THE IMPOSSIBILITY DOCTRINES
The vast majority of business agreements proceed to satisfactory completion without disputes or claims that there has been a breach arising. But some commercial ventures may be thwarted because of something happening which is beyond the contracting parties control. So, for instance, the goods contracted for may have perished, making performance impossible. Alternatively war may unexpectedly break out in a country in which components are being made for a UK-based computer company. This may make it difficult for the manufacturer to make or deliver the components. If the war is with the UK, what constituted a legal and legitimate contract for the supply of the components on Monday suddenly becomes trading with the enemy on Tuesday and is rendered unlawful. Events of this kind may make performance of the contract impossible, difficult or illegal. How do the courts respond to such unexpected circumstances? Are the parties absolved from responsibility to perform their contract or do the courts hold them to it? What happens where the parties have already begun performance or been involved in a significant financial outlay in anticipation of performance?
COMMON OR POSSIBILITY MISTAKE
In Chapter 10 we looked at the problems surrounding agreement mistakes. This is the term used to describe situations involving a fraudster and a unilateral mistake or instances in which the parties are at cross-purposes. It was made clear in that chapter that another category of mistake exists which involves a situation in which both parties share the same misapprehension. This would be the case, for instance, where oranges have, unbeknown to either party, perished while their sale was being negotiated, or if Slapper Trains’s whole fleet is destroyed by fire as the talks about their sale are ongoing. For this reason, this type of mistake is often referred to as common or possibility mistake, although the use of nomenclature differs considerably between commentators (see Figure 11.1).
The problem which arises in such instances is that it is impossible to perform the contract. What distinguishes this type of impossibility from the doctrine of frustration discussed in later sections is timing. Possibility mistake occurs because the contract has been negotiated on a mistaken assumption about the existence or quality of the thing being exchanged. In cases of frustration, the contract is capable of being performed at the time it is made but a subsequent event renders it impossible or futile. However, the main problem with possibility mistake, as in cases of frustration, lies in deciding when an incorrect assumption is sufficiently fundamental for the courts to justify setting the contract aside. As regards mistake, the weight of opinion is that a contract will only be void, that is considered to have never existed, where there is nothing to contract about and the agreement is devoid of all content.
For some years there has been disagreement between commentators and members of the judiciary as to whether there is a second doctrine of common mistake founded in equity which allows the courts to intervene in circumstances where the contract would not be rendered void by the common law. The decision in Bell v Lever Bros Ltd (1932), suggests that this is not the case but Lord Denning argued in Solle v Butcher (1950) that the court did have this power and that common mistake could also render a contract voidable. In contrast to void contracts, those rendered voidable can be set aside at the discretion of the courts. The more recent decision of the Court of Appeal in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd (2002) makes clear that this is not an appropriate statement of law. Applying Bell v Lever, the judges argued that there was no equitable jurisdiction in cases of common mistake and that the judgment in Solle had been an attempt to usurp the common law. The equitable doctrine envisaged by Denning was seen as bearing no difference to the common law doctrine and could not be used to revive a contract which the common law considered never to have existed. However, they argued per curiam that there was scope for the legislature to intervene to mitigate the harshness of the common law. We wait to see whether the legislature will take up the challenge.
In the Great Peace case, the defendants offered salvage services to a vessel in distress. The offer was accepted and the defendants approached a merchant ship which they both believed to be 35 miles from the vessel in distress. They entered into negotiations to use the ship for salvage purposes and concluded a contract to do so. They then discovered that the merchant ship was actually 410 miles away. However, the defendants did not cancel the contract until they had found an alternative ship to undertake the work. When challenged, they pleaded fundamental mistake of fact and that the contract was either void or voidable at law. The court found in favour of the merchant vessel, the owners of which were suing for breach of contract.
The judgment makes clear that the test for common mistake is extremely narrow. They contended that a common mistake would not allow the parties to avoid a contract unless it rendered the subject matter of the contract essentially and radically different from that the parties believed to exist. It was considered telling that the defendants did not want to cancel the arrangement until they knew whether they could find a nearer vessel. The judges rejected the argument that the doctrine was based on the notion of an implied term that the contract would be rendered void in the circumstances which had occurred. It was made clear that the circumstances were far removed from the contemplation of the parties and that, as a result, it was something of a falsity to imply agreement about such a term. In finding for the merchant shipowners they, were influenced by the fact that the ship could still have played a part in the rescue operation even though it was so far away, whereas the test for common mistake was that the circumstances had to render performance impossible rather than something which was just substantially different.
THE DOCTRINE OF FRUSTRATION
It has been argued that the security of contract is increasingly affected by the spread of political, economic and social upheavals, such as war, strikes, revolution or rampant inflation. Globalisation of markets has contributed to such modern disruptions, as more and more businesses form links with contractors in other states. The courts can respond to such problems through the doctrine of frustration, known elsewhere as the impossibility doctrine. Like the doctrine of mistake which deals with a pre-existing impossibility problem, the doctrine of frustration is a narrow one. This is because the courts have been reluctant to allow the parties to escape their obligations to each other in anything but the most extreme circumstances. A claim that a contract has been frustrated will not be successful, for instance, when one party merely finds performance difficult or unprofitable. However, frustration is often pleaded in such circumstances in an attempt to avoid contractual obligations. The courts have preferred to see the doctrine as one of last resort which should be used rarely and with reluctance.
There are few modern authorities that deal with the doctrine and trainee lawyers will not hear frustration being discussed with clients on a regular basis. Neither are there any empirical studies of the doctrine which allow us to place the formal law in its social, political or economic context. However, the doctrine of frustration remains important because it provides an example of the importance of planning contractual performance in advance. The allocation of commercial risk is something that all contractors are interested in and often bears a close relation to the price to be paid. Careful drafting and allocation of risk prior to performance means that the parties can often avoid the need for costly litigation should something unpredictable happen to disrupt the contract.
THE BASIC TENETS OF THE DOCTRINE
Taylor v Caldwell (1863) is generally acknowledged to be the first case which saw the introduction of a general principle of frustration and provides a good example of the use of the doctrine as a defence to a claim of breach of contract. In this case, Caldwell agreed on 27 May to let Taylor have the use of the Surrey Music Hall at £100 per day for four concerts. The first of the concerts was to be held on 17 June but on 11 June the hall was accidentally burnt down and it became clear that the parties had made no provision in the contract for such a contingency. Taylor claimed damages in respect of wasted advertising expenses but it was held that the contract was discharged by frustration and that Caldwell was not liable. Blackburn outlined the reasons for the decision:
Where, from the nature of the contract, it appears that the parties must from the beginning have known that it could not be fulfilled unless … some particular specified thing continued to exist, so that, when entering into the contract, they must have contemplated such continuing existence as the foundation of what was to be done; there … the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without the fault of the contractor. (p. 27)
Subsequent leading judgments were keen to make the point that the doctrine is a restrictive one. In Davis Contractors Ltd v Fareham Urban District Council (1956), Davis agreed to build Fareham Urban District Council 78 houses in eight months for £92,000. Serious shortages of labour and materials resulted in the contract taking 22 months to complete and costing Davis £18,000 more than estimated. Davis claimed that the contract had been frustrated by economic conditions and that, as a consequence, he was not bound by the agreed price. Instead he claimed a larger sum for services rendered on a quantum meruit basis. The House of Lords held that the delay caused did not mean that the basis of the contract was displaced. Lord Radcliffe famously explained the basic tenets underpinning the doctrine when he said that:
… 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 would render it a thing radically different from that which was undertaken by the contract … The court must act upon a general impression of what its rule requires … But, even so, it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. 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. (p. 160)
In this case the thing contracted for was 78 houses. These had been built so in the circumstances, the court considered it appropriate that the risk fell upon the builder and rejected the claim of frustration.
In 1981, in National Carriers Ltd v Panalpina (Northern) Ltd, the House of Lords upheld Lord Radcliffe’s ‘radical change in the obligation’ test, which was restated by Lord Simon as follows:
Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such a case the law declares both parties to be discharged from further performance. (p. 175)
In the same case, Lord Hailsham identified a number of different ways of justifying the setting aside of the contract in such circumstances. These included the inclusion of an implied term in the contract to the effect that if the parties had known what was going to happen they would have assumed that the contract should have been terminated. Alternatively he said it could be argued that the contract should be set aside because of a total failure of consideration. He noted that broader concepts employed by the judiciary to rationalise such interference included a requirement that justice be done in these exceptional cases or the assumption of an obligation to search for the real ‘meaning’ of the contract.
Unfortunately, the vast majority of frustration cases are not clear-cut. They frequently concern pleas of commercial futility brought about by a wide variety of political, economic or other disabling factors rather than the more obvious physical impossibility of the type in Taylor v Caldwell. So, for instance, in Krell v Henry (1903), Henry hired rooms in Pall Mall at a high price for the purpose of viewing the coronation procession of Edward VII. The procession was cancelled owing to the King’s illness but Krell sued for the hire charge and the doctrine of frustration was pleaded in defence. The court held that Krell’s claim failed. The contract had been frustrated and was therefore void. In their opinion it was the coronation procession and the relative position of the rooms which was the basis of the contract rather than the value of having a hired room (see also Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd, 1976).
However, in another ‘coronation case’, Herne Bay Steam Boat Co v Hutton (1903), Herne Bay Steam Boat Company hired a boat in order to offer cruises on coronation day. The aim of the trip was to see the royal naval review which had been organised to celebrate the coronation together with a day’s travelling around the fleet at Spithead. In contrast to Krell v Henry which involved the same frustrating event, the contract was held not to be frustrated when the royal review was cancelled because of the King’s indisposition. The reason given by the court was that, in this case, the royal review was not the sole basis of the contract. As Sir Frederick Pollock said: ‘In point of fact the fleet was still there and it was very well worth seeing without the review’.
At first glance the cases seem difficult to reconcile but it has been argued that they can be distinguished by reference to the relative economic positions of the parties. In Krell v Henry