Contract- Impossibility

Contracts and risk allocation

• if license required for imports and exports in relation to other countries isn’t granted then contract won’t be able to be performed

• allocation of risk refers to allocation of problems and deciding whose problem it is

• international SOG contracts; contract will say which party is responsible for licenses

• generally, exports is the sellers and imports is the buyers

Different circumstances:

• law may have to intervene which affects risk allocation

• risk of anything preventing performance lies on seller

• law can only intervene in contractual vacuum

• if goods destroyed before contract concluded then neither party is responsible as performance is impossible

• NEVER APPLY FRUSTRATION TO INITIAL IMPOSSIBILITY

• NEVER APPLY COMMON MISTAKE TO SUBSEQUENT IMPOSSIBILITY

Doctrine of frustration of contract

• look to see if contract gives the answer first

• if not, either non-performance excused by law (frustration) OR non-performance not excused by law (breach)

• frustration deals with circumstances in which the contract isn’t performed as it should be but the law excuses the non-performer and the consequences aren’t the usual remedies for breach

Old approach:

• absolute contracts = no role for the law to play

Exceptions:

• personal performance and key person dies or incapacitated so that cannot perform

• supervening illegality e.g. war between countries

Birth of the doctrine: Taylor v Caldwell

• A to render services to B

• Parties knew that performance by A was dependent on the existence of an item

• implied term that non-performance excused

• premises destroyed not at fault of either party

Post Taylor v Caldwell

• was there a broad principle?

• could we have more information on ‘foundation’?

Doctrine of frustration definition

Idea that change of circumstance post formation of the contract can have the consequences of absolving the parties of their obligations of performance under the contract

Davis Contractors v Fareham [1956]

FIND INFO

Factors of the doctrine of frustration

• An event that occurs after the contract is concluded

• Produces a radical change in obligations, such that you cannot reasonably say this is what the parties contracted for and it is unjust in all the circumstances to hold the parties to their bargain

• Impossible or illegal to perform, not merely unprofitable

• 'non haec in foedera veni' = 'it was not this that I promised to do'

• Always remember the contract

Frustration of purpose: Krell v Henry [1903]

• purpose of contract has disappeared

• coronation procession

• people with houses overlooking sold premises for day

• owner granted license to use flat

• king fell ill and coronation didn’t happen

• contract frustrated

Time charter cases

• right to exploit income potential and say what terms of contract are

• C forfeits extra profit but offload the risk of losses and in return gets a guaranteed income

• in the essence of the contract that there is an allocation of risk

• can have time charter party for any period of time

Herne Bay v Hutton [1903]

• contract for use of ship for 2 days to sell tickets

• COA said it was time charter party

• if COA had declared it frustrated, it would deny the nature of the contract

• contract remains intact

Specific goods

goods identified and agreed on at the time; contract of sale is made (includes an undivided share, specified as a fraction or percentage of goods identified and agreed on)

Unascertained goods

• any goods that don’t meet the definition of specific goods

• if you can’t identify which goods were the subject matter of the contract then they are unascertained

What applies

• S.7 only applies to specific goods and goods that perish

• under that requirement, 3 requirements satisfied

• all other cases involving specific goods and all cases of unascertained goods; whether frustration depends on common law

3 requirements

• is seller liable for short delivery? NO (Howell v Coupland 1876)

• does seller still have to deliver whatever is left? YES (Sainsbury v Street 1972)

• does buyer have to accept lesser quantity? No

Time when contract frustrated

• need impediment to performance of such duration as to generate radical change of obligations

• sensible commercial prognosis test, there will be a sufficient length of delay

• if point reached where delay may occur, contract is frustrated even if delay doesn’t actually occur

self-induced frustration

• BREACH

• wrongdoer cannot benefit from own wrongdoing

• cannot generate impossibility of performance and then claim frustration

Maritime National Fish v Ocean Trawlers [1935]

• fishing company running fleet of 5 trawlers; company owns 3 and 2 are chartered

• government introduced license to be required

• company needs 5 licenses but only awarded 3

• 2 to own boats and 1 to chartered boat, claims frustration for 2nd charter

• self induced, could have allocated license to 2nd boat

• Professor Treitel: if you change to all 5 chartered, can’t say frustration is self-induced

Lauritzen v Wijsmuller (The super servant two) [1990]

• contract for movement of large structure using super servant one or two

• allocated one of the tugs; contract says performance by either boat

• SS2 can’t perform so SS1 could but has it’s own contract

• leave SS1 with og contract and claim frustration

• contract not frustrated as could have used either; Judge didn’t agree with Treitel and said there’s still a choice

• tug company wins because of another clause (Force Majur) COA said clause applied

What happens to the contract?

Regulated by common law - up until point something went wrong, there is no need to interfere.

Contract ceases to bind the contract for the future

Automatic prospective discharge

Automatic = no need for either party to do anything

Prospective = discharge for the future only

3 Questions about money

• 1. What happens to money that has already been paid over when the contract is frustrated?

• 2. Where payment has accrued due and owing at the time the contract frustrated but money not yet paid, does it still have to be paid?

• 3. Where at the time of frustration a payment was not yet due under the contract, can any claim nevertheless be brought for payment of all or part?

Answers from common law

• The loss lies where it falls!!

• Money already paid is retained and money payable remains payable

• Subject to total failure of consideration

• Money neither paid nor payable cannot be claimed

• Problematic as financial consequences are accidental

Statute on money

• Parliament said common law approach wasn't satisfactory

• Only concerned with the financial consequences of frustration

• Law Reform (Frustrated Contracts) Act 1943

• sometimes apply statute, sometimes common law

• DO NOT TAKE INSURANCE INTO ACCOUNT

• not a right to recover expenses but it’s a possibility via the courts

Law Reform (Frustrated Contracts) Act 1943

• Ignore insurance: s 1(5)

• Section 1(2) answers questions 1. & 2.

  • Sums paid to be repaid; sums payable cease to be payable

  • Proviso if expenses incurred in performance of contract, court may, if thinks it just, permit retention of money paid and recover money payable up to maximum of expenses

Section 1(3) answers question 3 about money

• Permits claim against sums neither paid nor yet payable under the contract at the time of the frustrating event.

• Court discretion to award ‘such sum … as the court thinks just’ out of the sums neither paid nor payable, not exceeding the value of the benefit conferred on defendant by claimant’s work in performance of the contract.

• Take into account (a) expenses incurred, bearing in mind sums retained or recovered under s 1(2), and (b) the impact of the frustrating event on the benefit conferred under the contract.

Limitation: discharge by performance in whole or part

• Discharge by performance

  • Once contract fully performed, too late for frustration

• Severable contracts

  • Each severable part is discharged by performance of that part

  • Frustration cannot affect any discharged part

  • Law Reform (Frustrated Contracts) Act  1943, s 1 does not apply to discharged parts of a severable contract: s 2(4)

  • S 1 does still apply to those severable parts not yet performed in whole or part

  • How to recognise a severable contract?

    • Contract identifies portions of performance separately paid for

Discharge of performance

• We do not apply the law of frustration to discharged by performance matters, you don't apply section 1(2) of the frustrated contracts act under financial obligations under stage 1

• 1943 Act doesn't abolish the common law in their entirety

• Act applies is vast majority where contract is frustrated.

• 1943 Act applies unless the statute says it doesn't apply

Law Reform act is inapplicable to:

• Contracts within SGA, s 7

• Contracts for the carriage of goods by sea

• Voyage charterparties

SGA S.7 specific goods that have perished

• Total failure of consideration

• Only certain goods can be used

Doctrine of common mistake

• CAN'T APPLY FRUSTRATION

• Assuming impossibility is there at the time contract is performed

• Initial impossibility/common mistake

Bell v Lever Bros [1932]

• Mistake of both parties ‘as to the existence of some quality which makes the thing without the quality essentially different from the thing as it was believed to be.’

• Implied condition such that, if untrue, ‘the new state of facts makes the contract something different in kind from the contract in the original state of facts.’

• company enters into amicable agreement to terminate directors contracts

• company buys them out then discovers they are in breach

• if company knew, they would have fired them

• sued directors, contract effected by common mistake as it was unnecessary to buy them out

• directors hadn’t realised breach so win as HOL say arguments insufficient

Trietels test - matter only

• ‘The matter may be tested by imagining that one can ask the parties, immediately after they made the contract, what its subject-matter was. If, in spite of the mistake, they would give the right answer the contract is valid at law.’

• Need to give the same answer

• Answer given must be wrong so you have a sufficiently fundamental mistake

• Problematic issue then is not an identifying characteristic