Krell v Henry and Herne Bay Stream v Hutton

To what extent would you describe the reasoning in Krell v Henry [1903] 2 KB 740 and Herne Bay Steam Boat Company v Hutton [1903] 2 KB 683 as either compatible or incompatible?

Krell v Henry and Herne Bay Steamboat Co v Huttonare two cases that revolve around similar facts and were decided by the same Court of Appeal in 1903 within a few days’ interval, yet reconciling the rationale leading to the two different outcomes of the respective cases is often questionable. Both decisions have contributed to the development of theories to explain the doctrine of frustration of contracts, which dates back to 1863 when it was held in the case of Taylor v Caldwell that a ‘frustrating event’ was one that made it physically impossible for a party to carry out the purpose of the contract. Treitel explained that ‘the argument of frustration of purpose […] is that supervening events have so greatly reduced the value to [one party] of the other party’s performance that he should no longer be bound to accept it and to pay the agreed price.’ Over time, the application of the doctrine of frustration of the purpose of a contract has extended to cases where events other than the perishing of a thing caused performance to become impossible – this is what the two 1903 cases are concerned with.

In Krell v Henry, the parties entered into a contract for the hire of a flat in Pall Mall. The hire was for the specific days on which processions were planned to take place for the coronation of King Edward VII. The purpose of the contract was therefore to view those processions. As a result, when the processions had to be postponed due to the King’s illness, the Court of Appeal held that the said purpose of the contract was frustrated; therefore, there was a total failure of consideration for the amount claimed by the owner of the flat for the hire of the room. However, the same Court of Appeal a few days earlier decided the case of Herne Bay Steamboat Co v Hutton. In that case, the defendants hired a pleasure boat from the plaintiffs so as to take passengers from Herne Bay ‘for the purpose of viewing the naval review and for a day’s cruise round the fleet’. The Court of Appeal took the view that the fundamental purpose of that contract was simply the hire of a boat to transport passengers, and that purpose was not frustrated. Different theories have been presented to attempt to reconcile the two coronation cases, namely the “construction theory” and the “basis of the contract” theory.

It was held in Krell v Henry that a contract can be frustrated because ‘the event which renders the contract incapable of performance is the cessation or non-existence of an express condition or state of things, going to the root of the contract, and essential to its performance’. The legal scholarship has extensively discussed what is meant by the ‘impossibility of performance’ of the contract which goes to the ‘root of the contract’. According to Sir John Salmond, it is impossible to perform the contract when the party cannot physically do so, as in Taylor v Caldwell; hence, in Sir Salmond’s view, the performance of the contract itself remained possible in Krell v Henry. McElroy and Williams also submit that it was still possible for the defendants in Krell v Henry to make a money payment for the hire of the room. On the other hand, Sir Salmond explains that the ‘supervening impossibility of performance’ has to be distinguished from the ‘supervening impossibility of the fulfilment of the purposes with which the contract was made’ – according to Sir Salmond, this is what the Court of Appeal should have considered as the basis for frustration in Krell v Henry. Therefore, according to this school of authors, the Court of Appeal’s decision in Krell v Henry is explained by the ‘construction theory’.

In the famous case of Davis Contractors Limited v Fareham Urban District Council, Lord Reid explained the construction theory by stating that frustration depends ‘on the true construction of terms which are in the contract, read in light of the contract and of the relevant surrounding circumstances when the contract was made’. The test of construction was advanced in the earlier case of Knowles v Bovill, where Baron Martin held that the true question is, ‘What did [the defendant] buy?’ In Krell v Henry, the defendant bought a view of the coronation processions. The impossibility to view the processions therefore went to the root of the contract and frustrated it.

The application of the ‘construction theory’, however, led to a different outcome in Herne Bay Steamboat Co v Hutton. On the facts, it was found that the boat was hired to take passengers from Herne Bay for the purpose of viewing the naval review and for a day’s cruise round the fleet. Yet, the Court of Appeal took the view that the ‘fundamental purpose’ of the contract was simply the hire of a boat to transport passengers. The Court held that the ship was not required to be particular fit for the purpose of allowing the passengers to see the naval review. McElroy and Williams submit quite convincingly that “the same argument could be applied equally well to Krell v Henry. It could be said with equal truth that there was no particular fitness in the room which was let in that case.”

It is apposite to note HWR Wade’s submission that a contract can be frustrated for ‘commercial impossibility . One can argue that in Herne Bay Steamboat Co v Hutton, the boat was hired to charge customers a certain price (which is higher than normal) for the transport on the day of the coronation processions, and it became commercial impossible to do so when the said processions were cancelled. However, the Court of Appeal adopted a narrow approach when determining whether the cessation of a particular express condition or state of things goes to the root of a contract and whether that condition or state of things was commercially essential for the continued performance of the contract. In the Court of Appeal’s view, the opportunity to charge high prices because of the viewing of the processions was accessory to the fundamental purpose of transporting the passengers – therefore, it did not go to the root of the contract. Indeed, the hiring of a pleasure boat for the day was a common commercial activity that took place throughout the year, irrespective of whether or not there was a special event, and hence the viewing of the coronation processions was not an essential feature of the contract or a particular fitness of the boat. The cancellation of the coronation resulted in a bad bargain for the plaintiffs as they could not charge high prices to passengers. This is different from the situation in Krell v Henry, where there the only reason for renting the flat on the day of the coronation was for the viewing of the processions.

Hence, when determining the fundamental purpose of the contract in Herne Bay Steamboat Co v Hutton, the court was careful not to concern itself with saving a party from a realised commercial risk or a mere bad bargain. Lord Radcliffe stated in Davis Contractors that the court should assess whether an event ‘renders [performance of the contract] a thing radically different from that which was undertaken by the contract…It is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must as well be such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.’ This narrower application of the doctrine of frustrated has led to the development of what is termed the ‘basis of the contract theory’, under which the court must look at the ‘cause’ of the contract, its basic purpose, or motive. The theory is also well explained by Lord Haldane in FA Tamplin Steamship Co Ltd v Anglo Mexican Petroleum Products Co Ltd, where he stated that the frustrating event may be ‘of a character and extent so sweeping that the foundation of what the parties are deemed to have had in contemplation has disappeared, and the contract itself has vanished with that foundation’. More recently, the same idea was echoed by Rix LJ in The Sea Angel; he explained that “

the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.”

It is submitted that the reasoning used in the two coronation cases are compatible and can be explained by the ‘construction theory’ to determine the fundamental purpose of the contract, which the court applies very narrowly so as to preserve the autonomy of the contract and not intervene to save one party from the realisation of a commercial risk that it had taken. Whereas the ‘basis of the contract theory’ can also be relied upon to arrive at the same conclusion, it has been argued that it raises a question of fact, not of law. It is submitted that both theories require careful consideration of the facts of the case in order to determine the scope of what the parties had agreed on and whether that has become frustrated. This strict approach aligns with Bingham LJ’s observation in The Super Servant Two that the doctrine of frustration “is not to be lightly invoked, must be kept within very narrow limits and ought not to be extended.”

References

[1903] 2 KB 740

[1903] 2 KB 683

122 ER 309, (1863) 3 B&S 826

Edwin Peel (ed), Treitel on The Law of Contract (13^th edn, Sweet & Maxwell 2011) 942

[1903] 2 KB 740, 748

John William Salmond and Percy Henry Winfield, Principles of the Law of Contracts (Sweet & Maxwell 1927) 306

RG McElroy and Glanville Williams, ‘The Coronation Cases-I’, (1940-1941) 4 MLR 241

[1956] AC 696 (HL), 720

(1870) 22 LT 70

McElroy and Williams (n 7), 254

HWR Wade, ‘The principle of impossibility in contract’ (1940) 56 LQR 519, 550

Davis Contractors (n7), 696

Ibid, 729

GHL Fridman, ‘The Theory and Practice of Frustration’ (1977) 25 Chitty’s Law Journal 37

[1916] 2 KB 397

Ibid 406-407

[2007] EWCA Civ 547

[1990] 1 Lloyd’s Rep 1, 8

Bibliography

Caselaw

Taylor v Caldwell 122 ER 309, (1863) 3 B&S 826

Knowles v Bovill (1870) 22 LT 70

Herne Bay Steam Boat Company v Hutton [1903] 2 KB 683

Krell v Henry [1903] 2 KB 740

FA Tamplin Steamship Co Ltd v Anglo Mexican Petroleum Products Co Ltd [1916] 2 KB 397

Davis Contractors Limited v Fareham Urban District Council [1956] AC 696 (HL)

The Super Servant Two [1990] 1 Lloyd’s Rep 1, 8

The Sea Angel [2007] EWCA Civ 547

Secondary Sources

Edwin Peel (ed), Treitel on The Law of Contract (13^th edn, Sweet & Maxwell 2011)

John William Salmond and Percy Henry Winfield, Principles of the Law of Contracts (Sweet & Maxwell 1927)

HWR Wade, ‘The principle of impossibility in contract’ (1940) 56 LQR 519, 550

RG McElroy and Glanville Williams, ‘The Coronation Cases-I’, (1940-1941) 4 MLR 241

GHL Fridman, ‘The Theory and Practice of Frustration’ (1977) 25 Chitty’s Law Journal 37