Termination for Frustration

1. Termination for Frustration By Amanda Kennedy

2. Introduction • Frustration is another way a contract may be discharged • Frustration occurs where an event or events happens after a contract has been formed • “the performance of the contract impossible or so changes the circumstances that it can justifiably be said that the parties did not intend to be bound to perform in the changed circumstances.” • History: Paradine v Jane (1647) Aleyn 26 • Law now recognises that obligations may not be absolute • This lecture: • What amounts to frustration? • How is it dealt with? • Some contracts now have express ‘Force Majeure’clauses - e.g. Act of God, natural forces / catastrophes

3. Test for Frustration • Codelfa Construction Pty Ltd v StateRail Authority of New South Wales (1982) 149 CLR 337 • “…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” • Basis of test: • there is a contract; • after formation an event or events happen; • without the default of either party; and • performance of the contract after occurrence of the event or events is radicallydifferent from the performance contemplated by the contract.

4. Test for Frustration cont. • Depends on the circumstances of the case: • the terms and construction of the contract in question; and • the effect of the events which have occurred • Recall Codelfa regarding construction of the terms • Frustrating event must be totally unforseen…if it is anticipated in the contract then it will not amount to frustration • Past cases are therefore no more than a guide to a future application of the doctrine – i.e. if something has frustrated a contract in the past it may not necessarily frustrate a similar contract in different circumstances

5. Basis of the Doctrine • History • Paradine v Jane (1647) Aleyn 26 • Jane leased premises from Paradine but was evicted from the land by enemy forces during the English civil war. Jane denied liability for rent owing due the the contract being frustrated • Held that there was an obligation to pay the rent despite the eviction: “when the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract”. • The modern doctrine • Taylor v Caldwell (1863) 3 B & S 826 • Supervening events can frustrate a contract • Implied term theory • Court still did not enunciate the scope of the doctrine • ‘Change in obligation’ theory

6. Theoretical basis for frustration? • See National Carriers v Panalpina (Northern) Ltd [1981] AC 675 • Change in obligation theory? • Failure of consideration? • Justice? Fairness? • “Whatever the theoretical basis for frustration, its practical effect boils down to this – if performance becomes impossible through no fault of the parties, their contractual obligations are automatically discharged at the point of frustration.” • Stephen Graw, An Introduction to the Law of Contract (4th ed, 2002) p. 378

7. Instances of Frustration • Impossibility of Performance • Destruction of subject matter • Unavailability of subject matter • Availability of source of supply • Death or incapacity • Contemplated Method of Performance not possible • Frustration of Purpose or Common Objective • Illegality • Delay • War • Contracts involving land

8. Impossibility of Performance • Destruction of subject matter • Destruction can amount to a frustrating event • Taylor v Caldwell – would it have been different if the premises were damaged rather than destroyed? • Appleby v Myers • Frustration does not occur where one party agrees to bear risk of destruction • Sale of Goods legislation - Goldsbrough Mort & Co Ltd v Carter (1914) 19 CLR 429 • Unavailability of subject matter • Hirji Mulji v Cheong Yue SS Co Ltd [1926] AC 497; Bank Line Ltd v Arthur Capel and Co [1919] AC 435 • See also Jackson v The Union Marine Insurance Co Ltd (1874) LR 10 CP 125 - delay

9. Impossibility of performance cont. • Availability of source of supply • E.g. crop failure - Howell v Coupland (1874) LR 9 QB 462 • Death or incapacity • Where performance of a contract has a personal element • Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125 • Contract of employment – illness: Simmons Ltd v Hay (1964) 81 WN (pt1) (NSW) 358 • Depends on the kind of contract; the extent of the incapacity; and • the expected duration of the incapacity.

10. Contemplated Method of Performance not possible • Codelfa • Contract was frustrated as the mode of performance was ‘radically different’ • Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93 • Contract was not frustrated as a similar mode of performance could be contemplated, though at a considerable expense • Main difference is that time was of the essence in Codelfa • Is onerous performance evidence of frustration? • See Ocean Tramp Tankers Corp v V/O Sovfracht (The Eugenia) [1964] 2 QB 226 • Must be ‘radically different’ (Codelfa)

11. Frustration of Purpose or Common Objective • Where the purpose of the contract can no longer be achieved • The ‘Coronation’ Cases • Krell v Henry [1903] 2 KB 740 • Henry required the flat to view Edward VII’s coronation procession • Postponed coronation was the foundation of the contract and it would be in vain to continue • Compare with Herne Bay Steam Boat Co v Hutton [1903] 2 KB 740 • Hutton required boat to see a Navy Regatta as part of the Coronation celebration • Contract was not frustrated as it was not in vain; the vessel could be used to see the remaining regatta • A ‘mere disappointment’ is not the same as the destruction of the foundation of the contract – see also Scanlan’s New Neon Ltd v Tooheys Ltd (1943) 67 CLR 169

12. Illegality • If performance of a contract becomes illegal because of a change in the law after its formation but before it has been discharged by performance, it may be frustrated • Change in the law, eg Scanlans New Neon Ltd v Tooheys Ltd • Contracts with the enemy in time of war will result in the contract being illegal and frustrated, eg Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32

13. Delay • Does the delay render performance radically different from what was originally contemplated • Jackson v Union Marine Insurance Co Ltd (1874) LR 10 LP 125 • Delay frustrated the contract as it made the venture entirely different (i.e. radically different) in what the parties had contemplated • Delay will not frustrate a contract unless it radically alters the nature of the performance • Embiricos v Sydney Reid & Co [1914] 3 KB 45 • Frustrated due to delay as subsequent events did not effect rights and the delay was necessary at the time

14. War • Depends on whether the performance of the contract will be rendered radically different from that contemplated • Kodros Shipping Corp of Monrovia v Empresa Cubana de Fletes (The Evia) (No 2) [1983] 1 AC 736 • Contract was frustrated as war impinged upon performance of the contract

15. Contracts involving land • Wong Lai Ying v Chinachem Investments • Due to unforeseen circumstances the vendor had the right to rescind • National Carriers v Panalpina • Interruption to a lease was not sufficient to frustrate the contract • But note Australian position in Firth v Halloran – doctrine of frustration can’t apply to executed leases in many cases as a lease creates an estate in land which can not be destroyed by later events

16. Limitations on Frustration • Foresight of the Supervening Event • Frustration can only be invoked where parties have not foreseen the event • What was originally contemplated by the parties? • Must be foreseen as a serious possibility • Simmons v Hay [1965] NSWR 416 • Codelfa • Express contractual provision • Depends on the construction of the contract • If the contract makes provision with respect to what would otherwise be a frustrating event, then the event is dealt with as provided in the agreement • Claude Neon Ltd v Hardie [1970] Qd R 93

17. Limitations on Frustration cont. • Self-induced frustration • No reliance can be placed on a self-induced event which frustrates the contract • A party cannot plead frustration where it has brought about the event by some conscious act or omission • Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524 • the failure to secure a licence was the direct result of Maritime’s conscious election • The onus of proving self-induced frustration rests on the party alleging that the frustration was self-induced

18. Consequences of Frustration • Common Law • Unlike breach there is no election – frustration automatically discharges the parties from the obligation to perform their contractual duties • The contract only terminates from the point of frustration • See Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32 • Rejects the rule in Chandler v Webster [1904] 1 KB 493; Approved in Baltic Shipping Co v Dillon (1993) 176 CLR 344 • Difficult application in Australian jurisdictions where there are statutory provisions regarding frustration

19. Consequences of Frustration cont. • Statute • Frustrated Contracts Act 1978 (NSW) • “so complex as to be largely unintelligible” • Attempts to establish a scheme to apportion the loss resulting from frustration. • See text for discussion of relevant sections • “It is difficult to believe that the Frustrated Contracts Act 1978 (NSW) is, in the majority of cases, an improvement on the common law”

20. Are there any limitations to frustration? e.g. fault? Is a contract frustrated? YES NO • What is the • effect of the • frustration? • Statute • Common law Can another action be pursued? i.e. breach of contract? Conclusion Apply test from Codelfa: Has performance become radically different from that anticipated in the contract? How? Impossibility? Method of Performance not possible? Frustration of Purpose? Illegality? Delay? War? YES NO