Doctrines Contract

Do the doctrines of common mistake and frustration have a useful and coherent role to play in contract law?

Do the doctrines of common mistake and frustration have a useful and coherent role to play in contract law?

In this essay I shall examine the doctrines of frustration and common mistake in turn. Through careful analysis of the case law relating to each, I shall then argue to what extent their respective roles are coherent and useful to the English Law of Contract.

The doctrine of frustration in English contract law.

If during the execution of a contract some event occurs which, without being the fault of either party, renders the further performance of that contract an impossibility, illegal or causes changes in circumstances so radical that the contract becomes something quite different from that which was originally undertaken, then that contract may be automatically discharged via the doctrine of frustration.

There are two main theories underlying the juristic basis of this doctrine. The first, intervenes where radical changes have occurred to the nature of the contractual obligation in question. Lord Radcliffe in the case of Davis Contractors Ltd v Fareham UDC [1956], along with the majority of the House of Lords in that case, favoured this objective test, where “…such a change [has occurred] in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.”

The second theory stems from the case of Taylor v Caldwell (1863) and, more recently, the case of F.A. Tamplin S.S. v Anglo Mexican Petroleum [1916]. In these cases the contracts in question where construed as being subject to an implied term that the parties should be excused from their contractual obligations should performance of that obligation, through no fault of either party to that contract, become impossible. Commentators such as Treitel have heavily criticised this theory as being a highly artificial solution to such situations, and as such it is the first theory which generally prevails.

Whilst an exhausted list of all situations in which a contract might become frustrated is not easily constructed, it is possible to categorise the case law under the following general headings; impossibility, illegality and significant change in circumstance.

Impossibility can arise where the subject-matter of the contract is destroyed, where the subject matter becomes unavailable due to some extraneous cause or where the method of performance becomes impossible. An example of the first situation is the case of Taylor v Caldwell (1863). In this case the plaintiff contracted the hire of a concert hall from the defendant. Due to no fault of either party the hall was destroyed by fire prior to the booked dates, and as such the courts held that the contract was discharged by frustration. An example of the second situation can be found in the case of Nickoll and Knight v Ashton Eldridge Co, in which a ship required for the performance of the contract in question became stranded for reasons unavoidable, and as such the contract was held to be discharged by frustration. In relation to the third situation a contract will only be deemed frustrated in this way where the method was wholly essential to the performance of the contract and was expressly (or impliedly) stipulated in the contract instrument itself; for example in the case of Tsakrioglou Co Ltd v Noblee Thorl GmbH [1962] the closure of the Suez Canal was not deemed adequate grounds to frustrate a contract to ship nuts despite the fact that the parties anticipated that they would be shipped via Suez. The House of Lords refused to imply a term to that effect as the alternative voyage round the Cape was not fundamentally or commercially different.

Illegality may arise where a change in the law made subsequent to the original contractual undertaking renders the performance or further performance of that contract illegal. For example a contract made prior to July 2005 relating to the future sale of magic mushrooms would be rendered frustrated by the law made at this time criminalising such sales.

Significant changes in the circumstances surrounding a contractual arrangement may, though exceptionally, render a contract frustrated, where due to some extraneous event, further performance although technically possible would become something significantly different from what the parties to the contract originally envisaged. For example in the case of Krell v Henry [1903] the plaintiff contracted the hire of a room to the defendant for coronation day, for the purpose of viewing the procession. The Court of Appeal held that the subsequent cancellation of the event constituted sufficient grounds to discharge the contract, as the viewing of the procession was the “foundation of the contract.” This should be contrasted with the case of Herne Bay Steamboat Co v Hutton [1903] in which a contract for the hire of a steamboat for viewing the Kings naval review and for a cruise round the fleet was held not to be frustrated by the cancellation of the review, as the review was not the sole foundation of the contract. In a situation where a change of circumstance makes the contractual obligations of one party more burdensome, but does not radically change the nature of the performance, a contract will not be deemed frustrated. For example in the case of Davis Contractors Ltd v Fareham UDC [1956] labour shortages caused the contracted building work to take four times longer than anticipated. The House of Lords refused to hold the contract frustrated, as the nature of the performance had not been affected by the labour shortages.

It should be noted that traditionally the courts have shown reluctance to apply the doctrine of frustration to leaseholds in light of the fact that such arrangements create estates in land, although exceptionally in the case of National Carriers Ltd v Panalpina (Northern) Ltd [1981] the majority of the House of Lords did declare that a lease could, although only very rarely, be frustrated.

From the case law it is clear that the Courts have imposed certain limits upon the doctrine. Where the frustrating event has occurred due to the fault of one of the contracting parties the frustration is said to be self-induced and the contract will not be discharged. For example in the case of Super Servant Two [1990] the court held that the risk of over commitment fell on the defendants as it was they who had elected to continue using the SS II for another fixture, and as such refused to find that the contract in question had been frustrated. Likewise where a contract contains express provisions dealing with the possibility of a frustrating event, and such an event does, in the course of business, occur then the doctrine of frustration does not apply and the risks are allocated in accordance with the aforesaid contractual provision. Likewise, the doctrine of frustration will not be held to apply where one party to the contract is in a possession of special knowledge and therefore should have foreseen (or indeed, actually foresaw)
the frustrating event. In such a situation this party would be liable under breach of contract; Walton Harvey Ltd v Walker and Homfreys Ltd [1931]. Should the situation arise where both parties were able (or should have been) to foresee the frustrating events which occurred, but failed to provide for such eventualities within the contractual instrument itself then the case of W.J. Tatern Ltd v Gamboa suggests that such a contract may nevertheless be frustrated.

The legal effect of frustration is not to render a contract void rather to discharge the contract as to the future. As a result, at common law, the rights and liabilities of the parties exsisting before the frustrating event were preserved; this meant that money paid by one party to the other before the event could not be recovered, and money payable before the frustration remained payable (Chandler v Webster 1904). This harsh and rigid rule was somewhat modified in the case of Fibrosa S.A. v Fairbairn Lawson Combe Barbour Ltd [1943], yet certain aspects remained unsatisfactory; namely, there was no remedy where the failure of consideration was only partial and, where the payee had incurred expenses in reliance on the contract. As a result, the Law Reform (Frustrated Contracts) Act 1943 was enacted to provide for fair apportionment of losses flowing from contractual discharge by frustration. Section 1(2) of the Act states that whether or not there has been a total failure of consideration, money paid prior to frustrating event is recoverable, money payable prior ceases to be payable. This section does however state that if the party to whom such monies have been paid or are payable has incurred expenses prior to discharge in the performance of the contract, then the Court may order the other party to meet these costs. Section 1(3) of the Act states that, if one party has, prior to the frustrating event, by virtue of the other party’s behaviour, obtained a valuable benefit (not including money), then that party may be ordered to pay a just sum in respect thereof. It must be noted that this Act does not apply to contracts for the carriage of goods by sea, contracts of insurance or contracts of the sale of goods which are frustrated by the goods in question perishing.

In conclusion, I must argue that frustration in English Contract law is indeed a useful and coherent doctrine. Its role is an essential one; when a contract between two parties is no longer performable, due to circumstances outside the fault or control of either party, a mechanism must be in place by which the courts may set that contract aside, at least in respect of its future performance. Whilst loss may indeed be suffered by one such party as a result of these extraneous, or ‘frustrating’ events, it would be unfair to allow the other party to shoulder these burdens alone; after all, when parties enter into a contract they must accept some degree of risk that circumstantial misfortune may befall them. The doctrine of frustration is useful in this respect, as it provides a legal mechanism to prevent one party from gaining an imbalanced advantage from such unfortunate events, but at the same time, in light of the provisions contained within the Law Reform (Frustrated Contracts) Act 1943, does ensure that a suffering party is at least offered some financial remuneration to cover the losses already incurred. As for the doctrine’s coherence; apart from the fact that the courts have shown reluctance to apply the same principles to situations involving leaseholds, insurance or certain sales of goods, such as those carried by sea and those involving perishable goods, the doctrine is generally wholly coherent in the fact that the doctrine is relatively non-contentious in its application, the case law being fairly settled and comprehensive throughout.

The Doctrine of Common Mistake in the English Law of Contract

Common mistake refers to the situation where the parties to a contract have entered into that contract on the basis of a mutual false and fundamental assumption. There are two types of common mistake which can render a contract void.

The first relates to contracts concerning res extincta, i.e. subject matter which at the time of the contract no longer exists, or in fact never existed at all. In the case of Couturier v Hastie (1856) a contract was made for the sale of a shipment of corn, which unknown to either party had already been sold. The House of Lords did not find this contract void directly, it being common commercial practice to buy a risk rather than a cargo, but denied the sellers claim for payment. In the case of Scott v Coulson [1903] a person took out an insurance policy on the life of a person who was already, unknown to either party, dead. In this case the court of appeal held the contract to be void for common mistake. In Great Peace Shipping Ltd v Tsavliris International Ltd (2001) a ship, Great Providence was damaged and in danger of sinking. The owners engaged the defendants to recover her. The defendants were informed by a third party that a ship called the Great Peace was in proximity to the sinking ship and as such hired the ship in order to recover her. The Great Peace was not in fact that close to the Great Providence and as such the salvage company refused to pay the hire fee on grounds that the contract was void for common mistake. Toulson J. held that the mistake was not sufficiently fundamental to warrant such a claim, the Great Peace not being so far away as to be incapable of providing the required service.

The second kind of common mistake capable of rendering a contract void is where a common mistake has been made as to res sua, i.e. where the subject-matter of the contract already belongs to the supposed buyer. An example of this can be seen in the case of Cooper v Phibbs (1867) in which the plaintiff leased a fishery from the defendant, but unknown to either, the fishery was already owned by the plaintiff. The House of Lords held the contract void for common mistake, but in its equitable jurisdiction made an order that the defendant should have a charge on the property in respect of the value of the improvements he had made.

Other types of common mistake will not render a contract void: If A sells to B an antique jug which both A and B mistakenly believe to be Clarice Cliff, and therefore valuable, but is in fact a replica, the contract is still valid, as long as their beliefs are genuine and whole-hearted. The leading authority is the case of Bell v Lever Bros Ltd [1932]. In this case a manager was made redundant and a compensation package was agreed between the parties; it later emerged that he could have been dismissed for misconduct. The House of Lords recognised the presence of common mistake as to the security of his employment, but in light of the fact that there was no deliberate deception was not prepared to void the contract. This case has been interpreted as deciding that a common mistake as to quality can never, at common law, render a contract void. This has been supported by subsequent case decisions such as Leaf v International Galleries [1950] and Harrison and Jones Ltd v Bunten and Lancaster Ltd [1953]. It should be noted however that dicta in the speeches of the House of Lords in the Lever Bros case did suggest that a contract may be void if the mistake as to quality is sufficiently fundamental; the case of Associated Japanese Bank Ltd v Credit du Nord (1988) provides some, albeit limited, support for this contention.

Prior to the case of Solle v Butcher [1949] it was thought that the Court may, in order to relieve the hardship of the common law in cases where a common mistake is not enough to invalidate the contract, employ their equitable discretion e.g. rescission ordered on such terms as the Court considers just. An example of this can be seen above in the case of Cooper v Phibbs where the Court ordered that the defendant should be awarded a charge over the property in question. The case of Solle v Butcher however held that where there is an identical mistake as to quality, although the agreement is valid at law, it is apparently voidable in equity. In this case the parties negotiated the lease of a flat they both believed was not subject to rent control. On discovery of this mistake, the plaintiff sought repayment of the excess rent and succeeded. Even though the mistake was clearly fundamental to the negotiations, the defendants claim to avoid the contract for common mistake failed at law. The Court of Appeal however agreed that equity might intervene to set the contract aside on such terms as the court considered just and reasonable. The terms were imposed that the plaintiff should either give up the flat or stay on at the maximum rent chargeable by law. The scope of the equitable jurisdiction in this type of case awaits judicial clarification. Evans L.J. In William Sindall Plc v Cambridgeshire County Council [1994] suggested that equity can have regard to a perhaps unlimited category of “fundamental” mistake. In the Great Peace shipping case Toulson J. was “at a loss to what is the test for determining the nature of the ‘fundamental mistake’ necessary to give birth to the right to rescind.” Likewise, in this case Lord Phillips MR asserted that it was impossible to reconcile the case of Solle v Butcher, which was a Court of Appeal judgement, with the House of Lords decision in Bell v Lever Bros, and therefore argued that the former of these cases could not stand as law.

In conclusion, whilst there is no doubt that the doctrine of common mistake is certainly useful, serving the function of providing resolution in situations where contracting parties have made mutual errors which have in effect rendered the original agreement either meaningless or something wholly different from what was actually in the minds of the party at the time of agreement. However, its uses are certainly limited to the relatively small number of cases which arise where; for instance, one party sells property to another who is already, unbeknown to either party, the legal owner of that property. As for being coherent, the scope of the doctrine is quite unclear, at least in respect of common mistakes as to the quality of property contracted for. In such a situation it is not clear whether this doctrine should render such a contract void or not, the operative question resting with the vague and undefined notion of what constitutes a ‘fundamental’ mistake. Equity has intervened to throw further doubt on this doctrines coherence, and even the leading judges of the House of Lords are in disagreement on quite how to reconcile the case law, each differing in opinion as to the role or scope of this doctrine. This lack of coherence which has been evidence throughout my latter discussion inevitably leads one to the conclusion that this doctrine is only partially useful, and as noted above, only in certain rather exceptional circumstances at that.

Bibliography

Taylor v Caldwell (1863)
F.A. Tamplin S.S. v Anglo Mexican Petroleum [1916]
Taylor v Caldwell (1863)
Nickoll and Knight v Ashton Eldridge Co
Tsakrioglou Co Ltd v Noblee Thorl GmbH [1962]
Krell v Henry [1903]
Herne Bay Steamboat Co v Hutton [1903]
National Carriers Ltd v Panalpina (Northern) Ltd [1981]
Super Servant Two [1990]
Walton Harvey Ltd v Walker and Homfreys Ltd [1931]
W.J. Tatern Ltd v Gamboa Chandler v Webster 1904
Fibrosa S.A. v Fairbairn Lawson Combe Barbour Ltd [1943]
Couturier v Hastie (1856) Scott v Coulson [1903]
Great Peace Shipping Ltd v Tsavliris International Ltd (2001)
Cooper v Phibbs (1867)
Bell v Lever Bros Ltd [1932]
Leaf v International Galleries [1950]
Harrison and Jones Ltd v Bunten and Lancaster Ltd [1953]
Associated Japanese Bank Ltd v Credit du Nord (1988)
Solle v Butcher [1949]
William Sindall Plc v Cambridgeshire County Council [1994]

Law Reform (Frustrated Contracts) Act 1943

Treitel G H, The Law of Contract, Sweet and Maxwell, 2003
McKendrick, E, Contract Law, Palgrave, 2005
Poole, J, Casebook on Contract Law, Blackstone, 2003