English Law of Contract Discharge II October 12 th 2007

1. English Law of ContractDischarge IIOctober 12th 2007 Research Fellow Herman Bruserud

2. I. Introduction • Last time (Sept. 28th) • Discharge generally • Different instances of discharge • Performance • Agreement • Realization of condition subsequent • Breach • Today: Discharge by frustration

3. II. A short Recap on Discharge Generally • What does discharge mean? • Primary obligations, and sometimes secondary obligations, come to an end • Must be distinguished from void or voidable contracts

4. III. What is Frustration – Introductory Remarks • The crucial question: When s supervening event occurs, after the conclusion of the contract, which renders performance in one way or another more difficult or affects a party’s interest in the contract – does it affect the parties’ rights and obligations? • The doctrine of frustration gives, under certain circumstances, effect to such circumstances to the contract

5. III. What is Frustration – Introductory Remarks • The situations generally: Obligations owed by A to B Party A Party B Obligations owed by B to A A supervening event affects the performance of a party’s own obligations May be frustration by ”impossibility” A supervening event affects a party’s interest in the other party’s performance May be frustration of purpose

6. III. What is Frustration – Introductory Remarks • The consequences generally: A frustrating event Both parties’ future obligations are automatically (by law) discharged Conclusion of contract The parties’ obligations + The Law Reform (Frustrated Contracts) Act 1943

7. IV. Frustration by subsequent “impossibility” • The most important instances • Impossibility • Unavailability of the subject matter • Illegality • Impracticability • The general starting point: ”Perhaps it would be simpler to say at the outset that 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 performance is called for would render it a thing radically different from that which was undertaken by the contract (…). But, even so, it is not hardship or inconvenience or material loss itself which calls the principle into play. There must be such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.” (Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council)

8. IV. Frustration by subsequent “impossibility” • Impossibility • Physical destruction of the subject-matter (Taylor v Caldwell) • Death of a party to a personal contract (Stubbs v Holywell Railway Co.) • Performance must be made by a certain person, due to essential skills required • Temporary impossibility • If the impossibility is of such a nature and (likely) duration that the performance would be radically different (Pioneer Shipping v BTP Tioxide Ltd)

9. IV. Frustration by subsequent “impossibility” • Unavailability of the subject matter • Distinguished from strict impossibility: Performance not strictly impossible, while the thing still exists, but can not be put into its intended use • Garmerco SA v ICM/Fair Warning (Agency) Ltd, Bank Line Ltd v Arthur Capel & Co., Robinson v Davison • Temporary unavailability • Marshall v Harland & Wolff Ltd., Gryf-Lowczowski v Hinchingbrooke Healthcare NHS Trust, Jackson v Union Marine Insurance Co. Ltd, F. A. Tamplin Steamship Co. Ltd v Anglo-Mexican Petroleum Products Co. Ltd

10. IV. Frustration by subsequent “impossibility” • Unavailability of the subject matter (cont.) • Unavailability of the agreed means of performance • Is the means of performance… • …agreed? (Nickoll & Night v Ashton, Edridge & Co., Jackson v Union Marine Insurance Co. Ltd, Howell v Coupland) • …just planned or anticipated? (Blackburn Bobbin Co Ltd v T. W. Allen & Sons Ltd, Tsakiroglou & cO. Ltd v Noblee Thorl GmbH) Frustrated when unavailable Not frustrated when unavailable

11. IV. Frustration by subsequent “impossibility” • Illegality • Change in the law after the contract was concluded – making the performance illegal • Event after the conclusion of the contract – making the performance illegal (ex. trading with the enemy – Fibrosa SA v Fairbairn Lawson Combe Barbour Ltd) • Temporary illegality (National Carriers Ltd v Panalpina (Northern) Ltd)

12. IV. Frustration by subsequent “impossibility” • Impracticability? • Not technical impossibility, but performance would impose a different burden from what was initially contemplated on the performing party • English law reluctant to accept impracticability as a basis for frustration • Davis Contractors Ltd v Fareham Urban District Council • The English courts enjoys no power to adjust the contract to the changed circumstances – frustration only possibility

13. IV. Frustration of purpose • Destruction of the common purpose of the contract • Narrowly interpreted Krell v Henry Herne Bay Steam Boat Co. v Hutton

14. VI. Instances where the Doctrine of Frustration will not Operate • Express provisions on the materialized risk • The doctrine of frustration will not operate when it comes to risk materialization provided for in the contract – a matter of construction • Especially important: Force majeure clauses • Foreseeable risks – not provided for in the contract • The fact that a certain risk could have been foreseen may exclude the operation of the doctrine of frustration • Probably: Whether the risk was, and to what extent it was, foreseeable operates as a factor when determining the allocation of the materialized risk more than a stringent rule of law

15. VI. Instances where the Doctrine of Frustration will not Operate • Event due to breach or exercise of choice of a party • The doctrine of frustration only operates where the supervening event was beyond the control of the parties • Where performance has become impossible due to a breach – the breaching party can not claim that the contract has been frustrated (The Eugenia, Ocean Tramp Tankers Corporation v V/O Sovfracht) • Where the impossibility of performance is self-induced – the self-inducing party can not claim that the contract has been frustrated (Maritime National Fish Ltd v Ocean Trawlers Ltd, J. Lauritzen AS v Wijsmuller BV, The Super Servant Two)

16. A frustrating event Both parties’ future obligations are automatically (by law) discharged Conclusion of contract The parties’ obligations VII. Legal Effects of Frustration • The general starting point – automatic discharge (by law) of both parties obligations (primary and secondary):

17. VII. Legal Effects of Frustration • The general starting point can however cause hardship: Frustrating event Purchase price due and paid Purchased goods are due to be delivered The purchaser has paid the price, but does not get the agreed counter performance

18. VII. Legal Effects of Frustration • Financial implications of the common law rule • Money paid or payable in advance • Originally: Money paid before frustration could not be recovered (and money not actually paid (but due for payment before frustration) remained payable despite the frustration) • However: Fibrosa SA v Fairbairn Lawson Come Barber Ltd • Money paid (or payable) could be recovered where there was a total failure of consideration – restitutionary remedy • Payment on completion situations • Originally: Partly performance before frustration – no payment for this performance if the contract was frustrated Need for reform: The Law Reform (Frustrated Contracts) Act 1943

19. VII. Legal Effects of Frustration • The Law Reform (Frustrated Contracts) Act 1943 • Money paid or payable in advance – sec. 1 (2) • Money paid is recoverable, and money payable need not to be paid • Exception: The court has the discretion to allow the recipient of the advance payment to retain or recover a just part of the payment if the recipient has incurred expenses directly related to the performance of the contract • Cannot exceed the total amount payable in advance under the contract • Cannot exceed the value of the actual expenses incurred

20. VII. Legal Effects of Frustration • The Law Reform (Frustrated Contracts) Act 1943 (cont.) • Performance conferring a valuable benefit and the award of a just sum – sec. 1 (3) • If performance confers a valuable benefit to the other party before the frustrating event – the court has the discretion to award a just sum • May not exceed the value of the benefit received • The court must consider the expenses incurred by the party receiving the benefit • The court must consider the effect of the frustrating event on the benefit received • Certain limits to the field of application of the act (see Poole p. 492)

21. VIII. Appendix I – Sec. 1 (2) “All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as 'the time of discharge') shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable:  Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in, or for the purpose of, the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.”

22. VIII. Appendix II – Sec. 1 (3) “Where any party to the contract has, by reason of anything done by any other party thereto in, or for the purpose of, the performance of the contract, obtained a valuable benefit (other than a payment of money to which the last foregoing subsection applies) before the time of discharge there shall be recoverable from him by the said other party such sum (if any), not exceeding the value of the said benefit to the party obtaining it, as the court considers just, having regard to all the circumstances of the case and, in particular, -     (a) the amount of any expenses incurred before the time of discharge by the benefited party in, or for the purpose of, the performance of the contract, including any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under the last foregoing subsection, and (b) the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract.”