3. The doctrine of frustration
Introduction: initial and subsequent impossibility.
After the parties have concluded a contract, events beyond their control may occur which frustrate the purpose of their agreement, or render it very difficult or impossible, or as even illegal, to perform. An example of this is where a hall, which has been booked for the performance of a play, is destroyed by fire, after the contract has been concluded, but before the date of performance of the play. Some writers have seen a close resemblance between this type of subsequent impossibility and the subject of common mistake (also referred to as initial impossibility)
Both provide an important opportunity to define the strength of contractual obligation. How absolute are they? Under what circumstances will a part be excused from performing his contractual undertakings or from having to provide a remedy to the other.
In certain circumstances, it may by a fine, almost tenuous, dividing line between these two different branches of contract law, in Amalgamated Investment & Property Co ltd v John walker & sons Ltd [1976) 3 ALL ER 509, for example, the facts were:
The “The defendants owned a commercial property which they advertised for sale as being suitable for occupation or redevelopment. In July 1973 the plaintiffs agreed subject to contract, to buy the property for $ 1,710,000. The defendants knew that the plaintiffs purpose in purchasing the property was to redevelop it and that they would require planning permission to do so. In their enquiries before entering into a binding contract, the plaintiffs asked the defendants whether the property was designated (i.e listed) as a building of special architectural or historic interest. The defendants replied, on 14th1991 August that it was not. This was correct at the time. But in January 1973, unknown to the parties’ officials at the Department of the Environment had included the property in a provisional list of building to be listed as being of architectural or historic interest.
On 25 September, the parties signed the contract of sale on 26 September; the Department of Environment wrote to the defendants and informed them that the property had been included in the statutory list of buildings of special interest. (The list was given legal effect the following day. It transpired that the property had been unconditionally selected for inclusion in the list on 22 August. The value of the building without redevelopment potential was one and a half million pounds less than the contract price! The plaintiffs claimed rescission of the agreement on the basis of common mistake, or alternatively, they sought a declaration that the agreement was void or avoidable and an order rescinding the agreement.
The plaintiffs’ action was unsuccessful and specific performance was ordered against them. The case could not be treated as one of common mistakes as the mistake did not exist at the time the contract was concluded. It was after the contract was made that the property was actually listed.
The alternative argument put forward by the plaintiffs was that the contract was frustrated; that is, they had paid a high price for a property on the basis of its redevelopment potential and subsequently found that this objective was not possible to achieve. This contention was also rejected by the Court of Appeal, as the plaintiffs were assumed to have taken the risk that the building may have been listed at some time after the contract was concluded. They were very unlucky that it was listed at some time after purchase, but this was an inherent risk in the ownership of buildings. In other words it was foreseeable that the obtaining of planning permission, which was crucial to the plaintiff, might be thwarted by the listing of the building.
Development of the doctrine of frustration
The doctrine of frustration is a means of dealing with situations where events occur, after the contract had been concluded, which render the agreement illegal, or impossible to perform, or even commercially sterile. The frustrating event must also not be the fault of either party or foreseeable. Of course, the parties might expressly provide for the consequences of a frustrating event by what is known as a force majeure clause. For example, a building contract might provide for what will happen in the event of a strike. In this way the parties themselves deal with the consequences of future events, which might affect performance, and the doctrine of frustration will not apply. Certain types of agreement, e.g. export sales, shipping, building or engineering contracts, are particularly susceptible to disruption by unforeseen events. But in the absence of express provision by the parties, the doctrine of frustration is a legal recognition of the fact that in some instances it is just to excuse a party from his contractual obligations.
Until a little over a hundred years ago, the law was reluctant to excuse a party his performance of a contract even in cases where superyening events rendered that performance difficult or impossible. The rationale of this rule was that a party could always make express provision for unforeseen events and, if he did not do so, he should be bound by his contractual obligations. This is known as the absolute contracts rule, which was clearly stated in the seventeenth century case of Paradine v Jane (1647). In this case, P brought an action against D for the rent due on a lease. D argued that he had been disposed of the land by force by an alien born, enemy to the king and kingdom [who] had invaded the realm with an hostile army of men, D claimed that due to events beyond his control he had lost the profits form the land and therefore, that he was not liable for the rent. This plea was rejected by the court. D had undertaken an obligation to pay rent under a contract and he was bound to fulfill this despite the supervening events. He could always have expressly covered this contingency in his contract with P
This rigid approach has been mitigated, to some extent, by the gradual development of the doctrine of frustration. However, it must be emphasized that the doctrine operated within strict limits and does not provide an easy means of escape for those who have simply made a bad bargain (see Amalgamated investment & Property Co Ltd John Walker & Sons Ltd (1976) above. The famous case which marks the recognition of the doctrine is Taylor v Caldwell (1863) 3 B & 826. The facts were as follows.
“On 27 May 1861, Taylor entered into a contract with Caldwell which gave T the use of Surrey Gardens and music hall on four separate days later that summer. T was to use the premises for a series of four concerts, and for holding day and night fetes on the days in question, and he was to pay $100 for each day. After the contract was concluded but before the date of the first concert, the music hall was destroyed by fire. The fire was not the fault of either party and it made the performance of the concerts impossible. No express provision had been made by the parties to cover this contingency. T claimed damages for the money he had wasted in advertising the concerts”.
It was held that the defendants were not liable and Ts claim for damages did not succeed. This seems a fair decision, but how did the court circumvent the general rule that in a contract to do a positive thing, a person must perform it or pay damages for failure to do so? Blackburn J stated that this rule applies only where the contract is not subject to any condition, either express or implied.
The judge held that the continued existence of the music hall was essential to the performance of the contract and the parties contracted on this basis. Although there was no express provision to this effect, the court implied one as a matter of construction. If the parties had thought about it when making the contracts, they would have agreed to such a condition. In other word the doctrine of frustration, as established in Taylor v Caldwell, was based on an effort to give effect to the presumed intention of the parties.
The importance of the case is that it established the doctrine of frustration and made deep inroads into the notion of absolute contractual obligations.
Once the doctrine of frustration had been established, its scope had to be determined. Taylor v Caldwell (1863) dealt with the physical destruction of the subject matter of a contract, and its result was unexceptionable. Similarly, where a contract is made to do something which subsequently becomes illegal (e.g. trading with a country against which war is later declared), there is no difficulty in treating the contract as frustrated., But a more common and problematic type of case is where the commercial purpose of a contract is drastically affected by unforeseen events, whilst the performance of the contract remains physically and legally possible. A good example is the famous case of Krell v Henry [1903) 2 KB 740, where the facts were:
“Henry (D) agreed to hire a flat in Pall Mall from Krell (P) for the days of 26 and 27 June. These were the days that the coronation processions of Edward VII were to take place and the windows in the flat afforded good views of the procession route. D agreed in writing, on 20th June, to pay $75 for the exclusive use of the flat on the two days of the procession. The contract made no express reference to the coronation procession or to any other purpose. A deposit of $ 25 was paid by D at the time of contracting and the balance was to be paid the day before the procession s took place. Due to the Kings illness, the processions did not take place on the proposed days. Krell claimed $50 from Henry, who in turn counterclaimed for the return of the $25, which he had already paid under the contract.
The Court of Appeal decided that the contract was frustrated despite the fact that its performance was still physically possible. The doctrine is not strictly limited to cases in which the event causing the impossibility of performance is the destruction or no-existence of something which is the subject matter of the contract or of some condition or state of things expressly specified as a condition of it (per Vaughan Williams LJ at 749) Accordingly, the doctrine was applied in circumstances where some events, which must reasonably be regarded as the basis of the contract, failed to take place. The flat in Pall Mall could still have been used on the days in question, but the true purpose of the contract was frustrated by the postponement of the precessions.
This was a potentially far-reaching and controversial decision. It extended the doctrine to cases where the commercial object or purpose of the contract was frustrated. It raises problems as to what exactly is the foundation for a particular contract.
Although the outcome of Krell v Henry seems fair, the courts have to be careful not to allow a party a convenient means of escape from a contract simply because it turns out to be a bad bargain. Krell v Henry represents perhaps, the furthest development of the doctrine of frustration, and subsequent cases have suggested a rather narrower view.
An interesting contest to Krell v Henry provided by Herne Bay Steamboat Co v Hutton (1903) “The facts were that D agreed to hire the steamboat Cynthia form P for $250, on 28 and 29 June 1902, for the purpose of viewing the naval review and for a days cruise round the fleet. A deposit of $50 was paid in advance. The royal naval review, which was intended as part of the coronation festivities, was subsequently cancelled due to the Kings illness. However, the fleet was still anchored at Spit head on 28 June. D did not use the Cynthia on either of the agreed days and P sued for the balance of the hire charge. It was held that P could recover the $200 form D and that the contract was not discharged on the ground of frustration.”
At first sight it might be difficult to see why the case was decided differently form Krell v Henry. But on closer examination it is possible to distinguish it and to emphasize the limited application of Krell v Henry. It was held by the Court of Appeal in Herne Bay, that the taking place of the royal review was not the foundation of the contract, despite the reference made to this event in the contract. It was still possible to cruise around the fleet and therefore the whole purpose of the contract was not frustrated. It is also significant that the contract was for the hire of a boat- something which is frequently hired for a variety of purpose, whereas in Krell v Henry it was highly unusual for rooms in Pall Mall to be let by the day.
The strict limits of the doctrine of frustration can be further illustrated by Tsakiroglou & Co ltd v Noblee Thorl Gmbh (1962) the facts were as follows:
“The appellants contracted to sell groundnuts to the respondents at a price which included the carriage of the goods from the Sudan to Hamburg. Although no reference was made to this in the contract, it was assumed that shipment of the goods would be via the Suez Canal. The price of the nuts was calculated on this basis. After the contract was made, but therefore its performance, the Suez Canal was closed to commercial traffic due to political events. The alternatives route, via the Cape of Good Hope would have taken the appellant more than twice as long to ship the goods and would have doubled the cost of carriage. The appellants did not make the shipment and claimed that the contract had been frustrated by the closure of the Suez Canal the House of Lords rejected this argument. It was possible to ship the goods albeit at greater expense, and the contract was not discharged. The court refused to imply a term that the goods were to be shipped by the most direct route. The fact that the appellant had made what turned out to be a bad bargain did not by itself lead to the doctrine of frustration being applied.