LAW OF CONTRACT

Frustration

Under the doctrine of frustration a contract may be discharged if after its formation
an unforeseen event occurs which makes performance of the contract

impossible, or

illegal, or

radically different so that the purpose of both parties is no longer possible and
the contract becomes essentially different.

The doctrine cannot be invoked lightly and cannot allow a party to escape from a
bad bargain nor simply because performance becomes more difficult.

Also frustration will not occur where the frustrating event was caused by the fault of
one party.

However note the following:

A court will normally only need to decide if the contract has been frustrated if there is
no provision covering the event in the contract. In practice most written contracts will
cover the issue of frustration by including a Force Majeure clause.

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Impossibility

A contract may be frustrated because performance has become impossible.

Taylor v Caldwell (BAILII: [1863] EWHC QB J1 ) 122 ER 309, 3 B & S 826

The claimant hired a music hall in Surrey from the defendant for the purpose of
holding four grand concerts. The claimant went to great expense and effort in
organising the concerts. However a week before the first concert was due to take
place the music hall was through no fault of the defendant destroyed by an
accidental fire. The claimant sought to bring an action for breach of contract for
failing to provide the hall and claiming damages for the expenses incurred.

It was held that the claimant's action for breach of contract failed. The contract had
been frustrated as the fire meant the contract was impossible to perform.

Robinson v Davison 1871 (1871) LR 6 Ex 269

The claimant entered into a contract with the defendant that the defendant would
procure a concert to be performed by the defendants wife. The defendant said if the
claimant paid the defendant his wife would perform. The defendants wife became
seriously ill on the specified date. Had she gone on with the recital her life would
have been in serious danger. As a result the claimant suffered financial losses and
sued the defendant.

It was held that the defendant was not liable as the contract was frustrated by his
wife's illness. Both parties must have assumed that the performance would only take
place if his wife was fit to perform. As reasonable men must have intended that the
contract would be terminated if this were not the case.

Comments:

Note that in the above case it was a agreed that a specific person, the defendants
wife, would perform. Had the defendant agreed to provide a musician the contract
would not have been frustrated.

Similarly suppose a man agrees to hire a room at a price and then dies the contract
will probably not be frustrated. The hirer of the room will probably be able to claim
the hire price from the dead mans executors.

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Illegality

If during the contract a change in the law makes further performance illegal the
contract will be frustrated.

Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265 James B
Fraser & Co Ltd

James B Fraser & Co Ltd were timber merchants. An agreement with Denny, Mott &
Dickson Ltd in 1929 provided they would buy wood from Denny and lease a timber
yard with the option to buy it or take a long lease on certain terms.

The contract's first four clauses concerned the timber.

Clause 5 provided for the contract's termination on notice by either party.

Clause 6 provided for the letting of the timber yard "to enable the foresaid
[above] trading agreement to be carried out."

Clause 8 gave James B Fraser, "in the event of the foregoing trading
agreement being terminated by either party as aforesaid, ... the right as at the
date of the termination of the said agreement" to purchase the timber yard at
a certain price or to take a longer lease of it at a certain rent.

Because of the Control of Timber (No 4) Order 1939, further transactions between
the parties became impossible from the end of September 1939. In July 1941 James
B Fraser sent a letter purporting to give notice to terminate the agreement and also
of their intention to exercise the option of purchase the yard.

The House of Lords held that the contract had become frustrated and so the option
could not be exercised.

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Common Purpose of Both Parties Ended

In some circumstances frustration may occur where further performance, though

technically possible, would become something radically different from that originally
envisaged by the parties ie events have destroyed the purpose of the contract for
both parties.

Krell v Henry [1903] 2 KB 740

The defendant hired a flat on Pall Mall, London for the sole purpose of viewing King
Edward VII's coronation procession in 1902. The price agreed was 75 for two days.
The defendant paid 25 deposit. Due to illness of the King the coronation was
cancelled. Consequently the defendant did not use the flat. The claimant sought to
claim the outstanding 50.

It was held that the contract was frustrated as cancellation of the procession
deprived it of its commercial purpose. The claimant's action for breach of contract
was thus unsuccessful.

Contrast this with the following case:

Herne Bay Steamboat v Hutton [1903] 2 KB 683 (CA)

The claimant hired its steamship to the defendant. The purpose of the contract was
to take paying passengers to view the Naval Review which was part of King Edward
VII's coronation celebrations. The defendant was also offering a days cruise for the
passengers. The Naval Review was cancelled as the King was ill. The defendant did
not use the steamship and the claimant brought an action for the agreed contract
price. The defendant argued the contract had become frustrated due to the
cancellation of the Naval Review.

It was held that the contract was not frustrated. The contract had not been deprived
of its sole commercial purpose as it was still possible to perform the days cruise.
The Naval Review was not the only commercial purpose of the contract.

In the first of the above cases it was clear to both parties that the sole purpose of the
room hire was to view the coronation.

In the second case the viewing of the Naval Review was not the sole purpose of the
contract.

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Limitation to frustration

Frustration will not occur in the following cases:

Contract performance becomes more difficult:

Davis Contractors v Fareham UDC (BAILII: [1956] UKHL 3 ) [1956] AC 696, [1956] 2
All ER 145

Davis Contractors agreed to build 78 houses for Fareham Council within eight
months for an agreed price of 85,000. Due to a shortage in skilled labour and
material the contract took 22 months to complete and was much more expensive
than anticipated. Davis Contractors were paid the contractually agreed price but
brought an action arguing for more money based on the fact that the contract had
become frustrated and therefore they were entitled to further payment.

It was held that the contract was not frustrated. The fact that a contract becomes
more difficult to perform or not so profitable is not sufficient to amount to frustration.
It was still possible to perform the contract.

The event is attributable to the fault or choice of one of the parties:

Maritime National Fish Ltd v Ocean Trawlers Ltd (BAILII: [1935] UKPC 1 ) [1935] AC
524

Maritime National Fish Ltd chartered (ie hired) five fishing vessels one of which, the
St Cuthbert, was was owned by Ocean Trawlers Ltd. The fishing vessels were all
fitted with otter trawler nets. Legislation was in force requiring licences to be held by
those using otter trawl nets and the parties were aware of this. Martime National Fish
applied for five licences but was only granted three and was required to name which
vessels the licence would be used for. It named three vessels other than the St
Cuthbert with the result that it was no longer able to use the St Cuthbert. It informed
Ocean Trawlers that it was returning them the St Cuthbert prior to the end of the
charter arguing that it was no longer bound by the charter and not in breach of
contract as the failure by the government minister to provide a licence was a
frustrating event. Ocean Trawlers sued Maritime National Fish for payments
outstanding under the charter.

The Privy Council held that the contract was not frustrated since Maritime National
Fish had named three other vessels other than the St Cuthbert therefore causing the
frustrating event itself with the result that it was in breach of contract.

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Effect of frustration

The position at common law is that frustration discharges the parties only from duties
of future performance. Rights accrued before the frustrating event therefore remain
enforceable but those which have not yet accrued do not arise. This may cause
hardship as in some case advance payments made before the event frustrating the
contract were held not to be returnable.

The Law Reform (Frustrated Contracts) Act 1943 was enacted to remedy this defect.
Under the Act:

Sums paid before that date are recoverable.

Sums due after that date cease to be payable.

Where there has been partial performance the performing party may be able
to recover its expenses incurred in carrying out or preparing to carry out that
performance.

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Force Majeure Clause in Contract

In practice the issue of frustration will usually be dealt with in a written contract by
the inclusion of a Force Majeure clause:

Neither party will be liable for any loss, damage or delay arising out of its failure to
perform hereunder due to any cause or circumstance beyond its reasonable control,
including but not limited to acts of God or of the other party, acts of civil or military
authority, fires, strikes, floods, epidemics, quarantine restrictions, war, riot, delays in
transportation, or transportation embargoes. In the event of any such cause or
circumstance, any performance date(s) under this Agreement will be extended for
such period as may be reasonably necessary to compensate for the delay. A party
invoking such cause or circumstance shall promptly give written notice to the other
party of the same. In the event that such cause or circumstance continues for longer
than 180 (one hundred and eighty) days either party shall be entitled to terminate
the Agreement by giving 30 (thirty) days notice of termination without prejudice to the
rights to the parties which accrued prior to the effective date of termination.

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Privity of Contract and Third Party Rights

The doctrine of privity in the common law of contract provides that a contract cannot
confer rights or impose obligations arising under it on any person except the parties
to it.

Under this doctrine a person who is not a party to the contract (a third party) does
not have any right to enforce the contract.

Example:

A agrees to pay B 25,000 for a truck and that B will deliver the truck to C.

If A pays for the truck and B fails to deliver it to C only A can can sue B.

If B delivers the truck to C and and A fails to pay only B can sue A.

However this can lead to hardship to the third party, C. Suppose the following:

A informs C of the contract for delivery of the truck to C. In reliance on this C

contracts with D to transport some goods for D. However because B fails to
deliver the truck C is unable to fulfil his contract with D who cancels the
contract. C loses the profit margin on this.

Are there any potential remedies for C in this situation?

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Privity of Contract Common Law position

Only a party to a contract can enforce it.

Tweddle v Atkinson (BAILII: [1861] EWHC QB J57 ) 121 ER 762

A couple were getting married. The father of the bride entered into an agreement
with the father of the bridegroom that they would each pay the couple a sum of
money. The father of the bride died without having paid. The father of the son also
died so was unable to sue on the agreement. The bridegroom made a claim against
the executor of the will.

It was held that the claim failed. The bridegroom was not party to the agreement and
the consideration did not move from him. Therefore he was not entitled to enforce
the contract.

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd (BAILII: [1915] UKHL 1 ) [1915]
AC 847

Dunlop made tyres. It did not want them sold cheaply but wanted to maintain a
standard resale price. It agreed with its dealers (in this case Dew & Co) that the
dealers should not to sell them below its recommended retail price. Dunlop also
specified that the dealers should get the same undertaking from their retailers (in
this case Selfridge). If retailers did sell below the list price they would have to pay 5
a tyre to Dunlop. Dunlop thus was a third party to a contract under which Dew sold
tyres to Selfridge, a retailer. When Selfridge sold the tyres at below the agreed price,
Dunlop sued to enforce it contract with Dew by injunction and claimed damages from
Selfridge. Selfridge argued that Dunlop could not enforce the terms of a contract
between Dunlop and Dew to which Selfridge had not agreed.

The House of Lords found in favour of Selfridge. As Selfridge was not a party to the
agreement between Dunlop and Dew Dunlop could not enforce the contract against
Selfridge.

Note

Under the modern law of the Competition Act 1998 or European Union competition
law it would be regulated as an anti-competitive agreement.

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Common Law Exceptions

The common law developed a number of exceptions to this rule. One is set out
below.

Agency

If it can be shown that a contracting party is acting as an agent for the third party
then the third party may be able to rely on this.

An agent is one who agrees and is authorised to act on behalf of another, a

principal, to legally bind an individual in particular business transactions with third
parties pursuant to an agency relationship.

This is often relevant in relation to clauses which limit of exclude liability for a third
party and often in relation to shipping contracts. These are called Himalaya
clauses.

New Zealand Shipping v Satterthwaite Ltd (BAILII: [1974] UKPC 1 ) [1975] AC 154,
[1974] 1 All ER 1015, The Eurymedon

A drilling machine was to be shipped from Liverpool, United Kingdom to

Satterthwaite Ltd, New Zealand. The bill of lading between the carriers
(transportation company) and Satterthwaite stipulated the limitation of liability of the
carriers. It further stated that the clause would extend to servants, agents, and any
independent contractors ie third parties. The carrier company was a subsidiary of
the company, New Zealand Shipping, that also owned the stevedores company
(dock workers) that unloaded the drill. Due to negligence the stevedores damaged
the drill while unloading it. The stevedores claimed the protection of the limit of
liability clause in the contract between the carriers and Satterthwaite.

The Privy Council used the doctrine of agency to give effect to the exemption
(Himalaya) clause thus extending it from the carriers to the stevedores, using the
carriers as the agent.

The conditions set out in a previous case were satisfied:

(i) The main contract must make it clear the third party is intended to be
protected by the clause in the contract between the shipper and the carrier.

(ii) The main contract must make it clear that the carrier is also acting as an
agent for the third party.

(iii) The carrier must have authority from the third party to the contract.

(iv) The third party must have provided consideration for the main contract
promise of protection.

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Contracts (Rights of Third Parties) Act 1999

1. - (1) Subject to the provisions of this Act, a person who is not a party to a contract
(a "third party") may in his own right enforce a term of the contract if-

(a) the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.

(2) Subsection (1)(b) does not apply if on a proper construction of the contract it
appears that the parties did not intend the term to be enforceable by the third
party.

2.- (1) Subject to the provisions of this section, where a third party has a right under
section 1 to enforce a term of the contract, the parties to the contract may not,
by agreement, rescind the contract, or vary it in such a way as to extinguish or
alter his entitlement under that right, without his consent if

(a) the third party has communicated his assent to the term to the promisor,

(b) the promisor is aware that the third party has relied on the term, or

(c) the promisor can reasonably be expected to have foreseen that the third party
would rely on the term and the third party has in fact relied on it.

6- (5) Section 1 confers no rights on a third party in the case of

(a) a contract for the carriage of goods by sea, or

(b) a contract for the carriage of goods by rail or road, or for the carriage of cargo
by air, which is subject to the rules of the appropriate international transport
convention,

except that a third party may in reliance on that section avail himself of an exclusion
or limitation of liability in such a contract.

Explanation

It was decided to extend the common law doctrine with its exceptions in order to
enable contracting parties to confer the right to enforce the contract on a third party.

Section 1 (1) sets out the basic principle that a person who is named in the contract
as a person authorised to enforce the contract or a person receiving a benefit from
the contract may enforce the contract unless it appears that the parties intended that
he may not.

Section 2 (1) covers rescission and variation.

Section 6 (5) states that a third party may rely on an exclusion and limit of liability
clause in a contract for the carriage of goods by rail or road, or for the carriage of
cargo by air.

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4. Law of Contract Questions

What is meant by the doctrine of frustration?

Concerts Limited signs a contract with Musical Representatives Limited under which
Musical Representatives Limited agrees to provide a soprano for a concert being
organised by Concerts Limited. A few days before the concert Musical
Representatives Limited informs Concerts Limited that no soprano is available
because all the sopranos on their books are either ill or unavailable. Can Musical
Representatives Limited claim that the contract is frustrated?

Shipping Limited contracts with Tyre Company Limited to transport a quantity of tyres
from London, United Kingdom to the Sudan. After the contract is signed a civil war
breaks out in the Sudan and the UK government introduces legislation forbidding the
shipment of goods to the Sudan. Can Shipping Limited claim that the contract is
frustrated?

Electronic Company, United Kingdom signs a contract with Puchaser Company,

Ukraine to deliver electronic equipment for 2,000,000 and receives an advance
payment of 500,000 from Purchaser Limited on contract signature. The contract
contains a Force Majeure clause stating that neither party will be liable to perform
the contract in the event of outbreak of war. A civil war breaks out in the Ukraine.
Can Purchaser Company:

Claim that the contract is frustrated? and

Reclaim the advance payment of 500,000?

What is meant by privity of contract?

What is a third party?

Carrier Limited agrees to transport goods for Machine Company Limited from
London, United Kingdom to Hong Kong. The contract contains a limitation of liability
clause limiting liability for damage to each crate of goods to 500 although the value
of goods in each crate is much more. The contract makes no mention of third parties.
Carrier Limited engages Stevedore Company, Hong Kong to unload the goods at
Hong Kong harbour and they negligently damage twenty of the crates. Machine
Company Limited sues Stevedore Company for the full value of the damaged goods.
Can Stevedore Company claim the benefit of the limitation of liability clause?

Lorry Supplier Limited agrees to supply lorries to Buyer Limited. The contract states
that the lorries will be leased by Buyer Limited to Transport Limited and that in the
event of late delivery either Buyer Limited or Transport Limited will be entitled to
claim liquidated damages of 1% per week of the lorries value up to a maximum of
10% of the lorries value. Lorry Supplier Limited fails to deliver the lorries according
to the agreed delivery schedule. Can Transport Limited claim the liquidated damages
direct from Lorry Supplier Limited? [Note: liquidated damages are an agreed
percentage amount of damages. We will look at them later in the course.]

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