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KAREN ABIDICONTRACT B

Frustration

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Where are we?

1. Termination of contracts

2. Remedies for breach of contract

3. Frustration of contracts

4. Vitiating factors

3What is frustration?

"A contract is frustrated where, after the contract was concluded, events occur which make performance of the contract impossible, illegal or something radically different from that which was in the contemplation of the parties at the time they entered into the contract."

McKendrick, Contract Law, 8th edn 2009, at [14.8]

4Frustration as an excuse

Frustration brings contract to an end.

It is an excuse for non-performance.

It absolves parties from further

performance.

Non-performance of future obligations is

not a breach of contract.

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Test for Frustration

“Frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract... It was not this that I promised to do.”Lord Radcliffe in Davis Contractors Ltd v Fareham Urban UDCApproved by High Court in Codelfa Construction v State Rail Authority of NSW and Brisbane City Council v Group Projects

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Critical Issue

“The critical issue is whether the situation resulting from the grant of the injunction is fundamentally different from the situation contemplated by the contract”.

Codelfa v State Rail Authority

ie. compare:

1. the situation that arose; with

2. the situation contemplated by the contract,

and ask the question “Is it radically or fundamentally different?”

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Davis Contractors v Fareham

Contract to build 78 houses in 8 months for fixed price.

Post-war shortage of labour and materials – took 22 months to complete.

Builder claimed frustration.

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Lord Radcliffe

“frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.”

“… it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as 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.”

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Lord Reid

Determine “whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end.”

Frustration is “the termination of the contract by operation of law on the emergence of a fundamentally different situation.”

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Davis Contractors v Fareham

Held – No frustration because not “radically different” to what was contracted for: delay could reasonably have been foreseen – was

‘before their eyes’ and could have been subject of special contractual stipulation.

The builder took the risk of delay.

11Instances of frustration

Destruction of subject matter

Disappearance of the basis of the

contract

State of affairs essential to

performance

Illegality of performance

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Has the subject-matter of the contract been destroyed?

See Taylor v Caldwell

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Taylor v Caldwell

Contract to let music hall for 4 grand concerts. Before first concert, hall destroyed by fire.

Principle:

“The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.”

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Taylor v Caldwell

Contract frustrated.

“… the parties contracted on the basis of the continued existence of the Music Hall at the time when the concerts were to be given; that being essential to their performance… the Music Hall having ceased to exist, without fault of either party, both parties are excused, the plaintiffs from taking the gardens and paying the money, the defendants from performing their promise to give the use of the Hall and Gardens and other things.”

Explained on basis of implied term that hall would be in existence (though modern cases explain on the basis of construction of contract).

Court said that personal contracts are also frustrated by death.

15Discuss:

contract for shipment of cargo of datesvessel sinks and is subsequently raiseddates are impregnated with sewage and

fermented and cannot be sold as datesdates still have considerable value because

they can be used for distillation into spiritcontract frustrated?

facts taken from Asfar & Co v Blundell [1896] 1 QB 123

16Discuss:

contract for apprenticeship with watchmaker and jeweller for 6 years

apprentice pays upfront fee of £25

master dies after one year of instruction

contract frustrated?

facts taken from Whincup v Hughes (Executrix) (1871) LR 6 CP 78

17Discuss:

drummer agrees to play in a band 7 nights a week

drummer falls ill and can only play 4 nights a week

contract frustrated?

facts taken from Condor v The Barron Knights Ltd [1966] 1 WLR 87

18Temporary impossibility

Contract specifies time of performance & time is of the essence: frustration if person or thing is unavailable at specified time

Ccontract specifies no time of performance, or time is not of the essence: there may be frustration not by mere fact but by length of temporary impossibility.

19Discuss:

pianist agrees to give concert on certain

day

pianist is too ill to perform on that day

contract frustrated?

see Robinson v Davison (1871) LR 6 Ex

269

20Discuss:

1938: D, a music hall artiste,

employed P as his manager for 10

years

D was called to army in 1940 and

was not demobilized until 1946

contract frustrated?

see Morgan v Manser [1948] 1 KB

184

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Was there a state of affairs that was essential to performance, and has it changed?

See Codelfa Construction v State Rail Authority of NSW

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State of affairs essential to performance

Contract specifies certain method of performance: frustration if that method becomes impossible.

Contract specifies no method of performance: frustration only if possible methods are radically different from intended one; eg Codelfa Construction; Davis Contractors; Tsakiroglou

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Codelfa Construction v State Rail Authority

Contract between Codelfa and SRA to build a new railway line in Sydney, entered into on the mutual assumption that: Codelfa would work around the clock (3 shifts a day, 6 days a week

without restriction as to Sundays), the work would make a lot of noise and disturbance (close to

residential areas); and no injunction could be granted to restrain this work.

Injunctions were obtained (re: noise and other nuisance) from local council and residents, preventing work at night and on weekends. This meant that Codelfa couldn’t carry out the works by the method intended, and would incur additional costs.

Did the granting of the injunction frustrate the contract?

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Codelfa Construction v State Rail Authority

The contract was frustrated - the injunctions made the situation radically or fundamentally different from the situation contemplated by the parties when entering into the contract.

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Codelfa Construction v State Rail Authority

cl8(2)(c):“The operation of all plant and construction equipment shall be such that it does not cause undue noise, pollution or nuisance. This may

require the use of sound insulated compressors and air tools, silencers on ventilating fans and

restrictions on the working hours of plant or such other measures as approved by the engineer. The

contractor shall not be entitled to additional payment in the engineer requires that measures

be taken to reduce noise and pollution.”

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Tsakiroglou v Noblee Thor

Contract to ship nuts from Port of Sudan to Hamburg.

Suez Canal closed due to military crisis, but the nuts could have been shipped via Cape of Good Hope and still be delivered on time (although more than twice as long and more expensive).

Sellers did not ship the nuts.Was the contract frustrated by the closure of the

Suez Canal?No frustration - not sufficiently different to be ‘a

radically different thing’.

27Discuss:

Oct 1899: D sold P a cargo of cottonseed “to be shipped by the steamship Orlando at Alexandria during the month of January 1900”.

Dec 1899: Orlando went aground in Baltic Sea and could not get to Alexandria in January.

contract frustrated? see Nickoll & Knight v Ashton, Edridge & Co [1901] 2 KB 126

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Has the entire basis of the contract disappeared?

See the “Coronation cases”: Krell v Henry,Herne Bay Steamboat v Hutton

also, Brisbane City Council v Group Projects

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Frustration of purpose

Performance no longer needed by recipient.

Generally no frustration:Herne Bay Steam Boat Co v Hutton

Exceptions:• Krell v Henry• Brisbane City Council v Group Projects

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Krell v Henry

Contract to rent rooms on Pall Mall on days the coronation procession of King Edward VII would pass by.

Coronation did not take place as scheduled (although it was still perfectly possible to rent and use the rooms).

The contract was frustrated – the coronation procession was the foundation of the contract - the purpose of the contract had disappeared.

The cancellation of the coronation could not reasonably be supposed to have been in the contemplation of the parties.

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Criticisms of Krell v Henry

Didn’t the parties implicitly contemplate the possibility of the coronation not taking place or the route changing?

What is the alternative view of what the ‘basis of the contract’ was?

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Herne Bay Steam Boat v Hutton

Contract for the hire of a boat to view the naval review (part of King Edward VII’s coronation festivities) and to view the fleet.

Coronation and naval review cancelled.Contract was not frustrated. The naval

review was not the foundation of the contract. They could still view the fleet.

The object of the hire becoming limited was at the risk of the boat hirer.

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Brisbane City Council v Group Projects

Brisbane City Council and Group Projects entered into a contract in relation to particular land.

Brisbane City Council was to re-zoned the land as residential (so that Group Projects could sub-divide and develop it).

Group Projects was to do various works if the land was re-zoned (eg build roads, footpaths, drains, plant trees) and much of the work to be done was next to the land to be re-developed, not on it.

After the contract was entered into, the land was compulsorily acquired by the government for a school site. The land was re-zoned but was owned by the government.

Brisbane City Council wanted Group Projects to proceed with the promised works.

Group Projects claimed that the contract was frustrated.

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Brisbane City Council v Group Projects

Contract was frustrated – the compulsory acquisition of the land was a fundamentally different situation from that contemplated at time of contract. It had “wholly destroyed Group Projects’ commercial purpose in undertaking any obligations at all”.

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Has the subject matter of the contract become illegal?

See Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd

36Illegality

In cases of impossibility and frustration of purpose, frustration doctrine allocates risks between the parties.

In cases of illegality, frustration doctrine primarily implements supervening law.

Important category is trading with the enemy; eg Fibrosa

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Fibrosa v Fairbairn

Contract between a Polish company and an English manufacturer for the purchase of machinery

Poland was invaded by Germany; then war broke out between England and Germany

The contract was frustrated.

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Fibrosa v Fairbairn

Clause 7:

“should despatch be hindered or delayed by … any cause beyond our reasonable control including … war… a reasonable extension of time shall be granted”

What was the effect of clause 7?

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Discuss

Mal enters into a contract with Zoe to charter a cargo ship. Both parties are aware he needs to charter the ship urgently in order to make a delivery of cattle to Indonesia. Just before Mal takes possession of the ship, the Federal Government unexpectedly places an immediate ban on the export of live cattle to Indonesia as a result of animal cruelty concerns.

Is the contract frustrated?

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Frustration is not readily found

Frustration is not easy to make out.

A contract is not frustrated just because it has become more difficult or more expensive, or a party has disappointed expectations. Hardship is not enough.

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Limitations on frustration

No frustration by supervening event that:

was caused by the fault of party who seeks to rely on

frustration (“self-induced” frustration).

Risk assumption:

contract expressly provided for;

There was an implied assumption of risk.

was foreseeable at the time of the contract

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Limitation no. 1

The parties must not have allocated the risk of the frustrating event

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Implied assumption of risk – famous example

“…a lady going to a dressmaker and ordering a dress as a wedding dress, both the intending bride and the dressmaker being aware that the dress was required for, and only for, the purposes of a wedding between the customer and a particular man. The dress is made and delivered. The wedding goes off without “default’ of the lady. No one would suggest that the lady is under no liability to pay for the dress, or even that she was entitled to cancel the order if the dress was only partly made… The true position, all would agree, is that the promise to pay is absolute”.

Latham CJ in Scanlan’s New Neon Ltd v Tooheys Ltd

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Discussion

Company entered into contract to lease neon signs to Toohey’s hotels for 5 years (from 1937 – 1941).

In 1942 the NSW government made illumination of external lights illegal (wartime order).

Toohey’s couldn’t illuminate the neon signs.

Was the contract frustrated?

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Limitation no. 2

The event must not have been foreseeable by the parties at the time they entered into the contract

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Limitation no. 3

The frustrating event must not be the fault of the person seeking to rely on it.

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Discuss:

• contract for shipment of soya beans from China to Sweden

• due to carrier’s fault, ship reached Europe in late Sept, rather than mid-July, 1939

• WWII broke out on 3 Sept; UK government ordered discharge of cargo at Glasgow

• contract frustrated? see Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196

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Discuss:

• contract for lease of farm requires

tenant “to reside constantly at the

farmhouse”

• tenant is sentenced to 4 years’

imprisonment for shooting his wife

• contract frustrated?

• see Sumnall v Statt (1984) 49 P &

CR 367

49Consequences of frustration

Consequences under the common law (now overridden by statute)

Upon frustration, the contract is automatically terminated.

rights and responsibilities accrued prior to frustrating event are enforceable; most future ones are not. Chandler v Webster

But see Fibrosa re: total failure of consideration.

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Consequences of frustration

Consequences under the common law (now overridden by statute)

Under the common law, ‘losses lie where they fall’ (per Chandler v Webster), which can lead to injustice where one party had to perform prior to frustrating event while other party’s performance was due thereafter (eg. Chandler v Webster).HOWEVER:

This rule is subject to the ‘total failure of consideration’ rule (Fibrosa). If no consideration has been given for the payment it must be repaid, which can lead to injustice where a payee has spent advance payment on preparing performance.

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Cutter v Powell

Cutter dies ¾ of the way through voyage (this was a frustration of the contract).

The contract was entire and Cutter’s wife was not entitled to any payment for the work he performed on the voyage.

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Chandler v Webster

Another “Coronation case”. Contract to hire a room to view the coronation procession for

£1411.15s. The plaintiff paid £1001, and the balance of the purchase price was

due, before the date of hire / frustration of contract. The Coronation, and the procession, were cancelled. The contract was frustrated. The plaintiff claimed the return of the £1001 as a total failure of

consideration. The defendant claimed payment of the balance of the contract price. On frustration “losses lie where they fall”. Total failure of consideration doesn’t apply. The plaintiff couldn’t recover the £1001 he had paid, and was

required to payment of the rest of the contract price that had accrued.

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Fibrosa v Fairbairn

Contract between a Polish company and an English manufacturer to sell machinery.

Poland was invaded by Germany; then war broke out between England and Germany.

Was the contract frustrated? Paid 1000 pounds of 1600. The payment was for the machinery. Machinery

never delivered – therefore total failure of consideration for the payment and it had to be returned.

Fact that time and money spent on making machinery was irrelevant.

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Consequences of frustration

Consequences: Australian Consumer Law and Fair Trading Act 2012 (Vic)

Section 36 money that was paid before the contract was

frustrated must be repaid, and money that was owing before the contract was

frustrated need not be paid. Section 37 However, if the recipient incurred expenses related to

the contract, and the court considers it “just” in the circumstances, it can allow retention or recovery in whole or part up to the total amount that was paid or owing.

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Consequences of frustration

Consequences: Australian Consumer Law and Fair Trading Act 2012 (Vic)

Section 38 If one of the parties has received a non-

monetary but nonetheless valuable benefit before the contract was frustrated, the other party will recover an amount that the court considers “just” having regard to all the circumstances of the case.

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Consequences of frustration

Consequences: Australian Consumer Law and Fair Trading Act 2012 (Vic)

S35(3): Excluded contracts

Legislation does not apply to:

Charter-parties (except a time charter-party or charter-party by way of demise)

Any contract (other than a charter-party) for the carriage of goods by sea

Any contract of insurance (with exceptions)

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Discuss:

D agrees to perform in concert promoted by P

Authorities ban use of intended venueAt that time, P has paid $412,500 to D and

should have paid another $362,500P has incurred expenses of over $450,000D has incurred expenses of $50,000Any claims? see Gamerco SA v ICM/ Fair

Warning (Agency) Ltd [1995] 1 WLR 1226

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Quick Quiz

Choose the best answer:

If Ned, in NSW, agrees to sell 100 tonnes of wheat to Vicki, in Victoria, the contract may be frustrated if:

(a) The Victorian government bans the import of wheat from New South Wales;

(b) Ned sells all his wheat to Queenie, in Queensland;(c) Ned’s wheat crop fails;(d) There is a rail strike; or(e) The price of wheat increases by 40%.

from Carters Guide to Australian Contract Law

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Quick Quiz

Choose the best answer:

Katie grants a licence to occupy her city apartment to Jon so that Jon can view the Sydney marathon and parade of athletes. She gives Jon the key to the apartment. The contract is frustrated if:

(a) Katie changes the locks on her city apartment;(b) The Sydney marathon is cancelled;(c) The parade of athletes is cancelled;(d) The Sydney marathon and parade of athletes are cancelled;

or (e) It rains on the day of the marathon.

from Carters Guide to Australian Contract Law

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What do you need to know?

1. The modern day test for frustration, and how to competently and accurately apply and distinguish the facts of similar cases to reach a reasoned conclusion about whether that test is satisfied in any given scenario;

2. Whether any facts in a scenario will prevent a finding of frustration from being made out; and

3. What the consequences of a frustrating event will be both at common law and under statute.

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Discussion: 2009 Q1(b)

Owen owns three boats moored off Port Melbourne. Their names are Albatross, Boar and Caesar. He runs a business of renting the boats out for cruises on Port Phillip Bay. His customers are individuals who hire a boat for private events, and businesses which offer cruises to paying clients. Advise Owen as to his rights and obligations under the following contracts that he has entered into.Advise Owen as to his rights and obligations under the following contract that he has entered into:On 1 October 2009, Owen enters into a contract with Berta who hires the Boar for her birthday party on 15 October 2009. Assume this is a time charter-party agreement. Owen agrees to hire out the Boar to Berta on 15 October from 10am to 7pm, and to decorate the boat in a certain style. Berta agrees to pay a deposit of $100 immediately and further $400 on 15 October. Berta pays the deposit as agreed. On 14 October, Owen decorates the Boar as specified in the contract, which costs him $150. On the night of 14 October, the Boar is struck by lightning and suffers severe damage, even though Owen has taken all reasonable precautions to protect his boats against lightning. The Boar is unfit for any voyages until complete repair, which will take three months. Berta demands that Owen pay back the $100 that she has paid.

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Acknowledgments and Copyright

Thanks to Sirko Harder, Mark Davison and Rebecca Giblin for the use of their slides.

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