TUTORIAL 8

PERFORMANCE, BREACH AND FRUSTRATION

Next week: SR3, 2p.m. hour and a half lecture. E-mail my first term contract grade to

tutor. Also make sure I read Achileus – get citation off Manav

Reading:

McKendrick: Cases and Materials Chs. 21 & 22

Important Cases:

Taylor v Caldwell (1863) 3 B& S 826

The claimants entered into a contract to hire the ‘Surrey Gardens and Music Hall’ from the defendants for four grand concerts and fetes. Before the date of the first performance, the Hall was destroyed by fire without the fault of either party. The claimants argued that the defendants were in breach of contract by failing to supply the Hall as promised.Court held that Caldwell didn’t have to pay damages for breach. Court created the doctrine of frustration. Ground of frustration = impossibility.

Krell v Henry [1903] 2 KB 184

Involved the hire of a flat to see the coronation procession as it went by. Court said the illness of the king meant the purpose of the contract was frustrated because there was no other reason for hiring the flat.

Herne Bay Steamboat Co v Hutton [1903] 2 KB 683

The defendant hires a boat from the claimant in order to take passengers to see the naval review which the king will be presiding over. The review is cancelled but the fleet of ships is still there.

Held that the contract is not frustrated. Court said that it was still possible to see the fleet. King’s presence is incidental to this contract – its not radically different from that that was contracted for.

There seems to be contradiction between these two cases. The flat could still be used to live in just as the boat could still be used to see the fleet so should frustration apply? This case is more likely to be followed than Krell v Henry.

Fibrosa Spola Akcyjna v Fairburn Lawson Combe Barbour [1943] AC 32

English and polish companies. Contract entered into in 1939 – war is declared and Germany invades Poland. Britain then declared war on Germany and as a consequence all contracts between England and Poland became illegal. Held that the contract is frustrated because it was legally impossible to carry on with the contract.Doesn’t matter if the parties make a provision for what was going to happen eg. It will delay delivery until after the conflict because the government intervention means frustration is essential.

In this case, £1000 had been paid in advance of delivery. Question is what happened to that money – do English company keep it? Court said that the money would not normally be recoverable. But at common law, it is possible to recover the money but its an action in restitution – the money just has to be given back, there is no compensation element at all, just

the return of the money. The legal ground for this is because the consideration under the contract has totally failed.IMPORTANT TO REMEMBER. ‘Total failure of consideration’. – if you think about consideration, what we’re talking about the bargain – part of this, the part that makes it enforceable, has actually failed.

Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] A.C. 524 CANADA PRIVY COUNCIL

The respondents were owners and the appellants were charterers of a steam trawler which was fitted with, and could operate as a trawler only with, an otter trawl. By the charterparty the vessel could be used only in the fishing industry. The charter party was renewed for a year from October 25, 1932. At that date both parties knew that a Canadian statute, which was applicable, made it an offence to leave a Canadian port with intent to fish with a vessel using an otter trawl, except under licence from the Minister. In March, 1933, the appellants applied to the Minister for licences for five trawlers which they were operating. The Minister intimated that only three licences would be granted, and requested the appellants to name the three trawlers in respect of which the three licences should be granted. The appellants named three trawlers, excluding the trawler now in question, and accordingly licences were granted for those three only. The appellants thereupon claimed that they were no longer bound by the charterparty, and to an action claiming the charter hire pleaded that the charterparty had become impossible of performance and their obligations under it ended:-

There had been no frustration of the charterparty, as the absence of a licence was due to the election of the appellants, who remained liable for the hire.

The courts suggested that a force majeure clause be include in contracts like this. A force majeure clause is there for the event that things such as acts of god can be dealt with.

J. Lauritzen A.S. v Wijsmuller B.V. (The Super Servant No. 2) [1990] 1 Lloyd’s Rep 1

The defendants agreed to transport the claimants’ drilling rig using a special vessel. The defendants agreed that the rig would either be transported by Super Servant One or Super Servant Two. The defendants decided to use Super Servant Two, and committed Super Servant One for use in another contract. The Super Servant Two sank, and the defendants argued that the contract was frustrated – Super Servant Two sank was ground of frustration.

Court of Appeal reviews self-induced frustration law. Wijsmuller is not responsible for the sinking of Superservant Two. However the fact that Wijsmuller chose Superservant Two over Superservant One meant that he was involved in the frustrating event. He can’t rely on frustration – he puts himself into a frustrated situation. Part of the definition of frustration is that the event occurs outside the fault/control of either of the parties.

Gamerco SA v ICM[1995] 1 WLR 1226

The claimants agreed to promote a concert to be held at a stadium in Madrid by the rock persona of the defendants, Guns N’ Roses. Engineers reported that the stadium could not safely be used, and the authorities revoked the claimants’ permit to use the stadium. The concert was cancelled. The claimants had incurred expenses of $450,000, had paid the defendants $412,000 and were under an obligation to pay a further $362,500 at the time of cancellation. The defendants had incurred expenses of $50,000.

Held: the contract was frustrated. The claimants could recover their $412,000, and were no longer liable to pay the $362,000. In the circumstances, and having particular regard to the expenses incurred by the claimants, no deduction for the defendants’ $50,000 expenses would be made under the proviso to s 1(2). (since the claimants had incurred higher expenses)

Cutter v Powell (1795) 6 TR 320

(Entire obligations rule) Cutter contracted with Powell to be the second mate on a voyage from Jamaica to the UK. 7 weeks into the voyage, Cutter dies and the widow sued Powell for 7 weeks worth of wages.

Question for court: is it possible for widow to claim these wages that Cutter was due before he died? No. Widow can’t recover anything because Cutter has not fulfilled the entire obligations under the contract. The contract was for the voyage – he doesn’t get to the UK so he hasn’t fully performed.

Sumpter v Hedges [1898] 1 QB 673

Sumpter agreed to build two houses and stables on Hedges’ land and the cost of the contract is £565. Sumpter failed to complete the work so Hedges finished it using all the materials that Sumpter had left on the premises. Sumpter tried to recover the amount of money that represented the work that he actually had done.

Court said that Sumpter could not claim anything because Hedges had no option but to continue and finish the building. What he could get however was a sum representing the building materials that Hedges used. Court said it was always open to Hedges to get materials from somewhere else and he didn’t have to use the ones on the land – by using materials on the land, Hedges had saved an expense he would otherwise have incurred.

Hoenig v Isaacs [1952] 2 All ER 176

A contract for the decoration of a flat. The price for the contract is £750 but it was found on completion of the decorating that £55 of adjustments needed to be made. Is the £750 due or not then?

Argued that because there are defects in the decoration, the contract has not been fully performed so under Cutter v Powell no money is due. Court said that was really unfair because the proportion of work that had actually been carried out was substantial. What the court did was invent the doctrine of substantial performance – the claimant in this case could recover £750 - £55 for damage caused. Important thing to check here is whether the contract is substantially performed or not – in order to do that you must look at what the contracts for and what has been provided.

Doctrine of substantial performance

Bolton v Mahadeva [1972] 1 WLR 1009

Contract for the installation of central heating. The system is actually installed but it doesn’t heat to a decent temperature and there are fumes. The argument put before the court is that its like Hoenig v Issacs, the contract is substantially performed so should get a proportion representing that performance. Court said no and said this is a contract for central heating. Central heating is supposed to heat – its not heating therefore nothing has been gained from this contract.

Court says in order to determine substantial performance: Look at: Nature of defect, cost of rectifying them and contract price.

Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235

Contract said ‘it is a condition of the contract that two representatives will visit to check on the progress of manufacturing in the factory’. Court said you can call it what you want but this is clearly not a crucial term of the contract.

"Use of the word condition is an indication - even a strong indication … but it is by no means conclusive." (per Lord Reid.)

Think Lombard North Central v Butterworth though were paument was ‘of the essence’

Hong Kong Fir Shipping v Kawasaki [1962] 2 QB 26

(Innominate terms – classified as an innominate term at the time the contract is formed and the remedy for breach of that term is decided at the time of breach)

Hong Kong Fir entered into a charter party for hire of a ship for two years. They were doing the hiring. They breached the term in the contract that said the vessel had to be sea-worthy by failing to provide competent staff on the ship. The other party wanted to terminate the contract for breach of condition.

Diplock LJ gave an important judgment and completely revisited all the law on the designation of terms of contract. Said there are always certain commercial terms of the contract that are really difficult to classify at the time the contract is made because you can’t tell how important they’re going to be until the date of the breach. They are intermediate/innominate term because the consequences of breach could only be predicted at the time of breach.

He designated the ‘sea-worthiness’ term as an innominate term – a ship can be unseaworthy if it has a huge hole in the side but it can equally be unseaworthy if its missing its medical kit because the definition of seaworthy is an insurance driven one so it can be unseaworthy for a huge range of means. Its impossible at the time the contract is made to see how important the term will be so have to shift the remedy. Says you need to check whether the consequences of the breach are so serious that the contract should be terminated.

A lot of precedent re warranties and conditions so use of this is limited.

Photo Productions v Securicor Ltd [1980] AC 827 (read Lord Diplock's speech)

- Contract contains both primary and secondary obligations.

- Primary obligations are those undertaken in the contract, when breached they give rise to a secondary obligation to pay damages.

- Termination relieves parties of their primary obligations to perform the contract.

- It operates prospectively and must be distinguished from rescission (e.g. for misrepresentation).

Courts said that you’ve breached the term of the contract. This gives rise to a secondary right which is the right to terminate the contract. However, the right to terminate is at the election of the innocent party and that election must be communicated to the other party to the contract. It must be clear and unequivocal. Nature of clear and unequivocal election is discussed below. If you choose as an innocent party to carry on with the contract, that is your choice. You might also lose the right to elect to terminate also (s 35A Sale of Goods Act 1979)

White and Carter (Councils) v McGregor [1962] AC 413

It is a rule of Scottish, and semble likewise of English, law that if one party to a contract repudiates it, the other is at liberty nonetheless to perform it, if he can do so without the co-operation of the repudiating party, and if he does so he can insist on the repudiating party paying in full the amount due under the contract. He is not obliged to accept the repudiation and sue for damages. Per Lord Reid: It might be different if it is proved that the contractor had no interest at all in enforcing the contract – the ‘legitimate interest’ test – it was open to the respondent to seek to show that the appellants had no legitimate interest in continuing with the performance of the contract .

A Scottish garage proprietor, by his agent, agreed with a Scottish advertising contractor for the display of advertisements in Scotland for his garage for three years. The fee was payable weekly and the contract provided that if any payment was four weeks in arrear the whole three years' payments should immediately become payable. On the same day the proprietor wrote to the contractor to cancel the contract. The contractor refused to do so, displayed the advertisements in accordance with it, and when the first payment was four weeks overdue, sued for the whole three years' payments.

Held that the whole was due.

Claim in debt = claim that the debtor owes to the creditors a liquidated sum of money. Is not subject to the requirement that the creditor must have mitigated his loss. This claim was accepted. Damages would not be accepted because claimant for damages has a duty to act reasonably to mitigate their loss. Here, the claimant has done this.

Claim in damages = an unliquidated claim to be compensated for the loss that the innocent party has suffered as a result of breach – under a duty to mitigate loss though.

*You must bring the Law Reform (Frustrated Contracts) Act 1943 with you to the tutorial*

In your reading consider the following issues:

When is a contract discharged by frustration?

"Frustration of a contract takes place when there is a supervening event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature…of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances” per Lord Simon of Glaisdale National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 at 700

Three elements:1. Unforeseen event2. (Unforeseen event) takes place after the contract is formed3. Set of events makes the contract illegal, impossible or radically different from that

which the parties contracted for.

NB: if unforeseen event takes place prior to contract formation, its highly likely to be mistake/failure of consideration

Davis case: If an event if foreseeable enough then one cannot rely on frustration. Court did not let them escape from a bad bargain by means of frustration.

Why are the courts reluctant to allow parties to rely on the doctrine?

Doctrine is quite rare and it’s a strategic choice to plead frustration – if you are a party in breach of contract, it will be a good thing to plead frustration because then you won’t have to pay damages.The remedy is tough – the contract is discharged and the parties do not have to continue with their obligations under the contract – means that any sums which are due after the event do not have to be paid. The parties are deemed to have withdrawn their consent for the continuation of the contract after the frustrating event and they are relieved from their contractual performance.You can’t contract out of a frustrated contract – exclusion and limitation clauses don’t work.

Distinction between common law and statute:Common law: parties are discharged of their obligations after the frustrating event.Contract is discharged from the frustrating event – the parties are only relieved of their obligations after the frustrating event, not before. If any money is actually due/services prior to the frustrating event, they must still be undertaken. If money is paid over prior to the frustrating event, what happens to it? One party has got a benefit under the contract which they wouldn’t otherwise have got. (Note Fibrosa though)

Law Reform Frustrated Contracts Act 1943Section 2(5) – there are a number of contracts that are not covered by the Act – most important ones are shipping contracts and insurance contracts. In terms of things we will encounter, exclusion for contracts for specific goods are also not covered by the Act – the notion of ‘specific goods’ has a technical meaning – means goods which are identified and in existence at the time the contract is made. Contracts for a specific thing eg. For the Mona Lisa, there is only one.Section 1(2) – applies where a payment has been made or is due prior to the frustrating event. Essentially allows three things in these circumstances:

1. Payer to recover any payment they’ve actually paid over prior to the frustrating event (Sums actually paid will be recoverable

2. If there are any sums due prior to the frustrating event but they’ve not been paid then the payer doesn’t need to pay them. (Sums owed cease to be payable)

3. Allows the court if they consider it just and reasonable in all the circumstances of the case to offset any claim for expenses against the sum that is due/has been paid prior to the frustrating event. (Expenses incurred by the payee may be retained or recovered)

Second part: section 1(3)Deals with situations where a benefit has been incurred by one party but there is no deposit due prior to the frustrating event.This is not about damages – it is not punitive, nor about punishing someone who has done something wrong.Where one party has received a valuable benefit prior to the discharge, the other party will be able to recover a sum that the court considers just having regard to the circumstances of the case: s. 1(3)Think gardening paid for at the end.

Does performance have to be “impossible”?

No – that is only one of the grounds of frustration.

Frustration of purpose is another ground – all around King Edward VII

Supervening illegality - Look at what the original obligations of the parties were under the contract: assess whether those obligations are now substantially/radically different as a result of the event.

How relevant is the obligation in the contract to this issue?

When is the frustration seen as being self induced?

Probably the most important limitation on the availability of frustration. When the courts are looking for frustration, they are looking to see if the thing that happened was something for which the parties had not prepared. The event really does have to be unforeseeable. Due to catastrophic effect of frustration, the courts are reluctant to find it.

What is the ‘entire obligations’ rule? How have the courts mitigated the effects of this rule?

Idea: ‘Entire obligations rule’: if a shoe maker agrees to make a pair of shoes, he can’t offer you one shoe and ask you to pay half the price.

Based on Cutter v Powell

Doctrine of substantial performance: Hoenig v Isaacs

Idea of new contract: Sumpter v Hedges

Severable obligations – very common in commercial contracts – the contract will separate every obligation of the parties out and they will act as individual contracts (Statutory example = section 30(1) in Sale of Goods Act 1979

Three ways in which a contract may be breached: breach of condition, breach of warrantee and breach of an anonimate term. In the event of a breach of condition you are entitled to withdraw from the contract and claim damages. In the event that a warrantee is breached you are entitled to claim damages, but not to terminate the contract.Ways of determining what a condition is: Intention of the parties, common law and statutes (e.g. sale of goods act sets out examples) The court has the final say in what is a condition and what is not even if the parties call it a condition in the contract. An anonimate term is a term that was not present when the contract was formed.

Under what circumstances will a party be entitled to terminate a contract for breach?

What is an anticipatory breach? What was the principle laid down in White and Carter v McGregor ([1962] AC 413) and how have the courts mitigated the operation of this principle?

Occurs when there is a threat to breach the contract prior to the date when performance is due. It can either be a threat/fact that one party is aware that the other will be unable to perform on the due date. The reason why this is anticipatory is because the date of performance is later.

Once this happens, you as the innocent party can then decide whether to carry on with the contract or stop it on the 25th. You have the right to elect whether to terminate early or carry on.

Can only choose to carry on if you don’t need my cooperation (will see that in White and Carter v McGregor) and if its equitable to do so (The Dynamic).If you choose to carry on then they’re always a chance that I won’t perform on the due date. If I don’t perform on the due date for the reason that was apparent prior to the due date then you lose your right to terminate.

White and Carter v McGregor – the right of the innocent party to affirm the contract and continue with performance.

But rule doesn’t apply where the innocent party is dependent upon the co-operation of the party in breach in order to be able to continue with performance

The courts have adopted a broad notion of co-operation so that the innocent party can neither require the active nor the passive co-operation of the party in breach Hounslow London Borough Council v Twickenham Garden Developments

Other exception = ‘legitimate interest’ requirement. If it can be shown that if one party has no interest in the contract a remedy cannot be claimed. The party in breach must prove that their is no legitimate interest.

Please come prepared to discuss the following question:

Lady Puritan commissions Pecassi, a celebrated and popular artist, to paint a portrait of her husband Sir Sleeper for £9000. She pays £500 deposit to allow Pecassi to purchase basic materials to begin his work. Pecassi buys paint, brushes and an easel so he can start work: he spends £350. After the painting is begun, Lady Puritan finds out Sir Sleeper has been having an affair with his secretary, Maureen. Lady Puritan declares that she will have nothing more to do with him and instructs Pecassi to stop work immediately. But Pecassi, encouraged by Sir Sleeper who continues to come for sittings, finishes the picture and delivers it to Lady Puritan together with a bill for £8500. She is furious.

Advise Lady Puritan. Would your answer differ is Lady Puritan had not paid a deposit for the painting

Doesn’t want to pay for the painting and doesn’t want the painting either.

Frustration: automatically discharges her obligations to pay him and potentially she wouldn’t have to take the painting from him. Potentially she could also recover her deposit. Leading case: Taylor v Caldwell.

Need to say why you’re discussing frustration first.

Definition of frustration from Taylor v Caldwell:

Three elements:1. Unforeseen event2. (Unforeseen event) takes place after the contract is formed3. Set of events makes the contract illegal, impossible or radically different from that

which the parties contracted for.

Nothing has been destroyed.

Krell v Henry: frustration of purpose.Whether the purpose for which the contract has been entered into has been frustrated or not. Contract is for a painting, and she gets a painting. BUT you could say that the purpose of the contract is to be a material representation of her love for him. But Krell v Henry is a shared purpose as well….

Herne Bay Steamboat Co v Hutton – difference lies in whether there is any other reason for contracting. Could say in this case there are two purposes – to show her love but also she gets an expensive painter hence the painting might be valuable in the future: have an instrinsic value itself.

Does the Law Reform (Frustrated Contracts) Act 1943 apply?Section 2(5)c) doesn’t apply as goods haven’t perished.

1(2) – could recover the deposit ‘all sums paid before the time when the parties were so discharged- italic part is the offset idea – shes allowed to recover the £500 subject to his £350. She can

therefore recover £150.- Case on this section = Gamerco

If theres no deposit paid then she has a valuable benefit due to the painting and you use section 1(3).

If you think hits Hern Bay stop and don’t go onto the Act.

If she doesn’t claim frustration, Pecassi will sue her for breach and she will have to pay damages – damages will be the price of the painting.

Its breach because she is breaching her obligation to pay – this is a condition of the contract. It’s a condition because of Coucher v Hill (CHECK)

If it is a breach of condition, the painter is entitled to the remedy to terminate the contract and can keep the painting AND he can sue for damages.

Her obligation to pay is due when the painting is finished. She says he should stop painting before he has finished the painting – she threatens non-payment as anticipatory breach (Oster v DelaTure)

White and Carter v McGregor – the right of the innocent party to affirm the contract and continue with performance.Party needs cooperation from other party – painter doesn’t need it here – only Sir Sleeper.Needs a legitimate interest in carrying on with the contract – Dynamic gives you the three criteria to use legitimate interest test.

If he terminates early, you will then need to go on and calculate his damages from that point – discuss remedies – say what the measure of damages is (damages put you forward), causation etc.

If he has a right to election and can carry on, your date for setting the damages is different and assess damages from then.

a) discuss frustrationb) breach – what breach is, is it a conditionc) discuss anticipatory breach and its effectd) discuss damages.