Frustration and Force Majeure: A Guide for the Perplexed – Part II

[Shiv Swaminathan is Professor and Associate Dean (Research) at Jindal Global Law School (JGLS). Many thanks are due to Niranjan Venkatesan for his comments; my teaching assistant, Veda Singh and to Aaditi Pradeep and Rusha Ghosh Dastidar students of JGLS, for their research assistance]

This is part II of a multi part cheat-sheet on the doctrine of frustration (technically comprising impossibility, illegality and frustration of object) and force majeure (regulation of contingencies by agreement of parties). Part I is available here.

Frustration of Purpose

The trickiest cases of the lot arise where there is a ‘frustration of object’ or ‘frustration of purpose’ a category inaugurated by Bramwell B in Jackson v Union Marine Insurance in 1874. These are cases where it remains ‘possible’ to perform the contract in some sense of the term, but there is either a diminution in the value of such performance for the promisee or increase in the cost or onerousness of performance for the promisor. One of the reasons these cases are tricky is that all other than the most straightforward illegality and impossibility cases are automatically pushed into this category. Besides, what this calls for is that ‘the common object has to be frustrated’ and ‘not merely the individual advantage’ that one of the parties might have gained out of it, as per Lord Sumner in Hirji Mulji v Cheon Yeu SS [1926] AC 497, 507. The supervening event should strike at something ‘regarded by both contracting parties as the foundation of the contract’ [Krell v Henry [1903] 2 KB 740, 750 (per Vaughan Williams CJ); language of ‘foundation’ vanishing also used by Viscount Haldane in Tamplin SS 406-407]. What makes these cases tricky is the element of ‘common object’. Understanding this as a replica of ‘common mistake’ makes it a whole lot easier. As we have already seen earlier, straightforward cases of destruction of property are classified as cases of mistake depending on the timing of the destruction and Blackburn J in Taylor v Caldwell, treated it as a common assumption of parties that the subject matter shall continue to exist. There are a few aspects of this, which we could visit in turn.

First, is the idea of ‘common object’. It happens often that one party’s object for entering into a contract is defeated, but for this doctrine to be engaged, what needs to be defeated is the ‘common object’. The coronation cases illustrate this neatly. In Krell v Henry [1903] 2 KB 740, 750, the agreement to rent an apartment overlooking the Pall Mall to view the coronation procession was held to be discharged upon cancellation of the procession. Vaughan Williams LJ held that this was not a contract to rent an apartment simpliciter, but was made by both parties on the assumption that it was for viewing the coronation and as such, it was ‘regarded by both  the contracting parties as the foundation of the contract’. This, as Vaughan Williams LJ pointed out, was to be contrasted with a case where a cab is engaged to drive someone to the Epsom derby race on a specific day (Krell v Henry, ibid).This contract is not discharged if the race is called off because happening of the race is not the ‘foundation of the contract’ for both the parties (Krell v Henry, ibid). It is this principle that is dispositive of the famous Suez crisis cases where the closing of the Suez canal, which more than doubled the travel distance to Europe (around Africa) and increased freight by over a quarter, was held not to be ‘radically different’. According to Viscount Simonds in Tsakiroglou v Noblee Thorl [1962] AC 93, 115: the buyers did not attach any importance to the route, although the sellers clearly did.

Secondly, the notion of ‘common foundation’ goes some distance towards making sense of the significance of ‘source of supply’ in the common law which might otherwise come across as odd. When the source of the goods is not specified, the contract is not frustrated when the supplier lets down the seller [CTI Group Inc v Transclear SA (The Mary Nour) [2008] EWCA Civ 856; [2008] 1 Lloyd’s Rep. 179] even if it is the sole seller [Intertradex SA v Lesieur Torteaux SARL [1978] 2 Lloyd’s Rep. 509]. That is because the salience of the supply from the seller was for only one of the parties, not common to both. A clear illustration of failure of common object is Howell v Coupland (1874) L.R. 9 Q.B. 462, where parties contracted for 200 tons from portions of potato crop grown on the defendant’s land and blight destroyed crops. The common object was potato grown on the defendant’s land; hence the contract was frustrated.

Thirdly, the notion of ‘common foundation’ read in light of the notion of ‘common mistake’ is perhaps the most reliable way to make sense of the distinction drawn in frustration cases between a ‘radically different’ contract and a contract which has become merely more onerous to perform. The key to ‘common mistake’ is a difference between mistake as to identity of goods and mistake as to quality as stated in Bell v Lever Brothers Ltd.[1932] AC 161. We should expect to find the same distinction playing a part here. Except that quality could be replaced by the terms of the contract including its consideration; and identity could be replaced with whether—leaving aside the particulars of the terms for the moment—this is a kind of contract the parties would have entered into. Two cases illustrate this. One is the case of Davis v Fareham Urban District Council [1956] AC 696, from which we get Lord Radcliffe’s celebrated language of ‘radical difference’. Where a construction contract that lasted 22 months instead of 8 and had a 20% price escalation due to labour shortage, it was held not to be ‘radically different’ from the original and hence not frustrated. As Lord Radcliffe noted, the ‘job proved to be more onerous, but it never became a job of a different kind from that contemplated in the contract’ ([1956] AC 696, 723). Again, in the words of Lord Radcliffe, ‘common object’ is thought to be implicated where the change in circumstances is of a kind ‘radically different from that which was undertaken by courts’ ([1956] AC 696, 729).  What would be a contract of a different kind? The other case which illustrates this is Asfar v Blundell [1896] 1 QB where a contract for freight was discharged when the cargo of dates sunk and deteriorated. Here, technically the dates were not ‘destroyed’ but retained some residual value as a raw material for distillation. Rejecting the argument that deteriorated dates were still dates, Lord Esher MR noted, ‘the ingenuity of the argument might commend itself to a body of chemists, but not to businessmen’ in whose eyes, these were no longer dates but something with a different identity.

Fourthly, the idea of ‘common mistake’ and its distinction between mistakes as to ‘identity of contracting party’ (which are fundamental) and mistakes as to ‘quality of subject matter’ (which are not fundamental) might hold the key to deciphering why an escalation of costs or financial difficulty does not frustrate contracts (the locus classicus on this being Bell v Lever Brothers [1932] AC 161). The equivalent of the ‘mistake of identity’ is the contract becoming that of a different kind than the one parties entered into. And the equivalent of ‘mistake as to quality’ is contract becoming more onerous. As Christopher Clarke J (as he then was) put it, in Thames Valley Power Limited v Total Gas and Power [2005] EWHC 2208 at [50], ‘the fact that a contract has become expensive to perform, even dramatically more expensive’ does not frustrate the contract. A good illustration of this principle is found in Tandrin Aviation Holdings v Aero Toystore [2010] EWHC 40 at [38]: when a contract to purchase a jet was held to be not frustrated by the ‘unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets’ during the global financial crisis of 2008-2009 [(Hamblen J) (original emphasis)].

Fifthly, the ‘common object’ rule explains why agreements to ‘hire’ something are not that easily frustrated. For one, the two parties typically have quite different purposes when it comes to the hiring of something (Vaughan Williams LJ’s Epsom cab example). Often, there is some purpose to which the hired thing may be put—‘it is immaterial that he cannot use it for the particular purpose that he had in mind’ [Atiyah op cit 186].This principle was dispositive of another famous coronation case, Herne Bay Steamboat Company v Hutton [1903] 2 KB 683. Here, the agreement to hire a steamship to view the naval review and cruise around the fleet was not discharged by the cancellation of the navel review. Stirling LJ held that since it was still possible to cruise around the fleet the contract was not frustrated [[1903] 2 KB 683, 692: Although Vaughan Williams LJ and Romer LJ pegged the case on that ground that like in the case of the Epsom cab, only the object of one of the parties was defeated, not the common object ]. It is some version of this argument that seems to be doing the normative work in common law’s approach to leases. Although, it might still be possible for a lease to be frustrated, it would, in practice, be very rare [National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675. (About halfway into a 10 year lease of warehouse, a street granting vehicular access to it was closed for 20 months. Held not frustrated)].

Force Majeure Clauses

The foregoing fasciculus of doctrine lumped together under the label ‘frustration’ operates as a default legal response to supervening unforeseen circumstances. The law does, however, allow parties to make their own provisions in the contract for contingencies. Such provisions have come to be known as force majeure clauses. Although their label has been borrowed from the French equivalent of the English doctrine of frustration, one should be careful to note that the similarities end there [Lebeaupin v Richard Crispin and Company [1920] 2 KB 714]. Where a force majeure clause does apply, and makes full provision for the event in question, it pre-empts the court’s invocation of the doctrine of frustration (See Bank Line Ltd v Arthur Capel Ltd [1919] AC 435, 455). When the clause does not apply either because of under-inclusion or the event being one of a kind that it could not foresee, the court’s jurisdiction to invoke frustration if not pre-empted [J. Beatson, A. Burrows and J. Cartwright eds. Anson’s Law of Contract (29^thed. Oxford University Press 2010) 490].

Why might parties bother to draw up force majeure clauses in their contracts rather than let the default rule take its own course? [for a discussion, see McKendick op cit 33-55]

Firstly, the doctrine of frustration is by its nature, a narrow one. It requires a failure of ‘common purpose’ which is, in practice, not that easily found. Contracts might become unwieldy for one of the parties at a significantly lower threshold. This is why force majeure clauses come in handy, in lowering the bar for discharge. A whole universe of non-frustrating events are force majeure events [See Treitel op cit 19-0075].

Secondly, the doctrine of frustration operates in an all-or-nothing manner. Frustration puts an end to the contract, tout court. Courts do not have the liberty to seek pragmatic solutions to make the contract work for parties. Frustration, therefore, is too blunt a tool for businesspeople. Force majeure clauses can apportion the costs between parties in a more workable fashion [Anson op cit 474]. Moreover, as McKendrick points out, courts are more liberal in countenancing commercial impracticability scenarios enumerated in force majeure clauses than when wielding jurisdiction under the frustration rule.

Thirdly, seen from a businessperson’s point of view, the whole fasciculus of tests and principles constituting frustration must come across as rarefied mumbo jumbo that renders it difficult to anticipate beforehand which way a court is going to move in a given case. One of the functions of force majeure clauses is to let parties know where they stand, even whilst not in periwigged company.

Force majeure clauses thus, have much going for them. They do, however, have a major limitation—they might paradoxically be least useful when most required. As McKendrick puts it:

‘the greater the magnitude of the event, the less likely it is that it will be encompassed within a general clause or even a clause which covers that event “whatsoever and howsoever occasioned…It is, therefore, extremely difficult, if not impossible, to draft a force majeure clause which shuts out the doctrine of frustration completely’ [McKendrick op cit 36].

A force majeure clause, however widely worded, cannot be prayed in aid where the event is of a completely unforeseen nature, since there is no way the parties could have meant it to extend to that situation [Metropolitan Water Board v Dick Kerr [1918] A.C. 119]. Accordingly, war clauses where held not to be applicable to ‘world wars’ [McKendrick op cit) 36 (citing Pacific Phosphate Co. Ltd. v. Empire Transport Co. Ltd. (1920) 36 T.L.R. 750).].

[continued here]

– Shiv Swaminathan