Topic 13 - Frustration.docx

Topic 13 – Frustration The doctrine of frustration provides one of the ways by which contractual obligations end. In contrast to termination for breach, the discharge of the contract does not occur as a result of the wrongful actions of one of the parties. Nor does discharge for frustration depend u...

Topic 13 – Frustration The doctrine of frustration provides one of the ways by which contractual obligations end. In contrast to termination for breach, the discharge of the contract does not occur as a result of the wrongful actions of one of the parties. Nor does discharge for frustration depend upon the agreement or action of the parties. Instead, where a contract is discharged by frustration, this occurs automatically by operation of law. The courts decide when a contract has been frustrated and, if they decide that it has, then all future obligations cease. The consequences of this are dealt with by both common law rules and statute, the Law Reform (Frustrated Contracts) Act 1943. (Mini Lecture 1) Welcome to the next topic which we are going to look at in our series of mini-lectures. This topic is one I've mentioned before, it is the idea of frustration which you'll recall from when I've previously mentioned it, is the equivalence of calamitous circumstances after the time of contracting would sometimes have an effect upon the validity of the contract. We're going to have three lectures. The first will look at what constitutes frustration, what is a frustrating event. In the second, we'll look at certain things that do not amount to frustration, and in the final lecture, we'll look at what are the effects of holding a contract to be frustrated. Simply, our learning objective in this mini-lecture is to learn and understand what amounts to a frustrating act. This is a slide that you would've seen more or less word for word when we looked at the issue of common mistake because you might recall then that I said that when we're having to work out the effect of a calamitous event such as the destruction of the subject matter of the contract. It's important to work out when that destruction took place relative to the time of contracting. If that event took place prior to entering a contract, then the only way it will have an impact is through the doctrine of common mistake. If it took place after the moment of contracting, then it is the doctrine of frustration that must apply. This is one of those important things because at the beginning of a question, there's always in an exam setting that desire to want to start writing. I often tell my students that thinking time is never wasted time. That is never more so than in relation to an issue like this where the wrong classification of the event might result in you writing about the wrong doctrine. If you fail to notice that the physical destruction of the subject matter took place before the moment of contracting and you thought it took place after, you might write about frustration when you should be writing about common mistake and vice versa. That bit of analysis at the beginning of working out that the doctrine of frustration is applicable because the event, the significance of which we have to assess took place after contracting. What are the three broad categories of frustrating event? The first is illegality. If after contracting, the performance of the contract becomes illegal, then this can constitute a frustrating event. We sometimes call it supervening illegality. This can occur after the outbreak of war because when war has broken out, trading with the enemy is illegal. In the Fibrosa case, it's always known as the Fibrosa case. It's fuller name is Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour, I say from memory, whereas we always know it just as the Fibrosa case. In that case, the appellants ordered machinery from the respondents to be delivered to a particular Polish port, but following the outbreak of war, the port in question was occupied by the German army. Despite the fact that performance of the contract was not impossible, the overwhelming public interest in prohibiting trade that might benefit the enemy meant that the contract was frustrated. This public interest is so compelling that it will override even an express term in the contract to the contrary. Many of these cases involving illegality arise from declarations of war. Look at a non-wartime example is the Gamerco case. What happened in Gamerco was the contract was entered to promote a pop concert to be held at a venue in Madrid. Subsequently, the venue was examined by engineers who concluded that it must be considered unsafe until further testing was done. The contract was held to be frustrated because the authorities had banned the use of the contemplated premises. When performance of the contract subsequently becomes illegal, the contract is said to be frustrated. Perhaps the most compelling category, almost obvious category in one I've referred to in passing of frustration is where performance becomes impossible. In Taylor v Caldwell, the claimant agreed to hire the Surrey Gardens & Music Hall in order to stage four concerts. Almost a week before the first concert, the Music Hall burned down. Mr. Justice Blackburn held that the defendants were not liable to the disappointed concert organizer because it was impossible to hold the concerts. The previous two categories are easy to define, impossibility and illegality, but a broader category, which is sometimes called frustration of purpose or frustration of objective or radical difference can arise. This is where there has been such a change of circumstances that we would regard performance in those altered circumstances as a radically different thing than it was previously thought to be. The radical difference test comes from the case of Davis Contractors v Fareham and a famous judgment of Lord Radcliffe. The idea here is that the contract performance is literally possible, but the performance in the altered circumstances would be so different to what was contemplated that the contract should be regarded as frustrated. I've set some reading with some more detail on frustration of purpose, and I'm going to leave you to do that reading and contrast two cases, and I'll take you to that further reading now. These are cases that arose out of-- they're sometimes known as the coronation cases. They arose out of the cancellation of Edward VII coronation. The first case deals with the impact of that coronation upon a contract for the higher of a room to be used to view the coronation procession. The second is a case involving the higher of a boat in order to view the review of the fleet, the British Navy, which also had to be canceled. If you look at those two cases, you'll get a feel for how the doctrine of frustration's applied when the performances physically possible, but would defeat the true purpose of the contract. 13.1 The basis of the doctrine of frustration If, after entering into a contract, the continued performance of a contract becomes impossible as a result of subsequent events, the question arises as to whether one or the other of the parties or neither of them should be responsible for this failure of performance. A strict ‘freedom of contract’ approach might lead to the answer that a party who has undertaken to perform obligations has also undertaken the risk that performance of them will become impossible. On this view, failure to perform should therefore be treated in the same way whether that failure is due to a deliberate action or arises from impossibility caused by some supervening event after the contract has been formed. In other words, both situations involve a breach of contract and should be treated as such. This approach, of an absolute obligation, was the original approach taken by the common law and can be seen in the decision in Paradine v Jane (1647). This strict approach was relaxed in the 19th century in the case of Taylor v Caldwell (1863). In this case a music hall, hired for a series of concerts, was destroyed by fire before the concerts took place. Blackburn J held that this destruction 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. The effect of the decision was to allow a contract to be discharged but, at the same time, adherence to freedom of contract was maintained by the use of an implied term. In the 20th century it has generally been recognised that the suggestion that there is an implied term covering the frustrating situation is something of a fiction – see, in particular, the speeches of Lord Reid and Viscount Radcliffe in Davis Contractors Ltd v Fareham Urban District Council (1956). The point was made with some humour by Lord Sands in James Scott & Sons v Del Sol (1922). He suggests an example where the daily milk delivery to a house is suspended after the escape of a tiger from a travelling circus. The dairy should not be liable for the suspended delivery but ‘it would hardly seem reasonable to base that exoneration on the ground that “tiger days excepted” must … be written into the milk contract’. The preferred analysis now is that 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. See also National Carriers Ltd v Panalpina (Northern) Ltd (1981). That the courts will in some circumstances bring a contract to an end on the basis of frustration does not mean that the parties’ original agreement will be ignored. First, it is important that the courts determine exactly what obligations were originally undertaken, in order to decide whether the change in circumstances has made any of them radically different. This issue will be explored further in the next section. Secondly, it is quite possible for the parties themselves to make provision 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. This is common in commercial contracts, which frequently use what are known as ‘force majeure’ clauses. Where there is a clause of this type which covers the situation which has occurred, then the courts will give effect to it. In essence this means the event was foreseen. 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 857 (Comm) 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 467 (Comm) (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. Study task 1 Why do you think that McKendrick deals with the doctrine of frustration in a chapter that also deals with ‘mistake’? Show feedback There are close links between frustration and the type of mistake known as ‘common mistake’. For example, if A and B are contracting for the hire of a concert hall, but unknown to them at the time they make the contract the hall has just burnt down, their contract will be void for common mistake. If, on the other hand, the hall burns down the day after they make their contract, it will be frustrated. Both concepts are concerned with deciding where risks and associated losses should fall when a contract is disrupted by events outside the control of either party. The question as to which applies depends solely on whether the disrupting event takes place before or after the contract is made. (See, for example, Amalgamated Investments & Property Co Ltd v John Walker & Sons Ltd (1977).) For this reason, the area of law considered in Chapter 8 involving common (i.e. shared) mistake is sometimes called the law of initial impossibility, and the area covered by the doctrine of frustration is sometimes called the law of subsequent impossibility. It should be noted that some commentators argue that the close relationship between the doctrines of common (i.e. shared) mistake and frustration should ‘not be pressed too far’. Treitel (para. 19-122) notes that: The law seems to be less ready to hold that a contract is void for mistake than discharged by frustration, perhaps because it is, in general, easier to be sure of present fact than to foresee future events. 13.2 The nature of a ‘frustrating event’ What type of event will be treated as having frustrated a contract? It is impossible to give a comprehensive list because it is the effect of the event, rather than the event itself, which is in the end the determining factor. As Lord Radcliffe stated in Davis Contractors Ltd v Fareham Urban District Council (1956): 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 deciding whether or not a contract has been frustrated, courts apply a ‘multi- factorial approach’ (see 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 (see CTI Group Inc v Transclear SA (2008)). Factors which courts should take into account include: the terms of the contract itself, its matrix or context, 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 the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances. [per Rix LJ, The Sea Angel, para.111] 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. With this general principle in mind, we can now usefully look at examples from the cases of situations which have, or have not, led to a decision that a contract is frustrated. From these some general impression of the characteristics of a frustrating event can be gained. In all cases, however, it must be that the event has made the contract impossible, illegal or radically different – it is not enough that the contract has simply become more difficult or expensive for one party. In Davis Contractors Ltd v Fareham Urban District Council builders who contracted to erect 78 houses within eight months for £94,000 were not allowed to rely on frustration when construction took 22 months and cost the contractors £115,000. Similarly, in 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. 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. Thus in CTI Group Inc v Transclear SA (2008) the 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. In MSC Mediterranean Shipping Company SA v Cottonex Anstalt  EWCA Civ 789 the Court of Appeal recognised that the application of such a test ‘may be arbitrary but it is pragmatic’. 13.2.1 Destruction of subject matter The most obvious example is where the main subject matter of the contract has been destroyed, as in Taylor v Caldwell (1863). If something central to the performance of the contract no longer exists, then it is not surprising that the courts will find that the parties’ obligations should come to an end. Full destruction may not be necessary. In Asfar v Blundell (1896), the contamination of perishable goods, which rendered them unusable, was held to be equivalent to destruction (see also s.7 Sale of Goods Act 1979). 13.2.2 Personal incapacity Another clear case of frustration will be where both parties have agreed that the contract is to be carried out by a particular individual, and that individual dies, or is too ill to perform (see Condor v Barron Knights (1966)). The court will need to be satisfied, however, that the contract was not simply for work to be done, but for it to be done by the particular individual who is unavailable. Study task 2 On Monday Nathalie arranges for her car to be serviced at Phil’s garage on the following Friday. Jamie, the mechanic who normally carries out services on Nathalie’s car, is taken ill on Thursday and is unavailable on Friday. Will the contract be frustrated? Study Task 3 On Monday Nathalie arranges to have her hair styled at Phil’s salon on the following Friday. Jamie, the hairdresser who normally styles Nathalie’s hair, is taken ill on Thursday and is unavailable on Friday. Will the contract be frustrated? Show feedback As you will have realised, these questions are intended to focus attention on why some contracts which involve the provision of services are more likely to be frustrated than others. I suspect that you are much more likely to have said that the contract for hair styling would be frustrated than the contract for servicing the car. Why should there be such a difference? This can be explained by remembering that it is important when considering frustration to identify exactly what the contract was for. It is likely that, in Study Task 2, the contract was simply for Nathalie’s car to be serviced. In Study Task 3, because Nathalie is much more likely to be concerned about who styles her hair than who services her car, it may well be that the contract is for her to have her hair styled by Jamie. Once the precise nature of the contract has been identified, then the question becomes whether the alleged frustrating event has rendered performance impossible or radically different. In Study Task 2, if the mechanic is not specified in the contract, then the unavailability of Jamie makes no difference to Phil’s obligation to carry out the service. In Study Task 3, if Jamie has been specified as the stylist, then his absence will render performance on the Friday impossible and the contract will be frustrated. You might also like to consider what the position would be if all Phil’s mechanics go on strike on Friday (see The Nema (1981)). 13.2.3 Non-occurrence of an event A number of cases concerned with the cancelled coronation of King Edward VII in 1903 illustrate this category. In Krell v Henry (1903) a room overlooking the route of the coronation procession had been hired for the purpose of watching it. When the procession was cancelled, the contract for the hire of the room was held to be frustrated (see also Chandler v Webster (1904)). It has subsequently been implied that the decision in Krell is perhaps as far as the doctrine of frustration should be pushed (North Shore Ventures v Anstead Holdings (2011)). Again, however, it is important to be clear as to the precise obligations under the contract in order to decide whether a cancellation has this effect. Thus in Herne Bay Steam Boat Co v Hutton (1904) a boat had been hired to tour the fleet and to watch the King’s review of it, which was part of the coronation celebrations. The King’s illness meant that the review was cancelled. In this case, however, the contract was not frustrated. The tour of the fleet was still possible and this was a significant element in the contract. The hirer remained obliged to pay for the use of the boat. 13.2.4 Effects of war In time of war a government may make trading with companies based in enemy territory illegal. Contracts with such companies which were made prior to this action will be frustrated: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1943). Similarly, the requisitioning of property which had been allocated to a contract may lead to the frustration of that contract: see Metropolitan Water Board v Dick Kerr (1918) and FA Tamplin v Anglo-American Petroleum (1916) (although in this case the requisitioning of a ship as a troop ship was held not to have frustrated a charter of it, because the requisitioning was not of sufficient length to defeat the whole purpose of the contract). The frustration need not result from direct government action. In Finelvet AG v Vinava Shipping Co Ltd (1983), the continuing war between Iran and Iraq trapped certain ships in the Gulf for a lengthy period. Contracts relating to the charter of these ships were held to be frustrated. 13.2.5 Other government action Government action not related to war can frustrate a contract. In 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. It is also implicit in Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd (1976) that 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). 13.2.6 Other frustrating events Other types of event which have led to contracts being frustrated include industrial action (The Nema (1981)) and the accidental running aground of a ship (Jackson v Union Marine Insurance Co Ltd (1874)). As indicated above, however, the categories of frustrating event are not closed. It will always be possible to argue that some novel occurrence has frustrated a contract, provided that it has had the required effect on the obligations of either or both parties. Study task 4 Aaron has booked tickets to attend an event at Highplace Hall. The event is to include a tour of the grounds and a meal in the hall, followed by a concert featuring the famous pianist, Claudio Quays. Is the contract frustrated if the following take place? On the day before the event, Highplace Hall suffers a fire and is badly damaged. The grounds are still open, but the Hall is closed, so that the meal and concert cannot take place, or On the day before the event Claudio Quays sprains his wrist and is unable to perform. The concert is cancelled. Show feedback The events which have occurred in the two alternative situations (the fire at the Hall – destruction of subject matter, and the injury to Claudio Quays – personal incapacity) are clearly of a type capable of bringing about the frustration of a contract. The question requires you to think, however, about whether on the facts there is a sufficient effect on the particular contract for it to be frustrated. In particular, you will need to think about the case of Herne Bay Steam Boat Co v Hutton (1903), outlined above. In both the situations given, some part of the contract survives the ‘frustrating’ event. The question is whether the contract has become ‘radically different’ from what was originally intended. In (1), the answer is probably that it has. Although the tour of the grounds is still possible, two thirds of the contract cannot now take place. If it is frustrated, this will mean that Aaron will not be able to sue for breach of contract in relation to the meal and the concert, but the rules relating to the effect of frustration (discussed in Section 13.4) will apply. The answer to (2) is slightly more difficult. How important an element was the concert? The most likely answer here seems to be that the contract will not be frustrated, but that Aaron will be entitled to compensation for breach of contract, in that Highplace Hall has not provided the promised concert. All the above is on the assumption that there is nothing specific in Aaron’s contract with Highplace Hall to deal with these situations. Self-assessment questions What is a ‘force majeure clause’? In what circumstances may government action frustrate a contract? What is the distinction between ‘frustration’ and ‘mistake’? Summary The doctrine of frustration operates to relieve parties of further obligations under a contract. It applies when some event which is not the responsibility of either party has made performance of the contract impossible, or radically different from what was originally agreed. Examples of events which will lead to frustration include destruction of the subject matter, the non-occurrence of an event, outbreak of war and government intervention. The contract will not be frustrated if the performance is simply made more difficult or expensive, or if a significant part of the contract survives the frustrating event. (Mini Lecture 2) In the last lecture, we looked at what does constitute frustration. In this mini-lecture, we're looking at three particular circumstances which do not constitute frustration. Our learning objective in this mini-lecture is to understand which acts and circumstances do not constitute frustration. These are the three circumstances we're going to look at. The first is where parties have made a full and proper provision in their contract to deal with the event that happens. Clauses by which they do so are often called hardship clauses or force majeure clauses. These are clauses where the parties have thought in advance what would happen if certain calamitous events occurred and stated in their contract what is to happen. The courts will generally honor such provisions and not overrule them. The second circumstance, which will not constitute frustration, is where it is said that performance has become more onerous, it's become more burdensome, more expensive. The mere fact that performance is more onerous or expensive does not of itself constitute frustration. In Davis Contractors v Fareham UDC, you'll recall this is the case I introduced in the last lecture where Lord Radcliffe formulated the radical difference test. The facts of the case were that there was a contract to build 78 houses for £94,000. Because of post-war labor and material shortages, it took an extra 14 months to complete the houses and the cost of completing them was £115,000 compared to the contract price of £94,000. It was held there was no frustration here because there was a mere increase in the costs of performance. This had to be considered as a subsidiary issue in an interesting case called Canary Wharf v European Medicines Agency, because the European Medicines Agency, which authorized and regulated the use of medicines in the European Union, had premises in Canary Wharf in London. Following Brexit, it needed to relocate to continental Europe. It argued that the lease of the premises was frustrated, but the court held it was not frustrated. There was no reason why this regulation could not be done from a London base, although it was recognized that such a way of performing the contract would be more onerous or more expensive, but we know that performance becoming more onerous or expensive is not of itself a ground for frustration. The final circumstance is called so-called self-induced frustration. It is said that where frustration is self-induced, it does not constitute frustration sufficient to relieve parties of liabilities. What it's really saying is that if the frustration is the fault of one of the parties, it's really breach by them. What self-induced frustration means is breach of contract, and the dividing line between a breach occurring and frustration occurring is, of course, whether one party is at fault. In a case called the Super Servant 2, there was a contract for an oil drilling rig to be transported using a ship. The defendant only had two ships that could perform the task, Super Servant 1 and the Super Servant 2. Even though only one was needed to transport this rig, the contract referred to the possibility of performing it with either ship. Our defendant decided to use the Super Servant 2 to do the job, and so the other ship, which had owned capable of doing the job, Super Servant 1, was used for a contract with another party. Before oil rig was actually transported, the Super Servant 2 sank. The claimant argued that the failure to provide the ship was a breach of contract. In response, the defendant said that the contract had been frustrated. It had no ships to perform the contract. Court of Appeal held that there was no frustration, but that there was a breach. This is because the supposed frustration arose from the defendant's choice to use the Super Servant 2, the cause of their inability to perform the contract was the fact that they allocated to this contract the Super Servant 2 when they could have allocated the Super Servant 1. In selecting the Super Servant 2-- Sorry, the choice made was the choice made by the defendant that meant the contract was not frustrated, it was only breached. Now, that result can seem a harsh one, but I think you can see that it is a defensible one, and it does tell us that the courts take a restrictive approach to the doctrine of frustration. This doctrine, which relieves parties of their obligations because of occurrence of events after contracting, is a narrow doctrine. Put another way, the courts do not want someone to easily be able to get out, if you like, of a contractual obligation that they have assumed. As with the last topic, I've left you some cases, well, a case to read in the extra reading there, and that is one of the so-called Suez cases because, in a particular circumstance, the closure of the Suez Canal had an impact upon a number of contracts because when ships were being rooted from Europe to the Far East, they would often choose to travel through the Mediterranean and through the Suez Canal. When as a result of war that Suez Canal was closed, performance became much more onerous because the ship owners would then have to sail all the way around the Horn of Africa, a much longer, more expensive, and more risky voyage. The so-called Suez cases are the cases where the impact of the closure of the Suez Canal upon a number of contracts is considered, and particularly as to whether that merely made performance more expensive and more onerous, and so did not constitute a frustration. I want to leave that for you to read as an illustration of the principle that we looked at the Davis and Fareham principle, that the mere increase in performance costs or how onerous performance is, does not alone constitute frustration. 13.3 Limitations on the doctrine There are two principal limitations on the doctrine of frustration. The first is where the frustrating event has been foreseen and provided for in the contract; the second is where the alleged frustrating event has been ‘self-induced’ by one of the parties, since, as indicated in the quotation from Lord Radcliffe given in Section 13.2, the problem must arise ‘without default of either party’. Part of the essence of the doctrine of frustration is the fact that the event that has occurred is a surprise. This justifies the conclusion that the risk of the event occurring has not been allocated by the parties and that the court should therefore intervene. If, therefore, 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. 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 (Gold Corp Properties v BDW Trading Ltd (2010)). In Iris Helicopter Leasing Ltd v Elitaliana SRL  7 WLUK 499 a helicopter was imported from Switzerland into Italy for rescue services. The defendant became involved in a dispute with the Italian authorities over whether import taxes were payable. Ultimately, the aircraft was impounded for unpaid taxes and so became unavailable to the hirer. The Commercial Court rejected an argument by Elitaliana that the lease of the aircraft was frustrated because that lease expressly made Elitaliana liable for import duties and also allocated to them the risk of the aircraft’s non-availability for any reason, including its seizure. The courts have tended to narrowly interpret such clauses. In Jackson v Union Marine Insurance Co Ltd (1874) a charter required a ship to sail ‘with all possible dispatch’ from Liverpool to Newport, there to load a cargo for carriage to San Francisco. The ship ran aground off the coast of Newport, was damaged, and not fully repaired for some seven months. The charterer in the meantime used another ship to carry the cargo, on the basis that the contract had been frustrated. 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’. 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 contract was frustrated and the clause had no application – see also Metropolitan Water Board v Dick Kerr (1918). Another important element in the doctrine of frustration is that the alleged frustrating event must not be attributable to the fault of either party. If it is, then the likelihood is that the party at fault will be in breach of contract and the doctrine of frustration will have no application. 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 (whether these involved ‘fault’ or not) then the doctrine of frustration will not apply. In Maritime National Fish v Ocean Trawlers (1935) the defendants chartered a boat from the plaintiffs, but were then unable to use it as planned because they were not granted sufficient fishing licences to cover all the boats they wished to operate. It was held that their contract with the plaintiffs 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. Study task 5 Read the case of J. Lauritzen AS v Wijsmuller BV, The Super Servant Two (1990). Why is this case seen as extending (rather than simply applying) the principle established in Maritime National Fish v Ocean Trawlers? Why do you think the decision has been criticised? Show feedback A significant difference between The Super Servant Two and Maritime National Fish is that in the Super Servant the owner of the vessels was faced with breaking one or other of two contracts. Once the Super Servant Two had sunk it was impossible for both contracts to be performed. In contrast, in Maritime National Fish the defendants could have allocated one of the licences to the plaintiffs’ boat rather than to one of their own boats. In other words, they could have performed their contract with the plaintiffs without breaking a contract with anyone else. The Court of Appeal, however, treated the two cases as being the same, arguing that in Super Servant Two the reason for the inability to perform was not the sinking of the vessel, but the decision of the owners to allocate the Super Servant One to another contract. Thus in both cases the failure to perform resulted from a decision of one of the parties. Critics of the decision in Super Servant Two argue that the cases are not identical and that in the Super Servant Two case, the owners had no real choice, in that whichever contract they used the Super Servant One for, this would involve breaking another contract. There was therefore a much stronger case for treating the Super Servant Two as a case of frustration. Note, however, that the defendants in Super Servant Two were protected by a ‘force majeure’ clause, provided that they had not been negligent. At one time it was thought that there was a further limitation on the doctrine of frustration, in that it could not apply to leases of land: see Cricklewood Property and Investment Trust v Leighton’s Investment Trusts Ltd (1945). This limitation was rejected by the House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd (1981), though on the facts the contract under consideration in that case was held not to have been frustrated. Summary If the alleged frustrating event has been foreseen and provided for in the contract (e.g. by a force majeure clause) the doctrine of frustration will not apply. Similarly, if the alleged frustration can be said to ‘self-induced’ (i.e. it is the result of a decision taken by one of the parties) the contract will not be treated as frustrated. The party which took the decision will be in breach of contract. (Mini Lecture 3) Hello, and welcome to the final lecture on the topic of frustration. This deals with the effects of frustration. This will require us to look at a couple of statutory provisions that come from the Law Reform (Frustrated Contracts) Act in 1943. I hope you have, ringing in your head, my advice that if you came to me just before the exam and said, "What do I do as my last bit of revision?" I would tell you to go away and read the few statutory sections we come across in this course and the two key provisions of the Law Reform (Frustrated Contracts) Act Section 1(2) and 1(3) are two of those provisions I would urge you to read. Anyway, that is jumping the gun slightly. What's the purpose? What's the objective of today's lecture? It's to understand the legal consequences of a finding that a contract is frustrated. We find a contract is frustrated, there is a frustrating event so what are the effects? That is what we are looking at today. To do so, we need to look at the effects of common law and then, what this Act of Parliament from 1943 does. What are the consequences of common law? Well, we can illustrate those with an old case called Chandler v Webster. It was another of those coronation cases and it dealt with the hire of a room overlooking the coronation, which was frustrated by the cancellation of the coronation. What the particular facts of this case was that the contract for the hire of the room provided for £141.15 shillings, in modern money that's £141.75 to be paid in advance. Of that money, £100 had in fact been paid when the procession was canceled. The contract was frustrated but the effect of frustration at common law is that all future obligations are unenforceable, but past obligations are enforceable. The moment of contracting the obligation to pay £141.15s had arisen was due, only £100 had been paid. Despite frustration, because that past obligation to pay £141.15s was enforceable, then despite the frustrating event, the hire of the room had to pay the unpaid balance, which was £41.15s. Now, this, it seems quite a harsh decision in that someone is having to pay for something when they do not receive that which, in fact, don't really receive anything of that which they wanted. They wanted a room to overlook the coronation. Part of Chandler v Webster was overruled in the Fibrosa case. I've discussed this already with relation to why the contract was frustrated because the performance of the contract became illegal because of the outbreak of war. The contract was one to sell machinery for £4,800 of which £1,600 was payable in advance. In fact, only £1,000 had been paid when the contract was frustrated. The House of Lords held that the £1,000 was recoverable on the basis of a total failure of consideration. As the Polish company had not received any machinery, the consideration to support the company's advanced payment had totally failed and so it was said that the £1,000 had to be returned. There's a sense in which we can say that the Fibrosa case remedied one injustice but created others. It only applied where there was a total failure of consideration so it would not apply to a case where the failure was partial. In this case, none of the machinery had been delivered. If some had, that could not be said to have been a total failure of consideration. The second sense in which the case was defective was that it failed to provide any compensation to the party who was forced to return the advanced payment because a party who was forced to return an advanced payment, might themselves have incurred expenses such that they should not be required to return the whole of the advanced payment. It was to remedy some of these deficiencies that the Law Reform (Frustrated Contracts) Act of 1943 was passed. There were two sections, Section 1(2) and Section 1(3). The key difference is that Section 1(2) deals with payments, Section 1(3) deals with valuable benefits other than payments. Section 1(2) tries to do justice between the parties by saying that sums paid or payable before the contract was frustrated shall, in the case of sums paid, be recoverable but in the case of sums payable, cease to be payable. But, this is the proviso, provided that if the party to whom the sums were paid or payable incurred expenses, the court may allow him to retain some of that money. Section 1(3) deals with the confinement of benefits. Where the party has obtained a valuable benefit, that is, other than the payment of money because that's dealt with by Section 1(2), before the time of discharge, there shall be recoverable, from him, such some not exceeding the value of the benefit to the party obtaining it. There were two cases that I would suggest you read in order to see how these are applied. I do warn you that the second case is a slightly complex one. Gamerco is the case that deals with Section 1(2). A concert promoter advanced $412,000 to the performers who themselves had incurred expenses of $50,000. You'll recall from when we discussed frustrating events that the contract was frustrated because it failed, the venue had not been cleared for safety purposes. From those facts, you might expect an order for the return of the $412,000, perhaps minus $50,000 to be retained by the performers to cover their own expenses. The court said they have a very broad jurisdiction under Section 1(2) because the extra fact here is that the promoters themselves had incurred expenses of $450,000. It was said that the promoter in these circumstances should be entitled to the recovery of the full $412, 000. In that case, we can see that the court are trying to do justice between the parties because the promoter has incurred expenses of 450 but gets back 412 and so is out of pocket to the tune of 38,000 and the performers are out of pocket to the tune of 50,000 so there's a rough equality of a loss between them. BP and Hunt is the case that deals with Section 1(3), where one party has conferred a benefit on the other that is not a sum of money, and what was said in that case, was that where one party conferred a benefit on the other (other than a payment of money under Section 1(2)) the payer can recover what is described as a 'just sum', a fair sum for the benefit they've conferred, but that fair sum should not exceed the value of the benefit conferred. 13.4 The effect of frustration There are two sets of rules relating to the effects of frustration – one under the common law and the other under the Law Reform (Frustrated Contracts) Act 1943. In most cases the 1943 Act will apply, but there are some situations where the common law is still applicable. It is easiest to understand the effect of the Act by considering the common law rules first, and then to look at the way in which the Act has amended these. 13.4.1 Common law One common law rule which operates even where the Act is also applicable is that a frustrating event terminates the contract automatically, without any need for action by either party. This is in contrast to the position following a repudiatory breach of contract where the innocent party has the option of continuing with the contract or bringing it to an end (see Topic 12). It follows that any attempt to affirm the contract following frustration will be ineffective. This was confirmed in Hirji Mulji v Cheong Yeong Steamship Co Ltd (1926) and The Super Servant Two (1990). As to the distribution of losses following frustration, the common law started from the position that all future obligations were discharged, but that obligations incurred prior to the frustrating event survived. 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. Thus in Chandler v Webster (1904), which was one of the ‘coronation’ cases, the full obligation to pay for a room to watch the procession arose before the cancellation (in contrast to Krell v Henry (1903) where only a deposit was payable). The hirer of the room was therefore required to make full payment and the entire loss caused by the frustrating event fell on him. Look at the example demonstrated in the diagram below: The payments in January and February have to be paid but the instalment in March is no longer due under Chandler v Webster. The approach taken in Chandler v Webster was, however, modified in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (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’ (that is, the party paying the money has 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. Study task 6 Sabina makes a contract with Peter for the redecoration of a house which she owns. The total cost is to be £5,000 and, as provided in the contract, she gives Peter an initial payment of £1,500. The balance is to be paid on the completion of the work. The day before Peter starts work, vandals start a fire which totally destroys Sabina’s house. Peter has spent £500 buying materials for the job. What would be the position as to the distribution of losses on the redecoration contract under the common law rules relating to frustration? Show feedback The contract is clearly frustrated when the house is destroyed. The common law rules say that obligations which have arisen up to that point generally stand. The only exception is where there is a total failure of consideration. The obligation to pay the £1,500 arose before the destruction, but it seems that there is a total failure of consideration, in that Peter has done no work on the contract. The common law would therefore allow Sabina to recover the full £1,500. Peter has no entitlement to any payment under the contract – not even for the money spent on materials. Study task 7 As in Study task 6, but the fire takes place after Peter has done one day’s work. The entire job was expected to take four weeks to complete. Show feedback In this case, Peter has started work. Sabina cannot argue, therefore, that there is a total failure of consideration. Because Peter has done some work, albeit very little, the common law rules say that Sabina cannot now recover any of the £1,500 which she has paid. This was the situation in Whincup v Hughes (1871) where a father apprenticed his son to a watchmaker for six years for a premium of £25. When the watchmaker died after the first year the father could not recover any part of the consideration as the failure of consideration was only partial. Study task 8 As in Study task 6, but the fire takes place on the day before Peter was due to complete the work. Show feedback As in Study task 7, there is no total failure of consideration, so the £1,500 cannot be recovered. The obligation to pay the balance, however, does not arise until the contract has been completed. Sabina is not therefore, under the common law rules, obliged to pay anything to Peter for the work done over the previous weeks. (See, for example, the case of Appleby v Myers (1867)). Note that in practice the Law Reform (Frustrated Contracts) Act 1943 would apply to the contract between Sabina and Peter and this would affect some of the above answers. This is dealt with further in Section 13.4.2. 13.4.2 The Law Reform (Frustrated Contracts) Act 1943 The inflexibility of the common law rules, even following the slight modification provided by the Fibrosa case, led to demand for reform. This occurred in the shape of the Law Reform (Frustrated Contracts) Act 1943. There are some contracts to which the 1943 Act does not apply (see s.2(5)). These include contracts of insurance, some charters of ships (principally charters for a particular voyage) and contracts for the carriage of goods by sea. The exclusion of the shipping contracts exists because there are special rules under shipping law which deal with the situation. The most important exclusion from the effects of the Act is, however, in relation to contracts for the sale of specific goods. In relation to these contracts the common law rules as to the effects of frustration will apply. The two main provisions in the 1943 Act are s.1(2), which deals with money paid or payable prior to the frustrating event, and s.1(3) which deals with benefits conferred prior to that event. They need to be considered in turn. Section 1(2): money paid or payable prior to frustration Section 1(2) provides that where money was paid or payable prior to the frustrating event, it should be returned (if paid), or should cease to be payable (if not paid but owing). Unlike the common law, this is not dependent on there being a total failure of consideration. Not all the money may be recoverable, however. The section provides that if expenses have been incurred towards the performance of the contract, some of the money paid or payable may be retained or recovered, to the extent that a court considers it 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 discretion given to the court is a broad one, as confirmed by Gamerco SA v ICM/ Fair Warning Agency (1995). The case concerned the frustration of a contract to hold a pop concert because of the closure of the specified stadium on grounds of safety. The plaintiffs sought to recover some $412,500 which had been paid. Although the defendants could point to expenses which they had incurred, 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. Section 1(3): compensation for a ‘valuable benefit’ Section 1(3) deals with the situation where a party has received a benefit other than money prior to the point at which the contract was frustrated. In that situation 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’. This final consideration which the court must take into account has been interpreted in a way which has significantly reduced the scope for recovery for the provision of benefits. In BP Exploration Co (Libya) Ltd v Hunt (No 2) (1979), 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, ruled that the value of any alleged benefit under s.1(3) must be assessed in the light of the frustrating event itself. Where, therefore, the frustrating event has had the effect of destroying the benefit, nothing will be recoverable under s.1(3). This interpretation of the Act has been the subject of much criticism – though this is mainly focused on the poor drafting of the legislation, rather than Goff J’s interpretation of it. Study task 9 Sabina contracts with Peter for the redecoration of a house which she owns. The total cost is to be £5,000 and, as provided in the contract, she gives Peter an initial payment of £1,500. The balance is to be paid on the completion of the work. The day before Peter starts work, vandals start a fire which totally destroys Sabina’s house. Peter has spent £500 buying materials for the job. What would be the position as to the distribution of losses on the redecoration contract under the Law Reform (Frustrated Contracts) Act 1943? Show feedback You will remember that under the common law rules (see Study Task 6) Sabina would have recovered her full £1,500 because there was a total failure of consideration. Peter would have been entitled to nothing. Under the Act (which would apply in this situation) Sabina is still entitled to recover her payment under s.1(2). The main difference is that under the Act Peter can argue that he should be allowed to retain some of the £1,500 to cover the cost of the materials which he has bought. It is up to the court to decide what it is just for him to retain. It might be relevant, for example, whether the materials are of a kind which can be used on other jobs, or whether they were specially designed for the work to be done on Sabina’s house. Study task 10 As in Study task 9, but the fire takes place after Peter has done one day’s work. The entire job was expected to take four weeks to complete. Show feedback Under the common law, Peter could retain the full £1,500 because there is no total failure of consideration. Under the Act, the position will be the same as the answer to Study Task 9. In other words, under s.1(2) Sabina can recover the £1,500, subject to Peter being able to retain money to cover his expenses. These may be more than the £500 spent on materials and may include expenses relating to the day’s work which has been done (for example, wages paid to others working on the house). What do you think the position would be if Peter’s expenses totalled £2,000? What is the maximum he could receive under s.1(2)? Study task 11 As in Study task 9, but the fire takes place on the day before Peter was due to complete the work. Show feedback As regards the £1,500 the position is the same as in Study Task 10. The difference here is that Peter has almost completed the work on the house when it is destroyed. Will he be entitled to claim under s.1(3) for the value of the benefit which he has supplied by doing the work? The answer, based on BP Exploration v Hunt (1979) is that he will not be able to recover anything under this section. The benefit must be looked at in the light of the frustrating event; once the house has burnt down there is no valuable benefit to Sabina. The Act has not altered the position as it stood under the common law in Appleby v Myers (1867). The position would be different if, for example, the contract was to decorate two houses and only one of them was destroyed by the fire. In that situation Peter would be able to recover under s.1(3) for the benefit represented by the work done on the surviving house. Self-assessment questions Give an example of ‘self-induced’ frustration of contract. Can the doctrine of frustration be applied to leases of land? What is the ‘object’ of the Law Reform (Frustrated Contracts) Act 1943? Summary The common law rules discharge parties from future obligations, but otherwise leave any losses to lie where they fall. The only exception is the recovery of money paid where there is total failure of consideration. The Law Reform (Frustrated Contracts) Act 1943 provides more flexible rules under which money may be recovered, or payment ordered for benefits which have been acquired. The object of the Act is the prevention of unjust enrichment; it does not always operate, therefore, to distribute losses between the parties. The Act has been much criticised for its unsatisfactory drafting, particularly in relation to s.1(3). Exam question activity 1 Try to answer the following question: Bernard is the owner of a mansion called Stately Grange, which contains a collection of 50 valuable oil paintings. Bernard contracts with Artistic Cleaners Ltd to have all the paintings cleaned and re-hung at a cost of £200 per painting. He pays Artistic Cleaners £2,000 in advance, with the balance of £8,000 to be paid when all the pictures have been cleaned and re-hung. There is a stable yard in the grounds of Stately Grange from which Bernard runs pony-trekking holidays. Christine books a week’s holiday for herself and her five children for the week 8–15 August. She pays a deposit of £150 with the balance of £850 to be paid at the start of the holiday. Consider the effect of the following events on these contracts. On 6 August Artistic Cleaners Ltd have cleaned and re-hung 40 of the paintings. Of the remaining 10, five have been cleaned but remain at Artistic Cleaners’ workshop. The other five are still at the Grange. That evening Stately Grange is badly damaged by fire and all the paintings in the Grange are destroyed. The fire means that Christine’s holiday party will not be able to be accommodated in the Grange, as was planned, but will have to use tents in the grounds. In addition an outbreak of foot-and-mouth disease on a neighbouring farm means that riding will be restricted to the Grange’s own grounds, rather than including tours of the very attractive local countryside. On learning of this Christine seeks to cancel the holiday and reclaim her deposit. Feedback is available but try to answer on your own first. Your response will not match the feedback exactly but you should compare your performance with it and consider whether you took all the relevant factors into account.