Contract - Termination and Frustration (8) Flashcards
How is a contract terminated?
Termination: Innocent parties may terminate an ongoing contract on occurrence of a ‘repudiatory breach’. Alternatively, they may ‘affirm’ the contract.
(1) Repudiatory Breach: Breach of a ‘condition’ or major breach of an innominate term.
Anticipatory Breach: If a party has warned the other that they are not going to perform a condition or major innominate term when due, the innocent party may terminate immediately, or continue the contract in the hope the party will change course.
(2) Termination: The contract ends, and future obligations are discharged. Damages may be brought for losses.
(3) Completed Contracts: Generally, completed contracts cannot be terminated, subject to some exceptions.
Consumer Contracts: Consumers may be entitled to reject goods under a B2C contract for refund (ss9-11 CRA 2015).
Goods Contracts: Purchasers may be entitled to reject goods under a B2B contract for a refund (ss13-14 SGA 1979), subject to having ‘accepted’ them (s35).
(4) Affirmation: Rather than terminate, the innocent party may affirm the contract, requiring both parties to continue. Damages may be sought in any case.
Requirement: Affirmation must be clearly communicated to the defaulting party.
In Practice: May not be practicable, such as where one party is refusing to perform the contract.
How is a contract frustrated?
Frustration: A contract may be ‘frustrated’ (discharged at law) if an unforeseen event occurs, for which neither party was responsible, and makes the contract impossible or radically different to perform.
(1) Historical Position: Historically, parties would have to perform their contractual obligations irrespective of circumstances which make the contract impossible to perform (Paradine v Jane).
(2) Modern Position: Where a qualifying frustrating event occurs, the contract will be discharged at law, and neither party in breach as a result.
In Practice: This is automatic, not elected.
(3) Test: a) A supervening event occurs between agreement and completion; b) which renders the contract ‘radically different’ to perform; c) was unforeseen; and d) was not caused by either party (Maritime v Ocean; The Super Servant Two; Davis v Fareham).
Supervening Event
Supervening Event: A supervening event may constitute any event which has a major impact upon the contract.
Radical Difference
Radical Difference: Radical difference involves a number of potential circumstances. For example, having to use a boat rather than rail is not radically different.
(1) General Rule: Where a contract is slightly altered or slightly delayed, it is not radically different.
(2) Government Intervention: Government intervention may constitute radical difference, such as through conscription of the labour force in wartime (Metropolitan v Dick Kerr).
(3) Destruction of Subject Matter: A specific thing vital to the subject matter of the contract no longer exists, such as a rented music hall burning down (Taylor v Caldwell).
In Practice: Specific thing must be unavailable. If a company offers a ‘boat’, and has multiple, and only one is destroyed, then they must provide another boat. If this is already contracted out, they are in breach.
(4) Unavailability of Specific Person: Where a specific person to a contract is no longer available, such as following their death (Condor v Barron Knights; Morgan v Manser).
(5) Significant Delay: Significant delays may render radical difference (Metropolitan v Dick Kerr).
In Practice: Courts will consider the consequence of delay, its likely length, the anticipated ETAs of the contract, and whether the contract itself is radically different once resumed.
Rising Costs: Delays caused by rising costs, such as due to inflation, are not frustrating, as they are a foreseeable consequence of commerce (Tsakiroglou v Noblee).
Leases: Leases may only be frustrated where the frustrating event makes the lease unavailable for a significant proportion of the lease (National Carriers v Panalpina).
(6) Strikes: Labour strikes may constitute supervening events.
(7) Change in Law: Legislative changes which render a contract illegal may amount to supervening events (Fibrosa v Fairbairn).
In Practice: Only emergency legislation is sufficient, as other legislation is foreseeable (Metropolitan v Dick Kerr).
(8) Pure Commercial Issues: If a contract is merely made more onerous or impractical due to common commercial issues, such as market price rises, it will not be frustrated (Davis v Fareham).
Unforeseen
Unforeseen: Frustration cannot occur where a supervening event was foreseen by either party. Subjective, not objective.
(1) Force Majeure Clauses: Where a force majeure clause references certain frustrating events, frustration cannot be relied upon, but alternative provisions will be awarded.
In Practice: Provides greater flexibility, allows for specific provisions, and a greater degree of certainty.
Restriction: Force majeure clauses cannot prevent frustration for illegality.
Reasonableness: Force majeure clauses may be subject to the ‘reasonableness test’ for B2B contracts (s3 UCTA 1977).
(2) Subjective Foreseeability: Where parties have discussed potential frustrating events at the time of contract, it is unlikely to be ‘unforeseen’ (Davis v Fareham).
Not Self-Induced
Not Self-Induced: Self-induced events will not amount to frustration, but breach of contract (Maritime v Ocean; The Super Servant Two).
(1) Burden of Proof: Where one party blames the other for causing an event, they have the burden of proving it (Constantine v Imperial Smelting).
(2) Effect: Defaulting party should be sued for damages.
Law Reform (Frustrated Contracts) Act 1943
Law Reform (Frustrated Contracts) Act 1943: As frustration does not provide for damages to be sought, legislation exists to provide certain equitable remedies in respect of losses.
(1) Application: The legislation is implied into contracts, but may be contracted out of through a Force Majeure clause (s2(3)).
(2) Recovery of Sums: Sums paid in reliance on the contract are recoverable, or are no longer owed (s1(2)).
Expenses: A just sum for expenses wasted in reliance on the contract are recoverable from the sums paid or owed, as courts deem ‘fair and just’ (Gamerco v ICM). Nothing is recoverable above this amount.
(3) Valuable Benefits: The court has discretion to order a party to pay a just sum for any valuable benefit received, unless the value has been reduced to nil by frustration (BP v Hunt).
Example: A party used a premises for one week of a one month period before destruction. They may be required to pay a just sum for this one week of use.
