6 – and FRUSTRATION

Distinction between common mistake and frustration – where shared mistaken assumption false prior to contracting, CM; where false after contracting, frustration; CA in The Great Peace noted similarities.”

Mistake ‘Mistake’ in is a misunderstanding/erroneous belief as to present fact. It is not taking the risk that one might be mistaken (eg. Leslie v Farrar Construction Ltd (2016)).

Mistakes can be unilateral or common. Mistakes can be as to terms (what is being agreed), identity (who the other party is) or other matters (facts/circumstances influencing decision to contract).

In civil systems, mistake is “the greatest defect that can occur”, a fatal flaw in (Pothier (1761)); however, in if the other party makes no representation or warranty to the contrary, mistaken party can’t recover – justified by need to observe contract made (terms could have protected party from it being false) (Atkin, Bell v Lever Bros).

Unilateral Mistake: Terms and Quality Where one party makes a mistake about the terms of the contract, if the other party knew or ought to have known of the mistake, no contract has been formed on ordinary objective principles. - Hartog v Colin & Shields (1939) (negotiated price/skin, but final offer price/pound – change inexplicable, buyer could not reasonably have believed this was actual intention)

Cannot reasonably rely on outward assent when the underlying mistake is or ought to have been known, or was the relying party’s responsibility. This is objectively assessed (when mistake actually was known, falls within ‘ought to have known’ category so is still objective).

Where the mistake is caused or contributed to by the negligence of the party seeking to enforce the contract, cannot enforce - Scriven Bros v Hindley (1913)

Where the mistake is not known and could not reasonably have been known to the other party, it is binding from the outset, even if not yet relied on (objective agreement, binding from outset) - Centrovincial Estates Plc v Merchant Investors Assurance Co (1983) (contract typo; binding whether relied on or not) - Hasham v Zenab (1960) (signed, tore up immediately b/c mistake (no fraud/misrep); bound)

This mistake must be about terms – mistake about a background quality/factor, even if influential, cannot raise a claim of mistake preventing contract formation even if known to the other party - Smith v Hughes (1871) (old oats; no duty to disclose) - Cockburn: passive acquiescence of seller in self-deception of buyer won’t entitle buyer to – seller has not contributed; not a question of “scrupulous morality” - Blackburn: even if seller is aware buyer thought X quality and “would not have entered into the contract unless he had so thought”, if not a warranty, purchaser is bound – “mere abstinence from disabusing the purchaser of that impression is not fraud or deceit” – no obligation to alert to mistake not induced by vendor - Statoil v Louis Dreyfus Energy Services (2008) (Aikens rejected attempt to extend Smith v Hughes into broader equitable doctrine of common mistake; CL rule only applies where mistake to term)

Very limited doctrine. There is no general duty to disclose as long as the non-mistaken party is merely ‘acquiescing’ in the self-deception and has not contributed to it – if they induce, remedy (see misrep). Parties must do their due diligence or bargain for protective terms. - BCCI v Ali (2002) (Hoffmann: “there is obviously room in the dealings of the market for legitimately taking advantage of the known ignorance of the other party”)

Beale (2012) notes in continental Europe, taking advantage of ignorance is often fraud, whereas in UK it is the foundation of contract; Beale sees no value in not protecting the ignorant unless it is impossible to formulate a rule for liability or we wish to send a strong message of self- information. As a provisional proposal, suggests rule could take format of: if one party knows the other has made fundamental mistake and continues anyways, it is contrary to .

Gifts are treated differently – voidable in equity where made “under some mistake of so serious a character as to render it unjust on the part of the donee to retain the property give to him” (Lindley, Ogilvie v Littleboy (1897). Approved by Walker in Pitt v Holt (2013): “gifts [are] outside the law’s special concern for the sanctity of ”. - Pitt v Holt (2013) (UKSC approved Ogilvie; depends on gravity of mistake, consequences; mere ignorance or inadvertence is insufficient for equitable doctrine to operate) - Van der Merwe v Goldman (2016) (availability of equitable rule based on )

Parties at cross-purposes Ambiguity in the contract so great as to be incapable of resolution means no enforceable contract - Raffles v Wichelhaus (1864) (Peerless – two ships, same cargo; neither party responsible for ambiguity, so neither side could enforce – no contract)

Mistakes of identity If O makes an offer to A, A is the only person who can accept; where the purported acceptance is by T or to T, inoperative. Objective test – offer made to person to whom it reasonably appears to be made, regardless of intent - Boulton v Jones (1857) (Bramwell: if “the personality of the contracting party is or may be of importance … no other person can interpose and adopt the contract”; order could only be fulfilled by Brocklehurst (addressee))

Rogue Cases Where V sells to R (fraudster), who sells to innocent T; question is whether void or voidable, so as to pass T good title (if voidable, R has valid contract with V = R has good title to pass to T before rescission).

v Transactions voidable for duress, UI, and fraudulent to induce V to contract

v Traditional rule is that where V makes a mistake as to R’s attributes (status, wealth), even if R is fraudulent, the contract is voidable. Where V makes mistake as to R’s identity, even without fraud, void. Used to distinguish in-person contracts and contracts through correspondence.

- Cundy v Lindsay (1878) (Blenkarn/Blenkiron – no consensus, V intended to deal with Blenkiron) - Kings Norton Metal v Edridge, Merrett & Co (1897) (R pretended to be non-existent company; CA held there was contract, V intended to contract with writer of the letter) - Phillips v Brooks (1919) (jeweller, Sir George; intent to deal with person present) - Cf. Ingram v Little (1961) (in person car sale; checked in directory, identity important ≠ contract) - Devlin dissented – strong presumption O intends to contract with person present, which can be rebutted by showing R claimed to be agent of someone else or if R impersonates someone well-known to V where identity is important - Lewis v Averay (1972) (car, pretend to be actor; followed Phillips, Denning ciriticsed Ingram) - Denning noted difference between BFP/void should not depend on identity v attributes – same thing, name (identity) is an attribute; did not accept mistaken identity renders void, argued also voidable - Shogun Finance v Hudson (sale of car on credit; approved Averay and face-to-face objective principle; held where by correspondence, Cundy applies) - Hobhouse – Parole rule is essential, document is the contract - Phillips (majority) noted where in person, innocent C thinks he is dealing both with the person present and the pretended person (thinks same), whereas by writing no such difficulty – interpret document to decide who parties are - Nicholls and Millett dissent – agreed with Denning that Cundy should be overruled, fraud only makes the contract voidable. Current scheme says were you pretend you are creditworthy (attribute), voidable, but where you pretend to be someone creditworthy (identity), void – Nicholls notes these are just two ways for R to assert creditworthiness § Nicholls: innocent V and T, person who takes risk of credit should bear loss - Millett suggested presumption of intent to deal with person present (as per Devlin) should be irrefutable – bad idea!

Cundy, King’s Norton, and Shogun were by distance; it appears the contract is only void if the impersonated person/company actually exists (shows identity must be important?).

T can use where V has represented to T that R is the owner, and V knows/ought T will rely on it - Henderson v Williams (1895) (sugar warehouse, V told T sugar belonged to R; V-R contract void, but V estopped from denying to T)

Where R claims to be agent for X, void – contract not purported to be made with R, and not made with X; can rebut in-person presumption, since no claim the contract is made with person present - Hardman v Booth (1863) (R made order in firm’s name from V; no contract with R or firm) - Henderson v Williams (1895) (R claimed agent of sugar client; V had no contract with R or client)

Reform & Criticism MacMillan criticises Cundy – driving factor was 19th c larceny law, gave V remedy for obtaining property by false pretences – could reclaim even from third party. Argument about mistake was secondary. HOL aware of criminal remedy, wanted to keep civil law consistent. Not represented in textbook accounts which use Cundy as leading case on subjective agreement theory/ meeting of minds. 1983 SGA repealed larceny act, V could not get goods back from innocent T; basic rationale for Cundy gone.

Stevens (2007) suggests Cundy is actually consistent with contract principles – eg Smith v Hughes, if one party mistaken about terms no contract formed. Argues the duped party are making a mistake on the terms (think contract with X); R knows the other is making a mistake, contract not formed. Argues that if a written contract, shows that it is a term of the contract that the other party is in fact X.

Morgan asks when it actually is a term – often doesn’t matter for nature of contract who party is. If R makes contract where identity doesn’t matter, why should writing make a difference?

Devlin proposal (dissent in Ingram v Little) – why should D’s liability for damages depend on “voidness or voidability and on inferences to be drawn from a conversation in which the defendant took no part? … For the doing of justice the relevant question in this sort of case is not whether the contract was void or voidable, but which of two innocent parties shall suffer for the fraud of a third. The plain answer is that the loss should be divided between them in such proportion as is just in all the circumstances.”

Devlin recognised legislative intervention needed; LC considered, but disagreed – too uncertain, people who received in good faith would need to compensate.

Law Reform Committee recommended when goods are sold under mistake of identity, contract should be voidable (reversing Cundy) – not implemented, favoured by Shogun minority. Under current law, if V makes mistake of identity (without fraud!), always void – V who makes mistake better-protected than where R perpetrates fraud to attribute. Following Shogun, LC proposed re-examination but abandoned. Cundy still good law, supported by Shogun majority – identity/attribute distinction necessary.

Non est factum NEF initially to deny forgery; then extended to illiterate people who sign not knowing what the document says (relying on someone else reading out loud to you). Then extended to fundamental misapprehension as to what it meant – however, this is not the law. - Gallie v Lee (1971), Reid: doctrine that “a man’s deed is not his deed if his mind does not go with his pen” is “far too wide. It would cases where the man had taken no precautions at all, and there was no ground for his belief that he was signing something different…” - Denning said NEF doctrine wrong, should be abolished – if people are defrauded, should have remedies for fraud - HOL did not go so far as to abolish, but confined to cases where what they signed was essentially different from what they intended to sign and they acted responsibly and carefully in the circumstances (in Gallie, not void, insufficient reason for not reading – should have gotten her glasses)

Cf. misrep, not reduced by the fact representee was negligent. NEF narrower because void ab initio.

Common Mistake “If the contract expressly or impliedly contains a term that a particular assumption is a condition of the contract, the contract is avoided if the assumption is not true” (Atkin, Bell v Lever Bros). Implications should be “no more than are ‘necessary’ for giving business efficacy to the transaction … a condition should not be implied unless the new state of facts makes the contract something different in kind from the contract in the original state of facts.” - Bell v Lever Bros (1932) (severance package in ignorance of breach; no common mistake, contract not essentially different) - Atkin: “Mistake as to quality … will not affect assent unless it is the mistake of both parties, and … the thing without the quality [is] essentially different”

Current test In The Great Peace (2003), court ruled following necessary elements to avoid a contract: 1. There must be a common assumption as to the existence of a state of affairs 2. There must be no warranty by either party that that state of affairs exists 3. The non-existence of the state of affairs must not be attributable to the fault of either party 4. The non-existence of the state of affairs must render performance of the contract impossible 5. The state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible

The test does not confine to particular instances of mistake, but is narrow.

Once the court determines performance is impossible, it must identify whether “one or other party has undertaken responsibility for the subsistence of the assumed state of affairs … whether one or other party has undertaken the risk that it may not prove possible to perform”. Mistake will be less common than frustration – responsibility for mistake at time of contract is more likely to be undertaken by a party, whereas supervening events will not have been.

- The Great Peace (2003) (salvage vessel far away; distance not essentially different, failed at stage of )

Risk could be assigned by implied or express terms in contract; might also explicitly say risk falls on neither – only if neither are true does common mistake operate - Standard Chartered Bank v Banque Morocaine du Commerce Exteriuer (2006) (risk of money being used for fraud had been firmly allocated – CM ≠ operate)

Where A has superior knowledge and asserts the thing knowing (or ought) that B will act on it, it will likely be held as warranty; if equal knowledge, contracting on common assumption, probably not. - McRae v Commonwealth Disposals Commission (1951) (CDC promised tanker existed = liable)

Parties cannot rely on CM where at fault under Great Peace; competing interpretations of fault: 1. McRae – where the CM is a belief “entertained by [the relying party] without any reasonable ground, and … deliberately induced by him in the mind of the other party,” cannot rely (does not need to know belief is incorrect) 2. AJB – Steyn held no reliance where “mistake consists of a belief which is entertained by him without any reasonable grounds” – second limb of McRae not applied 3. Great Peace (CA) held no reliance where “the non-existence of the state of affairs [is] … attributable to the fault of either party” – the state of affairs, rather than belief, is examined

Great Peace denies reliance where the other party is at fault, and allows reliance where negligent misrepresentation of one party causes the other’s mistake; McRae is preferable.

Res Extincta , s 6: “Where there is a contract for the sale of specific goods, and the goods without the knowledge of the seller have perished at the time when the contract is made, the contract is void.” - Associated Japanese Bank v Credit u Nord (1988) (Steyn - exceptional cases where common mistake may apply, must be essentially and radically different from intended agreement; non- existent machines, void because implied condition precedent they exist – CM not the rationale) - Cf. McRae v Commonwealth Disposals Commission (1951) (Aus case; not void, distinguished b/c never existed so could not have perished; CDC also taken to have warranted the ship existed) - Bell v Lever Bros (1932) (criticised for outcome; could argue B was selling right to be employed, which no longer existed)

If subject matter (unknown to parties) does not exist or the purchaser already owns it, performance is impossible (the two examples given as ‘basic’ common assumption in Bell (Atkin)) - Couturier v Hastie (1856) (corn perished; no contract) - Atiyah argues this does not mean contracts are automatically void for CM on existence, but it is a matter of construction – where the risk is assigned (eg was it for sale of goods or did party ‘buy the adventure’ (risk)), might survive - Cranworth specifically said “the whole question turns upon the construction” - McRae High Court concerned Couturier laid down rule of voidness; however, Q of whether contract void did not arise in Couturier, so no authority for general proposition that for perished goods was void - Griffith v Brymer (1903) (coronation case – contract made after cancelled, void)

SGA 1893 (now 1979) draftsmen thought Couturier established absolute rule that contracts for perished goods must be void, which is why the rule has become absolute. Didn’t apply to McRae, because never existed, but appears that where goods perish s6 makes auto-void, irrebuttable. Where s6 doesn’t apply, no need for automatic doctrine – instead examine terms to establish whether risk allocated. Davies argues s6 should be interpreted as allowing common intention (eg where seller warrants it exists).

Common mistake as to quality vs impossibility – what is the test? In Bell v Lever Bros, Atkin’s “essentially different” test – where parties under common essential mistake about quality/value of subject matter, void if it renders the thing without the quality essentially different (otherwise mistake as to quality ≠ void - eg soundness of horse). Atkin’s “essential quality” test seems to have a high bar considering application in Bell. - Bell v Lever Bros (subject matter existed, both parties mistaken as to quality (was terminable at will); effectively paid £30,000 for nothing/something they owned; seems essentially different?) - Warrington, Hailsham dissent –assumption as fundamental as anything could be

v Smith (1994) suggests mistake as to quality will never be enough to void under this test; there have been no subsequent cases where contracts are auto-void if mistake as to quality renders subject matter “essentially different” (but AJB approved Bell “essentially different” test obiter). This practical effect was recognised in GP: “Atkin himself gave no examples of cases … rendered void because of a mistake as to quality”, instead gave examples of those which did not qualify).

In AJB, Steyn said analysis too simplistic – doubts whether Lever Bro’s decision to enter agreement would have been affected if he knew it was voidable, so not necessarily essentially different (but contradicts Bell finding).

v Treitel (2011) tried to rationalise Atkin’s approach by confining to mistakes as to essential quality by which subject matter is defined/identified

In Great Peace, CA held CM only serious enough to void contract if parties have agreed to do something which is impossible. However, unclear how CA dismisses the Bell HOL ratio and replaces the test.

Application suggests strict impossibility test might not actually be required: - Brennan v Bolt Burdon (2005) – CA held sufficiently fundamental mistake of law could make settlement void, even though no impossibility – it undermines basis of compromise; on facts, agreement not vitiated by mistake; Sedley suggested impossibility may be too narrow, preferable to ask whether without mistake there would be “intelligible basis for their agreement” or whether performance rendered quite difference from contemplation - Kyle Bay v Underwriters (2007) – applied the AJB “essentially and radically different” test – CA/Neuberger said since GP approved, must have considered it to be same as impossibility test; more consistent with Bell, which is HOL higher authority, and GP approved Bell - Apvodedo NV v Collins (2008) (Henderson suggested test might be whether performance in accordance with the common assumption was impossible, not performance itself impossible)

McBride argues GP impossibility test preferable for certainty (eg applied to Bell can see why not void – possible for payments and leaving to occur). GP is only reasonable way to fill gap where no fault, impossible, and not expressly or impliedly addressed.

Construction/implied term approach? Two schools of thought: 1. Certain types of common mistake inevitably make contract void where contract has not distributed risk of parties’ common assumptions being false (independent legal doctrine of mistake, current judicial approach supported in Great Peace) 2. No independent doctrine of mistake (O’Sullivan supports), normal interpretation and implication applies – only void if the contract says so

In Bell, Atkin said terms are implied where necessary to make sense of contract – reasoning is construction-based. However, construction does not resolve where parties have not given thought to how risk should be allocation (fictitious to imply or impute terms) – this is why an independent doctrine of mistake is claimed in Great Peace (implied term theory “unrealistic”, parties haven’t considered what would happen in event of mistake). However, implied terms approach has been invoked (CA) post-GP.

O’Sullivan favours the approach of asking if the term can be implied in fact; then look at terms implied in law (which are not meant to reflect intentions – default rules guided by policy). Suggests for each standard CM stiaution, there should be an available implied term in law unless inconsistent with intentions (eg where good doesn’t exist, Smith and Atiyah suggest seller typically promises goods exist, default risk on seller). This implied terms in law approach found support with Toulson at first instance Great Peace (“effect of a mistake must depend on the proper construction … [which] will depend … [on] general principles appertaining to the contracts of the relevant kind”). Hoffmann in William Sindall PLC noted implied terms “affect where the risk lies”, which the CA in Great Peace noted (“Hoffmann LJ commented … allocation of risk can come about by rules of general law … such as caveat emptor”).

O’Sullivan argues no need for independent doctrine of mistake – construction better accommodates relevance of fault, and mistake doctrine caused awkward categorisation of kinds of mistake.

Mistake in equity? There are well-established equitable jurisdictions relating to mistake:

v Refusal of – SP is equitable discretionary remedy, court may refuse if promisor mistaken when entering contract and conscience of promisee implicated in mistake - Webster v Cecil (1861) (mistaken offer of sale of property at almost ½ value; no SP)

Does not make contract void or voidable – promisee can still get damages, just not SP

v Unconscionably taking advantage of ignorance – voidable, equity may rescind - Fry v Lane (1888) (purchase of reversionary interests from poor, ignorant man without professional advice at undervalue; transaction set aside by equity; circumstances put burden on purchaser to show fair, just and reasonable)

v Rectification (see S3)

Effect of CM Atkin (Bell) says CM “operates so as to negative or in some cases to nullify consent” – void ab initio. Atkin did not allow possibility of being voidable.

Voidability (rescission) for Common Mistake in Equity? 19th c case Cooper v Phibbs allowed rescission of lease entered into under mistake – MacMillan notes the decision made it voidable, not void ab initio. Stand-alone doctrine of equitable mistake at the time. No such stand-alone doctrine exists today.

In , Denning (CA) held CM as to quality may render the contract voidable in equity if there is common misapprehension as to facts/rights, if the misapprehension was fundamental and the party seeking to set aside was not at fault (material misrep doesn’t need to be fundamental, but CM must be) - Solle v Butcher (1950) (mistake as to rent control, price too high; Denning held not void (agreed on subject-matter), but voidable in equity by fundamental mistake of quality) - Jenkins dissented – mere mistake of law, not ground for rescission; Denning argued Bell failed to consider equity - Grist v Bailey (1967) followed Solle because felt bound; seems wrong on principle, vendor made bad bargain – approaches allowing party to plead own misrep to escape - The Great Peace (2003) (overruled Solle as inconsistent with Bell – no category of cases not fundamental enough for Bell, but fundamental enough for Solle) - Court: Equity is meant to rescue the CL, but here CL has drawn line in Bell – Solle does not supplement/mitigate CL, but tries to say Bell wrongly decided; Bell and Solle cannot be reconciled – “if coherence is to be restored … there is no jurisdiction to grant rescission of a contract on the ground of common mistake where that contract is valid and enforceable on ordinary principles of contract law”

Great Peace should be welcomed – Solle objectionable on policy (relief for bad bargains). The broad scope would undermine clarity/certainty; the similar terms between equity and CL quality tests would lead to confusion. Ex. in Bell where relief should not be given would be undone under equity. However, unclear GP facts actually lent self to overruling Solle (mistake would not have been fundamental even under Solle). CA also bound by own decisions – can only depart where CA decisions conflict, CA decisions inconsistent with later HOL decision, or CA decision per incuriam (thus might be open for CA to now favour Solle – but unlikely, Walker in UKSC obiter Pitt v Holt recognised GP “effectively overruled” Solle). Arguably advantage to Solle was remedial flexibility – Denning said rescission should be granted ‘on terms’; CA in GP recognised benefit of flexibility, suggested area for legislative reform.

MacMillan thinks Denning was accurately stating law on equitable mistake – thinks Bell ignored equity, sad consequence of over-focus in the literature on intention. Midwinter (2003) argues as precedent, Great Peace CA was bound by Solle – not open to declare bad law. Hare (2003) argued overturning Solle reduced protection for innocent third parties (receiving property under voidable contract is protected; however, Great Peace did not broaden circumstances where void, so actually by eliminating voidable gave more protection).

Tettenborn (2011) notes The Great Peace keeps common mistake narrow, but most other legal systems say fundamental mistake makes the contract non-binding. Argues if there is specific mistake, contracts should be voidable, but only while contract is purely executory (once party begins to perform, binding) – morally worse to deny people what they have received than what they would have received.

Frustration

Contracts typically carry absolute strict liability for performance; however, in rare circumstances El allows frustration of a contract to bring it to an end. The doctrine is extremely narrow, because:

v Existence of clauses – parties specify which events might affect performance of obligations under the contract and how the obligations are to be adjusted - Eg. Great Elephant Corpn v Trafigura (2013) (delays for X reasons not in reasonable control of charterers would halve the late fees) - Eg (1990) (FM clause, gave right to cancel on certain events)

Where the contract implicitly or explicitly allocates risk (whether FM clause or not), frustration does not operate; however, courts sometimes slow to interpret clause to exclude frustration - Metropolitan Water Board v Dick Kerr and Co Ltd (1918) (FM clause interpreted narrowly, allowing party to apply for extension only where temporary obstacle)

v Parties also have option to alter obligation from absolute to an obligation to take reasonable care, but they are unlikely to do this – want certainty of performance or damages.

v Main EL remedy is damages (not SP), less need for frustration (damages always impossible)

Despite narrowness, there will virtually always be frustration when supervening illegality occurs - Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) (2010) (Beatson notes that usual situations of frustration are about allocating risks of unusual events (parties can make selves immune through force majeure clause); however here, it is the “public interest” which is the overriding concern, not risk allocation – FM clauses overridden) - Metropolitan Water Board v Dick Kerr and Co Ltd (wartime measures stopped construction)

Common in 1914, 1939 (‘trading with the enemy’ offence frustrated English-German contracts). Despite appearing as the twin to the doctrine of illegality (illegal from outset; not on syllabus), supervening illegality is part of frustration, so frustration legislation applies.

Development of modern law on frustration Originally no doctrine of frustration – “when the party by his own contract creates a duty … he is bound to make it good … because he might have provided against it by his contract” (Paradine v Jane (1646), Aleyn; tenant owed landlord rent despite occupation by enemy forces).

In Taylor v Caldwell (1863) (concert hall and garden; hall burned), Blackburn suggested that from the nature of certain contracts, the parties must have known it could not be fulfilled unless “some particular specified thing continued to exist … they must have contemplated such continuing existence as the foundation of what was to be done”; thus the contract is to be construed as “subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without [fault]”. Initially, Taylor viewed as an exception to Paradine.

Old authority (Cutter v Powell (1795)) showed personal services contracts terminated on death of promisor. By Taylor, establish loss of necessary skills, death of performer, destruction of good before ownership passed all terminated contract. Borrower discharged if destroyed without fault. Blackburn used for general principle that where performance depends on continued existence, condition implied that impossibility from perishing (in absence of warranty).

Frustration has now become a general (narrow!) rule, accepted by HOL in Davis Contractors v Fareham Urban District Council (1956) – Radcliffe: “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. … it is not hardship or inconvenience or material loss … there must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.” - Davis Contractors v Fareham Urban DC (1956) (building contract at fixed price; material costs went up due to scarcity; not frustrated)

The test for frustration In The Sea Angel, Rix made it clear that a “multi-factorial approach” is needed, a case-specific test – Radcliffe’s overall test for the doctrine is as specific as it will get. Rix denied that any individual factor ‘excluded’, ‘precluded’, or made frustration ‘inapplicable’, and that any factor was critical or a ‘prima facie rule’ – the “circumstances [of cases] can be so various as to defy rule making.” Rix notes the test of “radically different’ is important – it emphasises the narrowness, break in identity required.

Factors which have to be considered are “the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.”

Rix also explains that “the doctrine is one of justice” – the consequences of the decision, in applying the test, must be measured against the demands of justice … “consideration that the frustration of a contract may well mean that the contractual allocation of risk is reversed.” - The Super Servant Two (Bingham – frustration mitigates absolute performance – “to achieve a just and reasonable result, to do what is reasonable and fair”)

In Lloyds TSB Foundation for Scotland v Lloyds Banking Group plc (2013), Hope made it clear that there is no power for “equitable adjustment” where the change of circumstances falls short of frustration.

There is no exhaustive list of types of implied conditions which may cause frustration when not met: v Existence of a thing or person (see Blackburn, Taylor v Caldwell above)

v Impossibility of ‘an adventure’ without fault (usually delay); whether delay destroys the identity of the adventure is question of degree for court - Jackson v Union Marine Insurance Co Ltd (1874) (charter for definite voyage and time scale; implied condition that ship would arrive in time for it, so frustrated) - The Sea Angel (2007) (vessel detained by port authority, not returned on time – not frustrated, identity of adventure intact b/c successful salvage) - Shepherd FC & Co Ltd v Jerrom (1986) (apprenticeship frustrated, borstal training) - Morgan v Maner (1948) (music agent contract frustrated when agent conscripted)

v Occurrence of an event (see coronation cases)

v Sale of goods (s 7 SGA: where goods in agreement for sale subsequently, “without any fault on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is avoided”)

Where the contract is to sell goods by description, not frustrated just because specific goods in mind destroyed – assumption of seller may have failed, but not buyer, so no common mistake - Blackburn Bobbin Co Ltd v TW Allen & Sons Ltd (1918) (Finnish timber; supply from Finland cut off by WWI, but not frustrated b/c buyer hadn’t assumed import from F)

v Leases can be terminated by implied term, but rare – where lease has specific purpose, event preventing may frustrate (but neither leading case was frustrated – Cricklewood Property and Investment Trust v Leighton’s Investment Trust (1945); National Carriers v Panalpina (1981) – recognized frustration of lease possible); would need to “significantly change the nature of outstanding contractual rights and obligations”

Impossibility? There is no general CL rule that supervening impossibility frustrates a contract (cf. discharge by supervening illegality) – ‘impossibility’ is both too broad and too narrow. (Simon, Joseph Constantine Steamship Line v Imperial Smelting Corporation).

Simon provides example of ‘coronation cases’ – if they are regarded as correct, impossibility would be too narrow a test. In other cases, impossibility would be too generous – it is possible to promise/contract to do things outside one’s control. Furthermore, ‘impossibility’ is a matter of degree – eg in Taylor, gardens still could have been used as intended.

In cases of employment contracts/employee incapacity, the impossibility will frustrate - Notcutt v Universal Equipment Co (London) Ltd (1986) (employee argued not frustrated, employer could fire him and pay compensation; court held frustrated) - Since Equality Act 2010, employer must make reasonable adjustments for disabled employees; if work still impossible, frustrated

Mere difficulty to perform will not the party - Davis Contractors Ltd v Fareham Urban DC (1956) (building costs rose) - Tsakiroglou & Co Ltd v Noblee Thorl GmbH (1962) (shipping for fixed price; Suez Canal closed) - Paradine v Jane (bad bargain, but law still applies – cannot escape on this ground)

Why is frustration not lightly invoked? In Larrinaga & Co v Societe Franco-Americaine des Phosphates de Medulla (1923), Sumner: most contracts for future performance are “a form of commercial insurance, in which every event is intended to be at the risk of one party or another … contracts are made for the purpose of fixing the incidence of such risks in advance, and their occurrence only makes it the more necessary to uphold a contract and not to make them a ground for discharging it.”

This has been echoed by Hand (US judge) and Posner (US; Northern Indiana Public Service Co – “A fixed- price [sale] contract is an explicit of the risk of market price increases to the seller and the risk of market price decreases to the buyer”).

- The Mary Nour (2008) (Mexican cartel cornered Asian cement market; no frustration, seller bears risk of failure of source of supply) - Flying Music Co Ltd v Theater Entertainment SA (2017) (Griffiths notes frustration always rewrites a contract to benefit one party at expense of the other – must be narrow)

Frustration of Purpose? (Coronation Cases) In cases where it is physically possible to perform the contract, but the purpose has been radically altered or its value has declined, a series of cases suggest there may be , but they are hard to reconcile - Herne Bay SS Co v Hutton (1903) (steamboat; not frustrated, fleet worth seeing and still there; in renting, Hutton taking risk no passengers would want to see) - Krell v Henry (1903) (room overlooking parade; frustrated, did not pay to see ordinary traffic) - Decided 5 days apart from Hutton; difficult and controversial decision - Victoria Seats Agency v Paget (1902) (seats in stands overlooking procession; owners had insured against risk of cancellation – shows not unforeseeable)

Suggested the difference between cases is commercial agencies (Herne Bay, Victoria Seats) are distinct from party renting rooms out (Krell) not as part of larger commercial enterprise. Also suggested significant that Herne had more than one purpose. Also possible Krell only explicable by procession, while Herne not unusual (eg would be different if Krell was about a hotel; room not usually rented out) – Derby example discussed in both, aligns (but difficulty that cab driver in example was charging ‘enhanced rate’ for the day – reasonable person likely would see Derby as objective purpose). Maritime National said Krell should not be extended.

In Northern Indiana Public Service Co v Carbon County Coal Co (1986) (US!), Posner defended Krell on grounds of implicit allocation of risk – surely Henry had not intended to insure Krell against possibility of coronation being postponed since Krell could relet the room for coronation’s new date – Henry excused (Krell in better position to mitigate risk). Treitel responds that Posner using hindsight – at time, not clear procession would ever occur.

Later cases - Amalgamated Investment and Property Co Ltd v John Walker & Sons Ltd (1976) (building marked historical interest after sale; not voided, risk of property being listed inherent to all property) - Treitel notes how narrow doctrine is (+ how odd Krell is) – change in value did not affect

Negative factors? Certain factors will operate against a finding of frustration:

v Foreseeability – If at time of contracting, parties aware of risk performance may be disrupted, assume terms of contract have been entered into on that basis – if contract says nothing, assume risk lies where it falls (Treitel).

Rix in The Sea Angel took Treitel’s approach, but said foresight is not critical, excluding, or preclusive – mere indication of frustration; high degree of foreseeability needed.

- Blankley v Central Manchester NHS Trust (2015) (B hired solicitors, then lost mental to instruct; not frustrated – not incapable of performance (appointment of agent) + foreseeable) - Flying Music Co Ltd v Theater Entertainment SA (2017) (unrest in Greece affecting tour of Thriller Live did not frustrate, turmoil known at time of contract and had not gotten worse)

Where only one party could have foreseen, may suggest they bore the risk?

v Self-induced frustration – where the party has caused/contributed to the frustration, cannot argue frustration - Maritime National Fish Ltd v Ocean Trawlers Ltd (1935) (only 3/5 licences; charter chose not to apply to the Saint Cuthbert) - The Super Servant Two (1990) (SSII sank; could have used SSI, choice to uphold other contracts) § Can distinguish from Maritime National Fish – in this case, performance of all contracts possible (chose to give licences to own boat); however, in SSII party could have better protected itself by contracting to use the SSII - The Eugenia (1964) (sailed into ‘dangerous zone’, could not perform – no frustration)

Where it is unclear whether frustration due to fault, and neither party can establish what happened, it seems the person accusing fault has burden to prove - Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd (1942) (fault for explosion unclear)

Juristic Basis for Frustration Frustration is “a device, by which the rules as to absolute contracts are reconciled with a special exception which justice demands” (Sumner, Hirji Mulji v Cheong Yue Steamship Co Ltd (1926)).

Frustration is “invented by the court in order to supplement the defects of the actual contract. The parties did not anticipate fully and completely … or provide for what actually happened” (Wright, Denny Mott & Dickson v Fraser (1944)). Wright also says it is impossible to say if parties had thought of it, they would have provided to end contract; they would “almost certainly … have sought to introduce reservations or qualifications or compensations. As to that the court cannot guess.” Thus if we rationalise as implied term, courts unwilling to rescue parties when they could have made clause.

In National Carriers v Panalpina (1981), Wilberforce said the various theories “shade into one another”.

Modern approach rejects implied term theory of frustration. Some courts still use (eg Graves v Graves (2007)), explanation that there is an implied term that if common assumption fails, contract ends.

Effect of frustration Frustration brings the contract to an end automatically – total discharge from when frustration occurs - Hirji Mulji v Cheong Yue Steamship Co Ltd (1926) (Sumner confirms automatic termination)

Restitution at CL Where one party has started performance already, because the contract is not void ab initio but frustrated at later point, CL said work/money paid in advance could not be reclaimed; promises to pay before frustration occurred also enforceable - Appleby v Myers (1867) (term of payment only on completion; frustrated by fire = no payment) - Chandler v Webster (1904) (paid in advance for room to view coronation parade; not entitled to reclaim, bound to pay remaining fee – valid obligation incurred while contract active) - Cf. Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour (1943) (order for Polish tools; in 1939, Poland occupied by Germany, contract frustrated; party allowed to claim back advance payments for total failure of consideration; HOL overruled Chandler) - Simon noted good position for party who paid, but inconvenient for party who must return despite prudently stipulating advance payment for costs; HOL also recognised not fully satisfactory, even minor performance would prevent recovery

CL ‘total failure of consideration’ still applies to contracts not within Act (see s 2(5) below).

Law Reform (Frustrated Contracts) Act 1943 The Act only applies where no contrary intent; if parties make contrary provision, takes precedence. In BP Exploration CO (Libya), Goff held ‘entire’ contract does not automatically preclude s 1(3) award.

S 1(2): “All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged … shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be so payable:

Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in, or 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 him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.”

S 1(3): “Where any party to the contract has, by reason of anything done by any other party thereto in, or for the purpose of, the performance of the contract, obtained a valuable benefit (other than a payment of money to which the last foregoing subsection applies) before the time of discharge there shall be recoverable from him by the said other party such sum (if any), not exceeding the value of the said benefit to the party obtaining it, as the court considers just, having regard to all the circumstances of the case and, in particular,— a. the amount of any expenses incurred before the time of discharge by the benefited party in, or for the purpose of, the performance of the contract, including any sums paid or payable by him to any other party in pursuance of the contract and retained or recoverable by that party under the last foregoing subsection, and b. the effect, in relation to the said benefit, of the circumstances giving rise to the frustration of the contract.”

In BP Exploration (Libya) v Hunt (No 2) (1979), Goff provided leading analysis of the act. Note this is only first instance decision, since CA effectively said trial judges have discretion to do as they like – not properly analysed. Goff’s analysis:

v 1943 Act overall – the underlying principle is prevention of at the other party’s expense.

The act is not designed to: 1. Apportion loss – no general power under 1(2) or 1(3) to make allowance for expenses incurred by the claimant (except 1(2) to enforce payment of sum payable but unpaid before frustration); expenses by defendant only relevant to reduce net benefit obtained by him (limiting award to C) 2. Put parties in position they would have been if performance occurred 3. Restore parties to position they were in before contract made; the principle is unjust enrichment, but expenditure may be incurred under contract which confers no benefit on the other party and thus has no remedy under the Act

v S 1(3) – award has two distinct stages: identification/valuation of benefit, and award of the just sum. Amount to be awarded is the just sum, unless D’s benefit is less – limits amount.

Distinction between just sum and D’s benefit is controversial. Goff satisfied Parliament intended that the benefit should be identified as the “end product of the services” – eg if building contract, fire destroys building (similar to Appleby) (substantial amount of work already done), might seem ‘just’ to award C sum based on basis for work done, but s 1(3)(b) will reduce the award to nothing because of the effect “in relation to the defendant’s benefit” of the fire. “Benefit” is intended to refer to the actual improvement.

Goff’s understanding of s 1(3) as based on unjust enrichment is controversial. Also, BP Exploration decision controversial – benefit H received should have been valued at market value of BP’s services, regardless of end product (in Cobbe v Yeoman’s Row, Scott compared to locksmith – benefit conferred is value of the key services, not whatever is in the unlocked chest). ‘End product’ focus also unsatisfactory.

See also Gamerco SA v ICM/Fair Warning (1995) on s 1(2) application (C paid in advance for D to organise event cancelled by authorities; court held 1(2) operated to give C money back; statute conferred ‘broad discretion’ on court to achieve justice through apportionment).

2(4): Where … a part of any contract to which this Act applies can properly be severed from the remainder of the contract, being a part wholly performed before the time of discharge, or so performed except for the payment in respect of that part of the contract of sums which are or can be ascertained under the contract, the court shall treat that part of the contract as if it were a separate contract and had not been frustrated and shall treat the foregoing section of this Act as only applicable to the remainder of that contract.

2(5): This Act shall not apply— a. to any charterparty, except a time charterparty or a charterparty by way of demise, or to any contract (other than a charterparty) for the carriage of goods by sea; or b. to any contract of insurance, save as is provided by subsection (5) of the foregoing section; or c. to any contract to which section 7 of the Sale of Goods Act 1979 (which avoids contracts for the sale of specific goods which perish before the risk has passed to the buyer) applies, or to any other contract for the sale, or for the sale and delivery, of specific goods, where the contract is frustrated by reason of the fact that the goods have perished.