligation to pay for the room to watch the procession arose before the frustrating event. Thus the full amount must be paid by the hirer. The entire loss caused by the frustrating event was borne by him. Krell v Henry (1903) - only a deposit was payable. The approach taken in Chandler v Webster was, however, modified (overruled) in: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd HL (1943). £1,000 had been paid under a contract for the supply of machinery which was frustrated by the German invasion of Poland in 1939. The House of Lords held that where there has been a ‘total failure of consideration’ (the party paying the money had received nothing at all under the contract), then money paid could be recovered. The purchasers of the machinery were therefore allowed to recover their payment of £1,000. Contract Starts Frustrating Event Contract to be Performed Any obligation Any obligation after before the FE must the FE need NOT be be fulfilled performed Unless there is a TFC Compiled and prepared by Ms. Sharon Page 16 Section 1(2): Money paid or payable prior to frustration Section 1(2) Money paid or payable prior to the frustrating event, it should be: Returned Cease to be payable If the money had been PAID If the money is Not Paid but OWING Contract Starts Frustrating Event Contract To Be Performed Any Money: Any obligation after Paid – must be returned the FE need NOT be Payable – cease to be paid performed Note the difference with Common Law: a. Don’t have to prove Total Failure of Consideration. Even if they received some consideration, they can still recover the money b. Not all the money may be recoverable by the payor. If the payee has incurred expenses towards the performance of the contract, then some of the money paid or payable may be retained or recovered to set off against the expenses incurred. However it is to the extent that a court considers just in all the circumstances. The amount concerned cannot exceed the amount of the expenses incurred, nor can it exceed the amount paid or payable under the contract (even if the expenses are greater than this). The section does not however make clear the basis upon which the courts will calculate the amount of expenditure which a payee is entitled to retain. Compiled and prepared by Ms. Sharon Page 17  c. The discretion given to the court is a broad one, as confirmed by Gamerco SA v ICM/ Fair Warning Agency (1995), Garland J Contract to hold a pop concert was frustrated because of the closure of the specified stadium on grounds of safety. The plaintiffs sought to recover some $412,500 which had been paid. The defendants pointed to some expenses which they had incurred and wanted to retain some of the money. The judge concluded that in all the circumstances it was just that the $412,500 should be returned in full. It does not follow, therefore, that simply because a party has incurred expenses that it will automatically be allowed to deduct these from sums returnable under s.1(2). The overall justice of the case must be taken into account. The task of the courts was to “do justice in a situation which the parties had neither contemplated nor provided for, and to mitigate the possible harshness of allowing all loss to lie where it has fallen”. Section 1(3): Compensation for a ‘valuable benefit’ Section 1(3) - where a party has received a benefit other than money prior to the point at which the contract was frustrated, the section allows the party to recover from the other party ‘such sum …as the court considers just, having regard to all the circumstances of the case.’ In particular the court should take into account any expenses incurred by the benefited party and ‘the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract’. The courts will have to decide: Ø What is the Valuable Benefit that the party (the Defendant) has received – section does not define what is to count as a benefit i. It could be value of the services performed OR ii. It could be the end product of the services Ø What is the Just Sum that should be given to the other party (Claimant) which shall not exceed the value of the benefit which was conferred Appleby v Myers (1867) BP Exploration Co (Libya) Ltd v Hunt (No 2) (1979), Goff J Goff J (as he then was), having held that the purpose of the Act was the prevention of unjust enrichment rather than the apportionment of losses (compensating the provider), ruled that the value of any alleged benefit under s.1(3) must be assessed in the light of the frustrating event itself. The just sum cannot be more than the valuable benefit to the Defendant. Compiled and prepared by Ms. Sharon Page 18  A. What is Valuable Benefit In ‘an appropriate case’, it was the end product which was to be regarded as the benefit. Value of Services in identifying the benefit: i. Services by its very nature which does not result in an end product (transportation of goods) ii. Services which result in the end product which has no objective value (decoration) – if the house is burnt down, then cannot claim for the services as the end product is destroyed [this interpretation will not change the law as in Appleby v Myers] Where, therefore, the frustrating event has had the effect of destroying the benefit, nothing will be recoverable under section 1(3). This interpretation of the Act has been the subject of much criticism – Treitel & Haycroft & Waksman However the interpretation what is valuable benefit has been adopted in Parsons Bro. Ltd. v Shea ( 1966) as that is the closest to the wordings of section 1(3). The defendants benefit is not the value of the claimants performance B. What is Just Sum Robert Goff J The ceiling amount is the valuable benefit obtained. The contract allocation of risk will be a relevant factor. The aim of the courts in assessing the just sum ought to be ‘the prevention of the unjust enrichment of the defendant at the (claimants) expenses’. Thus the assessment should be similar as to a quantum meruit claim. Court of Appeal Lawton LJ ‘What is just is what the trial judge thinks is just’ and that the appellate court is not entitled to interfere with the assessment of the just sum by the trial judge ‘unless it is so plainly wrong that it cannot be just’ This leaves the issue to the untrammelled discretion of the trial judge The CA did not establish guidelines for the trial judges in the exercise of their discretion to ensure some consistency Compiled and prepared by Ms. Sharon Page 19 FRUSTRATING TIMES March 22, 2023 Contract Law, News, Undergraduate Laws 2 comments This post has been contributed by Professor Roger Halson, Module Convenor for Contract law. The doctrine of frustration provides relief from a contract when its performance becomes impossible, illegal or in other analogous circumstances. Two recent cases, in very different tribunals, have examined the doctrine in the context of the COVID 19 outbreak. In 2020 Jennie Barber booked two return tickets to Japan with British Airways. The flights were cancelled because of COVID restrictions. Ms Barber rejected BA’s offer of vouchers and asked for a full refund which BA declined. In January 2023 Ms Barber, who had studied A level law, represented herself in her action in Redditch Magistrates’ Court against BA. Magistrates Courts have jurisdiction in minor civil law cases. Ms Barber relied upon the Law Reform (Frustrated Contracts Act) 1943 and won her case! As there is no report other than those in newspapers, we must assume that the Court accepted that: the contract was governed by English law, the effect of the COVID restrictions amounted to a frustrating event with the consequence that under Section 1 (2) of the Act all sums paid under the contract prior to the frustrating event became repayable. A contrasting approach was recently taken by the highest Court of Appeal in Australia, in Laundy Hotels v Dyco Hotels (March 2023). The case involved the sale of a hotel which required the seller to carry on business before completion of the sale. Before completion Covid struck and the operation of the business was curtailed, but not altogether stopped, by Government restrictions. All courts held that the sale contract was not frustrated and interpreted the contract to only require that the business be kept operating lawfully and this they were able to do, albeit on a restricted basis. Consequently, the vendor could successfully sue for non-completion. Frustration cases often involve a difficult judgment of degree as to whether the effect of the alleged frustrating event was sufficiently catastrophic to render the contract frustrated. The impossibility of flight in the BA case was sufficient to frustrate the ticket sale; the restricted trading in the hotel sale case was not. Recently, such clauses have been examined in relation to the impact of Brexit, the COVID outbreak and the war between Russia and Ukraine. In PD Teesport v P&O North Sea Ferries EWHC the Court of Appeal rejected the defendant’s argument that Brexit was a force majeure event that released the defendant from its contractual obligations. In this case and MUR Shipping BV v RTI Ltd EWHC (involving Ukraine but pre-dating the conflict with Russia), the Court of Appeal emphasised that the legal effect of any individual force majeure clause will depend on its own precise wording. Compiled and prepared by Ms. Sharon Page 20 Question 7 2018 Zone A & B (a) Explain what is meant by the term ‘self-induced’ frustration. (b) Lou Rolls sells and restores antique bathroom fittings. One evening vandals break in and set fire to his workshop. The workshop and all its contents are destroyed. A week before the fire Mel had agreed to pay Lou £5,000 to restore an antique bath. As agreed, Mel paid Lou £500 when she delivered the bath with the balance payable on completion. Lou had purchased for £1,000 some specially formulated enamel to use in the restoration. Both the bath and the enamel were destroyed in the fire. At the time of the fire Ned, a builder, had almost completed retiling the floor of Lou’s warehouse. It had been agreed that Lou would pay Ned £8,000 as soon as the job was completed. Advise Lou as to his rights and liabilities to Mel and Ned taking account of the law relating to frustration. Question 6 2018 October Fabian builds wooden yachts. On 1st May Fabian enters a contract with Melinda, a successful business woman, to construct a yacht. The contract states that the hull should be constructed from ‘zebrano’, an exotic and attractive wood and that the contract price of £600,000 should be paid in equal instalments on the 1st June, 1st September and 1st December. While discussing the contract on 1st May Fabian also agrees to make a scale model of the yacht for Melinda’s office for a further £1,000 payable on the model’s completion. The model is to be carved from a piece of wood supplied by Melinda which had been salvaged from the wreck of the Titanic. On 1st August the UK government ban the importation and use of zebrano in order to try to preserve tropical rainforests. Neither Fabian nor any timber merchant has sufficient stocks of zebrano to complete the yacht. At this time Fabian has only received the first payment of £200,000 but had incurred costs of £300,000. Unfortunately, also on 1st August, the model yacht which was almost complete was destroyed in a small fire at the yard caused by a lightning strike. Advise Fabian as to his contractual rights and liabilities arising from the above facts with reference to the doctrine of frustration. Question 5 2019 October (a) With reference to relevant cases, critically examine the concept of ‘self-induced’ frustration. (b) On 1 January Gill Bates, a computer tycoon, contracts with Classic Boats to build a motor yacht for her for delivery on 1 July at a cost of £6 million. The specification states that the interior must be made from ‘Miramar Teak’ and that the price is payable in equal instalments on 1 January and 1 May. Gill pays the first instalment as required by the contract. On 1 March, a month before Classic Boats were due to begin construction of the interior, the UK government bans the importation of teak from Miramar and none is available at timber merchants in the UK. Classic Boats have spent £250,000 on varnish which was specially made to cover Miramar Teak. Discuss. Compiled and prepared by Ms. Sharon Page 21