#14989 - Frustration And Termination - Contract Law

FRUSTRATION

A contract is ‘frustrated’ and void when something happens after it is made which make performance of the contractual obligations impossible, illegal or otherwise ‘radically different’ from that contemplated by the parties.

Frustration cannot occur when (i) not an express term, (ii) pre-existing rule or (iii) implied allocation based on the courts’ assessment in a particular context

• (ii) -> eg Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd [1976] where courts imputed risk on one party -> this would be considered a pre-existing rule

• (iii) -> Rix LJ in “The Sea Angel” (2007) that must look at (a) allocation of risk and (b) gravity of supervening events

3 ways to frustrate

• Death

• Supervening illegality

• Destruction of subject matter

RELATIONSHIP WITH COMMON MISTAKE

For common mistake to apply, the parties must be mistaken as to some feature at the time of contracting, whereas for frustration to apply, the parties’ joint assumption must be shown to be false by events occurring after the contract has been entered into.

Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd [1976] -> where held contract for sale of land not frustrated when buyer found out land on a list to be listed as building of historic significance, value dropped from 1.7mil to 200k as (i) if listed before the sale, it would be a common mistake but property was not listed before sale (ii) inherent on the property buyer that buyer takes the risk

• Ie if listed before the sale – then it would be common mistake

THE TEST FOR FRUSTRATION

General formulation – the ‘radically different’ test

The test has three elements (The Sea Angel [2007]):

1. There must be a radical change in the obligation

   1. The doctrine is not to be lightly invoked. Increased expense, delay or onerousness is not sufficient for a radical change in the obligation. There has to be a ‘break in identity’ between the contract as provided for and contemplated and its performance in the new circumstances.

2. The contract must not distribute the risk of the event occurring

   1. If the express or implied terms of the contract contain a mechanism (even a rudimentary one) for dealing with certain changes in circumstances, the contract will be taken to contemplate such changes and not be frustrated by reason of them.

   2. Determining whether the contract contains such a mechanism requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties' knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, so far as these can be ascribed objectively.

   3. The most common method for expressly distributing risk is the force majeure clause, which provides a comprehensive list of events and problems, and provides a contractual regime for dealing with them (e.g. a right of cancellation, suspension, changes in price etc.). It provides certainty about what the impact of the specified events will be, it enables the parties to allocate the risk of events which would not count as frustrating events at common law and also to make provision for a more flexible remedial regime than that which applies on frustration.

3. The occurrence of the event must not be due to either party.

Morgan (2012) argues that we do not need a doctrine of frustration, that parties should be required to look after themselves by inserting a force majeure clause if they want protection from unexpected events. However, while it is important that the doctrine is not applied too readily it would be overly harsh to abolish it altogether to cover eventualities not provided for in the contract, but which falsify both parties’ assumptions in an important respect.

The alternative approach (the ‘construction approach’/’implied terms approach’) argues that the consequences of a change of circumstances after the contract is made can always be determined by construing and interpreting the terms of the contract in the ordinary way, implying terms where appropriate. This approach, which was rejected in National Carries v Panalpina [1981]), may provide a better way of explaining the cases, as the radical change of obligation test often fails to capture the essence of the court’s reasoning.

Some specific fact situations / examples of the test in operation

(i) Destruction of the subject matter of the contract

As it is clear that destruction of the subject matter results in a radical change of obligation, it is then a matter of construction of the contract as to whether it places the risk of destruction on one party

• Eg Taylor v Caldwell (1863) Blackburn J -> Destruction of the cinema in a fire, no one at fault, cinema at centre of contract as contract for performers to perform in the hall – held frustration – first case of frustration

(ii) Supervening illegality

If the contract becomes illegal to perform, this may frustrate the contract if the illegality results in a radical change of obligation. Whether the effect is serious enough to cause a radical change of obligation will normally depend on how long the legal restriction applies for compared with the term of the contract.

• This is the CLEAREST case we have for frustration

• Eg Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) per Beatson J at [100] where he citing Chitty that it was “customary to treat supervening illegality as an instance of frustration”

• Eg Fibrosa v Fairbairn [1943 HL (Contract frustrated by WWII, Polish ordered machines prepaid, as total failure of consideration since no machines delivered. Polish company got it back) -> shows supervening illegality would result in frustration

(iii) Death / incapacity of one party (in contracts for personal services)

Contracts for the provision of personal services, such as contracts of employment, may be frustrated if one party is unable to perform through death, illness or incapacity. The court looks at matters such as how long he is unable to perform for, how long the contract was for and the terms of the contract.

(iv) Contract has become commercially ‘pointless’? (non-occurrence of an event)

In Krell v Henry [1903], the defendant agreed to hire from the claimant a flat during King Edward VII’s coronation procession. The contract contained no express reference to the coronation procession. The procession was postponed, so the defendant declined to pay the balance of the agreed rent. The CA held that the taking place of the procession on the days originally fixed along the proclaimed route was regarded by both contracting parties as the foundation of the contract, so the contract was frustrated and the defendant did not have to pay the balance.

Vaughan Williams LJ distinguished the situation in Krell from a hypothetical example where frustration would not apply: ‘if a cabman was engaged to take someone to Epsom on Derby Day at a suitable enhanced price for such a journey, both parties to the contract would not be discharged if the race was cancelled.

• This example shows is that it is not enough that one party entered into the contract for the purpose of seeing the Derby: the fact that one party (frustration needs 2 parties) makes an assumption which subsequent events show to be incorrect is not enough to frustrate the contract.

• It also shows that even if one party makes an assumption that is subsequently shown to be incorrect AND the other party knows of this assumption at the time of contracting, this is still not enough to bring the contract to an end.

In Krell, the defendant’s motive for contracting was to see the procession and the plaintiff knew this. The cab example shows that something more is needed:

• First, he advertised that he was selling a view of the royal procession, rather than simply letting the room.

• Secondly, the claimant only offered the use of the room in the day, not during the night.

• Thirdly, the claimant was not in business hiring out his room regularly – unusually, and unlike the cabman, he only contracted because of the coronation procession.

Northern Indiana Public Service Co v Carbon County Coal Co

• Cf Posner J in (1986) argues that Krell could have let out the room again when the coronation actually occurred – therefore wouldn’t be harsh for owner

• Criticism -> this uses a lot of hindsight, what is King died or coronation route changed?

These factors show that the claimant was not merely hiring out a room for ordinary use; he was selling a view of the procession and nothing more. We can say that BOTH parties assumed that the procession would go ahead, and it was this that allowed the CA to say the contract should be discharged.

• Cf Henry Bay v Hutton [1903] – coronation cancelled, D chartered steamship to take passengers to view the naval procession. D argued frustration, held not frustrated (Sterling LJ) as (i) more than one purpose, passengers might be willing to view the other ships in the port (ii) risk assumed by D when chartering ship

• Ie the cancellation of the contract did not render the contract a complete waste of time

• Andrews argues that result might be different if advertised as “vessel available for hire during King’s review of the fleet”

• Andrews argues that best way to distinguish Henry Bay v Hutton from Krell v Henry is that Henry Bay v Hutton is that frustration would not occur if only PART of the anticipated contractual satisfaction had been removed as compared to Krell v Henry where the WHOLE anticipated contractual satisfaction...