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Discharge of contracts. Law of Contract LW1154 BCL 2005-2006. Books. Clark chapter 18 McDermott chapters 19-21. Introduction: When is performance due?. The problem . Suppose a contract has been made … … and one party is concerned that the other might not perform

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discharge of contracts

Discharge of contracts

Law of Contract

LW1154

BCL 2005-2006

books
Books
  • Clarkchapter 18
  • McDermott chapters 19-21
the problem
The problem
  • Suppose a contract has been made …

… and one party is concerned that the other might not perform

  • What is the earliest point at which legal action lies for non-performance?
    • The parties can specify exactly when the performance falls due
    • But what if they do not?
full performance by plaintiff
Full performance by plaintiff
  • The plaintiff\'s position is strongest if s/he has fully performed
  • If the other party should have paid money, then there is an action for that precise sum
  • If the other party should have provided property or services, then they can be sued for damages, or perhaps for an order for specific performance
but if neither side has performed
But if neither side has performed ...

… then we must determine the relationship between the two performances

  • The two performances may be independent ...
  • … or dependent on one another …
  • … or one may be a condition precedent to the other
independent promises
“Independent promises”
  • Each side must perform regardless of the other
  • Non-performance by the other is no defence
  • This may be agreed expressly …
  • … and is the normal presumption in landlord-and-tenant law
dependent promises
“Dependent promises”
  • Each is bound to perform only if the other does
  • One side can enforce only if they are themselves ready and willing to perform
  • This is the normal presumption where simultaneous performance is possible …
  • … eg sale of goods
slide9

Sale of Goods Act 1893 s 28 Unless otherwise agreed, delivery of the goods and payment of the price are concurrent conditions, that is to say, the seller must be ready and willing to give possession of the goods to the buyer in exchange for the price, and the buyer must be ready and willing to pay the price in exchange for possession of the goods.

condition precedent
“Condition precedent”
  • One side is bound to perform immediately …
  • … but the other need not perform until the first does
  • This is the presumption where simultaneous performance is impossible
example trans trust v danubian trading 1952 2 qb 297
ExampleTrans Trust v. Danubian Trading [1952] 2 QB 297
  • International sale of steel
  • Seller to perform by supplying appropriate shipping documents to buyer’s bank
  • Buyer to perform by arranging for the bank to pay against those documents
  • Obviously seller could not perform until buyer had performed
condition precedent1
“Condition precedent”
  • Hence the general notion of the “entire contract” …
  • … under which one side must perform, but the other need only pay on completion …
  • Partial performance earns nothing
  • This the presumption for contracts involving services
example cutter v powell 1795 101 er 573
ExampleCutter v. Powell (1795) 101 ER 573
  • Undertaking by a sailor to serve on a voyage from Jamaica to Liverpool
  • Payment 30 guineas, but only if he completed the voyage
  • He died in the course of the voyage
  • His widow could recover nothing
example cutter v powell 1795 101 er 5731
ExampleCutter v. Powell (1795) 101 ER 573

However,

  • It is not clear what the reasoning was
  • Legislation would now reach a different result on the facts
  • Yet the general principle is correct …
  • … particularly if the rate paid under the contract is a high one
entire contracts
“Entire contracts”

Avoidance of the rule:

  • The courts sometimes hold that substantial performance is enough to earn payment; or
  • The court may sever the contract into smaller pieces
substantial performance
“Substantial performance”
  • Payment of the contract price is subject to a condition precedent, that the other side should substantially perform
  • So nothing is due if the work is not substantially finished
  • If it is, then the price is due …
  • … though the other side may sue for any uncompleted aspects
example 1 hoenig v isaacs 1952 2 all er 175
Example 1 Hoenig v. Isaacs [1952] 2 All ER 175
  • Contract to redecorate a flat for £750
  • The work was done, except for minor defects (which would cost £55 to put right)
  • The decorator could sue for £750 …
  • … though he was liable to pay back £55 in compensation
example 2 bolton v mahadeva 1972 2 all er 1332
Example 2Bolton v. Mahadeva [1972] 2 All ER 1332
  • Contract to install central heating system for £560
  • The system as installed produced a small amount of heat, though also fumes
  • It would cost £174 to correct
  • The work was held not to have been substantially completed
severance
“Severance”
  • The contract is divided into several distinct parts …
  • … each of which is an entire contract
  • So each substantially completed part earns the price for that part
  • Contracts will be severable if the parties so intend …
  • … or if statute says so
severance party intention
“Severance” – party intention
  • An intention to sever can be stated expressly in the contract
  • It can also be inferred from other provisions
  • eg Payment at piece rates (Brown v. Wood (1854) 6 Ir Jur 221)
severance statute
“Severance” – statute
  • eg Sale of Goods Act 1893 s 30 (delivery of wrong quantity of goods)
  • eg Apportionment Act 1870 s 2 (“rents, annuities, dividends, and other periodical payments”)
meaning of discharge
Meaning of “discharge”
  • Some events effectively terminate or “discharge” the contract
  • The contract is effective up to the point of discharge, and rights created before discharge remain in force
  • Discharge may itself create rights
  • But once discharged, the contract can create no more rights
what sort of events discharge a contract
What sort of events discharge a contract ?
  • Agreement
  • Breach of contract
  • Refusal to perform (“anticipatory breach”)
  • Failure of contingent condition
  • Frustration of contract
discharge by agreement
Discharge by agreement
  • An agreement to terminate a contract is usually effective
  • An agreement to vary the terms may also be effective
  • Doubts as to which of the two the parties have agreed on are a matter for construction of the agreement
validity of the agreement to discharge
Validity of the agreement to discharge
  • Statute may require writing eg Statute of Frauds (Ireland) Act 1695
  • There must be an intention to affect legal relations
  • Consideration is required eg Williams v. Roffey [1991] QB 1
waiver
Waiver
  • But even without consideration, one party may waive their rights
  • So if one party abandons his or her rights …
  • … s/he can only assert them at a later stage on giving reasonable notice
  • egCharles Rickards v. Oppenheim [1950] 1 KB 616
discharge by breach
One party commits a serious breach of contract

The other party (“the innocent party”) may then escape the contract

This remedy for breach has great practical importance …

… as it can be exercised without going to court

Discharge by breach
effect of discharge for breach
Rights created before the time of discharge remain valid

Rights which were to arise after the time of discharge never arise at all

Effect of discharge for breach?

The contract is valid up to the point of discharge, but no further

effect of discharge
Effect of discharge
  • At the instant of discharge ...
  • … the duty to perform the contract (“the primary duty”) …
  • … is replaced by a duty to compensate for the lost performance (a “secondary duty”)
example hyundai v papadopoulos 1980 1 wlr 1129
ExampleHyundai v. Papadopoulos [1980] 1 WLR 1129
  • Ship-builders must complete the vessel according to a timetable
  • Buyers must pay as each stage in the timetable is reached
  • Suppose buyers fail to make one payment when due …
  • … whereupon ship-builders discharge the contract
example hyundai v papadopoulos 1980 1 wlr 11291
ExampleHyundai v. Papadopoulos [1980] 1 WLR 1129
  • The contract is valid before discharge
    • So money payable before discharge remains payable, including the missed installment
  • The contract is gone for the future
    • Neither side need perform further, but the ship-builders may sue for their loss of profit
example hyundai v papadopoulos 1980 1 wlr 11292
ExampleHyundai v. Papadopoulos [1980] 1 WLR 1129
  • So the contract creates rights up to the point of discharge, but not after it
  • The innocent party also gets a right to sue for loss of profit …
  • … which they may or may not exercise, as they wish
which breaches justify discharge
Which breaches justify discharge?
  • The parties will sometimes settle this question in advance …
  • … by agreeing that certain breaches merit cancellation
  • The courts will usually respect such an agreement
intention unclear
Intention unclear?
  • Where it is not absolutely clear what the parties meant …
  • … then the court will go for the reasonable solution
  • But in principle the question is one of construction (=interpretation of the contract)
  • … not reasonableness
example wickman v schuler 1974 ac 235
ExampleWickman v. Schuler [1974] AC 235
  • English firm agrees to act as distributor of a German firm\'s products
  • “It is a condition of this contract” that six particular customers were to be visited every week
  • A majority held that this did not imply a right to cancel if not all the visits were made
no intention
No intention?
  • If the parties have not specified the effect of breach, then perhaps the Oireachtas has done so
  • Statute therefore says exactly what effect breach has …
  • … unless the parties override this by their own express provision
example sale of goods act 1893 ss 11 15
ExampleSale of Goods Act 1893 ss 11-15
  • This classifies sale-of-goods terms as:
    • “conditions”, breach of which allows the innocent party to discharge the contract; or as
    • “warranties”, breach of which gives rise to damages only
what if neither the contract nor the oireachtas has said
What if neither the contract nor the Oireachtas has said ?
  • Until relatively recently, the courts followed the classification in the Sale of Goods Act 1893 …
  • … and held that all terms were either “conditions” or “warranties”
  • The court would classify the term by looking at its importance in the contract and to the parties
but then
But then ...
  • A re-think occurred in the Hong Kong Fir Shipping case [1962] 2 QB 26,involving the owners’ duty to provide a seaworthy ship to a charterer
  • This duty is in some ways important (eg there should be no holes in the hull)
  • But in some ways it is trivial (eg there should be sticking plaster in the medicine chest)
so as well as conditions and warranties
So as well as “conditions” and “warranties” ...
  • … there is a third class of term
  • (“intermediate terms” or “innominate terms” or even “Hong Kong Fir terms”)
  • Breach gives rise to a right of discharge only if the breach deprives the innocent party of the benefit they entered the contract to obtain
the test
The test
  • So if a contract term is of this third kind …
  • … then some breaches of it will give rise to a right to terminate, others will not
  • The magnitude of the breach is the main factor in determining its effect
example 1 the hong kong fir case itself
Example 1The Hong Kong Fir case itself
  • Two-year charter of an ocean-going vessel
  • The lack of seaworthiness led to delays of 20 weeks
  • The vessel was still clearly useable outside that period
  • The charterers were held unable to cancel
example 2 the hansa nord 1976 qb 44
Sale of citrus pulp, “good condition on shipment”

Breach: goods were overheated at the time of shipment

But buyers still used the pulp for the intended purpose

Again, no sufficiently serious breach

Example 2The Hansa Nord[1976] QB 44
example 3 aerial advertising v batchelor s peas 1938 2 all er 788
Batchelor’s paid their goods to be advertised by aerial banner

But the pilot mis-timed his flight, and advertised during a Remembrance day 2-minute silence

Example 3Aerial Advertising v. Batchelor’s Peas[1938] 2 All ER 788
example 3 aerial advertising v batchelor s peas 1938 2 all er 7881
Batchelor’s paid for good publicity …

… but got very bad publicity instead

Therefore they were entitled to treat the contract as discharged

Example 3Aerial Advertising v. Batchelor’s Peas[1938] 2 All ER 788
summary
Summary
  • If neither the parties nor the Oireachtas have said what the effect of breach is …
  • … then the court must classify the term as a condition, a warranty or a Hong Kong Fir term
  • If it is the last, then the court must also ask whether the effect of the breach justifies termination
classification of terms
Classification of terms

What factors are relevant in classifying the term?

  • Precedent
  • How important did the parties think the term was ?
  • What are the likely effects of breach ?
terms as to time
Terms as to time
  • In commercial cases, the presumption is that the term is a condition ...
  • ... that “time is of the essence”
  • egBunge v. Tradax [1981] 1 WLR 711
  • But any evidence of party intent is relevant
terms as to time1
Terms as to time
  • But a different attitude is taken in land transactions - the presumption is that time is not of the essence
  • This presumption can be rebutted by evidence of what the parties intendedegUnion Eagle v. Golden Achievement [1997] 2 All ER 215
terms as to time2
Terms as to time
  • Where time is not of the essence but there is a substantial delay …
  • … then either party can make time of the essence by setting the other a reasonable deadline
  • If the deadline is not met, then the contract may be terminated
  • eg Nolan v. Driscoll HC 25/4/78
exercising the right to terminate
Exercising the right to terminate
  • If a sufficiently serious breach has been committed …
  • … the innocent party has the right to discharge …
  • ... but the contract remains in force unless the right is exercised
  • It may be in the innocent party’s interests to keep the contract alive
the right arises only once the kanchenjunga 1990 1 ll 391
The right arises only onceThe Kanchenjunga [1990] 1 Ll 391
  • A charterer ordered a tanker to an oil terminal (Kharg Island) in a war zone
  • The ship-owner could have discharged the contract
  • But the ship-owner went along with this
  • So the right to discharge the contract was lost
exercising the right to terminate1
Exercising the right to terminate
  • An unequivocal declaration, that the contract is cancelled, is needed
  • It is not enough for the innocent party simply to protest at the breach …
  • … or to say that they are “really upset to receive notice of non-performance” Yukong Line v. Rendsburg Investments [1996] 2 Ll 604
can the right be exercised by silence
The right must be exercised unequivocally, and silence is rarely unequivocal

But sometimes silence can only mean one thing …

… and so silence can sometimes amount to an exercise of the right eg The Santa Clara[1996] AC 800

Can the right be exercised by silence ?
the reason given for discharge
The reason given for discharge
  • Does it matter why the innocent party decides to terminate the contract?
  • Most common law jurisdictions say that it does not matter at all …
  • … as the question is whether they had the right to terminate, not whether they were behaving reasonably
  • But Irish law takes a different line
the reason given for discharge1
The reason given for discharge
  • The Irish rule is that termination of the contract must be justified on the grounds given at the time, if at all …
  • … but if a “fundamental breach” is later discovered, termination can be based on thategHearn v. Collins HC 3 /2/98
  • For criticism see O’Dell [1998] Annual Review of Irish Law 146
does the innocent party have to terminate
Does the innocent party have to terminate?
  • The basic rule is that the innocent party has a free choice whether or not to discharge the contract
example white carter v mcgregor 1962 ac 413
ExampleWhite & Carter v. McGregor [1962] AC 413
  • A company ordered two years’ worth of advertising from an agency
  • Very soon afterwards, they purported to cancel, and never paid a penny
  • But the agency insisted on providing the advertising anyway
  • It was held that the agency were entitled to keep the contract in being, and claim the price
basic rule exceptions
Basic rule + exceptions
  • So the basic rule is that the innocent party does not have to terminate
  • But two exceptions are recognised:
    • Where the co-operation of both parties is needed
    • Where the innocent party has no legitimate interest in continuing
exception co operation needed
Exception: Co-operation needed
  • If a contract needs the co-operation of both parties …
  • … then the innocent party cannot proceed if the other party will not

eg contract of employment ...

  • … though perhaps in theory the contract can still be kept alive (Gunton v. Richmond LBC[1981] Ch 448)
exception no legitimate interest
Exception: No legitimate interest
  • Suppose the innocent party insists on performing, but this would force goods or services onto a party who has no use for them
  • The court may rule that there is no legitimate interest in so doing …
  • … and so the innocent party must terminate
exception no legitimate interest1
Exception: No legitimate interest
  • This doctrine is well established ...
  • … but it is not clear how the “legitimate interest” is defined …
  • … or whether there was such an interest in White & Carter v. McGregor itself
example the alaskan trader 1984 1 all er 129
ExampleThe Alaskan Trader [1984] 1 All ER 129
  • Charterers of a cargo vessel refused to take command of it according to the contract
  • The owners kept it crewed and available for the whole charter period
  • The Commercial Court said that there was no legitimate commercial interest in doing so
anticipatory breach
“Anticipatory breach”
  • Suppose performance is due on 1st September …
  • … then on 1st April, one side refuses to perform
  • There is not yet a breach of contract
  • But under the doctrine of anticipatory breach the refusal gives a right to terminate
the position is the same as on actual breach
The position is the same as on actual breach
  • The innocent party may either affirm the contract or discharge it
  • Discharge must be unequivocal; otherwise, the contract remains in force
  • The innocent party’s choice may be limited where there is no legitimate interest in keeping the contract in being
so the innocent party has a choice
They can ignore the refusal …

… so that the contract continues as if nothing has happened

Or they can accept the refusal ...

... so that the contract is discharged ...

... and the innocent party can sue for damages

So the innocent party has a choice
how serious a refusal to perform is needed
How serious a refusal to perform is needed?
  • Case 1: Refusal to perform any part of the contract
  • Case 2: Deliberately disabling oneself from performingany part of the contract

In both these cases, the innocent party may escape the contract

case 3 partial refusal to perform
Case 3: Partial refusal to perform
  • Where one side refuses to perform some part or aspect of the contract …
  • … the court will have to decide whether this can fairly be treated as a repudiation of the contract …
  • … or only as a minor breach
  • Various factors are relevant
case 3 partial refusal to perform1
Case 3: Partial refusal to perform

Relevant factors:-

  • Importance of the unperformed part
  • Whether the refusal to perform was in good faith
  • Whether the refusal was an isolated incident
  • The reasonableness of behaviour on both sides
example 1 carr v limerick vec 2000 elr 57
Example 1 Carr v. Limerick VEC [2000] ELR 57
  • P was employed by D as principal of a school, on a permanent basis
  • The school was then to be merged with another
  • P was ordered to report to the merged school for work
  • She refused
example 1 carr v limerick vec 2000 elr 571
Example 1 Carr v. Limerick VEC [2000] ELR 57

The Supreme Court held that she was not in anticipatory breach:

  • She had not been told what her new duties were
  • No attempt had been made to offer her a new principalship, or to negotiate a new job for her
example 2 house of spring gardens v point blank 1985 fsr 327
Example 2House of Spring Gardens v. Point Blank [1985] FSR 327
  • P licensed D to manufacture bullet-proof vests to P’s design
  • D stole P’s design, modified it slightly and manufactured their own vests
  • This was held to be an anticipatory breach of the licence contract
  • It was emphasised that D had used fraud
definition
Definition
  • Where the contract states that it is conditional on the happening of a certain event …
  • … then it is discharged as soon as it becomes clear that the event cannot occur
  • The precise effect of a condition is entirely a matter for the contract
different types of conditions
Different types of conditions
  • A condition may be a “condition precedent” (=the contract does not come into existence until the condition is satisfied) …
  • … or a “condition subsequent” (=the contract exists but is discharged if the condition cannot be satisfied)
different types of conditions1
Different types of conditions
  • A condition precedent may prevent a contract coming into existence at all …
  • … or it may be merely suspensory (=the contract exists, but neither side can sue until the condition is satisfied)
different types of conditions2
Different types of conditions
  • A condition may be for the benefit of both parties (in which case it operates automatically) …
  • … or for the benefit of one party only (in which case that party can dispense with compliance if they wish)
example o connor v coady 2003 iehc 77
ExampleO\'Connor v. Coady [2003] IEHC 77
  • Agreement for the sale of land
  • Contract was subject to the purchaser’s obtaining planning permission for the land within 4 months
  • At the end of the 4 months, permission had not been obtained
  • But the condition was obviously for the purchaser\'s benefit, and so he could waive it
the absoluteness of contractual obligations
The absoluteness of contractual obligations
  • Contracting parties are expected to do exactly what they said they would
  • Contractual duties are not simply duties of “best efforts” (unless they are agreed as such)
  • There is no general defence of unfairness or change-of-circumstance
when is a defence available
When is a defence available?
  • Where the parties have based their agreement on the existence of a certain state of affairs …
  • … but that state of affairs then disappears …
  • … then the contract has no application to the facts as they are …
  • … and is said to have been “frustrated”
example taylor v caldwell 1863 122 er 309
ExampleTaylor v. Caldwell (1863) 122 ER 309
  • Owners of a music hall agree to hire it
  • Before the start of the letting, the hall burns down
  • The contract assumed the existence of the hall …
  • … and so was discharged by the fire
when is a defence available1
When is a defence available?
  • So we look at the sort of facts the contract presupposes …
  • … and if those facts vanish, then the contract vanishes with them
  • There is no concern with fairness as such
  • Rather, the test is whether the facts have fallen outside those envisaged when the contract was made
slide89

“If ... a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point — not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation” (British Movietonenews v. London Cinemas [1952] AC 166)

relevance of the parties intention
Relevance of the parties’ intention
  • So we refer closely to the parties’ intentions …
  • … to determine what assumptions the parties were making …
  • … so that we can refuse to apply the contract where those assumptions no longer hold
need the frustrating event be unforeseen
Need the frustrating event be unforeseen?
  • The question is, what sort of circumstances the contract provides for
  • A failure to provide for certain events may (or may not) be because they were unforeseen
  • Frustration can certainly cover foreseen events, if the contract makes no provision for them
example 1 bank line v capel 1919 ac 435
Example 1Bank Line v. Capel[1919] AC 435
  • Charter of a vessel from April to April
  • The vessel was requisitioned, and not released until September
  • This was considered to make the charter an entirely different type of transaction
  • Therefore the contract was frustrated
example 2 neville v guardian 1995 1 irlm 1
Example 2Neville v. Guardian [1995] 1 IRLM 1
  • D owned a plot of land, and contracted with P for P to build on it
  • D undertook to secure access rights for a road to the land
  • However D failed to secure satisfactory terms for access, and cancelled the project
  • No frustration found
example 3 davis v fareham udc 1956 ac 696
Example 3Davis v. Fareham UDC [1956] AC 696
  • Contract to build an estate in 8 months
  • Due to labour shortages, it took 22 months …
  • … and involved much more expense than was originally estimated
  • Nonetheless, no frustration was found
  • Labour shortages were within the range of the parties’ contemplation
the doctrine is very hard to invoke
The doctrine is very hard to invoke
  • Most successful pleas of frustration are wartime cases …
  • … and most of those are about disruption to shipping
  • It is very hard to base frustration merely on changed economic conditions, however severe
example 4 the coronation cases
Example 4The coronation cases
  • These involve entertainments planned for the coronation of Edward VII …
  • … which were cancelled on his illness
  • Some are technically cases of Mistake
  • Some involve contract interpretation
  • A few involve (what we would now call) frustration
krell v henry 1903 2 kb 740
Krell v. Henry [1903] 2 KB 740
  • A flat was hired for a few days at a high rent
  • No motive was stated in the contract …
  • … but it was in fact to watch the coronation processions
  • Cancellation of the coronation was held to falsify an assumption underlying the contract, and hence to terminate it
herne bay steamboat v hutton 1903 2 kb 683
Herne Bay Steamboat v. Hutton [1903] 2 KB 683
  • A boat was hired to tour the fleet at anchor …
  • … at the time set for ceremonies to celebrate the coronation
  • But the contract was not held frustrated on cancellation of the coronation
  • Unlike Krellv.Henry, the arrangement was still a workable one
is krell v henry right
Is Krell v. Henry right?
  • The case has never been directly followed, and it has been criticised as often as it has been approved
  • It is not a case of impossibility
  • Nonetheless it seems defensible …
  • … as the holding of the coronation on the contract date was plainly a common contractual assumption
can all contracts be frustrated
Can all contracts be frustrated?
  • At common law, it was considered that leases could not be frustrated
  • But the English courts have departed from this (National Carriers v. Panalpina [1981] 1 All ER 161)
  • In any event, most Irish cases are covered by Deasy’s Act (Landlord and Tenant Law (Amendment) Act (Ireland) 1860 s 40)
self induced frustration
Self-induced frustration
  • Frustration cannot be pleaded by someone who is responsible for the frustrating event …
  • … whether deliberately or negligentlyegByrne v. Limerick SS [1946] IR 138
self induced frustration1
Self-induced frustration
  • The rule is applied strictly
  • No-one who could have performed a contract can say that it is frustrated
  • The reasonableness of carrying out the contract is irrelevant …
  • … nor is it a defence that the defendants cannot perform all of their contracts
example the super servant ii 1990 1 ll 1
ExampleThe Super Servant II [1990] 1 Ll 1
  • D hired out two specialised vessels, SS I and SS 2
  • The SS I sank, a potentially frustrating circumstance
  • However, no contract which could be carried out by SS2 was frustrated …
  • … even though D could not satisfy all of those contracts
frustration by subsequent illegality
Frustration by subsequent illegality
  • If the law changes, so that the contractual performance is now illegal, then the contract is frustrated
  • But this is conceptually distinct from other forms of frustration
  • The point is not that the contract is hard to perform …
  • … but that it is illegal to perform
effect of frustration
Effect of frustration
  • Rights which accrued before the frustrating event remain valid
  • After frustration, the contract cannot create any new rights
  • Money paid before frustration is recoverable if it was paid on a total failure of consideration (Fibrosa v. Fairbairn [1943] AC 32)
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