BetterLawNotes-5 (2)

CONTRACT LAW

What is Frustration?

‘Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such a case the law declares both parties to be discharged from further performance.’

National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, 700 (Lord Simon).

When will a Contract be Frustrated?

Destruction or non-availability of subject-matter

The parties may be discharged from performance of the contract where a thing or a person, essential to that performance, is unavailable through no fault of either party.

Taylor v Caldwell (1863) 3 B & S 826

Caldwell agreed to allow Taylor the use of the Surrey Gardens and Music Hall on four specified days beginning on 17th June 1861, for the purpose of giving concerts and holding fetes, at a rent of £100 per day. On 11th June the Music Hall was without the fault of either party destroyed by fire. T alleged that C had breached the agreement by not giving T the use of the Hall and Gardens on the specified days. Held: Both parties were excused from performance of the contract. It was evident that both had contracted on the continued existence of the Music Hall at the dates when the concerts were to be given, that being essential to the performance of the contract.

Robinson v Davison (1871) LR 2 Ex 311

D had agreed with R for D’s wife to perform a piano concert on a specified day. D’s wife was prevented from performing by serious illness. R sued D for breach of contract. Held: D was not liable as the contract had been discharged. Kelly CB held that the principle in Taylor v Caldwell was directly applicable.

Sale of Goods Act 1979, s 7

‘Where there is an agreement to sell specific goods and subsequently the goods, without any fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is thereby avoided.’

Non-occurrence of an event

The parties may be discharged from performance where the non-occurrence of an event wholly defeats the purpose of the contract.

Krell v Henry [1903] 2 KB 740

K placed advertisements in the windows of his flat on Pall Mall to the effect that windows to view the coronation processions of Edward VII, to be held on 26 and 27 June, were to be let. On 20 June H agreed to hire K’s flat for both days for £75, and paid a deposit of £25, with the balance due on 24th June. The processions did not take place due to the illness of the king. K sued for the balance of the rental. H sought to recover the deposit. Held: the taking place of the processions was contemplated by the parties as the foundation of the contract, and consequently, K could not recover the balance of the rental.

Herne Bay Steam Boat Co v Hutton [1903] 2 KB 683

D chartered a boat from C to be available to see the Royal naval review at Spithead on 28th June and for a day’s tour around the fleet, and also to be available on the following day for similar purposes. D paid a deposit of £50, the balance being due when the vessel left Herne Bay. On 25th June, the review was cancelled. C wired D saying the boat was ready and asking for instructions. C received no reply. The fleet remained anchored at Spithead. C used the vessel on 28th and 29th for its own purposes. C then sued for the balance of the hire, making allowance for the profits it made on the two days. Held: the holding of the review was not the sole basis of the contract and C was entitled to the sums claimed.

Illegality

A contract will generally be frustrated where its performance becomes illegal.

Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32

For details, see below under ‘Consequences of Frustration’.

Performance becomes more onerous

A contract will not be frustrated merely because subsequent events conspire to render performance substantially more onerous than the parties had expected.

Davis Contractors Ltd v Fareham UDC [1956] AC 696

D agreed with F to build 78 houses in eight months for £94,000. Due to labour shortages, the work took 22 months and cost D £115,000. D claimed the contract had been frustrated and that it was entitled to recover the reasonable value of the work done. Held: the contract had not been discharged and D could not claim more than the contract price.

Ocean Tramp Tankers Corp v V/O Soufracht, The Eugenia [1964] 2 QB 226

A time charterparty for a single voyage from Italy to India via the Black Sea was held not to be frustrated by the closure of the Suez Canal, notwithstanding that the Canal formed part of the usual route. While the journey around Cape of Good Hope was longer and more expensive, the cargo of metal goods would not be adversely affected and there was no special reason for early arrival.

Foreseeable events and risk

The contract will not be frustrated where one of the parties has assumed the risk of the occurrence, or non-occurrence, of a particular event. The fact that the relevant event had been foreseen by one or both the parties may, but will not always, preclude frustration.

WJ Tatem Ltd v Gamboa [1939] 1 KB 132

During the Spanish civil war, D, acting on behalf of the Republican government, chartered a steamship from C for 30 days, commencing 1 July, for purpose of evacuating the civil population from Northern Spain. D agreed to pay hire of £250 per day until the date of re-delivery. The agreed hire was three times the prevailing rate for ships not trading with Spanish ports. D paid hire to 31 July in advance. On 14 July, the ship was seized by the Nationalists and was detained until 7 September. The ship was re-delivered to C on 11 September. On 18 August, D wrote to C declining to have anything further to do with the vessel. C sued for hire for period from 1 August to 11 September. D conceded that it could not recover hire paid in advance. Goddard J held that the seizure had destroyed the foundation of the contract. ‘No more could be done with the ship’ (at 140).

‘. . . when one uses the expression “unforeseen circumstances” in relation to the frustration of the performance of a contract one is really dealing with circumstances which are unprovided for, circumstances for which (and in the case of a written contract one only has to look at the document) the contract makes no provision.’ (At 138).

‘Frustration’ is self-induced

A contract will not be frustrated where the relevant event or non-event is due to an act or election of the party seeking to rely on it. A contract may be nevertheless be frustrated where the relevant event is due to an act of one of the parties.

J Lauritzen AS v Wijsmuller BV, The Super Servant 2 [1990] 1 Lloyd’s Rep 1

D agreed to transport C’s rig, the Dan King, from Japan to the North Sea using one of its two self-propelled, semi-submersible barges, Super Servant 1 or Super Servant 2, at D’s option. The contract contained a force majeure clause (clause 17) entitling D to cancel the contract in certain circumstances.

Before the time for performance, SS2 sank while transporting another rig in the Zaire River. D had intended to use SS2 for the Dan King contract and SS1 had been allocated to perform, and did perform, two other contracts covering the expected period of performance of the Dan King contract.

Two weeks after the sinking of the SS2, D informed C that it would not perform the contract. Following without prejudice negotiations, it was agreed that D would transport C’s rig by tug and barge. This led to increased costs for both parties.

The CA held (i) on its proper construction, clause 17 did not give rise to a right to cancel on the part of D where D had been negligent; and (ii) the contract had not been frustrated, whether or not SS2 sank due to the negligence of D.

Express provision in the contract

Generally, a contract will not be frustrated where the contract expressly provides for the situation. However, a contractual provision is likely to be construed narrowly by the court.

Metropolitan Water Board v Dick Kerr & Co Ltd [1918] AC 119

In July 1914, D agreed to build a reservoir within 6 years. The contract provided for an extension of time if delay occurred due to impediments or obstructions howsoever caused. In February 1916, the Minister of Munitions ordered D to cease work and sell the plant.

The HL held that the contract was frustrated by the supervening impossibility. The interruption was of such a character and duration as to fundamentally alter the conditions of the contract: it could not have been in the contemplation of the parties when the contract was made.

THE CONSEQUENCES OF FRUSTRATION

Frustration brings the contract to an end automatically and immediately. Both parties are discharged from further performance of the contract.

The Position at Common Law

Originally, the response of the common law to frustration was to let the loss lie where it fell.

Chandler v Webster [1904] 1 KB 493

C agreed to hire a room for viewing the coronation procession of Edward VII. The rental fee of £141 15s was payable immediately. Before the procession was cancelled, C had paid £100 of this sum. C claimed to recover this amount. Held: C could not recover the amount paid and remained liable to pay the balance of £41 15s.

Subsequently, the courts allowed a party to recover money paid under the frustrated contract where there had been a total failure of consideration.

Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32

D carried on business manufacturing textile machinery in Leeds. On 12 July 1939, D agreed to supply certain machines to C, a Polish company, at a lump sum price of £4,800. The machines were to be delivered by D to Poland. One third of the price was to be paid on the making of the order, the balance against shipping documents. On 18 July, C paid £1,000 of initial sum due of £1,600. On 1 September, Germany invaded Poland. On 3 September, Great Britain declared war on Germany. On 7 September, C’s agents in England wrote to Ds saying delivery could not take place, and requesting return of £1,000. On 1 May 1940, C issued a writ claiming damages for D’s refusal to deliver the machinery, or alternatively for return of £1,000. The House of Lords held that C could recover the £1,000 in a claim in quasi-contract on the ground that there had been a total failure of consideration.

Nevertheless, the law was still regarded as unsatisfactory in several important respects.

Appleby v Myers (1867) LR 2 CP 651

A agreed to supply and put up various items of machinery at M’s premises. During performance of the contract, M’s premises and A’s work in progress were accidentally destroyed by fire. Held: A was not entitled to recover any payment.

Whincup v Hughes (1871) LR 6 CP 78

W apprenticed his son to Hughes, a watchmaker and jeweller, for a period of 6 years, paying a premium of £25. Hughes duly instructed W’s son for 12 months, and then died. W brought an action against H’s executrix to recover all or part of the premium. The claim failed.

Law Reform (Frustrated Contracts) Act 1943

The position at common law has now been modified by the Law Reform (Frustrated Contracts) Act 1943

Law Reform (Frustrated Contracts) Act 1943, s 1(2)

‘All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as “the time of discharge”) shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable:

Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in, or for the purpose of, the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.’

Gamerco SA v ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226

The promoter of a rock concert by Guns N’ Roses had made an advance payment of $412,500 out of a total amount due to the group under the contract of $775,000. The contract was frustrated when the concert had to be cancelled. Both parties had incurred expenses, the promoter, $450,000, and the group, $50,000, all of which were wasted. The promoter made a claim under s 1(2) LR(FC)A. Held: the promoter was entitled to recover the entire amount of the advance payment.

Law Reform (Frustrated Contracts) Act 1943, s 1(3)

‘Where any party to the contract has, by reason of anything done by any other party thereto in, or for the purpose of, the performance of the contract, obtained a valuable benefit (other than a payment of money to which the last foregoing subsection applies) before the time of discharge, there shall be recoverable from him by the said other party such sum (if any), not exceeding the value of the said benefit to the party obtaining it, as the court considers just, having regard to all the circumstances of the case and, in particular,-

(a) the amount of any expenses incurred before the time of discharge by the benefited party in, or for the purpose of, the performance of the contract, including any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under the last foregoing subsection, and

(b) the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract.’

BP Exploration Co (Libya) Ltd v Hunt (No 2) [1983] 2 AC 352

BP entered into a contract to exploit an oil concession in Libya owned by H. BP agreed to make initial payments in cash and oil to H in return for a half share in the concession and ‘reimbursement oil’ from H. A large oil field was discovered but after four years the contract was frustrated when the Libyan government expropriated the interests of both parties. At this stage, BP had received only one-third of the reimbursement oil due to it in respect of its initial expenditure and claimed the balance. Held: BP was entitled to recover a ‘just sum’ under s 1(3) LR(FC)A amounting to $35m.

Note also the following important provisions of the Act:

Law Reform (Frustrated Contracts) Act 1943, s 2(3)

‘Where any contract to which this Act applies contains any provision which, upon the true construction of the contract, is intended to have effect in the event of circumstances arising which operate, or would but for the said provision operate, to frustrate the contract, or is intended to have effect whether such circumstances arise or not, the court shall give effect to the said provision and shall only give effect to the foregoing section of this Act to such extent, if any, as appears to the court to be consistent with the said provision.’

Law Reform (Frustrated Contracts) Act 1943, s 2(4)

‘Where it appears to the court that a part of any contract to which this Act applies can properly be severed from the remainder of the contract, being a part wholly performed before the time of discharge, or so performed except for the payment in respect of that part of the contract of sums which are or can be ascertained under the contract, the court shall treat that part of the contract as if it were a separate contract and had not been frustrated and shall treat the foregoing section of this Act as only applicable to the remainder of that contract.’

Law Reform (Frustrated Contracts) Act 1943, s 2(5)

‘This Act shall not apply . . .

(c) to any contract to which section 7 of the Sale of Goods Act 1979 (which avoids contracts for the sale of specific goods which perish before the risk has passed to the buyer) applies, or to any other contract for the sale, or for the sale and delivery, of specific goods, where the contract is frustrated by reason of the fact that the goods have perished.’

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