Frustration

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  • Created by: Nikki
  • Created on: 14-04-16 13:41

Frustration and mistake (1)

Deal with same problem --> 3 points to support this analysis

  • (1) only difference in timing
    • false at contract formation = mistake; falsified after contract formation = frustration
    • affects when contract loses its binding force
      • mistake = from beginning (although voidable contracts can pass property to TP before they are rescinded
      • frustration = discharges otherwise valid contract (future performance) at occurence of frustrating event
  • (2) 2 coronation cases
    • Krell v Henry --> flat overlookiing Pall Mall rented out fo rpurpose of watching coronation procession pass by --> frustrated when King fell ill and coronation cancelled
    • Griffith v Brymer --> contract made at 11am --> decision to cancel procession for King's illness had already been made an hour earlier --> contract voided for mistake
  • (3) judicial recognition of similarity 
    • Great Peace --> CA assimilated two doctrines under formulation of 'impossibility of performance'
    • test for relief for frustration very similar to mistake --> reducidble to 3 step inquiry
      • (1) construction --> was risk fo change of circ expressly/impliedly allocated to one of the parties?
      • (2) fault --> was frustration self-induced?
      • (3) fundamentality --> did the new circ render oblgiation to perform radically/fundamentally diff from that originally undertaken 
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Frustration and mistake (2)

3 main differences

(1) scope
- frustration = wider
- but difference = of degree not kind 

(2) contract discharged, not void or voidable
- can effect amount of restitution ordered and position of good faith TP buyers who acquire rights in subject matter of contract
- TP fully protected irrespective of frustration since contract is fully valid at formation

(3) monetary adjustments
- LR(FC)A --> allows courts to adjust gainsa nd losses under contract up to point of frustration
- no analogous stat power exists for aftermath of operative mistake

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Development of frustration

Rule of absolute contractual liability --> Paradine v Jane (1647)

19th century theory of implied term --> Taylor v Caldwell

20th century --> just and reasonable solution

Doctirne extended beyond physical impossibility to cases where performance, although literally possible had become radically different to waht parties contemplated upon contract formation
- Jackson v The Union Marine Insurance Co Ltd

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Justification (1)

IMPLIED TERMS

  • Taylor v Caldwell --> justified doctrine on basis of implied term to effect that contract will come to an end of occurrence of the event that actually occurred
  • if parties had foreseen such circ they would have taken the action of ending the contract
  • contract discharged because that is what the parties would have provided for in contract and not because court has imposed a solution from outside the contract
  • attraction of theory is apparent respect for freedom of ocntract and will of contracting parties
  • counterpoint
    • can agreement be implied into unforeseen event?
      • Davis Contractors --> Radcliffe LJ --> 'logical difficulty' because 'they neither expect or foresaw' the event
    • would parties have agreed?
      • unlikely to have agreed that contract should simply cease t bidn parties, leaving lossess and gains to lie where they fall
      • surely would have sought to intro their own reservations/compensations
      • confriemd by widespread use of force majeure clauses
    • court can overrdie parties' attempts to continue contract
  • these difficulties led courts to move source of implied terms form actual contract parties to fictional resoanble contract parties
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Justification (2)

JUST AND REASONABLE SOLUTION

'a device, by which the rules as to absolute contracts are reconciled with a special exception which justice demands' (Hirji Mulji v Cheong Yue SS)

Counterpoint -->

  • inconsistent with other judicial statements
    • HL has denied any broad judicial discretion to release parties from contract whenever a chang eof circ makes contract signficantly more onerous or less advantageous than first anticipated
  • inconsistent with drastic response
    • concern with justice and reasoanbleness doesn't explain why contracts are automatically discharged rather than modified to make them more just and reasonable
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Justification (3)

RADICAL CHANGE IN OBLIGATIONS: LACK OF CONSENT

  • General agreemtn that appropriate test for frsutration is that of 'radical chang ein oblgiation undertaken' --> set out by Radcliffe LJ in Davis Contractors v Fareham
  • Assumes parties only ocnsent to perform in a limited (although wide) range of circ -->
    • when events radically change circ taking them outside the range, consent runs out 
      • question wether contract made is, on trust construction, wide enought o apply to new situation: if not, contract is at an end (Davis Contractors)
  • lack of consent rationale is consistent with other judicial formulations of frustration which 'shade into one another' (Panalpina)

TOTAL FAILURE OF CONSIDERATION

  • HL has rejected this explanation for frustration
  • ground for recobing money paid when D breacehs contract by total non-performance
  • can apply only if frustrating circ totally obstruct on party's performance
  • but this rationale doesn't explain why a party incurs no contractual liability for its failure of consideration
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Frustrating circumstances (1)

(1) court must construe contract terms in light of nature of contract and of relevant surrounding circ when contract was made to determine the scope of original right and oblgiations (Davis Contractors)

(2) court must compare this with a literal enforcement of the oblgiations int eh new circ to see wehther it is radically or fndamentally different from the original rights and obigations (Tsakiroglou)

Whether event is frsutrating or not is often a question of degree

3 cateogries give sense and shape to frustration doctrine:
(1) legal impossibility
(2) physical impossibility
(3) impossibility of purpose

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Frustrating circumstances (2)

LEGAL IMPOSSIBILITY

  • contractual performance made legally impossible by a chang ein teh law or by a change of circ triggering the operation fo pre-existing law
  • law may:
    • (i) prohibit the performance undertaken in teh contract
    • (ii) deprive a party of control over the subject matter of teh contract
  • supervening law will only frsutrate a contract if it makes a radical difference to the contractual oblgiations orgiinally undertaken and not if it merely delay sor hinders is operation in party --> matter of degree
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Frustrating circumstances (3)

PHYSICAL IMPOSSIBILITY

  • impossibility of performance is insufficient
    • even wholly unforeseen catastrophe will not excuse a party if the construction of contract shows he has undertaken to pay damages
    • difference between misjudgment and wholly unforeseen events
  • impossibility is unnecessary
    • legal impossibility/impossibility of purpose may frustrate contracts which are physically possible to perform
    • supervening events may result in partial impossibility or simply make contract more onerous
    • question of degree
    • courts particularly unwilling to allow commercial parties to escape bad bargains or risks against which they could reasonably be expected to provide for

Examples:
(a) death and incapacity in personal service contracts
(b) destruction of subject matter
(c) failure or disruption of supplies
(d) delay and hardship

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Frustrating circumstances (4)

(a) Death or incapacity in personal service contracts

  • contract of personal services is frustrated if death or incapacitating illness of one party renders its performance impossible or radically different
  • contract frustrated where performing party:
    • dies
    • is interned, conscripted, or imprisoned for all or the substantial remainder of teh contracts duration
    • incapacity by illness
  • contract not necessarily frsutrated by death or incapacity if performance is not of personal character

(b) Destruction of subject matter

  • destruction of something necessary for contractual performance may frustrate the contract
  • where subject is only partially destroyed, frustration is a matter of degree
  • all this is subject to contractual allocation of risks for supervening destruction of subject matter
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Frustrating circumstances (5)

(c) Failure or disruption of supplies

  • s7 SOGA --> 'where there is an agreement to sell specific goods and subsequently the goods, without fault on part of seller or buyer, perish before the risk passes to the buyer, the agreement is avoided
  • specific goods = goods identified and agreed on at the time the contract is made
  • contracts for unascertained goods -->
    • rarely frustrated because, subject to physical or legal impossibility, source of supply is noramlly at supplier's risk --> can always find alt source, albeit at greater cost and inconvenience
    • where a particular source was only intended by one of the parties, failure of that source will not frustrate contract
    • but contract may be frustrated if source of supply was intended by both parties and it fails without fault of either party
    • where commonly intended source partially fails, term implied requiring supplier to deliver small quanitty avaialble --> relieved only to extent of deficiency 
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Frustrating circumstances (6)

(d) Delay and hardship

  • not enough that performance has become commercially unreasoanble, a radical change in oblgiations originally undertaken is required --> but in practice line is hard to draw
  • focus not on casue of delay or hardship but effect it has on performance of oblgiation undertaken --> do they fall outside what parties could reasoanbly conetmplate at time of contracting? --> 3 factors particulalry significant in finding of frustration:
    • (1) increased difficulty of performance is caused by a new and unforeseeable event and is not merely within the commercial risks undertaken
    • (2) parties are entitled to know where they stand
    • (3) performance in new circumstances radically alters original rights and obligations --> 3 categories
      • (i)it is clear from terms or nature of contract that it was to be performed only at a specified time or within a specified period, subsequent delayed performance may be of no use to recipient so frustrate contract
      • (ii) performance after the delay may be radically different because it would occur in a radically different market
      • (iii) contract may be frustrated when contemplated means of performance is made impossible by a supervening event when (a) it is the only method of complying with the contract, or (b) the alt means radically alters the oblgiations undertaken 
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Frustrating circumstances (7)

IMPOSSIBILITY OF PURPOSE

  • recipient of performance claims that supervening event has so undermined the purpose of the contract fo rhim that he should not be required to accept or pay for it
  • 2 factors severely limit its scope
    • (1) purpose which has become impossible to achieve must be common to both parties and have expressly/impliedly 'been assumed by the parties to be the foundation or basis of the contract' (Krell v Henry). Frustrated purposes of only one party will not suffice. Generally difficult for C to establish that his purpose, even if obvious, was shared by other party
    • (2) the common purpose must be thwarted to a high degree

Non-occurence of an event --> very exceptioanlly the non-occurence of an event which constitutes the basis of the contract can frsutrate teh contract --> e.g. Krell v Henry

Leases and sales of land
- HL in Panalpin accepts that leases can, in principle be frsutrated although hardly ever
- frustration more likely if commercial premises are let for a short term, for one principal purpose known to lessor, that purpose gives the premises its substantial value, and the supervening event defeats that purpose for a substantial proportion of the lease 
- may also be frstrated by catastrophic events whic physcially destroy leased premises
- frustration of slaes of land even rarer, since risk of destruction, damage or changes to land's uses is usually borne by purchaser as equitable owner in period between making and completion of contract

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Construction of contract (1)

Express provisions: force majeure and hardship clauses

  • express provisions which state what will happen if certain eventualities occur
  • increases certainty and allows them to depart from default rules provided by frustration doctrine
  • parties can specify:
    • circ excusing furhter performance of contract
    • consequences of trigger circ 
  • must still be interpreted by courts todetermine whether they actuall cover the supervening even in a full complete way 
  • restrictive appraoch from court to interpretation fo such clauses to avoid unfair outcomes --> done in name of parties presumed intention
  • McKendrick
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Construction of contract (2)

Implied allocation of risk: foresight

  • court can infer from parties' silence that they have impliedly allocated the risk of the supervening event to the performing party
  • type of trasnaction may be understood as allocating a particular risk
  • how foreseeable must supervening event be to oust frsutration doctrine?
    • matter of degree
    • question of construction wether the parties' silence, despite foreseeing the risk, should be taken to mean:
      • tha the contract remains binding irrespective of the change of circ
      • that the fate of the contract should be dealt with by frustration doctrine
    • inference ousting frustration should only be drawn where teh degree of foreseeability is very high --> any person of ordinary intelligence would regard as likely to occur, and one which is foreseeable in some detail
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Fault (1)

Self induced frustration -->

  • barred if C's own deliberate or negligent conduct has brought about the alleged frustrating event 
  • up to party suing for breach to prove that event was self-induced
  • Super Servant Two --> Hobhouse J set out 3 categories

(1) breach of contract --> 

  •  party cannot plead frustration if he has contributed to the alleged frustrating event by conduct amounting to a breach of contract --> remains liable for breach

(2) anticipatory breach of contract

  • disqualified if deliberate, voluntary or negligent conduct has teh effect of disabling himself from performance of contract, analogous to anticipatory breach by party's own act
  • issue is one of control --> test is whether C had the means and opportunity to prevent the alleged frustrating event from occurring, but nevertheless cuase or permitted it to occur
  • matter of degree
  • if one party is disqualified by his self-indcued frustration, the other party can still rely on the otherwise frustrating event
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Fault (2)

(3) power to elect

  • when party enters into a number of contracts and an external event partially destrys his supplies so that he cannot satisfy all his contracts, he must choose which contracts to allocate his remaining supplies to, and which to leave unperformed
  • fact that a party has exercised a choice not to perform a certain contract bars the frustration of that contract --> choice breaks chain of causation between external event and his inability to perform 
  • in contrast, frustration permitted if:
    • (a) outside event completely destroys a party's supplies
    • (b) he had specified only one mode of performance or allocated a specific supply to a particular contract, and that becomes impossible to perform due to the outside event 
  • 2 objections can be raised
    • (i) if frustration is barred because C has chosent to enter a contract or could have povided for the frustrating event, then we are back to absolute liability because this reasoning logically swallows up the rationale for frustration --> same goes for reasoning that it is alway sopen to parties to make express provision for supervening events
    • (ii) W's power to allocate Super Servant One to its contract with L is entirely theoretical since ship already allocated to other job --> thus a party can only guard against finding of self-induced frustration by:
      • eliminating any choice by expressly allocating speicfic supplies to particular contract
      • including a suitable force majeure clause 
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Effect of frustration (1)

(1) Automatic discharge 
- consent which initially attaches to contract at formation runs out on occurrence of frustrating event, relieving both parties from further performance
- contract cannot be kept alive or revived at option of either party
- niether can court keep contract and ajust terms to meet new circ 
- but a party responsible for frsutrating event cannot treat himself as automatically discharged from contract, although his contract partner can do so

(2) Lossess and gains under the contract

Common law position

  • (i) money paid or due
    • originally any sums paid before frustrating event were unrecoverable and any sums due before frustrating event still had to be paid
    • position softened by allowing recovery of money paid for total failure of consideration in Fibrosa
  • (ii) non-money benefits
    • valueo f goods or services conferred under contract was only recoverable if payment for them was 'due' under the contract before the frustrating event
    • oblgiations to pay thereafter, as with all outstanding obligations, are discharged on frustration
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Effect of frustration (2)

Money paid or payable under LR(FC)A

  • s1(2)
    • allows payer's claim to recover payments made prior to frustrating event
    • relieves payer from paying sums due prior to discharge 
    • empowers court 'if it considers it just to do so having reagrd to all circ' to allow payee to:
      • set off against sum returned
      • claim against sum payment by A but not paid
    • whole or part of expenses incurred, before the time of discharge, in or for the purpose of, the performance of the contract
  • payee's 'just expenses' should be calculated by use of broad discretion (Garland J in Gamerco)
  • ceiling of 'just expenses' = sums paid plus any sum due --> wasted expenses in excess of this figure are not recoverable
  • ideally a party should secure a large pre-payment from other party against which to offset its wasted expenses in event of frustration
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Effect of frustration (3)

Non-money benefits under the Act

  • s1(3) allows B to claim a 'just sum' where B's contractual performance before discharge confers a 'valuable benefit' on A other than money
  • 'just sum' cannot exceed valueof benefit conferred on A and should be fixed having regard to all circ of case, in particular:
    • amount of expenses incurred before time of dischrge by a in, or for the purpose of, the performance of the ocntract, inc any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under the last foregoing subsection
    • effect in relation to said benefit of the circ giving rise to frustration of the contract
  • in BP v Hunt, Goff J broke down such claims into 2 stages:
    • Stage I: identifying and valuing the benefit
    • Stage II: assessing the 'just sum'
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Effect of frustration (4)

Stage I: identification and valuation of the benefits conferred

  • starting point is to assess object (or market) value of benfits conferred
  • benefit of services usually denotes end product of services; but in cases of pure services which are never intended to produce end products, the benefit must be the value of the services themselves 
  • 2 situations present more difficulties -->
    • partial performance
    • reduction of benefit by frustrating event 

Stage II: assessment of the 'just sum'

  • little guidance on how court will calculate it
  • discretion confined by 5 factors
    • (1) ceiling --> value of benefit fixed at Stage I is ceiling/max for just sum
    • (2) effect of frustrating event on benefit conferred 
    • (3) contractual risk allocation 
    • (4) date of valuation --> generally date of frustration; even if money and services were conferred long before that date no allowance can be made for their time value
    • (5) recipient's expenses
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Hardship and contract modification

  • supervening event which makes contract impossible or more onerous for one party to perfor may trigger renegotiation of contract 
  • frustration -->
    • if original contract frustrated then modified contract enforceable because entirely new contract so problems of contract modification are sidestepped
    • party may escape modified contract by pleading mistake of law (only renegotiated because thought original contract was still binding)
  • no frustration, just hardship -->
    • enforceability of renegotiation depdnds on wehther it is supported by consdieration and wehther duress vitiates the renegotiation 
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