Legalease Home page
Blog

 

From the King’s Coronation to Coronavirus - am I still bound by my contract?

A tale of frustration and force majeure - Part 2

The coronavirus pandemic has imposed enormous strain on countless contractual relationships. Every sphere of economic activity and every type of contract has been affected: sale of goods, supply of services, landlord and tenant, insurer and insured and so on. If it becomes difficult or impossible for one of the parties to the contract to perform, do they have any get-out or relief under English law?

Part 1 of this article discussed contracts which contain some form of clause designed to meet these circumstances, often called a 'force majeure' clause. Part 2 considers when English law will treat a contract as “frustrated” and release the parties from their obligations, where the contract makes no provision for what is to happen in the event of unforeseen circumstances, or the clause does not cover such circumstances.

The so-called “doctrine of frustration of contracts” has been developed by a series of cases decided by the English courts in the last 150 years or so. For centuries, the common law rule was that when a party by his own contract created a duty or charge upon himself, he was bound to make it good, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract. This was the principle upheld in the famous case of Paradine v Jane [1647] 4 (KB). During the English Civil War, Royalist forces under the command of Prince Rupert, the nephew of King Charles I, took possession of land owned by Paradine which he had leased to Jane. When after three years the land was released, Paradine sued Jane for the unpaid rent. The defendant pleaded that he had been expelled through no fault of his own. The court ruled however in favour of the plaintiff Paradine.

Prince Rupert

Prince Rupert

It was not until the landmark case of Taylor v Caldwell [1863] (see below) that the harsh rule in Paradine v Jane was abrogated by the developing principle of frustration of contract. To this day, this principle causes controversy among lawyers who debate its exact scope. Because the doctrine has been developed in case law and not enshrined in an Act of Parliament, there is no single authoritative statement. However one judicial expression of the doctrine stands out, stated by Lord Radcliffe in the House of Lords in Davis Contractors Limited v Fareham Urban District Council [1956] AC 696]:

“..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.”

As often is the case, it is one thing to state the principle however clearly, and another thing to apply it. According to decided English law cases, events which have caused contracts to be frustrated may be grouped into five categories, although the events may well fall into more than one category:

*  Destruction of the subject-matter of the contract;

*  Frustration of common purpose;

*  Incapacity or death;

*  Delay;

*  Supervening illegality

Destruction of the subject-matter of the contract

If the contract expressly identifies a building, equipment or other thing as essential to the contract and the thing is destroyed through no fault of either party, the contract will be frustrated because it is impossible to perform. This was as established in the landmark case of Taylor v Caldwell [1863] EWHC QB J1 in which promoters booked four days of concerts in a music hall which burned down.

Surrey Music Hall

Surrey Music Hall which burned down

Contracts for the sale of goods are governed by specific legislation, the Sale of Goods Act 1979 (as amended). In a contract for the sale of specific goods (i.e. goods means goods identified and agreed on at the time the contract is made), and without any fault on the part of the seller or buyer the goods subsequently perish before risk in the goods has passed to the buyer, the agreement is avoided. On the other hand, a contract for the sale of non-specific goods will not be avoided if the goods are lost, or destroyed before risk has passed to the buyer.

Frustration of common purpose

A contract is frustrated if the supervening event renders the performance of the bargain "radically different", when compared to the considerations in play at the conclusion of the contract.

On 24 June 1902, King Edward VII fell ill with acute appendicitis. The coronation of the King and his Queen, Alexandra, was to have taken place two days later and the ceremonies including a grand procession had to be postponed at short notice. This caused a crop of about ten cases to come before the courts.

In Krell v Henry [1903] 2 KB 740, Mr Henry agreed to hire Mr Krell’s chambers on the third floor of a building in Pall Mall for the days of 26 and 27 June when the coronation processions were due to pass through. The agreed hire fee was £75 and Henry paid a deposit of £25. Krell knew that Henry’s purpose was to view the processions but the hire agreement made no mention of them. When the processions were cancelled, Henry failed to pay the balance of £50. Krell sued Henry in the High Court for the unpaid £50. The judge found that that there was an implied condition in the contract that the procession should take place, and gave judgment in favour of Henry. The judgment was upheld by the Court of Appeal.

56A Pall Mall

56A [now 56-58] Pall Mall: third floor chambers booked fo view the Coronation procession

Copyright: of Google Street View gratefuly acknowledged

Chandler v Webster [1904] 1 KB. 493 was in a way a mirror image of the Krell v Henry situation. Mr Webster agreed to let Mr Chandler (who was acting for a customer) a room on Pall Mall to watch the King's coronation on June 26 1902 for £141 15s. Chandler paid £100 on 19 June but then the procession was postponed and he sued to recover the money. Both the High Court and Court of Appeal held that he was not entitled to recover the £100.

In both these cases, the frustration of the contract left the parties “where they were”. Mr Krell could not recover the balance of the hire fee and Mr Henry did not get his £25 deposit back.  Mr Chandler could not recover the large advance he had paid for the hire of the rooms. It was not till 1943 when Parliament addressed this problem by enacting the Law Reform (Frustrated Contracts) Act 1943 (see below).

In another Coronation case, the postponement of the King’s coronation did not cause the contract to be frustrated. In Herne Bay Steam Boat Company v Hutton [1902] 2 KB 683, Mr Hutton hired a steamboat in order to go to Spithead and to view the royal review of the fleet. The Court of Appeal held that the entire purpose of the contract had not been frustrated by the cancellation of the coronation because even though the King was not present to review the fleet, the cruise around the fleet was still possible.

A contract will not be frustrated if the potentially frustrating event was in some way induced by one of the parties. For example, a claim of frustration was denied in Ocean Tramp Tankers Corporation v V/O Sovfracht (“the Eugenia”). The charterer of the 'Eugenia' allowed it to travel through the Suez Canal (in reach of the charter agreement) where the vessel became stuck due to the closure of the canal during wartime.

Incapacity or death

A contract may become frustrated where a person's or group of persons’ services under contract become unavailable because of death, illness or other incapacity.. This principle is applicable where the contract is for the performance of personal services. If the services could be performed by any skilled individual, frustration would not apply.

Robinson v Davison (1871) LR 6 Ex 269 was a case involving a pianist who became too ill to perform before the date fixed for the concert. The contract was held to be frustrated. A similar result in a more recent case occurred in Condor v The Baron Knights [1966] 1 WLR 87. Condor signed to play drums for the Knights seven days a week. He became ill and was advised to restrict his playing to four nights a week. The judge ruled his contract was frustrated because of his illness and the group could not practicably employ a replacement drummer; using a new drummer on the nights when Condor was unable to perform as the replacement would have to learn the group’s routines.

A normal contract for employment may be frustrated even though contract may be terminated by notice. In Notcutt v Universal Equipment Co[   [1986] EWCA Civ 3, the employee, a skilled metal worker, suffered a coronary infarct and could no longer work. The Court of Appeal ruled that the inability of the employee to perform contractual duties frustrated his contract of employment and prevented him from entitlement to sick pay.

Delay

 

A contract may be frustrated by events which cause excessive delay in its performance. In Bank Line Ltd v Arthur Capel and Co [1918] UKHL 1, Capel & Co chartered a ship from the Bank Line in February 1915, for a term of twelve calendar months from the time the vessel should be delivered and placed at the disposal of the charterers ready to load at a coal port in the United Kingdom; the vessel to be employed in trade between safe ports. However, the government requisitioned the ship in May 1915. The ship owners decided to sell the ship, conditionally upon it being released, which occurred in September 1915. The charterers sued to recover damages for failure by the ship owners to deliver the ship.

The High Court decided the case in favour of the ship owners, ruling that the requisitioning of the vessel had put an end to the contract. However, the Court of Appeal (on a majority) reversed this decision. On appeal, the House of Lords restored the High Court’s decision. They found that the chartering contract had been frustrated because if the ship owners had been obliged to charter the ship when it was released by the government, in September it would be on a “contract differing most materially from that provided for by the original charter.”

Whether the delay is sufficient to frustrate the contract will depend on the circumstances and it is often a difficult judgment to make. The courts will not readily release parties from their contractual obligations. Mere economic hardship or a bad bargain will no frustrate a contract frustrated. In Davis Contractors v Fareham UDC [1956] AC 696, a year after WW2 the contractors had agreed with Fareham Council to build 78 houses within eight months at a cost of £85,836. Due to the general post-war lack of skilled labour and other reasons, the construction took not eight but twenty-two months. The contractors were paid the £94,42s 4d which was the price after increases and adjustments provided in the contract. The contractors however claimed that the contract had been entered into on the footing that adequate supplies of labour and material would be available to complete the work within eight months, but, contrary to the expectation of both parties, there was not sufficient skilled labour and the work took twenty-two months, and that this delay amounted to frustration of the contract.

Supervening illegality

A contract is frustrated if the purpose for which it was made becomes unlawful. This is exemplified by a number of wartime cases. Metropolitan Water Board v Dick, Kerr and Company, Limited :[1917] UKHL 2 concerned a contract for the construction of a reservoir and the works started just after war broke out in 1914.  However, in 1916, the government using wartime emergency powers ordered the contractor to cease work. The House of Lords held the contract had been frustrated.

The World War II case of James B. Fraser & Co v Denny, Mott & Dickson [1944] AC 265] concerned an agreement between two parties for carrying on dealings in imported timber. The importation of timber was made illegal by emergency legislation. Neither party was in default. The House of Lords ruled that the parties’ mutual obligations had been brought to an abrupt stop by the legislation. One of the parties claimed that one of the stipulations of the contract was severable from the rest and remained enforceable; the option to buy a timber yard. The court ruled that even though the purchase would not infringe the emergency legislation, the option could not be upheld because the main purpose of the contract had been frustrated.

An English law contract will not be enforceable where performance of the contract is forbidden by the law of the place where it must be performed; see Ralli Brothers v Compania Naviera Sota y Aznar [1920] 2 KB 287 in which an agreement for the payment in Spain of chartered freight beyond the maximum permitted by Spanish law was held not to be enforceable in England. Lawyers argue whether this principle is part of the law of frustration or a rule of private international law.

As noted above in connection with frustration of the common purpose of a contract, a contract will not be frustrated if the illegality was self-induced by one of the parties. In Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] UKPC 1, charterers hired a steam trawler fitted with an otter trawl from Ocean Trawlers Ltd. Both parties knew that the use of such a vessel without a licence was illegal. The charterers applied for five licences from the Canadian government. The government subsequently decided that only three licences would be granted and the charterers chose not to name for one of the licences the ship they had chartered from Ocean Trawlers. When sued by the owners for unpaid charter fees, the charterers claimed the charter had been frustrated. The Supreme Court of Nova Scotia rejected that defence. The UK Privy Council upheld that decision, agreeing with the Canadian appeal court that the problem had resulted from the deliberate act of the charterers in selecting the three trawlers for which they desired licences to be issued.

Even if it becomes illegal for one party to continue to perform a contract, the contract may not be frustrated if there is a lawful way in which the contract may be performed. In the recent case of Canary Wharf (BP4) T1 Ltd and others v European Medicines Agency [2019] EWHC 335 (Ch), the European Medicines Agency (EMA) held a 25 year lease of premises at 25/30 Churchill Place, Canary Wharf. In August 2017, less than three years into the lease, the EMA wrote to its landlords stating that if and when Brexit occurred, it would be treating that event as a frustration of the lease. The lease allowed the EMA to assign or sublet the premises, albeit subject to onerous conditions.

Rather than wait for Brexit, the Canary Wharf landlord applied to the High Court for a declaration that the withdrawal of the United Kingdom from the European Union and/or the relocation of the EMA would not cause the lease to be frustrated. The EMA argued that the lease had been frustrated by reason of frustration of common purpose and frustration by supervening illegality; the UK’s withdrawal from the European Union would cause legal consequences preventing the EMA from continuing with the lease. The consequences included that the EMA would:no longer enjoy certain privileges and immunities under the EU treaties, necessary to its proper functioning and independence, not be able to be lawfully located in the premises and not have legal capacity to meet its obligations under the lease.

In a detailed judgment covering a thorough review of the facts, parties’ arguments and the law, Mr Justice Marcus Smith concluded that the lease expressly contemplated that the EMA might and certainly as a matter of law could entirely divest itself of the lease of the premises. Assignment or sub-letting of the whole of the premises was expressly contemplated and provided for, albeit subject to onerous conditions. The lease would therefore not be frustrated on the withdrawal of the United Kingdom from the European Union.

25-30 Churchill Place

25/30 Churchill Place is one of the most energy efficient office buildings on the Canary Wharf Estate to date. ARCHITECT: Kohn Pederson Fox Associates

AREA NIA: 583,420 sq ft. SPECIFICATION: Steel framed building clad with glazed stainless steel curtain wall.

Copyright of Canary Wharf Group plc gratefully acknowledged.

 

Adjustment of pre-paid sums and compensation for expenses

The effect of the frustration of the contract is to discharge or terminate the contract and the parties are released from any further obligations to one another. Under previous common law rules, the parties were left 'where they are', so that a party who had paid some part of the price in advance could not recover the money, and a party who had spent time and/or money in performing the contract but had not been paid would not be compensated. This clearly led to injustices.

The case of Chandler v Webster [1904] 1 KB. 493 referred to above is an illustration of the injustice. Mr Chandler had paid £100 in advance for the Pall Mall rooms but when the contract was frustrated due to the postponement of the Coronatino, he was not allowed to recover the payment.

It was not until  the enactment of the Law Reform (Frustrated Contracts) Act 1943 that the courts were given power to make orders to adjust the financial consequences of a frustrated contract so as to avoid injustice to a party. The Act provides:

*  all money paid to any party in pursuance of the contract before the time when the contract was frustrated is recoverable from that party; in the case of money which was payable at that date, the money ceases to be so payable;

*  however, if the party to whom the money was payable incurred expenses before the time of frustration 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 that party to retain or, as the case may be, recover the whole or any part of the money paid or payable, but not exceeding the amount of the expenses incurred;

*  if any party to the contract has, by reason of anything done by any other party for the purpose of, the performance of the contract, obtained a valuable benefit before the time of frustration, the other party may recover from the recipient of the benefit such amount (if any), not exceeding the value of the benefit to the recipient, as the court considers just, having regard to all the circumstances of the case.

The Act states that the court must not take into account any insurance benefit which a party to the contract becomes entitled to as a result of the circumstances giving rise to the frustration unless the contract expressly imposed an obligation to insure.

The following types of contract are excluded from the Act:

*  ship charters (other than time limited and 'bareboat' charters);

*  contracts of insurance;

*  contracts for the sale of specific goods which have persished( as they are covered by section 7 of the Sale of Goods Act 1979).

 

Conclusion

Whether the coronavirus pandemic has caused a contract to be frustrated will depend on the circumstances. Decided cases give examples of when an event is or is not treated as frustrating the contract. Many of these cases have gone to one or more levels of appeal, with judges at each level sometimes taking a view different from the one below, and sometimes differing from each other!

[Page updated: 07/06/2020]

 

<Back to Part 1