The Doctrine of Frustration - Part 2

The Doctrine of Frustration - Part 2 - Types of frustrated contracts

What is a frustrated contract? In simple terms, a frustrated contract is a contract where, one or either party, subsequent to the contract formation, becomes incapable of performing his contractual obligations, due to unforeseen 'supervening' event that renders the obligations under the contract, without the fault of either party, radically different from those contemplated by the parties to the contract. The immediate implication of this is that a party cannot rely on the doctrine to excuse performance if he can foresee the occurrence of an event and decided not to make any provision for it in the contract. It may be inferred that the parties accepted the risk of the occurrence of this event and the contract will not be allowed to be frustrated by the court[1].

There are many instances in which the contract can be frustrated and it may therefore not be possible to list or summarize all cases in which a contract can be terminated due to frustration. However, this can be categorised under the general headings of impossibility, illegality, significant change in circumstance and the non-occurrence of a particular event which forms the basis of the contract.

1.???Impossibility of performance

If an event emerges rendering performance impossible, this will discharge the contract. Commonly, there are three main types of impossibility. Impossibility can arise where a) the subject-matter of the contract is destroyed, b) where the subject matter becomes unavailable due to some extraneous cause or c) where the method of performance becomes impossible.

The first situation may well be illustrated in the landmark case of Taylor v Caldwell[2]. In this case the plaintiff contracted the hire of a concert hall from the defendant. Unexpectedly and without any fault on the side of either party the hall was destroyed by fire prior to it been used by the plaintiff. The courts held that the contract was discharged by frustration[3]. The importance of Taylor is that until this case, parties to a contract were held to be absolutely bound and a failure to perform was not excused notwithstanding any radical changes in circumstances. Further, it has been established, the term "destruction" shall not be limited to its literal interpretation. Destruction, in its objective interpretation, can also cover situations where the foundation of the contract has not been physically destroyed but, where they had ceased to exist in a commercial sense as they had become something which was not merchantable as dates[4].

?An example of the second situation can be found in the case of Nickoll and Knight v Ashton Eldridge Co[5], in which a ship required for the performance of the contract in question became stranded for reasons unavoidable. The contract provides express reference to the ship, The Orlando, which was to carry the cargo. As such the contract was held to be discharged by frustration. Further, in Howell v Coupland[6], It was held that seller was relieved of the obligation to deliver the remainder of 200 tons by reason of impossibility of performance[7].???

In relation to the third situation a contract will only be deemed frustrated in this way where the method was wholly essential to the performance of the contract and was expressly (or impliedly) stipulated in the contract. In the case of Tsakrioglou Co Ltd v Noblee Thorl GmbH[8], there was neither an express nor an implied term for shipment via Suez canal. The closure of the Suez Canal was not deemed adequate grounds to frustrate a contract to ship nuts despite the fact that the parties anticipated that they would be shipped via Suez. The House of Lords refused to imply a term to that effect noting that alternative means of performance was still available round the Cape.

2.???Supervening Illegality

Illegality may arise where a change in the law, made subsequent to the conclusion of a particular contract, renders the performance or further performance of that contract illegal. Supervening illegality will be understood to mean subsequent changes in legislation, subsequent acts of governments or their administrative bodies, or "change in surrounding circumstances which have the effect of prohibiting performance by virtue of the previously existing law"[9]. A good illustration of this principle may be found as a consequence of the outbreak of war. One of the consequences of the Trading with the Enemy legislation in the UK, is that contract may be frustrated when the place of performance became part of enemy territory[10]. This is best explained in the leading Fibrosa case[11]. In this case, a contract for the defendants, a British company, to supply machinery to the claimants, a Polish company, was frustrated by the outbreak of war. Poland was subsequent to the contract, invaded by Germany, which made it impossible to deliver the machines. The importance of the court decision is that despite the fact that the contract could have been 'physically' performed, the contract was seen as frustrated as the buyer country and designated port had become an enemy territory, due its occupation by the Germans[12].

In Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd[13], the House of Lords held that the contract had become frustrated as, by a wartime control order (the Control of Timber (No 4) Order 1939), trading under the agreement became illegal. Interestingly, in the case of Ertel Bieber Co. v. Rio Tinto Co. Ltd[14] which came before the House of Lords, the plaintiff claimed that the contract was terminated by the declaration of war between Great Britain and Germany. The defendant relied on a clause of the contract stating that the contract obligation should be suspended during war, and claimed that the plaintiff's obligation would revive when the war came to an end. ?On the ground that suspensory clause was void because it will be against public policy to allow the contract to survive, the House of Lords held that the contract was frustrated on the outbreak of war notwithstanding the express contractual provision. This is a special case shall not be construed as if a supervening impossibility cannot be excluded by express provisions in the contract[15].

?3.???Radically different:

?Frustration may occur where, due to some extraneous event, further performance, though technically or physically possible, would become something fundamentally different from that originally envisaged by the parties

?In the landmark case of Davis Contractors Ltd v. Fareham Urban District Council[16] , Lord Radcliffe enunciated the standard that:

?"…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". In National Carriers Limited v Panalpina (Northern) Limited[17], the House of Lords redefined the test of frustration in the following terms "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".

The closure of the Suez Canal in 1956 has resulted in several law cases claiming frustration[18]. The court held that “nothing was proved or found as to the nature of the goods or other circumstances which would render the route around the Cape unreasonable or impracticable, and this route was at all time available[19].?This, it is held, did not render the contract fundamentally or radically different. The fact that performance may be rendered different only does not suffice. The change must be radical and must affect the substance of the contract. It is important however to note that the concept of "radical change" shall always be distinguished from situations where the supervening event renders performance of the contract more onerous or expensive[20]. In the same context, where a contract expressly or implicitly provides for a particular method of performance and a supervening event renders that method of performance impossible, the contract may still be frustrated[21].

In Codelfa[22] the contract specifically stated that work on an underground railway would be carried out seven days a week. This could not have been achieved due to noise restrictions where the company by injunction has been restrained from working the planned seven days a week.?It was held that the performance of the contract in the events which have occurred is radically different from performance of the contract in the circumstances which it, construed in the light of surrounding circumstances, contemplated[23]. Conversely, a 90 day extension in a vessel journey due to closure of Suez canal was not considered radically different[24]. Similarly, in Davis Contractor v Fareham UDC[25], circumstances did not make performance radically different from what was expected. In fact, performance only turn out to be more onerous and did not change the nature of what was expected to do[26].

From the above, it is apparent, the “radically different” test remains a very important test in English law, although, it has been applied very restrictively. In the Sea Angel[27], Rix LJ stated that "..what the ‘radically different’ test, however, does not in itself tell us is that the doctrine is one of justice, as has been repeatedly affirmed on the highest authority".

4.???Non occurrence of a particular event which forms the basis of the contract

This invites a crucial comparison of two of the “Coronation Cases” arising out of the postponement of the coronation of Edward VII due to his sudden illness. In both cases, the performance of the contract was still feasible, however, the courts reached two different opinions. These opinions have considered the effect of the event(s) on the basis of the formation of the contracts. In the case of Krell v Henry[28], the defendant had agreed to hire a flat to watch the coronation procession. When the coronation was cancelled, he refused to pay. The question before the court was whether the contract was frustrated or not. The court of appeals excused the defendant from his obligation to rent the flat. The court reasoned that the occurrence of the coronation procession was the basis of the contract, the cancellation of which was not contemplated by either party at the time they made the contract. Although the contract itself was silent on the purpose of the renting, the common intention of the parties was the hire of a room for the sole purpose of watching the procession. The contract was held to have been frustrated.

The Krell decision has however been subject to some criticism. Lord Wright commenting on the Krell decision said that ?“it is certainly not one to be extended”[29]. However, the Author is of the view that Krell has been rightfully decided. The whole point of hiring the room was to allow the hirer to watch the procession; if the procession wasn’t going to happen, then there is no merit in the entire contract. The viewing of the procession not only was the fundamental element of the contract, but, in fact, it was its sole purpose. This has been perfectly illustrated in the words of Vaughan Williams LJ when he said that "the subject of the contract was ‘rooms to view the procession’, the postponement, therefore, made the rooms not rooms to view the procession". In fact, the illness of the king had frustrated the purpose of the two parties. On the one hand, Mr. Henry couldn't view the procession (due to the cancellation) and Mr. Krell couldn't provide a viewing facilities (as there has been nothing to view).

In contrast, in Herne Bay Steam Boat v Hutton[30], steamboat had been chartered to watch naval review and taking a cruise around the fleet during the King’s coronation day. It was held that inability to watch naval review during coronation was not fundamental to the contract as pleasure trip still possible. So the contract did not become radically different and was, therefore, not frustrated. This emphasises that where appropriate the pact principle would be upheld and in this particular case, despite the cancellation of principal reason for the contract, if, a substantial part of the contract can still be performed, the contract will not be held to be frustrated[31].

The facts in these two cases had a common element. They, amongst other contracts, had been made in anticipation of a specific event, being the coronation. When the event forming the substance of the contract had to be postponed, performance of the contractual obligations could still have been achieved however, in krell, ?it would be radically different from what had been originally intended by the parties.

[1] Walton Harvey Ltd v Walker & Homfrays Ltd [1931] 1 Ch. 274

[2] (1863) 3 B & S 826 ; 122 ER 309; [1863] EWHC QB J1

[3] ibid. Blackburn J reasoned that the rule of absolute liability only applied to positive, definite contracts, not to those in which there was an express or implied condition underlying the contract. Blackburn J further reasoned that the continued existence of the Music Hall in Surrey Gardens was an implied condition essential for the fulfilment of the contract

[4] Asfar v. Blundell, [1896] 1 Q.B. 123 at 128

[5] [1901] 2 KB 126

[6] (1876) 1 QBD 258

[7] ibid. at 261 Lord Coleridge explain the decision as follows: ".. the simple and obvious construction of the agreement both parties understood and agreed, that there should be a condition implied that before the time for the performance of the contract the potatoes should be, or should have been in existence, and should still be existing when the time came for performance… It was not an absolute contract of delivery under all circumstances, but a contract to deliver so many potatoes, of a particular kind, grown on a specific place…. On the facts the condition did arise and the performance was excused.

[8] [1962] A.C. 93 (HL)

[9]G.H. Treitel, Frustration and Force Majeure (London: Sweet and Maxwell, 2004) at 349

[10] In Esposito V Bowden (1857) 119 ER1430, the parties entered into a contract of charter party whereby Bowden, who chartered the ship belonging to Esposito, agreed to load the ship with wheat at Odessa. However, before performance had taken place, war broke out between the UK and Russia and, thereby rendering any performance of the contract illegal. It was held that, in these circumstances, the contract had been discharged by frustration, since performance by him would have amounted to trading with the enemy.

[11] Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour, Ltd. [1943] A.C. 32

[12] ibid. Lord Atkin found that the declaration of a state of war had "caused an indefinite delay and the legal impossibility of delivery at the enemy-occupied port".

[13] [1944] A.C. 265

[14] [1918] A.C. 260

[15] In Joseph Constantine SS Line ltd v Imperial Smelting Co. Ltd [1942] A.C. 154 at 163, Lord Simon said:" There can be no discharge by supervening impossibility if the express terms of the contract bind the parties to performance notwithstanding that the supervening event may occur"

[16] [1956] AC 696 at 729

[17] [1981] AC 675

[18] Tsakiroglou & Co Ltd. v. Noblee and Thorl G.m.b.H., [1962] AC 93.

[19] This is despite that the closure of the Suez Canal forced the cargo to travel around the Cape of Good Hope at a cost increase of over 100 percent.

[20] Ocean Tramp Tankers Corpn. v. V/O Sovfracht The Eugenia 1964 2 QB 226

[21] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337

[22] ibid

[23] ibid, at 363

[24] The Eugenia (n102) where Lord Denning MR held that there was no frustration of the contract. First, that the charterers could not rely on any self-induced frustration (sailing into the canal) as a ground for arguing the contract was frustrated. If they had not tried the Suez canal, they would have had to sail round the Cape, but this would not have rendered the contract radically different

[25] [1956] AC 696

[26] ibid. Lord Radcliffe along with the majority of the House of Lords in that case, favoured this objective test, where "…such a change [has occurred] in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for."

[27] Edwinton Commercial Corporation & Anor v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] EWCA Civ 547 (12 June 2007)

[28] [1903] 2 KB 740

[29] Maritime National Fish Ltd. v. Ocean Trawlers, [1935] A.C. 524 at 529.

[30] [1903] 2 KB 683

[31] [1903] 2 KB 683, 692. As explained by Stirling LJ: It is said that, by reason of the reference in the contract to the “naval review,” the existence of the review formed the basis of the contract, and that as the review failed to take place the parties became discharged from the further performance of the contract, in accordance with the doctrine of Taylor v Caldwell. I am unable to arrive at that conclusion. It seems to me that the reference in the contract to the naval review is easily explained; it was inserted in order to define more exactly the nature of the voyage, and I am unable to treat it as being such a reference as to constitute the naval review the foundation of the contract so as to entitle either party to the benefit of the doctrine in Taylor v. Caldwell. I come to this conclusion the more readily because the object of the voyage is not limited to the naval review, but also extends to a cruise round the fleet. The fleet was there, and passengers might have been found willing to go round it. It is true that in the event which happened the object of the voyage became limited, but, in my opinion, that was the risk of the defendant whose venture the taking the passengers was.

Disclaimer

This article sets out a variety of materials relating to the law to be used for educational and non-commercial purposes only; the author(s) of this blog do not intend the blog to be a source of legal advice. Please retain and seek the advice of a lawyer and use your own good judgement before choosing to act on any information included in the article. If you choose to rely on the materials, you do so entirely at your own risk