Chapter 9: Frustration Flashcards
What is the case that laid down the definition of Frustration?
Definition (taken from Davis Contractors Ltd v Fareham UDC)
- Where an unforeseen event occurs
- Occurred after the contract had been formed
- It was not the fault of any party
- Which makes the performance of contract illegal, impossible or renders the performance as fundamentally/radically/significantly different from what was initially intended at the time the contract was entered into
What is the outcome of succesful frustration?
Contract would be discharged/comes to an end automatically
- Regardless of the parties’ wishes (Hirji Mulji v Cheong Yue SS. Co. (1926))
Note
- Use the words ‘comes to an end by operation of law’
- Do NOT use ‘void’
What are the 3 attitudes of the courts when dealing with frustration cases?
What are the cases that laid down the approach for each ?
timeline of events
Strict approach (before)
- Paradine v Jane (1647)
- Absolute obligation theory
Relaxed approach (after Paradine)
- Taylor v Caldwell (1863)
- Implied term theory
Today
- Davis Contractors Ltd v Fareham UDC (1956)
- Unforeseen event was fundamentally radical to the contract that was entered
Paradine v Jane (1647)
Strict approach (before)
Theory
- Absolute obligation theory
Held
- Decision was based strictly on ‘freedom to contract’ (laissez faire)
- On grounds that they should have foreseen/included such possible events in the contract to begin with
- Only then it would become illegal or impossible to perform
Problem
- However, the whole point about frustration is that it’s a freak accident/event (how would they know?)
Taylor v Caldwell (1863)
Relaxed approach (after Paradine)
Theory
- Implied term theory
Facts
- Destruction of a music hall brought the contract to an end and discharged both parties
Held
- There was an ‘implied condition’ that the SM has to exist for the contract to be performed
- On grounds that, they can’t hold parties to account for something they do not have control over
Davis Contractors Ltd v Fareham UDC (1956)
IMPORTANT
appraoch today
Theory
- Unforeseen event was fundamentally radical to the contract that was entered
Facts
- Contractor agreed to build 78 houses within 8 months for £94,000
- Turns out they did not have enough workers and materials to complete it within the time given
- The houses ended up being complete after 22 months, and costed £115,000
- Contractors argued that there was frustration, to avoid needing to pay compensation
Held - Lord Reid & Viscount Radcliffe
- Could not plead frustration
- On grounds that they should include such possibilities in the terms of the contract
- In situations where the contract has been entered, and unforeseen changes in circumstances (not due to fault of parties).
The contract is to be said as impossible, illegal or radically different from what the parties have originally intended. Justice requires that courts should treat the contract as coming to an end - The contract would only be frustrated where there is a complete change between what was undertaken in the contract circumstances which were called upon to be performed (National Carriers Ltd v Panalpina (Northern) Ltd (1981))
Note
- It is not good enough if the obligations are just more difficult/onerous/expensive (Tsakiroglou & Co v Noblee and Thorl (1962))
- Must be freak accident (something radically different) which can’t be controlled by either party
What is the ‘Test of multi-factorial approach’? What case was this laid down in?
What are the preconditions to this test. And what are the 5 conditions/factors to consider?
Used in Edwinton v Tsavliris (The Sea Angel) (2007)
Precondition
- Must be a break in identity between what was contemplated and the new performance
- Courts will not easily conclude that such break has occurred
5 conditions/factors courts take into account
- Terms of the contract itself
- Matrix/context
- Parties’ knowledge, expectation, assumptions and contemplations, in particular as to risk, as to time of the contract, at any rate so far as these can be ascribed mutually and objectively
- Nature of the surprising event
- Parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances
What is there to note about the ‘Test of multi-factorial approach’
This test gave a degree of flexibility to the law for the courts to take into account to decide if a contract has been frustrated
- Although frustration is still very strict/limited
Test may be arbitrary but pragmatic (practical) - MSC Mediterranean Shipping Company SA v Cottonex Anstalt (2016)
What are the 2 reasons the doctrine of frustration is so narrow/strict?
Introduction
- On the basis that courts do not like to entertain/protect parties that entered into a bad bargain
2 reasons courts don’t like to protect parties
1. Bad bargains
2. Express provisions in the contract (clauses)
What is the case for parties entering into a bad bargain
Davis Contractors Ltd v Fareham UDC (1956)
Davis Contractors Ltd v Fareham UDC (1956)
Bad bargain
Context
- A clear example of a bad bargain
Held
- Claimant could not rely on frustration
Takeaway
- Courts did not want to protect the claimant
- A clear rule that the courts will not lend their assistance to a party that is looking for a way out of a bad bargain
Why are courts less inclined to allow frustration to parites where there are express provisions in the contract (clauses)
What are the 3 kinds of expressed clauses in a contract?
Introduction
- Parties are expected to foresee such possibilities when entering into contract and guard against them with the contracts
- E.g. parties can make provisions in the contract for what’s to happen when performance becomes impossible/radically different due to freak events
Very important in commercial contracts - where provisions clause are stated in the contract -
- ‘Force majeure’
- Hardship clauses
- Intervener clauses
What is a ‘Force majeure’ clause?
What is the case for this?
Express provisions in the contract
Introduction
- Clause that covers the actions of when such situations could possibly occur
- Then the courts will give it effect
Case
- Channel Island Ferries Ltd v Sealink UK Ltd [1988]
Channel Island Ferries Ltd v Sealink UK Ltd [1988]
‘Force majeure’
Held
* A party won’t be liable in the event of non-fulfilment of any obligation arising under this contract by reason of Act of God or any nature beyond the control of the relevant party
What are hardship clauses?
Express provisions in the contract
Introduction
- Clauses which generally define what constitutes ‘hardship’ (usually economic). And will state the procedure adopted by the parties in such hardship occurring
- Clause will propose obligations for procedure of renegotiation to alleviate the hardships arisen
Example
- Predictable events (e.g. possible labour deficit, not enough funds, etc.) which when occurred to renegotiate terms
What are intervener clauses?
Express provisions in the contract
Introduction
- Similar to hardship clause, but gives authority to a third party to adjust/dispute the terms
- Clause saying, in the event the situation happens, they will appoint an independent arbitrator (intervener)
Intervener
- Employed as a sanction to negotiate their way out of a hardship event
Example
- An independent expert to negotiate terms that the parties may not been knowledgeable to
What are the 4 advantages of such Express provisions in the contract
- Helps prepare for future events
- Provides a greater degree of certainty
- It is much wider than frustration as the parties can stipulate wider range categories of events
- Parties can stipulate what happens after the event
What are the 5 situations/scenarios for frustration?
- Impossibility of the performance of the contract
- Frustration of purpose
- Illegality (effects of war)
- Government action
- Other frustrating events
What are the 3 scenarios for Impossibility of the performance of the contract?
What are the cases for each?
1) Destruction of subject matter
- Taylor v Caldwell (1863)
- Asfar v Blundell (1896)
2) Personal incapacity
- Contract to be carried by a certain individual - Condor v Barron Knights (1966)
3) Performance only temporarily impaired - contract still can be frustrated
- Jackson v Union Marine Insurance Co
Taylor v Caldwell (1863)
Destruction of subject matter
Facts
- License to use the “Surrey Gardens and Music Hall” for a series of concerts
- Music hall burnt down, and was impossible to stage the concert
- C argued that Ds were in breach of contract in failing to supply the hall
- Sued for wasted advertising expenditure
Held
- Frustrated - discharged
- Destruction of the hall rendered the performance of the contract impossible
Asfar v Blundell (1896)
Destruction of subject matter
Full destruction may not be necessary
Jackson v Union Marine Insurance Co
Performance only temporarily impaired - contract still can be frustrated
Facts
- Ship was supposed to sail from Liverpool to Newport, to offload cargo in San Francisco
- Ship had suffered some structural damages at the coast of Newport
- It was not fully repaired for several months
- Charterer then used another ship to carry cargo, on the basis that the contract had been frustrated
- Ship owner sued for breach of contract. That the charter contained a clause stating ‘damages and accidents of navigation excepted’.
Held
- Contract had been frustrated
- As it was not available for the voyage for which it was chartered
- On the basis that performance was radically different from that originally contemplated/agreed to
- The clause could not have been able to intend to apply in reaction to the delay of length occurred (it was an unforeseen possibility)
Takeaway
- Though there was a clause stating about damages and accidents, they could not have possibly foreseen that such delay was possible
What is Frustration of purpose (non-occurrence of an event)?
What are the 3 cases?
IMPORTANT
situations of frustation
Introduction
- Where common purposes which the contract was entered into can no longer be carried out, due to an unforeseen event
Case
- Krell v Henry (1903)
- Chandler v Webster (1904)
- Herne Bay Steam Boat Co. Hutton (1904)
Krell v Henry (1903)
Frustration of purpose
Facts
- Room hired for 2 days in Pall Mall to view the coronation (become king) procession of King Edward VII
- This purpose was not expressed in the contract
- After contract concluded, coronation process was postponed - due to king’s illness
Held
- Frustrated
Herne Bay Steam Boat Co. Hutton (1904)
Frustration of purpose
Facts
- Boat hired for the purpose of 1) naval review and for a 2) day’s cruise around the fleet
- Naval review cancelled due to king’s illness
Held
- Contract not frustrated
- On grounds that there were 2 purposes for the hiring of the boat
Takeaway
- It must be the sole purpose of the contract
- If there are other purposes, it might not be valid frustrated
What is Illegality (effects of war)
What are the 3 cases for this?
situations of frustration
Introduction
- Frustration due to war (which was the unforeseen event)
Case
- Finelvet AG v Vinava Shipping Co. Ltd (1983)
- Fibrose Spolka v Fairbairn (1943)
- FA Tamplin v Anglo-American Petroleum (1916)
Finelvet AG v Vinava Shipping Co. Ltd (1983)
Illegality
Facts
- War between Iraq and Iran trapped ships in the Gulf for a long period
Held
- Any contract related to any charter of these ships will be held frustrated
What is government action?
What are the 3 cases?
situations of frustration
Introduction
- Frustration due to any circumstances that the government deems as illegal to do so (e.g. illegal to kill sharks)
Case
- Metropolitan Water Board v Dick Kerr (1918)
- Gamerco SA v ICM/ Fair Warning Agency (1995) - health & safety
- Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd (1976)
Metropolitan Water Board v Dick Kerr (1918)
Government action
Facts
- requisitioning of property which had been allocated to a contract
Gamerco SA v ICM/ Fair Warning Agency (1995)
health & safety
Government action (IMPORTANT)
Facts
- Stadium had been booked for a pop concert was closed due to health and safety reasons
Held
- Frustrated
Note
- However, if government action was taken due to reasons by the defendant/claimant not complying with certain terms
- Contract won’t be frustrated
- As it was still their fault
What are 5 examples of Other frustrating events
situations for frustration
- Industrial actions – The Nema (1981)
- Strikes
- Lockdowns
- Global pandemic
- Running aground of a ship – Jackson v Union Marine Insurance Co
What are the 2 limitations to the doctrine of frustration?
- Self induced frustration
- Foreseen or foreseeable events
What is self-induced frustration?
What case gave the definition?
limitations
Introduction
- Party can’t plead frustration if the frustrating event was brought about by his own conduct or by the conduct of those that he is responsible for
- Thus the D would not be able to rely on frustration and will be in breach of contract
Definition
- Hobhouse J in The Super Servant Two (1989)
- Self Induced Frustration as a “label” which has been used by the courts to describe “those situations where one party has been held by the courts not to be entitled to treat himself as discharged from his contractual obligations”.
What are the 2 cases for self-induced frustration?
- Maritime National Fish v Ocean Trawlers (1935)
- The Super Servant Two (1990)
Maritime National Fish v Ocean Trawlers (1935)
self-induced frustration
Facts
- D chartered a boat from claimants, but could only be used for otter trawl
- An otter trawl could only be used by obtaining a license
- D applied for 5 licences for 5 vessels that they operated
- Given only 3 licenses
- They elected/chose to apply the licenses to the ships that they owned, rather than the ones chartered from C
- C sued under terms of the contract
- D denied liability on grounds that the contract had been frustrated, due to failure to obtain the license (which was his own fault)
Held
- Not frustrated
- It was the D’s choice to which boats they used the licenses for
- ‘Frustration’ was held to be self-induced and ineffective to relieve D of liability
Ratio (reason)
- The fact that the D elected/chose to allocate the license to their own ships
- The mere fact that the D had a choice to distribution of the license was sufficient to constitute SIF
Takeaway
- It was because he was the one that caused the outcome of the vessels of the C not being able to be used
The Super Servant Two (1990)
IMPORTANT
more significant SIF (controversial)
Note
- COA adopted this case to the 2 possible interpretations before it
Facts
- D agreed to transport the C’s oil rig - either using SS One or SS Two
- Prior to the time of performance, D made a decision to allocate SS Two to perform with the C, and to allocate SS One to other concluded contracts
- Before the fixed time for performance in the contract was concluded, SS Two sank while transporting another rig
- Couldn’t use SS one (it was for other contracts)
- C brought action for breach of contract
- D denied liability on 2 grounds - 1) the sinking of SS Two; and 2) Force Majeure Clause in the contract
Held
- frustration - rejected -
* COA held that the cause of non-performance of the contract was not the sinking, but the decision of the D to allocate SS One to performance for other contracts
* Held to be sufficient SIF - ‘Force Majeure’ Clause - effective defence -
* COA held that force majeure clause “perils or dangers and accidents of the sea”, was apt/able to cover the sinking of SS Two that its sinking was not attributable to negligence of the
Takeaway
- Rejected - self induced because the allocated the performance for other contracts
- Allowed - But they escaped liability through the force majeure clause
What is the foreseeability test for ‘foreseen or foreseeable events’
limitations
Prof Treitel
- An event is foreseeable if any person of ordinary intelligence would regard it as likely to occur
- Question of fact - degree and extent depends on the facts of each individual case
What are the 4 cases for foreseen or foreseeable events?
- Gold Corp Properties v BDW Trading Ltd (2010)
- Walton Harvey Ltd. V Walker & Homfrays Ltd (1931)
- The Sea Angel [2007]
- Gold Corp Properties v BDW Trading Ltd (2010)
Gold Corp Properties v BDW Trading Ltd (2010)
foreseen or foreseeable events
Facts
- Company argued that the contract for development property was frustrated when there was a crash in property values
Held
- Not frustrated
- On the basis that the risk was both foreseen and provided by a clause that permitted the renegotiation of minimum prices in such circumstances
Note
- ‘Force majeure’ and similar clauses may well replace the common law and statutory rules on frustration
- Courts have tended to narrowly interpret these clauses (to keep them as it is)
The Sea Angel [2007]
foreseen or foreseeable events
Held - Rix LJ
- “ ‘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’.
- It would depend on the facts (individual cases)
What are the 6 effects of frustration?
- Contract valid until discharged/ended/terminated automatically by Frustration by operation of law
- Discharge occurs regardless of parties intentions and actions - Hirji Mulji v Cheong Yeong Steamship Co Ltd (1926)
- Discharge at the time of frustrating event (after contract has been entered)
- All future obligations come to an end
- Parties can’t be sued for breach of contract if not performed
- Courts would have to distribute/allocate losses
What are the 2 sets of rules for frustration?
1) Common law - old law
2) Statute - Law Reform (Frustrated Contracts) Act 1943 - new law
- Section 1(2) - Money paid or payable prior to frustration
- Section 1(3) - Compensation for ‘valuable benefit’
What are the rules under common law (old law)?
Introduction
- Obligations incurred before/prior to frustrating event happening must be fulfilled
Example
- Any obligations before FE - must be fulfilled (e.g. X deposited £100 - can’t recover)
- Any obligations after FE - no need to perform (e.g. X incurred £900 (after FE) - can recover)
What are the 2 cases for common law rules (the need to pay anything that happend prior to the FE)
Chandler v Webster (1904)
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1943)
Chandler v Webster (1904)
Common law rules (old law)
Facts
- Made booking for hotel room to watch king perform
- King fell ill
Held
- Can’t recover losses before FE
- Contract stated that the full obligation to pay for the room to watch the procession arose before the frustrating event
- Where the loss fell would therefore depend entirely on what the contract said about when payment was to be made, or when work was to be done
Note
- But this old law could lead to injustice (see Fibrosa case)
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd (1943)
Common law rules (old law)
Note
- Overruled Chandler v Webster (case above)
Facts
- £1,000 had been paid under a contract for the supply of machinery which was frustrated by the German invasion of Poland in 1939
Held
- Allowed to recover the £1000
- HOL held there has been a ‘total failure of consideration’, as the party that paid had received nothing at all in return
- Then the money paid could be recovered
Takeaway
- If there was no consideration in return of the payment, may be able to recover
What are the 2 provisions under the new law - Law Reform (Frustrated Contracts) Act 1943
Section 1(2)
* Money paid or payable prior to frustration
Section 1(3)
* Compensation for ‘valuable benefit’
How does Section1(2) of the Law Reform (Frustrated Contracts) Act 1943 work?
staute rules
Before FE
- Any money paid - must be returned
- Any money payable - ceased/no need to pay
What is the difference between Section 1(2) and the common law (old law)?
No need to prove total failure of consideration
- Even if the received some form of consideration, can still recover money
Not all the money is recoverable by the payor - if there is incurred expenses by the payee for the performance of the contract, some of the money can be recovered (for the court to decide the amount)
- Amount to recover can’t exceed the amount of expenses incurred
- Amount to recover can’t exceed the amount paid or payable under the contract
Which case supports the fact that the new Section 1(2) allows a very wide discretion given to courts?
Gamerco SA v ICM/ Fair Warning Agency (1995)
Gamerco SA v ICM/ Fair Warning Agency (1995)
wide discretion - section 1(2)
Facts
- Contract to hold pop concert frustrated due to closure of stadium by grounds of safety
- Plaintiffs sought to recover $412,500 which had been paid
- Ds pointed to some expenses which they had incurred and wanted to recover some money
Held
- In this case, judge did not allow Ds to recover any money
- The judge decided that the £412,500 was to be paid in full
Takeaway
- It doesn’t mean that there was incurred expenses meant there would automatically be able to recover some money
- Overall justice must be considered - if the incurred expenses was specifically done for the performance of contract (then likely recoverable)
How does Section 1(3) of the Law Reform (Frustrated Contracts) Act 1943 work?
Compensation for ‘valuable benefit’
Introduction
- If a party has received a benefit other than money prior to the FE
- Just sum - this section allows the party to recover from the other party ‘such sum…as the courts consider just, having regard to all the circumstances of the case.’
- Courts will take into account any incurred expenses by the benefitting party and ‘the effect, in relation to the said benefit, of the circumstances giving rise to the frustration to the contract’
Who decides the ‘valuable benefit’ of the parties in Section 1(3)?
1) Court decides - The valuable benefit that the party (D) has received (section 1(3) doesn’t define what is benefit)
- Could be value of services performed
- Could be the end product of the services
2) The** Just Sum** that should be given to the other party (C) (which can’t exceed the value of the benefit that was conferred)
What are the 2 cases for Section1(3) of the Law Reform (Frustrated Contracts) Act 1943?
- Appleby v Myres (1867)
- BP Exploration Co (Libya) Ltd v Hunt (No 2) (1979)
What is valuable benefit?
Section 1(3)
In an appropriate case - it is the end product that is the benefit
- Services by its very nature which does not result in an end product (e.g. transportation of goods)
- Services which result in the end product having no objective value (e.g. decoration)
If the FE had the effect of destroying the benefit, nothing is recoverable under Section 1(3)
- This has been subject to much criticism - Treitel, Haycroft & Waksman
However, the interpretation of valuable benefit has been adopted in Parsons Bro Ltd. v Shea (1966) -
- The D’s benefit is not the value of the claimants performance/value of service
What is Just Sum
Section 1(3)
Robert Goff J
- The ceiling amount is the valuable benefit obtained
- The contract allocation of risk will be relevant
- ‘The prevention of the unjust enrichment of the D at the (C)
Lawton LJ - COA
- ‘What is just is what the trial judge thinks is just’
- It is of the discretion of the trial judge
