Cases and Materials on Contract Law - Assignment Example

Contract Law Q1 When will a party be discharged from his contractual obligations by reason of a change of circumstances? A party will be discharged from his contractual obligations by reason of a change of circumstances when such changes operate to render the performance of his obligations under the contract impossible, illegal and in some cases, when the purpose of the contract has been frustrated. The principle of allowing a party to escape from his obligation under the aforecited circumstances is known as the doctrine of frustration. The impossibility of performing under the contract could be engendered by destruction of the subject matter of the contract, death or incapacity, unavailability, and government intervention, among others. Prior to 1963, parties to a contract, under English law, are strictly bound to their obligations. In the 1647 case, for example, of Paradine v Jane, 1 the Court did not heed the Defendant’s plea to be exempted from paying the lease of the land during the time that it was forcefully taken over by enemy forces expelling him in the process and precluding him from using and profiting from it. The Court declared him liable for the payment of the lease even during the occupation period because “when the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.” 2 That decision was therefore, justified by the Court on the ground that the parties could have easily made provisions concerning force majeure events or events that are beyond the control of man. The doctrine of frustration began to take shape with the case of Taylor v. Caldwell 3 in 1863, where the Court had laid down the “impossibility of performance arising from the perishing of the person or thing” as the first exception to the requirement of absolute performance of obligation under a contract. In this case, the Court relaxed their strict interpretation of the privity of contracts by ruling in favour of the Defendants who were sued by the Plaintiffs for breach of contract for failure of the former to perform their obligation. The Plaintiffs had previously entered into an agreement with the Defendants, owners of Surrey Gardens and Music Hall, for the use of the latter’s hall for a series of concerts as well to be produced by them. Before the concerts could take place, however, the place burned down. Despite the force majeure aspect in this case, which has parallelism to the earlier Paradine case, the Court ruled in favour of the Defendants. The Court justified its ruling on the ground that the contract had set an implied condition: the continued existence of the music hall. Since the obligation of the Defendants under the contract cannot be performed when such existence ceases, the Defendant’s obligation cannot therefore, be performed and must be discharged. To the Court’s mind, the Taylor ruling did not conflict with the Paradine decision primarily because the land in question in that case did not perish unlike in the Taylor case. In addition, the Court asserted that the general rule is applicable only when the contract is positive and absolute and are without exceptions. Since the Taylor case admitted of a condition, albeit implied, the Court considered it as an exception to the general rule. Moreover, the ‘condition’ justification was deemed as not an infringement upon the doctrine of privity of contract because it was not extraneous to the contract considering its implicit nature. 4 In 1903, a long line of breach of contract cases, known as the coronation cases, reached the courts where the defendants employed “impossibility of performance” or the frustration doctrine as their main line of defence. These cases stemmed from the one incident, which was the aborted public coronation of King Edward VII on June 26, 1902. The King fell ill and as a consequence the coronation was postponed. These cases were: Krell v Henry, 5 Chandler v Webster, 6 Herne Bay Steamboat Co v Hutton, 7 Hobson v Pattenden, 8 Clark v Lindsay, 9 and Griffith v Brymer. 10 What the coronation cases emphasised is that the frustration doctrine on the ground of “impossibility of performance” can be relied only if the obligation has become entirely undoable because of the changes in circumstances after the consummation of the contract but not when the contract partially involves other considerations that have nothing to do with the perished circumstances. Neither is the doctrine applicable when the contract touched on the possibility of the happening of the event that could cause the change of circumstance. In Krell, the Court considered the defendant’s obligation, viz. payment of balance of room rent rented for the purpose of witnessing the coronation, as discharged on the ground that an implied condition, the existence of the coronation, did not materialise. Similarly, in Hobson, the Court excused the defendant from performing his obligation to the other party on the ground that the event contemplated by the parties and central to the agreement ceased to exist. However, in Chandler, the Court ruled that Plaintiff could not recover the partial payment he made and ordered to pay his balance because his obligation to pay accrued even before the coronation day. Similarly, in Clark, the Court ruled that there was no discharge of obligation because the agreement itself provided for the possibility of a coronation postponement, hence, precluding frustration of performance of the obligation. In Herne Bay, the defendant was ordered to pay despite the non-happening of the coronation on the ground that the contract for the lease of a steamship did not only refer to its use for the coronation but also for a day’s cruise. The Griffith case, which had parallel issues with Krell in that it also involved the renting of a room for the purpose of viewing the coronation was also decided in favour of the lessee except that in this case frustration was not the only issue but mistake of fact. The parties entered into the agreement at the time that the event was already cancelled but without their knowledge, making the agreement void ab initio. There must also be a distinction between total commercial impossibility and commercial difficulty or inconvenience for the doctrine to be applicable. The test should be that if the obligation is to be performed the party would be carrying out a thing that is radically different than what has been agreed upon. In addition, the alteration of circumstances should not have been the fault of either party. This was the essence of the Court decision in Davis Contractors Ltd. v Fareham UDC, 11 where the test of the doctrine of frustration was first established. The basic facts involved in Davis were: Davis entered into an agreement with Fareham UDC for the construction of 78 houses for 8 months at the contract price of £94,425. However, labour supply suddenly became difficult to obtain and the work took longer to do at a cost more than the contract price. Davis wanted to claim additional sum on a quantum meruit basis for the work and entered the frustration doctrine argument. The Court did not accept Davis’ argument and ruled that although circumstances, not attributable to the parties, had made the performance of the contract onerous; they did not act to discharge Davis from his obligations under the contract. In the Davis case, the Court assailed the artificiality of the implied contract condition, which was used as early as the Taylor case, as a basis for the doctrine of frustration. In assailing the implied contract basis, Lord Reid said: “It appears to me that frustration depends, at least in most cases, not on adding any implied term, but on the true construction of the terms which are in the contract read in light of the nature of the contract and the relevant surrounding circumstances when the contract was made.” 12 It was, however, Lord Radcliffe who essayed the definitive test for the doctrine when he said: “Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which the performance is called for would be radically different from that which was undertaken by the contract. Non haec en fedora veni. It was not this that I promised to do… that special importance is necessarily attached to the occurrence of any unexpected event that, as it were, changes the face of things. But even so, it is not hardship or inconvenience or material loss itself which calls the frustration into play. There must be well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.” 13 There were those, however, who disagreed with the total reliance on the construction theory and a total rejection of the implied condition theory, asserting instead that the approach to a case must depend on the circumstances at issue and that no one factor is absolutely conclusive. Author H. Beale opined that the courts must balance the various factors at play in determining whether a contract is frustrated or not, which should include factors like the intention of the parties, explicit and implicit, as well as the construction of the terms of the contract. On the other hand, Professor Treitel suggested that courts should not disregard the intention of the parties in determining the application of the frustration doctrine. Instead, they should ask under what circumstances did the parties intended the contract to operate by employing an objective test. 14 Aside from the implied condition and construction theories as basis for the frustration doctrine, other court decisions also offered other theories that could operate to discharge a party’s obligation by reason of changes in the original circumstances of the contract. In National Carriers v Penalpina (Northern Ltd), 15 Lord Hailsham proposed theories other than Lord Radcliffe’s construction theory and Taylor’s implied condition theory, naming among others total failure of consideration, special exception demanded by justice, and the “frustration of the adventure” also known as “foundation of the contract.” The concept of impossibility as a basis for the frustration doctrine cover frustrating events engendered by the destruction of the subject matter of the contract, death or incapacity, unavailability, government intervention, and supervening illegality. 16 Destruction of a subject matter as a cause of frustrating the contract was illustrated in the Taylor case and in Asfar v Blundell. 17 In the latter case, the Court allowed a case of frustration albeit the subject matter was not totally destroyed but only materially obliterated. This should contrast with some of the coronation cases, particularly the Herne Bay case, where the court ordered the defendant to pay the agreed rent for the steamship despite the fact that the coronation of the King did not push through. The main difference is that in the Asfar case, the barge that carried a cargo of dates sank on the Thames and although it was eventually recovered and the dates were still distillable into spirit, their commercial value had drastically went down because of the seepage of swage that contaminated and affected their fermentation. In the Herne Bay case, although the event for which the steamship had been rented had been canceled, the steamship had still value for the lessee who had earlier indicated that he would be additionally using it to cruise around. The death or incapacity of either party will operate to frustrate the contract and the illustrative cases for this are Cutter v Powell 18 and Condor v Barron Knights. 19 In the former, the party, a second mate of a ship, died on the 8th week of a ten-week journey. His ship captain refused to pay his wages because he was not able to complete the journey whilst the deceased’s wife filed for the payment of his wages on a quantum meruit. The Court declared decided in favour of the ship captain on the ground that the death of shipmate had discharged the obligation to pay since partial performance is no performance at all. In the second case, the drummer of a band collapsed during one of the band’s performances and had to be confined to a psychiatric hospital and his doctors declared that he was fit to perform only 4 nights a week. The band terminated his services on the ground that their engagement was to perform every night of the week. The Court decided that this was a case of frustrated contract and declared the dismissal proper. The elements of unavailability and government intervention as possible factors of the impossibility theory are illustrated in the cases of Jackson v Union Marine Insurance Company Ltd 20 and Fibrosa Spolka Ackyjna v Fairbairn Lawson Combe, 21 respectively. In the first case, the charterers of a ship decided to lease another chip when the fist ship ran aground whilst it was sailing along the way to its destination. The Court ruled that the length of time that it took the ship to be repaired gave the charterers the right to consider the contract discharged on the ground of temporary unavailability. On the other hand, in the second case, a party, an English company, entered into a contract with a Polish company for the delivery machinery for which the latter paid an advanced sum but war broke out precluding the delivery. The Court held that the sum advanced is recoverable although the obligation of delivering machinery was discharged due to a frustrating event because the obligation remained before the happening of that event. Since there was a total failure of consideration, then the amount advanced must also be returned. Another factor that could call for the frustration doctrine at play is supervening illegality as illustrated in Denny, Mott & Dickson Ltd v James B Fraser & Company Ltd 22 [1944] AC 265, where transactions in timber was declared illegal by virtue of a government ruling. Before the passage of that administrative ruling, the parties in this case agreed for the lease of a timber yard where the owner additionally agreed to buy timber from the lessee. The Court allowed the lessee to terminate the agreement after the passage of the administrative ruling on the ground of the frustration doctrine. Finally, the frustration of purpose as an element of the doctrine of frustration is a rarely applied factor albeit there are some cases where it is employed. As was previously discussed in Davis and in some of the coronation cases, the Court is not inclined to use this excuse to let a contractee escape from his obligation but in some of the coronation cases like Krell, the frustration of purpose was upheld. References: Asfar v Blundell [1896] 1 QB 123. Chandler v Webster [1904] 1 KB 493. Clark v Lindsay [1903] 19 TLR 202. Condor v Barron Knights [1966] 1 WLR 87. Cutter v Powell [1795] 6 TR 320. Davis Contractors Ltd. v Fareham UDC [1956] AC 696. Fibrosa Spolka Ackyjna v Fairbairn Lawson Combe [1943] AC 32 Griffith v Bryner [1903] 19 TLR 434. Jackson v Union Marine Insurance Company Ltd [1874] LR 10 CP 125 Krell v Henry [1903] 2 KB 740. Herne Bay Steamboat Co v Hutton [1903] 2 KB 683. Hobson v Pattenden [1903] 19 LTR 186. National Carriers v Penalpina (Northern Ltd) [1981] AC 675. Paradine v Jane [1647] Aleyn 26, 82 ER 897, Mich. 23 Car. Banco Regis., Hil. 22 Car. Rot. 1178 & 1179. Stone, R. & Cunnington, R. (2007). Text, Cases and Materials on Contract Law. Taylor & Francis. Taylor v Caldwell [1863] 3 B & S 826. Read More