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Frustration And Termination Notes

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FRUSTRATION A contract is 'frustrated' and void when something happens after it is made which make performance of the contractual obligations impossible, illegal or otherwise 'radically different' from that contemplated by the parties. Frustration cannot occur when (i) not an express term, (ii) pre-existing rule or (iii) implied allocation based on the courts' assessment in a particular context
- (ii) -> eg Amalgamated Investment and Property Co Ltd v John Walker &
Sons Ltd [1976] where courts imputed risk on one party -> this would be considered a pre-existing rule
- (iii) -> Rix LJ in "The Sea Angel" (2007) that must look at (a) allocation of risk and (b) gravity of supervening events 3 ways to frustrateDeath Supervening illegality Destruction of subject matter

RELATIONSHIP WITH COMMON MISTAKE For common mistake to apply, the parties must be mistaken as to some feature at the time of contracting, whereas for frustration to apply, the parties' joint assumption must be shown to be false by events occurring after the contract has been entered into. Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd [1976]
-> where held contract for sale of land not frustrated when buyer found out land on a list to be listed as building of historic significance, value dropped from

1.7mil to 200k as (i) if listed before the sale, it would be a common mistake but property was not listed before sale (ii) inherent on the property buyer that buyer takes the risk
- Ie if listed before the sale - then it would be common mistake

THE TEST FOR FRUSTRATION General formulation - the 'radically different' test The test has three elements (The Sea Angel [2007]):

1. There must be a radical change in the obligation a. The doctrine is not to be lightly invoked. Increased expense, delay or onerousness is not sufficient for a radical change in the obligation. There has to be a 'break in identity' between the contract as provided for and contemplated and its performance in the new circumstances.

2. The contract must not distribute the risk of the event occurring a. If the express or implied terms of the contract contain a mechanism (even a rudimentary one) for dealing with certain changes in circumstances, the contract will be taken to contemplate such changes and not be frustrated by reason of them.

b. Determining whether the contract contains such a mechanism requires a multi-factorial approach. Among the factors which have to be considered are 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, so far as these can be ascribed objectively. c. The most common method for expressly distributing risk is the force majeure clause, which provides a comprehensive list of events and problems, and provides a contractual regime for dealing with them (e.g. a right of cancellation, suspension, changes in price etc.). It provides certainty about what the impact of the specified events will be, it enables the parties to allocate the risk of events which would not count as frustrating events at common law and also to make provision for a more flexible remedial regime than that which applies on frustration.

3. The occurrence of the event must not be due to either party. Do we need a doctrine of frustration?
Morgan (2012) argues that we do not need a doctrine of frustration, that parties should be required to look after themselves by inserting a force majeure clause if they want protection from unexpected events. However, while it is important that the doctrine is not applied too readily it would be overly harsh to abolish it altogether to cover eventualities not provided for in the contract, but which falsify both parties' assumptions in an important respect. The alternative approach (the 'construction approach'/'implied terms approach') argues that the consequences of a change of circumstances after the contract is made can always be determined by construing and interpreting the terms of the contract in the ordinary way, implying terms where appropriate. This approach, which was rejected in National Carries v Panalpina [1981]), may provide a better way of explaining the cases, as the radical change of obligation test often fails to capture the essence of the court's reasoning. Some specific fact situations / examples of the test in operation (i) Destruction of the subject matter of the contract As it is clear that destruction of the subject matter results in a radical change of obligation, it is then a matter of construction of the contract as to whether it places the risk of destruction on one party
- Eg Taylor v Caldwell (1863) Blackburn J -> Destruction of the cinema in a fire, no one at fault, cinema at centre of contract as contract for performers to perform in the hall - held frustration - first case of frustration (ii) Supervening illegality If the contract becomes illegal to perform, this may frustrate the contract if the illegality results in a radical change of obligation. Whether the effect is serious enough to cause a radical change of obligation will normally depend on how long the legal restriction applies for compared with the term of the contract.

-

This is the CLEAREST case we have for frustration
? Eg Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) per Beatson J at [100] where he citing Chitty that it was "customary to treat supervening illegality as an instance of frustration"
? Eg Fibrosa v Fairbairn [1943 HL (Contract frustrated by WWII, Polish ordered machines prepaid, as total failure of consideration since no machines delivered. Polish company got it back) -> shows supervening illegality would result in frustration

(iii) Death / incapacity of one party (in contracts for personal services) Contracts for the provision of personal services, such as contracts of employment, may be frustrated if one party is unable to perform through death, illness or incapacity. The court looks at matters such as how long he is unable to perform for, how long the contract was for and the terms of the contract. (iv) Contract has become commercially 'pointless'? (non-occurrence of an event) In Krell v Henry [1903], the defendant agreed to hire from the claimant a flat during King Edward VII's coronation procession. The contract contained no express reference to the coronation procession. The procession was postponed, so the defendant declined to pay the balance of the agreed rent. The CA held that the taking place of the procession on the days originally fixed along the proclaimed route was regarded by both contracting parties as the foundation of the contract, so the contract was frustrated and the defendant did not have to pay the balance. Vaughan Williams LJ distinguished the situation in Krell from a hypothetical example where frustration would not apply: 'if a cabman was engaged to take someone to Epsom on Derby Day at a suitable enhanced price for such a journey, both parties to the contract would not be discharged if the race was cancelled.?

This example shows is that it is not enough that one party entered into the contract for the purpose of seeing the Derby: the fact that one party (frustration needs 2 parties) makes an assumption which subsequent events show to be incorrect is not enough to frustrate the contract. It also shows that even if one party makes an assumption that is subsequently shown to be incorrect AND the other party knows of this assumption at the time of contracting, this is still not enough to bring the contract to an end.

In Krell, the defendant's motive for contracting was to see the procession and the plaintiff knew this. The cab example shows that something more is needed:
? First, he advertised that he was selling a view of the royal procession, rather than simply letting the room.
? Secondly, the claimant only offered the use of the room in the day, not during the night.

?Thirdly, the claimant was not in business hiring out his room regularly - unusually, and unlike the cabman, he only contracted because of the coronation procession. Northern Indiana Public Service Co v Carbon County Coal Co Cf Posner J in (1986) argues that Krell could have let out the room again when the coronation actually occurred - therefore wouldn't be harsh for owner
- Criticism -> this uses a lot of hindsight, what is King died or coronation route changed?

These factors show that the claimant was not merely hiring out a room for ordinary use; he was selling a view of the procession and nothing more. We can say that BOTH parties assumed that the procession would go ahead, and it was this that allowed the CA to say the contract should be discharged.
- Cf Henry Bay v Hutton [1903] - coronation cancelled, D chartered steamship to take passengers to view the naval procession. D argued frustration, held not frustrated (Sterling LJ) as (i) more than one purpose, passengers might be willing to view the other ships in the port (ii) risk assumed by D when chartering ship
? Ie the cancellation of the contract did not render the contract a complete waste of time
? Andrews argues that result might be different if advertised as "vessel available for hire during King's review of the fleet"
? Andrews argues that best way to distinguish Henry Bay v Hutton from Krell v Henry is that Henry Bay v Hutton is that frustration would not occur if only PART of the anticipated contractual satisfaction had been removed as compared to Krell v Henry where the WHOLE anticipated contractual satisfaction has been removed
? Also possible to argue that Henry Bay v Hutton intended to use it for profit while in Krell v Henry it was a consumer
- Cf Victoria Seats Agency v Paget (1902) -> where express solution for refund or the cancelled coronation necessarily excludes the doctrine of frustration The 'radical change' test was not a significant explanation for the decision in Krell. The court simply asked whether both parties had contracted on the assumption that the procession would take place. This reasoning looks similar to asking whether a term should be implied. (v) Delay / Interruption / Increased expense?
Increased expense If the contract has become more expensive to perform for one party, this does not frustrate the contract, as that party's assumptions upon entering into the contract are not the business of the other party (The Mary Nour [2008]) (Sale of concrete in large quantities in an attempt to break cartel. Rival found out and bought up all the concrete, seller unable to get the concrete. CA held contract not frustrated as sellers considered risk of failure when made "unqualified"

statement and hence assumed the risk). The contract has already (impliedly) allocated that risk. Similarly, even if the defendant's supplier chooses not to supply to the defendant, rendering it impossible for him to perform his contractual obligations, the contract is not frustrated. It is the defendant's business how he goes about performing his obligations, and the risk that he cannot do so is a risk that he must bear, not the other party to the contract (i.e. the risk that he cannot perform has already been allocated by the contract).
- Decision seems to suggest that there is no rule allowing for frustration of supervening impossibility - or at least the rule for impossibility is extremely narrow
? Supported by Viscount Simon LC in Joseph Constantine Steamship Line v Imperial Smeltin Corporation [1942] "discharge by supervening impossibility is not a common law rule of general application" Difficulty and "impracticability" -> No frustration Davies Contractors Ltd v Fareham Urban District Council (1956) Lord Radcliffe ->
increase in cost due to labour shortages that were unforeseeable and price increase from 94K to 114K held not frustrated as price increase was not dramatic enough to satisfy frustration
- Rejected frustration as an implied term - Lord Reid - because people do not write about unforeseeable events Delay/temporary interruption To frustrate a contract, the delay must be so abnormal, in its cause, its effects, or its expected duration, so that it falls outside what the parties could reasonably contemplate at the time of contracting (Chitty). This poses a problem for contracting parties because it is impossible to know in advance how long the interruption will last, yet they need some way of calculating when they can safely assume that the contract is frustrated and walk away. In the Sea Angel [2007], Tsavliris chartered a ship from Global from 23 rd Aug to 15th September. Having done its work, T wanted to redeliver the ship but the Karachi port authority refused to issue to allow it to leave. In response to G's claim for payment of the hire of the vessel in respect of the period after 15th Sept until eventual redelivery in December, Tsavliris claimed that it was not liable to pay past 13th October because the contract was frustrated on this date, it being clear that there would be a delay of at least three months in releasing the vessel. CA rejected this argument. When a ship is chartered for a specific period, the risk that something will happen to delay it being returned is generally on the charterer, because he agrees to pay hire until redelivering the vessel. Further, it was foreseeable that the ship would be detained due to pollution issues. Andrews argues that it all depends

-Delay sufficient to frustrate:
? Eg The Nema [1982] -> where held strikes that caused the delay sufficient to frustrate a charter party
? Eg Metropolitan Water Board v Dick,Kerr&Co (1918) -> where contract for construction of reservoir in 6 years delayed due to government order to stop work and seel contract plant by wartime government - held frustration even though there was words "however occasioned" that though the words were literally wide enough to cover the situation, did not actually cover this drastic "event" Delay insufficient to frustrate:
? Eg Davies Contractors Ltd v Fareham Urban District Council (1956) ->
building contract expected to last 8 months in fact took 22 months not held to be frustrated + must look at increase of price from 94k to 114k also as failing
? Eg "The Eugenia" (1964) -> voyage expected to last 108 days lasted 138 days not frustrated
? Eg "The Sea Angel" (2007) -> salvage vessel hired for 20 days prevented to leave the port until payment made for pollution caused, took 3 months to get out - held not frustrated as this delay fell within scope and duration of the risk borne by the charterer

OTHER ISSUES WHEN CONSIDERING FRUSTRATION 'Self induced' frustration and fault by one party (Remember to check which party is pleading frustration) Eg The Eugenia" (1964) -> where trapped in the canal cannot plead frustration as that was a self-induced frustration (Lord Denning dicta since this case turned on shipped not yet entered canal but canal close so had to take long route around Cape of Good Hope) Choice precludes frustration -> If it was your act that caused the alleged frustrating event, the case for relief is less strong and you (though not the other party)) will often be prevented from claiming that the contract was frustrated. Bingham LJ in The Super Servant Two [1990] held that the essence of frustration is that it should not be due to the act of the party seeking to rely on it. A frustrating event must be some outside event or extraneous change of situation. In The Super Servant Two, the defendants contracted to transport the claimants' drilling rig using one of their two barges. Before the time came to transport the claimants' rig one of the barges sank. The defendants refused to use the other one for the job, so the claimants sued for breach of contract, in response to which the defendants claimed that the sinking of the barge discharged the contract because of a force majeure clause, or failing that, frustrated the contract.
- Ie contract not frustrated if it remained physically possible for a party to have performed the contract but did not because:
? (i) to advance own interest - eg Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] OR

? (ii) he had overcommitted himself - eg The Super Servant Two CA held that the contract would not be frustrated. The defendants could still have performed the contract despite the sinking of the barge: they simply chose not to. So it was the defendants' choice not to use the other barge that made them unable to perform the contract
- Contract also stipulated that either Super Servant One or Super Servant Two could be used ie because it was given an OPTION
? Suggest that if only Super Servant Two cited in the contract decision might be differentThe problem is that the defendants had overstretched themselves: they were unable to serve the claimants without defaulting on their duties to the other customers. McKendrick (1990) argues that the decision puts people such as the defendant in a very difficult position: they are not allowed to get out of any of the contracts (unless the contracts provide that they can do so) so they have to choose which of the contracts to breach.An alternative point of view is that the other party to the contract should not lose out (by the defendant being able to invoke the doctrine of frustration) just because the defendant has overstretched himself by entering into more contracts than he should have. This is the defendant's business alone, so we should say that the contract normally places the risk on the defendant in such circumstances.Andrews supports this view - that English law is realistic

Moreover, a defendant can protect himself by inserting a force majeure clause to remove its liability in such circumstances.
? Ie shows that force majeure clause can protect -> but CA said clause would not exonerate if there was negligence (since case fought on preliminary point, no known result)
? Cf Thames Valley Power Ltd v Total Gas & Power Ltd (2005) -> Clarke J held that even a force majeure clause would not exonerate an energy supplier to supply energy under a 15 year contract despite significant increase in the wholesale price - as the supply of energy remained possible, though unattractive The standard of fault necessary to prevent frustration is not completely clear. The better view is that negligence is sufficient to prevent frustration, as allowing a party to act negligently and then claim that the contract is frustrated is unjust. Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] -> where charter of fishing boat given only 3 licences though applied for me, used those 3 licences for their own boats rather than fulfilling the contract - held not frustrated as it was the choice of the charterer not to use the licence to enforce the contract

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