#16748 - Frustration Pq Notes - Contract Law

Contractual liability is strict. Contract law is not concerned with fault (unlike tort) – lack of fault does not excuse breach of contract. This is because of the principle of certainty – one can rely on the promise made by another.

Frustration appears to be in tension with the strictness of contractual liability.

Traditional Approach – necessity of force majeure clause

Paradine v. Jane (1646): “[W]here the law creates a duty or charge, and the party is disabled to perform it without any default in him … there the law will excuse him. … [B]ut when the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.”

Modern approach

Davis Contractors Ltd v Fareham Urban District Council: “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. Non haec in foedera veni. It was not this which I promised to do.”

The Sea Angel (2007): The doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.

The Sea Angel (2007): Deciding when this arises involves a multifactorial approach. The factors include

1. Terms of the contract

2. Context of contract

3. Parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, at the time of contract

4. Nature of supervening event

5. Parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.”

NB. Frustration is a binary concept – a contract is either frustrated or not. There is no middle ground: Lloyds TSB Foundation for Scotland v Lloyds Banking Group

Relevant factors

(1) Gravity of supervening event

Commercial cost

Davis Contractors Ltd v Fareham Urban District Council: Mere commercial hardship does not constitute frustration: “it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play”. On the facts, an increase in the cost of work by less than 25% did not frustrate the contract, even though it had the effect of eliminating the contractor’s profit margin.

Delay

The Sea Angel: “[T]he doctrine is not to be lightly invoked… mere incidence of expense or delay or onerousness is not sufficient”.

Pioneer Shipping Ltd v BTP Tioxide, The Nema: Whether delay operates to frustrate the relevant contract will depend on the context; it is a question of “degree”.

Davis Contractors Ltd v Fareham Urban District Council: “It may be that delay could be of a character so different from anything contemplated that the contract was at an end.”

Examples of delay successfully frustrating contract: Jackson v Union Marine Insurance, where a chartered ship ran aground and took nine months to be repaired. Examples of insufficient delays: Davis Contractors, where a building contract took twenty-two months instead of eight; The Eugenia where a voyage lasted 138 days instead of the expected 108 days.

Destruction of physical subject matter

Taylor v Caldwell: “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.” On the facts, D agreed to make available to C a music hall and gardens for four days. C agreed on these days to provide artistes who would entertain. The music hall was destroyed by fire. It was held that this had frustrated the contract because, “looking at the whole contract, we find that the parties contracted on the basis of the continued existence of the music hall at the time when the concerts were to be given, that being essential to their performance.”

(2) Allocation of risk

Express allocation:

Victoria Seats Agency v Paget: The contract is not frustrated if it contains an express clause dealing with the supervening event. The presence of this clause shows both parties had foreseen the supervening event and allocated risk if it occurred.

Implied allocation:

The Sea Angel: “Contracts are about the allocation of risk, and… the allocation… of risk is not simply a matter of express or implied provision but may also depend on less easily defined matters such as ‘the contemplation of the parties’.”

Imputation of risk:

It is also possible to impute the allocation of risk based on pre-existing rules. For e.g., in the context of purchasing land, Amalgamated Investment and Property v John Walker shows that a purchaser of land is allocated the risk that, subsequent to the contract’s formation, the property might become listed as a building of special architectural/historical interest. This planning restriction would not amount to frustration. Likely a niche point.

Davis Contractors: in construction contracts the builder bears the risk of building materials becoming scarce with consequent delay

(3) Foreseeability and foresight

Krell v Henry: “In each case one must ask oneself, first, what, having regard to all the circumstances, was the foundation of the contract? Secondly, was the performance of the contract prevented? Thirdly, was the event which prevented the performance of the contract of such a character that it cannot reasonably be said to have been in the contemplation of the parties at the date of the contract?”

However, not an absolute rule. The Sea Angel: (1) The foreseeability of a risk “must not be exaggerated into something critical, excluding, preclusive… In a sense, most events are to a greater or lesser degree foreseeable. That does not mean that they cannot lead to frustration.” (2) “Even events which are not merely foreseen but made the subject of express contractual provision may lead to frustration: as occurs when an event such as a strike, or a restraint of prices, lasts for so long as to go beyond the risk assumed under the contract and to render performance radically different from that contracted for.” (3) “However… the less that an event, in its type and 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.”

(4) Default and self-induced frustration

The Super Servant Two: “[T]he real question… is whether the frustrating event relied upon is truly an outside event or extraneous change of situation or whether it is an event which the party seeking to rely on it had the means and opportunity to prevent but nevertheless caused or permitted to come about.”

On the facts, contract for hire of Ships 1 and 2. Ship 2 sank. Even though Ship 1 had not sunken, the hirer had committed it to other contracts, and thus argued it was unavailable to replace Ship 2. That being the case, Ship 2’s sinking was a frustrating event. Held: no, because it was the decision of the hirer not to prioritise this contract and commit Ship 1 to other contracts beforehand.

Specific fact-patterns

Employee illness of death under employment contracts

Notcutt v Universal Equipment Co (London) Ltd: An employment contract is frustrated by the supervening incapacity, and a fortiori by the supervening death, of the employee.

Frustration of purpose

This is possible: Krell v Henry: Frustration is not limited to cases in which the event causing the impossibility of performance is the destruction or non-existence of a thing which is (1) the subject-matter of the contract or (2) some condition or state of things expressly specified as a condition of it.

Krell v Henry – The approach is to ask: (1) ascertaining, not necessarily from the terms of the contract, but, if required, from necessary inferences drawn from surrounding circumstances, what the substance of the contract was; (2) asking whether that substantial contract needs for its foundation the assumption of the existence of a particular state of things; (3) if yes, if the contract becomes impossible of performance by reason of the non-existence of the state of things assumed to be the foundation, there is no breach of contract.

The facts of Krell v Henry, which gave rise to frustration of purpose, are exceptional. Because (1) the person hiring out his room was not in the normal business of renting rooms, (2) he only rented specifically the rooms with a view of the coronation, and (3), the duration of hire was for the specific timing of the coronation, court held that the coronation procession was the foundation of the contract, and its non-happening prevented contractual performance.

Cf. Herne Bay Steam Boat v Hutton: the coronation was not the foundation of the contract because the substance of the contract was not limited to the naval review of the coronation, but also extends to a cruise around the fleet. This is despite the insertion of a reference in the contract to the “naval review”, which the court finessed as merely an insertion to define more exactly the nature of the voyage, but which was still...