As lockdown restrictions begin to be relaxed there seems to be little sign of frustration easing. The global lockdown certainly threw up some strange reports. Apparently, demand for fantasy nurse costumes in Bavaria saw a thirty-fold rise. It is not clear whether they were being used for their intended purpose or to evade restrictions. Elsewhere, in Berlin, sales of one article of autoerotica at Dildo King grew eight-fold, year-on-year. Karex, which makes a fifth of condoms worldwide, was obliged to close all its factories in Malaysia. There was clearly plenty of frustration to go around.
In business, contractual counterparties have been considering how unforeseen “supervening” events affect the rights and obligations of their agreements. Much has been written recently on ‘frustration of contracts’ (as well as the various other kinds of frustration), but where does this concept come from and is there anything to be learned from history about how might it be applied today? What is the legal position when a contract cannot be performed because, for example, the government mandates the cessation of business? The courts have grappled with that issue for centuries in extreme and sometimes bizarre circumstances.
Before 1861, contracts were absolute; supervening events provided no excuse for non-performance. For example, in the 1600s a tenant was ordered to pay back rent despite the leased property being invaded by Royalist forces during the English Civil War. That changed with Taylor v Caldwell. The owner of the Surrey Gardens and Music Hall agreed to allow musicians to give a series of concerts over several days. The musicians went to the expense of organizing and advertising the concerts. Before curtain up on the first night, however, the music hall was accidentally burned to the ground. Naturally, the tragedy was unforeseen and nothing in the contract provided for what should happen.
Blackburn J dug deep into the books to find a way to temper the harsh rule of no excuse for non-performance. What principle governed in Ancient Rome when a vendor’s slave had the misfortune of dying before delivery to a contractual purchaser? How did the common law view a person who, having possession of another’s horse, refuses to redeliver it on request, on account of the horse having died? The judge found that, where an act of God renders it impossible to perform the contract, through no fault of any party, “as, for instance, in the case of a painter employed to paint a picture who is struck blind, it may be that the performance might be excused”.
Did the musicians have to pay for the music hall? Did the owner have to reimburse the musicians for their costs, and any liabilities to litigious musicophiles? Blackburn J held that the music hall having ceased to exist, through no one’s fault, both parties were excused – the musicians from taking and paying for the premises, the owner from performing the promise to give the use of the premises.
The principle was developed further by a line of authority known as the coronation cases. After the death of Queen Victoria, Edward VII succeeded to the throne. His coronation was planned for June 1902, and would involve a stately procession through central London.
Before the coronation, there was a brisk trade in renting out one’s flat on Pall Mall, if appointed with majestic balcony views, for the day to royal fans. The sums involved were extraordinary. In Chandler v Webster, Mr Chandler agreed to cough up £141 15s, which in today’s money would be £17,444; in Krell v Henry, Mr Henry stood to earn about half that amount.
Alas, Edward fell ill with appendicitis two days before the coronation, which had to be postponed. The thorny question then arose whether the royalists could recoup their sizeable deposits or whether the hosts could sue for the unpaid balance.
The answer was that neither could recover because the contract had been discharged by frustration. Nothing had perished – indeed, Edward’s quick recovery brought surgical treatment of appendicitis into the mainstream for the first time – but, in a more abstract sense, the whole purpose of the contract had been frustrated. The legal result was that the losses lay where they fell: deposits were irrecoverable, and no balance was owing.
The principles have moved on a little since 1902. In particular:
- Frustration is a more narrow doctrine because force majeure clauses and hardship and intervener clauses are frequently inserted into commercial contracts. The effect of these clauses is to reduce the practical significance of the doctrine of frustration because, where express provision has been made in the contract itself for the event which has actually occurred, then the contract is not frustrated.
- If the doctrine is engaged, statute has mitigated the potentially punitive consequences of the common law position that the losses lie where they fall. Under the Contracts Law (1996 Revision), the deposits paid by Messrs Krell and Chandler would be recoverable, save that the Court could order, if it considered it just to do so, a deduction to reflect any expenses that Messrs Henry and Webster incurred in relation to the contract prior to the frustrating event.
Bingham LJ explained five key principles in The Super Servant Two:
- The doctrine of frustration has evolved “to mitigate the rigour of the common law’s insistence on literal performance of absolute promises” and that its object was: “… to give effect to the demands of justice, to achieve a just and reasonable result, to do what is reasonable and fair, as an expedient to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances.”
- Frustration operates to “kill the contract and discharge the parties from further liability under it” and that therefore it cannot be “lightly invoked” but must be kept within “very narrow limits and ought not to be extended”.
- Frustration brings a contract to an end “forthwith, without more and automatically”.
- The essence of frustration is that “it should not be due to the act or election of the party seeking to rely on it” and it must be some “outside event or extraneous change of situation”.
- Finally, a frustrating event must take place “without blame or fault on the side of the party seeking to rely on it”.
The modern test has been formulated as follows. If the literal words of the contractual promise were to be enforced in the changed circumstances, would performance involve a fundamental or radical change from the obligation originally undertaken? In the leading case of Davis Contractors v Fareham UDC, Lord Radcliffe said:
“… 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. Non haec in foedera veni. It was not this that I promised to do … There must 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.”
It is clear that the relaxation of lockdown will be gradual and may even suffer reversals due to further waves of disease. It is important to remember that contracts that have been frustrated cannot be revived; and contracts that have not yet been frustrated may be susceptible to frustration in the future. The disruption to businesses will continue and the rate of business failures may even increase as relaxation continues – and frustration, both personal and legal, will remain a feature of our lives for some time to come.