Discharge of Contracts Flashcards

Question

When might make performance be impossible?

Answer 1

In Taylor v Caldwell (1863) 3 B & S 826 the defendants granted the claimants a licence to use its music hall at a cost of £100 per concert. After the contract had been entered into but before the first performance, the music hall was destroyed. No provision had been made for this risk in the contract. The court held that the contract was frustrated due to the destruction of the music hall rendering it impossible to continue with the contract. In Taylor v Caldwell the subject matter of the contract, ie the music hall, was destroyed. Frustration may also operate where the event destroys an asset that does not form the subject matter of the contract in question, but rather is essential for the performance of the contract. For example, in Appleby v Myers (1867) LR 2 CP 651 a contract to install and maintain machinery in a factory was frustrated when the factory was destroyed by fire. The factory was not the subject matter of the contract, but was nevertheless essential to its performance. Impossibility might be extended to situations of death or illness of one of the parties in a personal contract, especially where a specified individual is engaged to render a particular service. In Condor v The Barron Knights Ltd [1966] 1 WLR 87, the drummer in a music group was taken ill and only capable of working three or four nights a week, whereas the group had engagements for seven nights a week, such that the contract was frustrated because the drummer was not capable of performing the contract in the way intended.

Answer 2

The concept of unavailability is common in shipping contracts. Even temporary unavailability may discharge a contract if the interruption is such as to make performance substantially different from what was originally undertaken. Thus, where a ship was requisitioned for a period of five months out of a year’s charterparty, the contract was frustrated: Bank Line v Arthur Capel & Co [1919] AC 435. In Tamplin SS Co Ltd v Anglo-Mexican Petroleum Co [1916] 2 AC 397, the court had to decide whether the requisitioning of a ship (for the purposes of war) in February 1915 frustrated a fiveyear charterparty which was to last until December 1917. The court held that it did not, on the basis that the war would soon be over and thus a considerable proportion of the charterparty would remain. In the circumstances, this was overly optimistic, but it nevertheless demonstrates the problems facing a court in reaching satisfactory conclusions. In Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd, The Sea Angel [2007] EWCA Civ 547 the court made clear that the amount of time left to run in the contract is the starting point only in establishing frustration. A multifactorial approach should be adopted when assessing whether unavailability was sufficient to amount to frustration. The factors to be considered included: 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, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.

Answer 3

Frustration may also occur where a change in the law or state intervention renders performance illegal. Key case: Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 Facts: a contract for the sale of machinery provided for it to be shipped to a port in Poland. That port was then occupied by the enemy during the Second World War. Held: the contract was frustrated – the parties could not be obliged to perform a contract when to do so would be illegal.

Answer 4

Where the common purpose for which the contract was entered into can no longer be carried out because of some supervening event, the contract may be frustrated despite the fact that it is still physically possible to carry out the contract. It is important to remember that it must be the joint purpose of the parties. It is not enough that it is the purpose of just one party. In the case of Krell v Henry [1903] 2 KB 740 the defendant agreed, by a written contract, to hire a room in a flat on Pall Mall from the plaintiff for two days. The purpose in hiring the room was to view the coronation procession that was to pass along the street below on those days. However, no express mention was made of this in the contract. King Edward VII fell ill and the processions did not go ahead as planned. The Court of Appeal held that the common foundation of the contract was that the room was hired to view the king’s procession and this purpose had been frustrated. This is a highly unusual case. The rooms were hired out for the day only and both parties understood that the only purpose in hiring the rooms was to have a view of the procession. In Herne Bay Steamboat Co Ltd v Hutton [1903] 2 KB 683, the plaintiff hired their steamboat to the defendant ‘for the purpose of viewing the Naval Review and for a day’s cruise round the fleet’. The naval review was cancelled but the cruise could still go ahead. The contract was not frustrated. Viewing the naval fleet might have been the principal motivation for the defendant but it was not the common foundation of the contract. In Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch) the European Medicines Agency (EMA) argued that its lease of its headquarters premises in Canary Wharf was frustrated when it was forced to move its headquarters to Amsterdam following Brexit. Mr Justice Smith found that there was no common purpose which had been frustrated and that the parties had divergent purposes when they entered into the bargain set out in the lease. The EMA wanted premises which suited its purposes but with flexibility as to exit and a low rent. The landlord in contrast wanted a secure long term cash flow opportunity and a balance on its obligations as to the condition of the premises. They had bargained for the possibility that the EMA might not fulfil the full term for some reason (albeit not due to Brexit) when they entered into the contract. Putting it another way, had Brexit been a possibility then the parties could have taken it into account and still agreed an adjusted commercial arrangement. The nature of the bargain had therefore not fundamentally changed for both parties.

Answer 5

The doctrine of frustration, as Viscount Simonds stated in Tsakiroglou Co Ltd v Noblee Thorl GmbH [1962] AC 93, ‘must be applied within very narrow limits’. While in Pioneer Shipping Ltd and others v BTP Tioxide Ltd, The Nema [1981] 2 All ER 1030, Lord Roskill remarked that ‘the doctrine is not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains’. It is unsurprising, therefore, that the law has developed a number of limitations on the doctrine. ‘[W]here, without the default of either party, there has been an unexpected turn of events, which renders the contract more onerous than the parties had contemplated, that is [not] by itself a ground for relieving a party of the obligation he has undertaken.’ Frustration will not apply where the event was induced by one of the parties, ie because the event was their fault or choice. It is for the party alleging self-induced frustration to prove that it is. If they succeed in showing the frustrating event is self-induced then the defence of frustration fails and the defendant will be in breach of contract. In a sense, most events are to a greater or lesser degree foreseeable. That does not mean that they cannot lead to frustration. 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 princes, lasts for so long as to go beyond the risk assumed under the contract and to render performance radically different from that contracted for. However, […] the less that an event, in its type and its 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. If you could have foreseen an event, but failed to make provision for it in your contract, the doctrine of frustration will be less likely to apply. In Flying Music Company Limited v Theater Entertainment SA [2017] EWHC 3192 (QB), the negative effect on a contract in Greece of civil unrest and the economic crisis could not amount to frustration because at the time the contract concluded there were already signs of unrest. Although Theater Entertainment had hoped matters would improve there was a risk that they might not and the parties were deemed to have had the opportunity to deal with this risk and allocate responsibility for it in the terms of the contract that was eventually concluded. The Court refused to re-allocate the risks by intervening in the contract and deeming it frustrated. However, in Canary Wharf (BP4) T1 Ltd v European Medicines Agency Mr Justice Smith found that the key test is whether the event would have informed the manner in which the parties assessed the risk of entering into the contract. Highly theoretical risks which the parties would not have taken into account would not be relevant: There will, no doubt, be many cases where something can be foreseen as a theoretical possibility, but where neither party can be criticised for failing to take it into account.

Answer 6

The doctrine of frustration cannot override express and unambiguous contractual provision for the frustrating event. Commercial contracts often contain what is known as a force majeure clause, a clause that states what will happen to the contractual relationship between the parties should a particular set of circumstances (which could otherwise amount to frustrating events) materialise. Force majeure clauses often refer to acts of terrorism, war and ‘Acts of God’. The inclusion of a force majeure clause enables the parties to allocate risks in relation to these events at the outset and may allow for the continuance of the contractual relationship in circumstances that would otherwise amount to frustration of the contract. It is very unlikely that a party would be allowed to rely on the doctrine of frustration in relation to a particular event when the risk has already been provided for by the parties through a force majeure clause.

Answer 7

If a frustrating event occurs all future obligations are automatically discharged by the common law. The Law Reform (Frustrated Contracts) Act 1943 deals with obligations arising prior to the frustrating event. The Act does not apply to future obligations. If a frustrating event occurs future obligations are automatically discharged by the common law. The Act deals with obligations arising prior to the frustrating event. Section 1(2) of the Act makes the following provision: * Money paid before the frustrating event can be recovered. * Money that should have been paid before the frustrating event no longer needs to be paid. * Expenses incurred by the payee (usually the supplier) can be recovered out of the total sum paid/payable before the event. The recovery of expenses is at the discretion of the court and is discussed further on the next page. S1(2) gives the court a discretionary power to order such retention or recovery of money as it thinks just in all the circumstances to account for expenses incurred by the payee. The expenses incurred by the payee must be directly related to an attempt to perform the contract. The amount retained or recovered is capped and cannot exceed (i) the actual expenses incurred and (ii) the amount paid or payable prior to the frustrating event. It is for the payee to establish that the expenses were incurred and that it is just for the court to deduct them from the sums paid or payable to them before the frustrating event. If the supplier has expenses exceeding the amount of advanced payments actually paid or invoiced then it cannot claim them back. If nothing was paid or payable before the frustrating event, the party will not be able to get any expenses at all. It is also important to note the requirement that it be just for the supplier to retain the expenses. The sum retained or recovered to account for the expenses may not be the actual expenses incurred but only what the court considers to be a just sum having regard to all the circumstances of the case. The court therefore has a ‘broad discretion’ when considering whether and how much to allow the payee to retain or recover to account for his expenses under s 1(2) (provided it does not exceed the actual expenses incurred or the sums paid or payable in advance of the frustrating event). Where the benefit conferred before the frustrating event occurs is a non-monetary benefit, s 1(3) of the Act may be of some assistance. It provides that a party who has gained a valuable benefit under the contract before the frustrating event may be required to pay a just sum for it. The task for the court when applying this subsection is, firstly, to identify and value the benefit conferred, and then, secondly, to make an assessment of the just sum that should be awarded. The amount awarded cannot exceed the value of the benefit obtained. Provided the court does not award more than this amount, the court may award whatever sum is just, having regard to all the circumstances of the case and, in particular, s 1(3)(a) and (b). Held: on the wording of the legislation it was clear that ‘benefit’ meant the end product of the claimant’s services, not the services themselves. So in this case, the lesser of the two options. The practical impact of this is that where the value of the benefit has been reduced to nil by the frustrating event, the provider of the ‘benefit’ has no claim. The defendant’s benefit under s 1(3) is clearly not necessarily the value of the claimant’s performance.