Frustration, Breach – April ’08 – Q2

Frustration, Breach – April ’08 – Q2

The first issue we must consider is whether the contract is indeed frustrated as Finn has claimed.

Frustration is a defence used in contract law when the existence of a certain state of affairs, that the parties have based their agreement on, has disappeared so the contract has no application to the facts as they are. The law then looks at sort of facts that 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. A good example of this is in the case of Taylor v Caldwell [1863], where it similarly involved the renting of a music hall but before the start of the letting the hall burned down. Obviously the contract assumed the existence of the hall so it was discharged by the fire.

Frustration was defined in the case of British Movietonenews v London Cinemas where it was stated:

“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 it’s discretion thinks it is just and reasonable to qualify the terms of the contract, but because of its true construction it does not apply in that situation.”

In deciding whether a contract has been frustrated we must look closely at the parties’ intentions and determine what assumptions the parties were making so we can refuse to apply the contract where those assumptions no longer hold. Frustration can cover foreseen events, if the contract makes no provision for them. This was the case in Neville v Guardian where the defendant contracted with the plaintiff to build a house on his property. The defendant tried to secure access rights for a road onto the property. His attempts failed and he subsequently cancelled the project. The court held that the contract was not frustrated so he was unable to cancel the project on those grounds. Similarly in Davis v Fareham UDC no frustration was found on a contract to build an estate in 8 months. Due to labour shortages the project took 22 months and involved much more expense than was expected. The court held that labour shortages were within the range of the parties’ contemplation.

As can be seen from the previous two cases and many others the doctrine of frustration is hard to invoke. The most successful pleas of frustration are wartime cases and they usually involve disruptions to shipping. There are also the famous coronation cases which involve entertainment planned for the coronation of Edward VII which were cancelled due to illness. An example of one of these cases is Krell v Henry which involved the hiring of a flat for a few days at a high rent. No motive for this was stated in the actual contract but it was in fact to watch the coronation procession. The cancellation of the coronation was enough to falsify an assumption underlying the contract, and hence to terminate it. Another example of a coronation case is Herne Bay Steamboat v Hutton. The defendants hired a boat from the plaintiff to tour the fleet at anchor at the time set for ceremonies to celebrate the coronation. Unlike Krell v Henry, however, the arrangement was still workable.

Another aspect of the doctrine is self-induced frustration; frustration cannot be pleaded by the party who is responsible for the event whether deliberately or negligently. This rule is applied strictly. No-one who could have performed a contract can say that it is frustrated. The reasonableness of carrying out a contract is irrelevant nor is it a defence that the defendants cannot perform all their contracts as can be seen in The Super Servant Two [1990]. In this case the defendant hired out two specialised vessels; SS1 and SS2. They contracted with the plaintiff to use one of their vessels but never specified which one. The defendants intended on using SS2 so subsequently allocated the SS1 to other contracts. The SS2 then sank and the defendants claimed that the contract was frustrated but the court held that the doctrine of frustration did not operate to remove their liability under the contract. Another example of self-induced frustration can be seen in Byrne v Limerick Steamship Co. Ltd. where failure to obtain a war permit did not constitute frustration of the contract.

If we apply the doctrine to this situation and compare it to previous case law we can decide whether Finn has a valid argument. I think it is safe to say that both parties assumed that the wine license would be obtained before the concert could go ahead as the whole event is for Finn’s wine club, and Finn had informed Joe that he intended on serving food and wine to the entire audience. This is similar to the case of Krell v Henry. The question does not give a lot of information of how important both parties viewed obtaining the license was and how they decided that Finn was the one to try and obtain it. On the facts given it was Finn’s duty to obtain the license and in failing to do so he claimed that the contract had been frustrated. Not obtaining the license should have been reasonably foreseen by both parties and should have really been factored into the contract. If we look at the case of Neville v Guardian above the defendant’s failure to secure satisfactory access to his property did not amount to frustration. In the case at bar the reason for not obtaining the license was due to Finn’s negligence in filling out the paperwork for the application. Therefore Joe cannot be blamed for this, nor can we blame the circumstances/state of affairs, it was in fact Finn’s fault. Finn is therefore claiming that the contract has been frustrated because of his own actions, and failure to perform his part of the contract. As stated above frustration cannot be pleaded by the party who is responsible for the event whether deliberately or negligently. It may seem unfair to Finn to force the carrying out of the contract because it means he will lose €3, 000 and not even be able to hold the event he wanted to while Joe is still making a profit and may have been able to use the theatre for something else that day, but the court does not consider what is fair and reasonable in these cases.

Another aspect to consider in this question is whether Joe’s claim that Finn’s statement constituted a repudiatory breach as it would entitle Joe to treat the contract as repudiated and sue for damages. A breach occurs where, without lawful excuse, a party fails or refuses to perform a contractual obligation. If it is found to be repudiatory breach then at the instant of discharge, when Finn cancelled the contract, the duty to perform the contract is replaced by a duty to compensate for the lost performance. This can be seen in the case of Hyundai v Papadopoulos where the plaintiffs, shipbuilders, were building a ship for the defendants and were being paid as each stage in a timetable was reached. If the buyers fail to make a payment then the plaintiffs are entitled to all the payments up to and including the payment the buyers failed to make but neither party ha to perform after that. However, the plaintiffs may sue for loss in profits. Therefore 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. If a sufficiently serious breach has been committed the innocent party has the right to discharge but the contract remains in force until the right is exercised. It may be in the innocent party’s interests to keep the contract alive. The right must be exercised unequivocally and silence is rarely unequivocal. It was held to be unequivocal in the case of Santa Clara which involved a contract for the sale of propane. The propane was going to be delivered late which was a breach of contract. A telex was sent repudiating the contract and no reply was sent, silence was held to be acceptance of the repudiation. There is a basic rule that the innocent party has to terminate the contract but there are two exceptions to the rule:

(i)         Where the co-operation of both parties is needed; e.g. an employment contract

(ii)        Where the innocent party has no legitimate interest in continuing.

So if the innocent party insist on performing, but it forces good or services onto a party who has no use for them, then the court may rule that there is “legitimate interest” in doing so and so the innocent party must terminate the contract.

If one party informs the other that he is refusing or will fail to perform their contractual obligations before performance is due then it may be regarded as anticipatory breach. If this is the case there is no breach of contract but under the doctrine of anticipatory breach the refusal gives a right to terminate. The innocent party may affirm the contract, where there is a “legitimate interest”, or terminate. The classic case in favour of anticipatory breach is Hochester v De la Tour, whereby an agreement made in May for the plaintiff to commence work on June 1^st was terminated by a letter sent late in the month of May. The court held that the plaintiff could sustain her action prior to June 1st; since there had been a clear breach of an existing promise, albeit an existing promise to undertake a future act. The courts are, however, slow to exercise relief for claims of anticipatory breach and will normally require either express evidence of the anticipatory breach, as above, or very strong evidence of an implicit nature. In Athlone Rural DC v Campbell proof of the express intention of the defendant not to proceed with a contract partly underway took the form of a letter stating that the defendant (the District Council) no longer required the plaintiff to complete the work in question. The express or implied conduct must repudiate the contract in its entirety and not merely arise due to a dispute as to the true construction of the contract in question. Two cases which illustrate this point are: Federal Commerce and Navigation v Molena Alpha and Woodar Investment Development v Wimpey Construction. In the former, acting on legal advice that was erroneous, the defendant took steps which the plaintiffs believed amounted to an effective repudiation of the contract in question. Here the defendant party genuinely thought that such rights existed under the contract; nonetheless the HOL held that the acts constituted an effective repudiation. In the latter case, on similar facts, the defendants’ belief as to the construction of the contract led to acts that the plaintiff believed amounted to repudiatory breach. Again, the actions arose from a genuine but mistaken view of the law with respect to the contract. However, the court here held for the defendants, repudiation did not occur. The latter case seems to be a more accurate statement of the law. The facts of each case must be examined. In the former case the breach had immediate consequences for the plaintiff and there was little time in which to react. The latter case was different in that the completion date of the contract was some time away and, therefore, there was sufficient time to have the issue resolved by the courts without exercising self help remedies of repudiation of an anticipatory nature.

If it was found in this case that Finn breached his contractual obligations then the contract may be discharged and Finn may be forced to pay damages to Joe, up to €2000, which was the remainder owed to him, minus Joe’s own expenses. It seems that it was Finn’s duty to acquire the wine license for the event and in negligently failing to do so Finn may have breached the contract.  Finn cancelled the contract two days before the day of the event/performance this may in fact constitute an anticipatory breach as in the case of Hochester v De la Tour mentioned above. If it in fact anticipatory breach and Joe attempts to repudiate the contract on the grounds of repudiatory breach, then there may be a chance of Finn escaping repudiation as those grounds may be found to be insufficient. An example of a similar situation can be seen in Panchaud Freres v Etablissements General Grain Co.

However comparing the case of Woodar Investment Development v Wimpey Construction to this case, one may argue that Finn’s genuine but mistaken belief that, in not acquiring the wine license, the contract was frustrated may mean that the contract is not repudiated at all as he genuinely believed he had a lawful excuse to escape his contractual obligations. This may be a valid point but I feel that it would be a hard one to argue because similar to Federal Commerce and Navigation v Molena, Finn’s breach, which was only two days before the event was to take place, would have immediate consequences on Joe and time would not allow them to resolve the dispute in court.

In conclusion, Finn’s claim of frustration of the contract is erroneous as it was his negligent acts that led to the problem. As it was only two days before the date the contract was to commence and he genuinely believed he had a lawful excuse, I believe Finn’s statement may be found to constitute an anticipatory breach of their contract and it may be argued that Joe cannot repudiate the contract as he is attempting to do so on the wrong grounds. But this is being quite hopeful as the courts have the “…liberty to blow hot and cold…” in cases like this. Therefore it is most likely that the contract shall be discharged and Finn will be liable to pay damages for loss in profits to Joe.