What could the coronation of King Edward VII and the outbreak of SARS-CoV-2 have in common? The answer is – firstly – both pertain to events that caused contracts to be either impossible or more difficult to perform. Secondly, both form part of a rich legal discourse on the canvas of the law of England and Wales.
The outbreak of SARS-CoV-2 has hit businesses hard. Consequently, many are now seeking ways to escape their contractual commitments. Contracts subject to English law are no exception. However, one must appreciate that not every difficulty allows a discharge from one’s obligations. A party will not be discharged from its obligations where performance is still possible but impracticable. Discharge will in certain cases only be possible where a party satisfies a very high standard of frustration of purpose.
This short article will outline the difference between the two. In order to achieve this, it will first and foremost introduce English law’s strict approach towards performance (1) and subsequently describe one of the exception to this approach called the doctrine of frustration; a doctrine which, under certain circumstances, brings a contract to an end (2). The article will outline a mere fraction of this doctrine, namely the difference between impracticability of performance (a non-frustrating event) and the frustration of a contract’s purpose (a frustrating event) (3).
1. The strict approach towards performance.
English law takes a strict approach towards the performance of contracts; they must be “completely and precisely performed.”[1] Failure to perform by this standard results in the contract being breached. Indeed, for a long time excuse for non-performance was an alien concept to English law. In the leading case on English law’s strict approach towards contractual performance – Paradine v Jane (1647) – a defendant was deprived use of land by the action of an enemy army. Nonetheless, the court ruled that the defendant was still obliged to perform, “for though the whole army had been alien enemies, yet he ought to pay his rent.”[2] Such contracts are thus deemed to be positive and absolute.[3]
Since the law can be so unforgiving, any reasonable party will include in their contract a force majeure clause. Such a clause will determine what unforeseen events over which the parties have no control and which the parties cannot overcome will excuse a breach. However, even if the parties do not include a force majeure clause in their contract, after Paradine v Jane, English case law developed a fallback doctrine called frustration.
2. The doctrine of frustration and its many faces.
It was more than two hundred years later that the strict standard of Paradine v Jane was relaxed in the case of Taylor v Caldwell (1863)[4] where the plaintiffs were to use the Surrey Music Hall for four concerts for a fee. Subsequently the hall was destroyed by fire consequently making it impossible to hold the concerts. The plaintiffs thus wanted to recover for their loss due to wasted advertising and other expenses. The court however held for the defendants and distinguished positive and absolute contracts – as in Paradine v Jane – which impose a strict obligation of performance, irrespective of the risks, from contracts that impliedly excused parties from a breach where performance became impossible.
Surrey Music Hall ca. 18581, source: The New Park Street Pulpit; Charles H. Spurgeon; Passmore & Alabaster; London; 1858 / Public domain
Taylor v Caldwell marks the beginning of the doctrine of frustration. Frustration will operate only, if a force majeure clause is not present in the contract.[5] If frustration applies, it automatically brings the contract to an end for the future. As for the financial consequences of frustration, the courts’ approach towards this topic evolved considerably. Initially, the loss was said to lie where it falls, meaning that the contract terminated as of the time of the frustrating event.[6] This meant that an advance payment was not recoverable, if the frustrating event was subsequent to that payment.[7] This changed however as a result of the House of Lords’ judgment in Fibrosa SA v Fairburn Lawson Combe Barber Ltd (1943)[8]. In that case a Polish company – Fibrosa SA – ordered machinery and paid an advance of £1,000. Due to the German invasion of Poland the contract was frustrated. As a consequence Fibrosa sought to recover the advance. The House of Lords decided in Fibrosa’s favor ordering restitution of the advance. Lord Wright noted that because of the frustrating event, there was a total failure of consideration, meaning that the Polish company’s benefit from the contract was vitiated.[9] Nowadays the financial consequences of frustration are governed by the Law Reform (Frustrated Contracts) Act 1943[10]. Under this Act – put simply – money paid is recoverable, while money payable need not be paid. However, recoverability is – in case the receiving party already incurred certain expenses – subject to a judge’s discretion. Namely, if it would be just to do so in the circumstances, a judge may order the benefit, or part of it, to remain with the receiving party.
One can spill a substantial amount of ink writing about further developments of the doctrine and frustration in general. After all, it constitutes compulsory subject matter for any English law textbook. It also encompasses many frustrating events such as impossibility, (temporary) unavailability of subject matter, failure of specific source or illegality. All of these may be of particular interest in the context of the SARS-CoV-2 outbreak. However, the interplay of two particular aspects will be of relevance in the subsequent part of this short article: impracticability and frustration of purpose. Both are similar in that they concern cases where performance has not become impossible.[11]
3. Comparing impracticability to frustration of purpose.
One can argue that impossibility is relative, as even in Taylor v Caldwell the music hall could, in theory, have been rebuilt albeit with enormous effort.[12] Yet still, English lawyers argue, impossibility must be distinguished from impracticability. In the case of impracticability, performance imposes “a burden on one party quite different from that contemplated at the time of contracting.”[13] Such a burden is not considered as an excuse for breach. The leading authority on English law’s unwillingness to accept impracticability as a frustrating event comes from the speech of Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council (1956) where he stated that “it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play.”[14] In other words, impracticability is not a frustrating event.
On the other hand, frustration of purpose differs from impracticability in that it deals with situations where performance becomes “radically different from that originally envisaged by both parties.”[15] One must however interpret this basis of frustration narrowly; a contract will only be frustrated, if it becomes wholly devoid of purpose for both parties.[16] This becomes clearer when comparing two major cases on the subject.
In the first case – Krell v Henry (1903)[17] – the plaintiff hired a flat to the defendant, as it was the latter’s intention to view the coronation procession of Edward VII. However, as a result of the King’s illness, the procession was cancelled. Consequently, the defendant refused to pay. Although the purpose was not stated explicitly in the contract, the Court of Appeal decided that the purpose of the contract was not merely to hire a flat but to provide a facility whereby the defendant could view the procession.[18] Consequently, this purpose constituted the foundation of the contract. Since this purpose was frustrated, the defendant did not need to pay.
View of flat at 56A Pall Mall central to the Krell v Henry case / Panhard / CC BY-SA (http://creativecommons.org/licenses/by-sa/3.0/)
The second case – Herne Bay Steam Boat Co. v Hutton (1903)[19] – can be contrasted with Krell v Henry. In the former case the defendant hired a boat for a day’s cruise and in order to observe Edward VII’s review of the Navy. Due to the King’s illness the review was cancelled. However, the contract was not deemed frustrated, since the obligation of carrying passengers could still be performed; it was only the defendant’s motives for hiring the boat that were frustrated.
The distinguishing characteristic between the cases is widely considered to be the purpose of the contract. In Krell v Henry it was to view the coronation procession. In Herne Bay the purpose to view the review of the Navy was something additional; the other part of the purpose – the cruise – was still feasible, which consequently made the contract possible to perform.[20]
When choosing between the two approaches, English courts will be reluctant to apply the Krell v Henry approach in favor of Herne Bay.[21] This conclusion stems from the so-called Suez Canal cases where parties, having planned a shipment, did not specify the exact route to the port of destination; they simply assumed the most common-sense route through the Suez Canal and did not include this in the contract. As a result of the Anglo-French invasion in 1956 the canal was closed. The alternative route through the Cape of Good Hope would have been more onerous. Nonetheless, the courts did not consider the closure of the canal – even for ships trapped in the canal – to be a frustrating event.[22] One therefore needs to be mindful that even if one thinks that a contract’s purpose has been frustrated by the SARS-CoV-2 outbreak, English courts may still not be inclined to deem the contract frustrated.
4. Conclusion.
Many may deem the SARS-CoV-2 outbreak as a marvelous excuse to escape burdensome contractual commitments. If their contracts are subject to English law and they failed to include force majeure clauses, they may try to achieve this through the doctrine of frustration. In such a scenario, however, they may have to swallow a very bitter pill. In most cases, if the contract is not impossible to perform or its purpose is not wholly frustrated, they will need to stick to their obligations, because impracticability is no excuse for a breach. Only in very limited cases, where the foundation of the contract has been frustrated, will the contract itself be frustrated. Still, those considering breaching their contract need to be mindful that English courts will construe this test in a narrow fashion.
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References:
[1] Jill Poole, Textbook on Contract Law 297 (Oxford University Press, 10th ed.).
[2] Paradine v Jane (1647) Al 26, 82 ER 897.
[3] See Poole, supra note 1, at 467.
[4] Taylor v Caldwell (1863) 3 B & S 826.
[5] See Alfred Denning. The Discipline of Law 44-45 (Butterworths, 1979).
[6] See Jan Halberda, Fibrosa S.A v. Fairbairn Lawson Combe Barbour Ltd (1942) Spółka z Kresów przed Izbą Lordów , in Miscellanea Historico-Iuridica XIV.1. (2015), at 197, 204.
[7] See Chandler v Webster [1904] 1 KB 493.
[8] Fibrosa SA v Fairbairn Lawson Combe Barber Ltd [1943] AC 32.
[9] See Graham Virgo, The Principles of the Law of Restitution 308 (Oxford University Press, 3rd ed. 2015).
[10] Available at: http://www.legislation.gov.uk/ukpga/Geo6/6-7/40/contents
[11] See Guenter Treitel, The Law of Contract 885 (Sweet & Maxwell, 11th ed.).
[12] Id., at 880.
[13] Poole, supra note 1, at 476
[14] Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696.
[15] Poole, supra note 1, at 475.
[16] See id.
[17] Krell v Henry [1903] 2 KB 740.
[18] See Treitel, supra note 11, at 886.
[19] Herne Bay Steam Boat Co. v Hutton [1903] 2 KB 683.
[20] See Poole, supra note 1, at 475-476.
[21] See Treitel, supra note 11, at 886.
[22] See The Eugenia, Ocean Tramp Tankers Corporation v V/O Sovfracht [1964] 2 QB 226; see also Tsakiroglou & Co. Ltd. V Noblee Thorl GmbH [1962] AC 93.