Mistake and Frustration

Question 1

Difference between mistake and frustration?

Answer 1

• If the contract party’s assumption deviates from the state of things at the time of formation mistake
• If the contract party’s assumption deviates from the state of things as they turn out to be due to a subsequent and unexpected change of circumstances frustration

Question 2

I – Common Mistake
I.I – Common Mistake at Common Law
A – Leading Cases in Modern Law

Bell v Lever Bros [1932] AC 161

1. effect of common mistake
2. facts
3. held

Answer 2

1. A common mistake does not lead to a void contract unless the mistake is fundamental to identity of the contract.
2. Facts: D paid £50,000 to terminate the employment of two employees as part of his corporate reorganization. Unknown to D, the employees had breached their contracts, entitling D to dismiss them without compensation. D sought the return of the £50,000 for fraud (failed) or common mistake. The jury found that D would never have paid if they had known the truth, and that the employees were also mistaken because they didn’t have the breach in mind.
3. Held (HL, by 3/2 majority): there is jurisdiction to void a contract for common mistake, but in this case the mistake was not sufficiently fundamental to void the contract.

Question 3

I – Common Mistake
I.I – Common Mistake at Common Law
A – Leading Cases in Modern Law

Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] 3 WLR 1617

Facts

Held

Phillips 5 conditions for common mistake

Answer 3

Sets out test for common mistake to void the contract.
- Facts: T in the business of salvaging ships in difficulty, and when informed of a ship in trouble, hired a ship C that they thought was close by. However, this ship turned out not to be close by and when T found a closer ship, they terminated the contract with C. C sued for damages but T argued that the contract was void for mutual mistake.
- Held (CoA): Mistake wasn’t sufficiently fundamental to void the contract. Delay of 22 hours (difference between expected and actual distance) wasn’t sufficient to make performance “essentially different from those the parties envisaged”.
- Phillips MR:
o Conditions for common mistake:
♣ Common assumption as to existence of a state of affairs
♣ No warranty by either party that the state of affairs exists
♣ Non-existence of state of affairs not fault of either party
♣ Non-existence of state of affairs must make performance impossible
♣ State of affairs may be the existence or a vital attribute of (i) consideration or (ii) circumstances that must subsist if performance is to be possible

Question 4

I – Common Mistake
I.I – Common Mistake at Common Law
A – Leading Cases in Modern Law

The four step inquiry into mistake

Answer 4

Thus there is a four-step inquiry:

• Shared mistake: the mistake must be shared by both parties
• Construction: the risk of mistake was not allocated to either party
• Fault: the claimant was not at fault (ex. For inducing the other party’s mistake)
• Fundamentality: mistaken assumption is so serious as to make performance “impossible”

Question 5

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

1/ -

Answer 5

1/ Shared mistake

Question 6

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

2/ Construction

Answer 6

The contract must not (i) have allocated the risk of mistake to either party or (ii) provided (expressly or impliedly) that the contract’s existence is contingent on the existence of an assumed state of affairs.

Question 7

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

2/ Construction
a/ Risk allocation to either party

William Sindall v Cambridgeshire CC [1994] 1 WLR 1016, 1034, 1035, 1042

1. what do courts usually do re risk of uncertainties?
2. general principle of caveat emptor?

Answer 7

1. Courts usually find that one party has assumed the risk of ordinary uncertainties at time of contract formation that party must perform (or be liable for non-performance)
2. General principle of caveat emptor in sale of goods risk of mistakes on the fitness of land for particular purposes means that it is allocated to the buyer. But sometimes it will be allocated to the seller:

Question 8

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

2/ Construction
a/ Risk allocation to either party

McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (HCA)

1. facts
2. CA held?

Answer 8

1. D, relying on anecdotal evidence, believed there to be a marooned oil tanker and sold it to P, who after searching, found that it did not exist. CA awarded certain damages. D had tried to escape all compensation by claiming that the tanker’s existence was one of “mutual-mistake” and therefore they should not be punished.
2. However CA said “a party cannot rely on mutual mistake where the mistake consists of a belief which is…entertained by him without any reasonable ground”. There was a promise that the ship existed and, in the absence of a condition stating that the contract’s validity was contingent on the ship’s existing, D was too bear the loss of its making a false promise.

Question 9

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

2/ Construction
b/ Condition precedent

Answer 9

If the contract provides (expressly or implicitly) that the parties’ obligations are only to arise if an assumed state of affairs is true, so that no obligation arises if this condition precedent is not satisfied:

Question 10

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

2/ Construction
b/ Condition precedent

Associated Japanese Bank v Credit du Nord [1988] 3 All ER 902

Answer 10

• Facts: A fraudster purported to sell to C machines that did not actually exist. D was sued (as the fraudster’s guarantor).
• Held (CoA): since the guarantee stipulated that the machines could only be substituted with the bank’s consent, this was an express condition precedent that the guarantee was for existing machines (alternatively, the Court would have implied such a condition from the facts)

Question 11

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

2/ Construction
b/ Condition precedent

NB Smith, “Contracts - Mistake, Frustration and Implied Terms”, (1994) 110 L.Q.R. 400

Answer 11

• In determining whether a contract exists, there is no room for a distinct doctrine of mistake additional to the principles of formation of contract and implied terms
• Types of mistake:
  o Unilateral – A intends to deal with B but actually deals with C
  o Mutual – A intends to deal with subject X but B intends to deal with subject Y
  o Common – parties both make the same mistake
• Argues that common mistake rests on the presence or absence of an implied term
  o If A hires B a theatre and unknown to both parties it is destroyed 5 mins before contract or 5 mins after contract, both should lead to same outcome – if one is governed by an implied term then so too should the other
• Take case of non-existent goods (McRae): if A promises B that the goods exist, then it is easy; otherwise, an implied promise can be imputed to the intentions of the party. The absence of an implied promise must also rest on the intentions.
• Conclusion: a contract can be void because a) no offer and acceptance or b) an express or implied condition precedent to the contract is not satisfied. No room for independent doctrine of mistake.

Question 12

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

3/ Fault

Associated Japanese Bank v Credit du Nord [1988] 3 All ER 902

• who was the judge?
• approved in which case?
• a party cannot rely on common mistake (2 points):

Answer 12

• Held (Steyn J, approved in Great Peace Shipping): a party cannot rely on common mistake:
  o Where the mistake is a belief entertained by him without any reasonable grounds for such belief.
  o Where the party contracts with minimal knowledge of the facts to which the mistake relates but is content that it is a good speculative risk

Question 13

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

3/ Fault

McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 (HCA)

Answer 13

• The mistake was deliberately induced by the party seeking to rely on common mistake in the mind of the other party

Question 14

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

4/ “Substance” of the contract/“fundamentality”

• rule (authority?)
• examples of such attributes:
• are these exhaustive/will they necessarily void the contract?

Answer 14

The mistake must result in the non-existence of a state of affairs assumed by both parties as going to the foundation (“substance”, “essence”…) of the contract (Great Peace Shipping, Lord Phillips, approving Vaughan Williams LJ in Krell v Henry).

It must relate to the “existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible” (Great Peace Shipping):

• Existence of subject matter
• Mistakenly acquiring one’s own property
• Essential quality of the thing contracted for
• Essential background assumption

NB these are only illustrations of mistakes that can (but not necessarily will) void the contract for mistake.

Question 15

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

4/ “Substance” of the contract/“fundamentality”
a/ Existence of subject matter

Couturier v Hastie (1856) 5 HLC 672

Answer 15

• Held: Goods that have perished at the time of contracting (unknown to seller) makes for a void contract for total failure of consideration and buyer is not obligated to pay the price, because on a proper construction of the contract it was for the sale of existing cargo and not for cargo whether existing or not. The risk of mistake as to the existence of the corn was allocated to the seller.

Question 16

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

4/ “Substance” of the contract/“fundamentality”
a/ Existence of subject matter

S6 Sale of Goods Act 1979

Answer 16

provides that a contract for the sale of specific goods is void if the goods, without knowledge of the seller, have perished at the time of formation.
- However, this:
o (i) only applies to goods that once existed and perished (≠goods that never existed)
o (ii) doesn’t seem to make room for a contrary intention by the parties (so seems to automatically void contracts irrespective of construction)

Question 17

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

4/ “Substance” of the contract/“fundamentality”
b/ Mistake as to the seller’s title

Answer 17

NB S12 Sale of Goods Act 1979 creates an implied term that the seller warrants their title to the property sold so is liable for breach if this is untrue.

Question 18

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

4/ “Substance” of the contract/“fundamentality”
c/ Essential quality of subject matter

Answer 18

There must be a mistake aobut the “existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be” (Bell v Lever): the mistake must relate to the substance and not quality of the subject matter.

Question 19

I – Common Mistake
I.I – Common Mistake at Common Law
B - Steps in the Inquiry

4/ “Substance” of the contract/“fundamentality”
d/ Background assumptions

Answer 19

Whenever it is to be “inferred from the terms of the contract or its surrounding circumstances that the consensus has been reached upon the basis of a particular factual assumption, and that assumption is not true, the contract is avoided” (Bell v Lever).

Question 20

I – Common Mistake
I.I – Common Mistake at Common Law

C - Effect of Common Mistake

1. effect
2. contrasting remedies

Answer 20

1. Voidness of the contract for all purposes (thus property right will not pass under the contact and innocent third party purchasers are unprotected from actions by the original mistaken transferor to recover the property).
2. Contrast more flexible:
   - Rescission equitable remedies that can protect third party bona fide purchasers
   - Unilateral mistake refusal of specific performance
   - Rectification
   - Frustration Law Reform (Frustrated Contracts) Act 1943

Question 21

I – Common Mistake
I.II – Common Mistake at Equity

A – Rescission on Terms

Which authority held that an equitable doctrine of common law mistake conferred a wider scope of relief and greater remedial flexibility?

Answer 21

Solle v Butcher

Question 22

I – Common Mistake
I.II – Common Mistake at Equity

A – Rescission on Terms

Solle v Butcher [1950] 1 KB 671

1. Facts
2. Held Denning

Answer 22

1. Facts: parties agreed for £250 yearly rental when they were subject to a £140 limit under the Rent Act unless a notice of increase was served, which was not done because of a common mistake as to the status of the property.
2. Held (Denning LJ): granted the landlord rescission of the lease on the terms that he offered the tenant a new lease for £250.

Question 23

I – Common Mistake
I.II – Common Mistake at Equity

B – Rejection of the jurisdiction

1. authority case on this point?
2. COA in that case
3. reasoning for limited jurisdiction?

Answer 23

1. Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd
2. CoA rejected the equitable jurisdiction that would set aside contracts not void at common law, because:
3. Parties have since not been inclined to argue it and lower courts haven’t resisted the rejection of the jurisdiction, so there is probably no future for the equitable doctrine anymore.

Question 24

II – Unilateral Mistake
A – Mistake as to Terms

Hartog v Colin & Shields [1939] 3 All ER 566

Answer 24

• Facts: a seller offered to sell hare skins at a price “per pound” when he meant “per piece” (thus mistakenly offered the skins a 1/3 his intended asking price). A buyer purported to accept and then sued for damages when the seller refused to deliver.
• Held: there was no contract because it was apparent from the custom of the trade and negotiations between the parties (where price was always discussed “per piece”) that the buyer must have realized, and did in fact know, that a mistake must have occurred.

Question 25

II – Unilateral Mistake A – Mistake as to Terms Smith v Hughes (1871) LR 6 QB 597 1. facts 2. held 3. which 2 reasons for holding for the trainer are possible?

Answer 25

1. Facts: a racehorse trainer agreed to buy oats from a farmer after inspecting a sample (which the trainer believed to be old oats). The oats turned out to be new and useless to him, so refused to pay. 2. Held: jury found for the trainer, but didn’t say which reason suggested by the trial judge was correct: o The parties agreed on old oats so the buyer wasn’t obliged to pay for new oats rejected on appeal because the seller gave no such undertaking, and the sample delivered corresponded with the sample inspected. o The seller knew that the buyer believed that he was contracting for old oats on appeal, held that: ♣ If the seller knew that the buyer believed the oats to be old did not void the contract ♣ If the seller knew that the buyer believed that the seller was promising them to be old did void the contract (but since no evidence suggested this court thought that the jury mistakenly found on the other interpretation, so ordered new trial)

Question 26

II – Unilateral Mistake A – Mistake as to Terms Raffles v Wichelhaus (1864) 2 H&C 906

Answer 26

- Facts: the parties contracted to buy goods to arrive on the ship Peerless. The seller intended delivery from a ship called Peerless to arrive in December whereas the buyer intended a different ship also called Peerless to arrive in October. The buyer refused to pay. - Held: the buyer didn’t have to pay. But the court didn’t give its reasons… Commonly explained on basis of non-coincidence of the parties’ subjective intentions.

Question 27

II – Unilateral Mistake B/ Mistake as to Identity 1. in 2-party cases 2. in three party cases: - A-B contract is void + passes to D - A-B contract is voidable but A did not rescind before passed to D - A-B contract is voidable and A did rescind before it passed to D

Answer 27

1. In two-party cases, usually the victim can rely on misrepresentation. 2. But in three-party cases, if A contracts with B, thinking that B is C, and passes property to B, then B passes the property onto D and then disappears, can A recover the property from D? - If the A-B contract is void legal title doesn’t pass to B so cannot pass to D legal title remains with A so can recover - If A-B contract is voidable B obtains good title until A rescinds it, and can pass to D D is protected if bona fide purchaser for value so A cannot recover (can only sue B for reliance damages) - If A-B contract is voidable AND A rescinds it before B passes property to D title in the property is revested in A from that point in time so D cannot obtain good title from B A can recover.

Question 28

II – Unilateral Mistake B/ Mistake as to Identity Only void when - rule - distinction guided by 4 rules

Answer 28

In mistaken identity cases, it will only void if it goes to the other party’s identity and not attribute (solvency, character, social position…) of the other party. Distinction guided by four rules: - Objectivity - Written contracts - Non-existence of the identity assumed - Fact-to-face dealings

Question 29

II – Unilateral Mistake B/ Mistake as to Identity 1/ Objectivity (you can’t accept someone else’s offer) 1. if you know the offer was made to someone and you accept it (authority?) 2. what does this assume?

Answer 29

1. If you know that the offer was made to someone else, and you accept it, it is not a valid contract (Bolton v Jones). 2. However, this assumes that the identity is vital to the claimant (Ingram v Little) – thus, (ex.) retailers aren’t generally concerned about the identity of the shopper.

Question 30

II – Unilateral Mistake B/ Mistake as to Identity 2/ Written Contract which parties alone can be bound by a written contract?

Answer 30

The contract can only be between the persons named in the written contract as the parties to the contract.

Question 31

II – Unilateral Mistake B/ Mistake as to Identity 2/ Written Contract Cundy v Lindsay (1878) 3 App Cas 459

Answer 31

- Facts: D received an order for goods from Blenkarn of “37 Wood Street”, who had forged the signature of Blenkiron of 123 Wood Street (with whom D had previously dealt). D sent the goods to Blenkarn, who sold them to C. - Held (HL): the contract was void for D’s mistake of identity – D only made a contract with the party identified in the writing (Blenkiron), so that C had to return the goods to D.

Question 32

II – Unilateral Mistake B/ Mistake as to Identity 2/ Written Contract Shogun Finance Ltd v Hudson [2003] UKHL 62, [2004] 1 AC 919

Answer 32

- Facts: C sold a car on hire purchase agreement to a fraudster posing as “Mr Patel”, after checking the credit rating of Mr Patel whose driving license the fraudster produced. The fraudster then sold it to D. - Held (HL): C could recover the car from D because the buyer’s identity named in the agreement was crucially important to C.

Question 33

II – Unilateral Mistake B/ Mistake as to Identity 3/ Non-existence of the identity assumed void or voidable? (authority?) 2 exceptions

Answer 33

If A mistakes B for someone who is non-existent or non-identifiable (≠ another existing and identifiable party), it will only be voidable (King’s Norton Metal v Edridge). Two exceptions: - A contract may be void if A makes the additional mistake that C exists, even if C does not exist (Lake v Simmons – there was no valid contract even though the party C contracted with was posing as a non-existent wife) - A contract may be void if A merely believes that B was not B (whether C exists or not) as long as there is an implied term that B is not B (Said v Butt): o Where the offer is only made to persons fitting particular descriptions which excludes B (“over 18 years”) o Where B knows from previous dealings that A is unwilling to contract with them

Question 34

II – Unilateral Mistake B/ Mistake as to Identity 4/ Face-to-face dealings

Answer 34

Parties that deal face to face are presumed to intend to deal with the person present and identified by sight and hearing contract is only voidable.

Question 35

II – Unilateral Mistake B/ Mistake as to Identity 4/ Face-to-face dealings Phillips v Brooks [1919] 2 KB 243

Answer 35

- Facts: A fraudster bought some jewellery and handed the seller a cheque, saying “I am Sir George Bullough” (someone of good credit known by reputation to the seller). The seller accepted the cheque after checking the address of Sir George Bullough in a directory, and matching it with that given by the fraudster. The fraudster then sold the jewellery to a bona fide purchaser for value. - Held: The seller intended to sell to the person present in the shop even though he thought the person was Sir George Bullough (an identified and existing third party). Hard to reconcile with Ingram v Little and Lake v Simmons (both face to face contracts)…

Question 36

II – Unilateral Mistake B/ Mistake as to Identity 4/ Face-to-face dealings Ingram v Little [1961] 1 QB 31

Answer 36

- Facts: A fraudster bought a car from the sellers and paid by cheque; when the sellers insisted on cash the fraudster said he was a respectable businessman and gave an address and initials. The seller checked the address in a directory and accepted the cheque. The fraudster sold the car to a bona fide purchaser. - Held: the sale to the fraudster was void because the seller’s act of checking in the directory rebutted the presumption that they intended to deal with the person in front of them; in fact they only intended to deal with the person the fraudster was pretending to be. Criticized in Lewis, where structurally identical facts only made the contract voidable:

Question 37

II – Unilateral Mistake B/ Mistake as to Identity 4/ Face-to-face dealings Lewis v Averay [1972] 1 QB 198

Answer 37

- Facts: a fraudster posing as a well-known actor Green offered to buy C’s car with a cheque. When C refused to let the car go until the cheque cleared, the fraudster produced an officially stamped pass to Pinewood Studio’s in Green’s name but bearing the fraudster’s photograph. C then let the fraudster take the car, which he sold on to the defendant. - Held: C intended to contract with the person before him, so that property validly passed on to the defendant and C could not recover the car.

Question 38

II – Unilateral Mistake B/ Mistake as to Identity 4/ Face-to-face dealings Commentary on cases

Answer 38

Thus Phillips and Lewis on one hand (voidable) and Lake and Ingram on the other (void) are impossible to reconcile. But it seems to have been resolved in favour of voidable unless in writing in Shogun Finance because the HL said that the presumption against a contract being void for mistaken identity in face-to-face dealings is a strong one and some even doubted the possibility of rebutting it. However, if there is also a written contract (as in Shogun Finance), that written contract trumps the claimants’ face-to-face dealing with the fraudster.

Question 39

II – Unilateral Mistake | C/ Non est Factum

Answer 39

A very exceptional exception to the rule that one is bound by their signature (ex. Where the signer is blind or illiterate and the content of the document is misrepresented to them). Similarly to mistaken identity, in two-party cases usually suffices without need for non est factum (Lloyds Bank v Waterhouse): - If B’s misrepresentation induced A’s mistake misrepresentation - If B knew of A’s mistake as to terms or has negligently induced A’s mistake mistake as to terms However, in three party cases the law against resorts to the void/voidable distinction.

Question 40

II – Unilateral Mistake C/ Non est Factum 1/ Requirements as to the seriousness of the mistake

Answer 40

The mistake requires a: - “Fundamental” difference between the nature of the actual document and document believed to be (Saunders v Anglia) - A question of degree rather than kind - Difference in practical result rather than legal character

Question 41

II – Unilateral Mistake C/ Non est Factum 1/ Requirements as to the seriousness of the mistake Saunders v Anglia Building Soc (sub nom Gallie v Lee) [1971] AC 1004

Answer 41

Rejected non est factum because the purpose of the contract is not fundamentally undermined. - Facts: C (wanting to help her nephew raise money by putting a security on her house) signed a document without reading it (having broken her glasses) when told that it was a deed of gift to her nephew. She actually signed a sale of her house to her nephew’s friend, who mortgaged the house to D but kept the money it raised. - Held: the purpose of assisting her nephew by raising money on her house would have been achieved by the actual sale had the friend paid. Thus the purpose of selling is not fundamentally different from a gift to her nephew.

Question 42

II – Unilateral Mistake C/ Non est Factum 1/ Requirements as to the seriousness of the mistake Gillman v Gillman

Answer 42

No relief is available if there is no positive mistake but mere ignorance (Gillman v Gillman).

Question 43

II – Unilateral Mistake C/ Non est Factum 2/ Requirements as to the nature of the claimant - who can it normally NOT be relied upon by? - who would be able to rely on it? - what other requirement is there re the person seeking to rely on non est factum? - when is carelessness irrelevant?

Answer 43

- Cannot normally be relied on by literate persons of full capacity (Saunders) - applies to those permanently or temporarily unable through no fault of their own to have without explanation any real understanding of the purport of a particular document (from defective education, illness or innate incapacity, or from being tricked). - The person must also take such care as can be expected of them (which was the alternative basis in Saunders – though she couldn’t be expected to look through all the complexities, she could at least have checked the identity of the transferee. - However, carelessness is irrelevant in two-party cases (Peterlin v Cullin).

Question 44

II – Unilateral Mistake | D/ Unilateral mistake at equity

Answer 44

Sometimes courts have given relief where one party made a mistake about the terms of the contract where it would be unconscionable for the other party to take advantage of it. But because of the (i) rejection of the jurisdiction and (ii) fact that most cases can be decided on alternate grounds this category has receded in importance.

Question 45

III – Rectification Parties who wrongly record their agreement who prove (Chartbrook v Persimmon Homes) 3 points:

Answer 45

1. Parties had a common and continuing intention up to the execution of the instrument (whether or not amounting to an agreement) in respect of the matter in the instrument 2. An outwards expression of accord applying an objective test (though this might require “refinement as different and more complex factual situations arise – Daventry) 3. By mistake, the instrument did not reflect that common intention

Question 46

III – Rectification Can be for unilateral mistake if it would be inequitable for the unmistaken party to object because they (Thomas v Wyndhams):

Answer 46

- Knew of the mistake and the mistaken party’s real intentions AND - Failed to draw the mistake party’s attention to the mistake or made false and misleading statements to divert the other from discovering the mistake AND - The mistake results in benefit to the unmistaken party or detriment to mistaken party

Question 47

III – Rectification Rectification has somewhat been overtaken by interpretation, though there are three differences (Lord Neuberger, Daventry):

Answer 47

- Prior negotiations are admissible in rectification not interpretation - Some subjective evidence of intention or understanding is normally required in rectification since C must show that they made the relevant mistake when entering into the contract - Rectification is an equitable remedy so (ex.) is discretionary Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38 Daventry District Council v Daventry & District Housing Ltd [2011] EWCA Civ 1153

Question 48

Part II – Frustration I – Frustration and common mistake 1. similarities 2. differences

Answer 48

1. Deal with the same problem (how the law is to respond where the parties’ assumptions are or turn out to be radically different from those which the parties assumed). 2. The difference is in timing + consequences - Mistake if at time of formation; frustration if assumption is falsified after formation - Mistake = void ab initio or voidable; frustration discharges (future performance of) an otherwise valid contract

Question 49

I – Frustration and common mistake *Krell v Henry [1903] 2 KB 740

Answer 49

- Facts: a flat was rented out for the purpose of watching the coronation procession. Was frustrated when the king fell ill and the coronation was cancelled (because the common assumption that the coronation would take place was falsified after formation)

Question 50

I – Frustration and common mistake Griffith v Brymer (1903)

Answer 50

- Facts: a similar contract made at 11AM whereas the decision to cancel the procession was made at 10AM the same day. The contract was voided for mistake.

Question 51

I – Frustration and common mistake Commentary on coronation cases + difference between mistake and frustration

Answer 51

However, MCW thinks that in Krell the mistaken assumption was as to the king’s health so that it should have been void for mistake – whether something is void or frustrated shouldn’t depend on whether someone made a contract five minutes earlier. Differences between mistake and frustration: - Scope of frustration is wider than mistake (events amounting to frustration may not be sufficient for mistake) - Contract is discharged (≠void/voidable), extinguishing both parties’ obligations - Monetary adjustments under the Law Reform (Frustrated Contracts) Act 1943.

Question 52

II – Development of the doctrine Authority for the “rule of absolute contractual liability”:

Answer 52

Paradine v Jane (1647) Aleyn 26, 82 ER 897 - Facts: court rejected D’s plea for relief from paying rent when an enemy invasion drove him out of the premises – “if the lessee covenants to repair a house, though it be burnt by lightning, or thrown down by enemies, yet he ought to repair it”

Question 53

II – Development of the doctrine The rule of absolute contractual liability was overturned by

Answer 53

Taylor v Caldwell (1863) 3 B & S 826 - Facts: D hired C a music hall and gardens for concerts for four nights and was sued for breach when it burned down before the first night. - Held (Blackburn J): D was not liable because the perishing of the person or thing upon which performance depended excuses performance

Question 54

II – Development of the doctrine How was the scope expanded?

Answer 54

Extended to cases beyond physical impossibility (like coronation cases) but where performance became “something radically different from that which the parties contemplated when it was concluded” (Great Peace v Tsavliris).

Question 55

II – Development of the doctrine Jackson v Union Marine Insurance (1879) LR 10 CP 125

Answer 55

- Facts: C’s ship was chartered to load cargo and ship it. It was frustrated when the voyage was delayed for over six months because the ship was stranded before loading the cargo. - Held: a voyage undertaken after the ship was repaired would have been a different voyage … different as a different adventure – the delay was so substantial that it destroyed the commercial sense of the transaction.

Question 56

III – Frustrating circumstances 2 steps:

Answer 56

Because frustration requires literal performance in the changed circumstances to amount to the performance of a fundamentally or radically different obligation from that originally undertaken: 1. Step 1: construe the contract terms (in light of the nature of the contract and relevant surrounding circumstances) to determine the scope of the original rights and obligations (Davis v Fareham) 2. Step 2: compare this with a literal enforcement of the obligations in the new circumstances to see if it is radically different from the original rights and obligations

Question 57

III – Frustrating circumstances A/ Legal impossibility 1. 2 fact patterns such that performance barred? 2. what are 2 consequences of the change in circumstance? 3. when will it frustrate a contract/when will it not?

Answer 57

1. Performance is barred by a change in the law or change of circumstances triggering existing law that 2. (i) prohibits the performance of the contract or (ii) deprives the party of control over the subject matter of the contract. 3. It will only frustrate a contract if it makes a radical difference to the contractual obligations NOT merely delay/hinder operation in part (though question of degree):

Question 58

III – Frustrating circumstances A/ Legal impossibility Metropolitan Water Bd v Dick Kerr [1918] AC 119

Answer 58

- Facts: contract to build a reservoir in six years was halted when the government ordered the builders to sell their plant because of wartime constraints, delaying the project indefinitely. The contract provided for extensions of time “whatsoever and howsoever occasioned”, but was held not to apply because the interruption was of such a character and likely to last so long as to fundamentally change the obligations undertaken. Contract was frustrated.

Question 59

III – Frustrating circumstances B/ Physical Impossibility 1. is it sufficient to frustrate a contract (authority)? 2. cf legal impossibility and impossibility of purpose

Answer 59

1. Not sufficient (depends on the risk allocation in the contract): one may undertake to do something that turns out to be impossible but still be bound by his agreement (in damages) (Taylor v Caldwell) 2. Not necessary (legal impossibility and impossibility of purpose may frustrate though not physically impossible)

Question 60

III – Frustrating circumstances B/ Physical Impossibility 3 examples scenarios:

Answer 60

1. Personal service contracts where performance is of a personal character performing party dies/is interned/is incapacitated by illness 2. Destruction of subject matter necessary for performance (ex. Taylor v Caldwell) if partial destruction the question was one of degree (ex. Jackson v Union Marine – damage occasioned to the ship amounted to “practical commercial destruction” because of the significant delay) 3. Failure or disruption of supplies: o Sale of ascertained goods: if the goods (without fault of either party) perishes before the risk passes to the buyer, the agreement is avoided (s7 Sale of Goods Act 1979) o Sale of unascertained goods: rarely frustrated because the source of supply is normally at the supplier’s risk

Question 61

III – Frustrating circumstances B/ Physical Impossibility In cases of delay three important factors: 1/

Answer 61

Increased difficulty of performance caused by new and unforeseeable event and not within the commercial risks undertaken

Question 62

III – Frustrating circumstances B/ Physical Impossibility In cases of delay three important factors: 1/ * Davis Contractors v Fareham UDC [1956] AC 696 1. facts 2. held 3. Lord Radcliffe 4. Lord Reid

Answer 62

1. Facts: C agreed to build houses within 8 months for C for a contracted price; due to a shortage in skilled labor and material the contract took 22 months and was much more expensive. C sought an action for more money because the contract had become frustrated and they were entitled to further payment. 2. Held (HL): the contract was not frustrated because: o By agreeing to a fixed price C took the risk of increased costs and delay o The difficulties were foreseeable and C could have provided for them in the contract o Performance was not radically different, merely significantly more onerous 3. Lord Radcliffe: not hardship or inconvenience or material loss itself that calls frustration; there must be a change in the circumstances that the thing undertaken would, if performed, be a different thing from that contracted for. 4. Lord Reid: the delay was greater in degree than expected, but not caused by any new and unforeseeable factor or event. It was more onerous but not of a different kind than contemplated.

Question 63

III – Frustrating circumstances B/ Physical Impossibility In cases of delay three important factors: 2/

Answer 63

Parties should be allowed to know where they stand In the question of delay suffered and likely to be suffered, it is relevant that parties can’t be expected to wait too long for how things turn out but are entitled to know where they stand (National Carriers v Panalpina).

Question 64

III – Frustrating circumstances B/ Physical Impossibility In cases of delay three important factors: 3/ 3 sub examples

Answer 64

Performance in the new circumstances radically alters the original rights and obligations - If it appears from the contract that subsequent delayed performance is of no use to the recipient it might frustrate the contract (Jackson v Union Maritime) - If performance after the delay occurs in a radically altered market it might frustrate the contract (Metropolitan Water Board v Dick Kerr) - If the means of performance is made impossible by a supervening event and (i) it is the only method of performance or (ii) alternative means radically alters obligations undertaken.

Question 65

III – Frustrating circumstances B/ Physical Impossibility In cases of delay three important factors: 3/ *The Eugenia [1964] 2 QB 226

Answer 65

Facts: a charterparty was not frustrated by the blocking of the Suez Canal though the alternative route increased the journey time from 108 to 138 days, because it was not sufficiently radical since the cargo was such as not to be affected and there was no evidence that it was particularly important for the cargo to arrive by the deadline

Question 66

III – Frustrating circumstances C/ Impossibility of purpose The purpose:

Answer 66

- Must be common to both parties and | - Must be expressly or impliedly assumed by the parties to be the foundation or basis of the contract (Krell v Henry)

Question 67

III – Frustrating circumstances C/ Impossibility of purpose Krell v Henry [1903] 2 KB 740 1. what was it an agreement for? 2. what was it not an agreement for? 3. how was this constructed? 4. obiter re cab

Answer 67

1. Facts: frustrated because the contract was interpreted as “for the purpose of seeing the Royal procession” and 2. not simply an agreement to let and take the rooms. 3. This was because the position of the flat, the flat owner’s advertisement for windows to view the coronation and the unusual hire terms (enhanced price for two days excluding nights). 4. Obiter: no frustration if a contract to hire a cab to go to the coronation place on the day at an enhanced price, if it is cancelled, because the purpose is only that of the hirer (the cab had no special qualification leading to its selection for the occasion)

Question 68

III – Frustrating circumstances C/ Impossibility of purpose * Herne Bay Steamboat v Hutton [1903] 2 KB 683 1. facts? 2. reasoning? 3. analogy with obiter cab remark in Krell? 4. was purpose entirely thwarted?

Answer 68

1. Facts: contract “for the purpose of viewing the naval review and for a day’s cruise around the fleet” was not frustrated by the cancellation of the naval review 2. because C’s venture to charge passengers for the cruise was at his own risk. 3. By analogy with the cab, though the purpose was stated, that statement would not make the object any the less a matter for the hirer alone (and would not affect the person letting out the vehicle for hire). 4. Also, the purpose was not entirely thwarted (he could still cruise around).

Question 69

III – Frustrating circumstances C/ Impossibility of purpose Frustration can also apply to leases, though it would hardly ever be frustrated: *National Carriers v Panalpina [1981] 1 All ER 161

Answer 69

Facts: 10-year lease of warehouse covenanted for use only as warehouse for lessee’s business was not frustrated though five years into the lease the local authority closed the street giving the only vehicular access to the warehouse for 20 months (though court suggested that it would have been frustrated had it been permanent, because the length of the unexpired term was a significant

Question 70

III – Frustrating circumstances C/ Impossibility of purpose Sale of land even rarer: Amalgamated Investment v John Walker [1976] 3 All ER 509

Answer 70

- Facts: sale of land for the purpose of redevelopment (buyers made clear that they were buying for redevelopment, and seller advertised it as suitable for redevelopment). Shortly after, the land was listed as an SSSI so could not be used for redevelopment, reducing its value from £1.7M to £200,000. Not frustrated because risk that the property may be listed was assumed by the buyer, there was no warranty that the land could be redeveloped, and performance was not radically different. NB consistency with Krell v Henry (since here the land was clearly bought for the sole purpose of redevelopment)?

Question 71

IV – Defences to Frustration A/ Express allocation of risk (force majeure and hardship clauses) 1. outline 2. how must this be interpreted?

Answer 71

1. Can specify the circumstances excusing further performance, and the consequences of triggering circumstances. 2. However, this must still be interpreted by the court to determine whether the clause actually covers the supervening event in a full and complete way (ex. Metropolitan Water v Dick Kerr).

Question 72

IV – Defences to Frustration B/ Implied allocation of risk (foresight?) 1. certain types of transactions 2. foreseeability requirement - example case/Denning?

Answer 72

1. Certain types of transactions may be generally understood as allocating a particular risk (ex. Davis v Fareham) 2. The foreseeability must be very high to oust frustration: The Eugenia - Lord Denning: sometimes said that frustration only applies when the situation is “unforeseen”, but it is not so – the only essential thing is that the parties should have made no provision for it in their contract.

Question 73

IV – Defences to Frustration C/ Self-induced frustration 1. burden of proof? 2. how many categories/authority?

Answer 73

1. Burden of proof on the party alleging breach to prove that it was self-induced. 2. Three categories (The Super Servant Two):

Question 74

IV – Defences to Frustration C/ Self-induced frustration 1/ 1. rule? 2. example?

Answer 74

Breach One cannot plead frustration if they contributed to the alleged frustrating event by conduct amounting to a breach of the contract (ex. The Eugenia, where a charterer ordered a ship into a war zone where it was then detained could not plead frustration).

Question 75

IV – Defences to Frustration C/ Self-induced frustration 2/ 1. rule? 2. test?

Answer 75

Anticipatory breach 1. One cannot plead frustration if their deliberate, voluntary or negligent conduct has the effect of disabling them from performance of the contract. 2. The test is whether they had control (i.e. means and opportunity to prevent the alleged frustrating event) but nevertheless caused or permitted it to occur.

Question 76

IV – Defences to Frustration C/ Self-induced frustration 3/

Answer 76

Power to elect If a party enters into a number of contracts and an external event partially destroys their supplies so that they cannot satisfy all of their contracts, the fact of choosing which contracts to perform and which not to perform bars frustration.

Question 77

IV – Defences to Frustration C/ Self-induced frustration 3/ Maritime National Fish v Ocean Trawlers [1935] AC 524

Answer 77

- Facts: C chartered a trawler from D, applied for five licenses but only got three, which they allocated to other trawlers and sought to frustrate their contract with D. - Held (PC): no frustration because the reason for D’s trawler not being usable was C’s own election.

Question 78

IV – Defences to Frustration C/ Self-induced frustration 3/ The Super Servant Two [1990] 1 Lloyd’s Rep 1

Answer 78

- Facts: C agreed to transport D’s goods using at its option either of two ships. C then internally allocated the second ship and committed the other to other contracts. The second ship sank. - Held (CoA): no frustration because (i) it was C’s own election not to use the other ship that led to non-performance, and not the sinking of the second ship. (ii) The risk is allocated to the carrier because it was within their control how many contracts they entered into. However, (iii) there was a force majeure clause that excused the carrier.

Question 79

IV – Defences to Frustration C/ Self-induced frustration 3/ Commentary on Super Servant 2

Answer 79

MCW says that this is objectionable because: - If C’s choice of entering into a contract is a bar to frustration, then we are back to the absolute liability rule - C’s power to allocate the other ship was purely theoretical because it had already been allocated to other contracts

Question 80

V – Effect of frustration

Answer 80

Automatic discharge relieving both parties from future performance.

Question 81

V – Effect of frustration A/ Before the 1943 Act 1/ Money

Answer 81

Money paid before the frustrating event were unrecoverable, until softening of the rule in Fibrosa v Fairbairn where money can be recovered for total failure of consideration. Fibrosa v Fairbairn [1943] AC 32 - Facts: C paid D for the manufacture of machinery. Contract frustrated by war. D refused to return the money because they had done considerable work and incurred considerable expenses under the contract. - Held: allowed recovery for total failure of consideration. NB this consideration (performance itself) is different from the consideration required at time of formation (promise of performance). But this is unsatisfactory because: - Even trivial performance bars recovery - Payee cannot offset their wasted expense

Question 82

V – Effect of frustration A/ Before the 1943 Act 2/ Non-monetary benefits - rule? - authority?

Answer 82

Value of goods or services conferred under the contract only recoverable if payment was due under the contract before the frustrating event. Appleby v Myers (1867) 3 B&S 826 - Facts: contract for payment on completion of the work was frustrated before completion. Recovered nothing for the work already done because payment fell due on completion only.

Question 83

V – Effect of frustration B/ Under the 1943 Act 1/ Money paid or payable

Answer 83

- Section 1(2): o Payer can recover payments made prior to frustrating event o Payer is relieved from sums due prior to discharge o Court can “if it considers just having regard to all the circumstances allow the payee to get whole or part of just expenses incurred before the time of discharge in or for the purpose of performance by: ♣ Set off against sums to be returned ♣ Claim against the sum payable but not paid Calculating “just expenses: - Section 1(4): “expenses” includes pre-contract expenses

Question 84

V – Effect of frustration B/ Under the 1943 Act 1/ Money paid or payable Gamerco SA v ICM [1995] 1 WLR 1226

Answer 84

- Facts: $775,000 payable by promoters of a concert to the pop group, of which $412,500 was paid before the venue was declared unsafe and contract frustrated. The group had incurred $50,000 and promoters $450,000 in wasted expenses. - Held (Garland J): the payee had the onus of showing why the discretion should be exercised to reduce restitutionary liability, and outlines three approaches: o Total retention (allowing the payee to offset all wasted expenses so reducing recovery to $412,500 - $50,000) rejected o Equal apportionment (offsetting half of the payee’s wasted expenditures so reducing recovery to $412,500 - $25,000) rejected o Broad discretion exercised to do justice accepted, because (i) nothing in the Act or authorities obliges the court to go for either of the above, and (ii) neither approach takes account of the payer’s wasted expenditure - On the facts: allowed recovery of the entire sum ($412,500) without deduction because of the promoters’ own wasted expenditure Ceiling of “just expenses” is sums paid + sums due.

Question 85

V – Effect of frustration B/ Under the 1943 Act 2/ Non-monetary benefits

Answer 85

- Section 1(3): B can claim a “just sum” where B’s performance: o before discharge o confers a “valuable benefit” on A o other than money (where s1(2) applies) - where the just sum o cannot exceed the value of the benefit conferred on A and o is fixed having regard to all circumstances especially: ♣ Amount of expenses incurred before time of discharge by A ♣ The effect in relation to the benefit of the frustrating event

Question 86

V – Effect of frustration B/ Under the 1943 Act 2/ Non-monetary benefits Two-stage inquiry (Goff J):

Answer 86

Stage I – Identifying and valuing the benefit - Assess the market value of the benefits conferred - If part performance, start with objective value and leave any “subjective devaluation” to Stage II - Reduce the benefit by frustrating event Stage II – Assessing the just sum - Broad discretion - Confined by five factors: o Ceiling (value of the benefit fixed at Stage I) o Effect of the frustrating event of the benefit conferred (must be taken into account under s1(3)(b)) o Contractual risk allocation (is an important consideration) o Date of the valuation is the date of frustration (though even if the money and services are conferred long before, no account can be made for their time value (recipient’s use)) o Recipient’s expenses (must be taken into account under s1(3)(a))

Question 87

V – Effect of frustration B/ Under the 1943 Act B.P. Exploration v Hunt (No. 2) [1982] 1 All ER 925 (Robert Goff J)

Answer 87

- Facts: C agreed to explore D’s oil concession. C had to make initial payments to D in exchange for a 50% share in the concession and a portion of the oil to be discovered. An oil field was discovered and worked for 4 years before the contract was frustrated by the government’s expropriation of the concession. C had only received part of the oil. - Goff J: o Stage I: the benefit to D was half the value of (i) D’s receipt of oil from the concession and (ii) compensation from the government. This was the s1(3) ceiling. o Stage II: just sum was the reasonable value of C’s work and expenses conferred on D, evidenced from what the parties themselves agreed (i.e. the consideration due to C).

Question 88

VI – Effect of Renegotiation

Answer 88

If hardship causes renegotiation of the contract (one party accepts to pay more or accept less) enforceability of the modified contract depends on: - If the original contract is frustrated: the modified contract is enforceable because it is a new contract o No consideration problems o No duress problems since the threat not to contract is generally legitimate If the original contract is not frustrated: enforceability of the modified contract depends on whether it is supported by consideration and whether vitiated by duress (cf Williams v Roffey).