Saturday, August 06, 2005

Contract Law - Doctrine of Frustration


Frustrated contract – automatic discharged.

Types of frustrated contracts:

1. Impossible contract: Taylor v Caldwell (1863) Lord Blackburn

Concert was impossible to be held because building was burnt down.

2. Unavailable for performance:

Condor v Barron Knights; Robinson v Davison: Contract for personal performance frustrated because illness made it impossible to perform.

3. Method of performance impossible:

Nickoll & Knight v Ashton Edridge: Sales of cottonseed; specified to be shipped by steamship Orlando from Alexandria in January. Orlando was grounded and could not make the journey. Held: that the contract requiring performance in a stipulated manner had been frustrated.

Tsarkiroglou v Noblee Thorl: Suez canal closed. Journey can continue with a much longer route. Performance had only become onerous or more expensive; performance still possible; manner of performance not specified. Contract not frustrated.

Davis Contractor v Fareham UDC: Labor shortage caused delay and cost more. Held: that the risk events can reasonably be expected to occur. Circumstances did not make performance radically different from what was expected. Performance only become more burdensome and did not change the nature of what was expected to do. Contract not frustrated.

4. Supervening event illegal: Fibrosa Case: War was declared and port was occupied by enemy. Illegal to trade with enemy.

5. Performance made pointless:

Krell v Henry (1903)

Rented suite room to watch coronation procession. Price of room reflected the significant event. Coronation was called off due to king’s illness. Held: that the procession was the foundation of the contract and event renders the contract incapable of performance due to non-existence of express condition which goes to the root of the contract which is essential to its performance. Contract was frustrated.

Herne Bay Steam Boat v Hutton (1903)

Hired steamboat to watch naval review during the King’s coronation day. Held: that inability to watch naval review during coronation was not fundamental to the contract as pleasure trip still possible. Contract is not frustrated.

6. Self-induced frustration: St. Cuthbert Case

Both parties aware that ship requires a licence from government before it can be legally operated. Charterer had a choice but decided not to use one of the available licences for Cuthbert.

The Super Servant Two (1990)

Contract to carry drilling rig in one of the two vessels owned. SS II sanked and D claimed contract frustrated. Held: D had chosen to use SS I on another contract as SS I contract was made after SS II. D negotiated extra payment to use SS I. This indicates that D attempted to use frustration to avoid an agreement which had become inconvenient.

7. Where one party had made what turns out to be a bad deal: Amalgamated Investment and Property v John Walker (1977)

Redevelopment became difficult and impossible. Held: that it did not mean that there was no purpose at all to the contract. It only had become not so lucrative as expected. Contract not frustrated.

Time of Frustrating Event

Event must occur after contract had been made. If event occurs before contract made, then it is Mistake.

Theory of Frustration – Common Law

Traditional View – any loss resulting from frustration should lie where it fell. If advance payment made before frustrating event, it will not be recoverable.

Fibrosa Case – court enunciated that advance payment could be recovered if there is a total failure of consideration. Advance payment will not be able to be recovered if the other party had received some benefits (‘All-or-Nothing Approach’). Criticism: receiving little benefit but lose all money paid. Total failure of consideration would allow recover-back which in some circumstances can be unfair to payee.

Camerco v ICM/Fair Warning (1995) – Court concluded that there ‘is no indication in the Act or relevant literature that the Court is obliged to incline towards total retention or equal division. The task of the judiciary is to do justice in a situation where neither parties contemplated, nor provided for, and to mitigate the possible harshness of allowing all loss to ‘lie where it had fallen’.

Law Revision Committee 1939 Report

Reported that the Act was based on the fact that contracting parties who did not negotiate for advance payment would be voluntarily assuming the risk of loss.

Criticism: Since frustration concerns events which cannot be foreseen, it is hard to see how contracting parties could consciously assume the risk that the risk events might happen.

Theoretical Basis for Doctrine of Frustration

Two school of thoughts (1) Implied Term Theory, & (2) Imposed Term Theory

Implied Term Theory: suggest that contract is discharged because, by implication, the parties have agreed that it will no longer be binding if the frustration event occurs. This approach was adopted by Blackburn J in Taylor v Caldwell.

Imposed Term Theory: approach adopted in Gamerco SA v ICM?Fair Warning (Agency) where the court is to do justice in a situation where neither parties contemplated, nor provide for, and to mitigate the possible harshness of the ‘all-or-nothing’ maxim.

Criticism: most commentators wish to see the court as intervening to impose a fair solution where circumstances make the whole situation completely different.

Law Reform (Frustrated Contracts) Act 1943

s.1(1): where a contract…becomes impossible of performance …and the parties been discharged from the further performance of the contract, …the following provisions shall apply:

s.1(2): All sums paid shall be recoverable and all sums payable shall ceased to be so payable. Court may allow the party who had received the money to deduct direct expenses incurred.

s.1(3): The other party is entitled to claim a just sum if the payee had enjoyed a valuable benefit. Court would consider the direct expenses incurred, and the effect, in relation to the said benefit..

At the time of Bell v. Lever Brothers the law of frustration and common mistake had advanced hand in hand on the foundation of a common principle. Thereafter frustration proved a more fertile ground for the development of this principle than common mistake, and consideration of the development of the law of frustration assists with the analysis of the law of common mistake.

The foundation of the law of frustration was Blackburn J's famous judgment in Taylor v. Caldwell (1863) 3 B.& S. 826. The parties had entered into an agreement for the hire of a music-hall for concerts on four specified nights. The hall burnt down before the first of these. Blackburn J., giving the judgment of the Court of Queen's Bench held that performance of the contract was excused by reason of an implied term:
as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing, without default of the contractor ... The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance. In none of these cases is the promise other than positive, nor is there any express stipulation that the destruction of the person or thing shall excuse the performance; but that excuse is by law implied, because from the nature of the contract it is apparent that the parties contracted on the basis of the continued existence of the particular person or chattel."

Taylor v. Caldwell was a case in which the subject matter of the contract was destroyed, so that performance of the letter of the contract was rendered impossible. The principle of frustration thus established, its ambit of operation was then extended. Claims for frustration were advanced, not where a supervening event had made it impossible to perform the letter of the contract, but where performance of the letter of the contract had become something radically different from that which the parties contemplated when it was concluded.

Lord Radcliffe in Davis Contractors Ltd v. Fareham UDC [1956] AC 696 at 728 and Lord Simon advanced the following refinement of that test:

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 case the law declares both parties to be discharged from further performance.

Initially the effect of frustration was to terminate the parties' respective obligations from the date of the frustrating event, but to leave outstanding any accrued obligations. This harsh result was mitigated to a degree by the decision of the House of Lords in the Fibrosa case [1943] AC 32 and to a greater degree by the Law Reform (Frustrated Contracts) Act 1943.

What do these developments in the law of frustration have to tell us about the law of common mistake? First that the theory of the implied term is as unrealistic when considering common mistake as when considering frustration. Where a fundamental assumption upon which an agreement is founded proves to be mistaken, it is not realistic to ask whether the parties impliedly agreed that in those circumstances the contract would not be binding. The avoidance of a contract on the ground of common mistake results from a rule of law under which, if it transpires that one or both of the parties have agreed to do something which it is impossible to perform, no obligation arises out of that agreement.

In considering whether performance of the contract is impossible, it is necessary to identify what it is that the parties agreed would be performed. This involves looking not only at the express terms, but at any implications that may arise out of the surrounding circumstances. In some cases it will be possible to identify details of the "contractual adventure" which go beyond the terms that are expressly spelt out, in others it will not.

Just as the doctrine of frustration only applies if the contract contains no provision that covers the situation, the same should be true of common mistake. If, on true construction of the contract, a party warrants that the subject matter of the contract exists, or that it will be possible to perform the contract, there will be no scope to hold the contract void on the ground of common mistake.

This test is applicable whether or not the event occurs as a result of the default of one of the parties to the contract, but the consequences of the event are different in the two cases. Where the event occurs as a result of the default of one party, the party in default cannot rely upon it as relieving himself of the performance of any further undertakings on his part, and the innocent party, although entitled to, need not treat the event as relieving him of the further performance of his own undertakings. This is only a specific application of the fundamental legal and moral rule that a man should not be allowed to take advantage of his own wrong. Where the event occurs as a result of the default of neither party, each is relieved of the further performance of his own undertakings, and their rights in respect of undertakings previously performed are now regulated by the Law Reform (Frustrated Contracts) Act, 1943.


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