ABE Principles of Business Law 2008-1

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Sainsbury (HR and S) Ltd v. Street (1972)

A contract was made for the sale of 275 tons of barley from a certain farm. Through no fault of the farmer, the crop yielded 140 tons. The seller claimed to be excused from delivering any of it.

HELD: The contract was not frustrated. A term would be implied that the seller was bound, if the purchaser so required, to deliver as much as was grown (i.e. 140 tons).

Various classes of frustrating events can be distinguished – as follows.

(a)Cancellation of an Expected Event

These are the so-called "coronation cases", which all hinge on the same frustrating event. In 1902, just days before his coronation, King Edward VII had an operation for appendicitis. The coronation was postponed.

Contracts the sole purpose of which was directly connected with the event were, therefore, commercially frustrated.

Krell v. Henry (1903)

Krell agreed to hire rooms in his Pall Mall flat to Henry, for the day of the coronation. The rooms overlooked the route. Krell sued for the balance of hire.

HELD: Henry was not liable. The viewing of the procession was the sole basis of the contract, which was, therefore, frustrated.

The same result was arrived at on similar facts in Chandler v. Webster (1904).

However, the situation was different in Herne Bay Steamboat Co.

Herne Bay Steamboat Co. v. Hutton (1903)

Hutton contracted to hire Herne Bay's steamship to take passengers to view the Naval Review at Spithead, and for a day's cruise around the fleet.

HELD: The contract was not frustrated. Although the Naval Review was cancelled, the fleet was still at anchor in Spithead, and passengers could still cruise around it.

(b)Subsequent Legal Changes or Illegality

If a contract is made on the basis that the performance of it is lawful, and legal changes occur afterwards, making performance illegal, then this will, normally, serve to frustrate the contract.

Metropolitan Water Board v. Dick, Kerr & Co. Ltd (1918)

The company contracted with the Water Board, in July 1914, to construct a reservoir and to complete within six years. In August, war broke out and in 1916, under statutory authority, the company was compelled to cease work on the reservoir.

HELD: The contract was frustrated.

On the other hand, a supervening legal prohibition which, to a substantial extent, destroyed the commercial purpose of a lease of a warehouse was held not to frustrate the lease.

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This decision was made as a result of a ship being bottled up in the Shatt al Arab waterway by the Iraq/Iran war (Finelvet AG v. Vinava Shipping Co. Ltd – "The Chrysalis" (1983)).

Self-induced Frustration

The essence of the doctrine of frustration is that the event must not have arisen by the fault of either party. If, therefore, it is induced by the act or neglect of one of them, he/she cannot rely on this to escape from his/her obligations.

Maritime National Fish Co. Ltd v. Ocean Trawlers Ltd (1935)

A trawler, the "St Cuthbert", was chartered. She was fitted with an otter trawl, and both parties were aware that it was illegal under the Canadian Fisheries Act to use an otter trawl without a licence. The charterers used five trawlers, including the “St Cuthbert”, and they applied for five licences. Only three were granted, and the charterers chose not to apply one of these to the St Cuthbert. They claimed that the charter contract was frustrated.

HELD: They could not rely on this, as it was their own voluntary election that prevented the “St Cuthbert” being used.

It is not yet fully settled as to which act or neglect is necessary to debar a person from claiming frustration. For instance, a sentence of imprisonment on an employee is not considered as "self-induced" so as to prevent the contract of employment from being frustrated (Hare v. Murphy Bros Ltd (1974)).

Legal Consequences of Frustration

At common law, if a contract is frustrated, it is not thereby made void ab initio. All that frustration does is forthwith to release both parties from any further performance. Originally, the loss lay where it fell. For instance, in one of the "coronation cases" we referred to previously – Chandler v. Webster (1904) – the deposit paid for the rooms was irrecoverable. It was only the balance of rent due that did not have to be paid.

The harshness of this rule was later appreciated, and partially corrected by the House of Lords in the Fibrosa case.

Fibrosa Spolka Akcyjma v. Fairbairn Lawson Combe Barbour Ltd (1943)

In July 1939, a contract was made to deliver machinery to Poland. A deposit of £1,000 was paid. In September, England went to war with Germany, and in the same month Poland was occupied by Germany. The contract was frustrated.

HELD: The advance consideration of £1,000 must be repaid as the consideration had wholly failed. The repayment claim did not arise out of the contract but under the equitable rule of "money had and received ". Chandler v. Webster was overruled.

However, although the deposit was repayable, the manufacturers could recover nothing for the work they had done and expense incurred up to the date of frustration. The result was that Parliament stepped in with the Law Reform (Frustrated Contracts) Act 1943.

This Act applies to any contract which has been frustrated or rendered impossible of performance. It does not specify what constitutes frustration, it merely alters the legal consequences. These are provided to be as set out below.

All sums paid before the date the contract is discharged become repayable, and all future sums cease to be payable.

However, the court has power to apportion such payments between the parties if it is just and equitable so to do.

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If any party has received a valuable benefit, other than the receipt of money, before the date of discharge, then the court can order him/her to pay such amount as may be just and equitable.

So, what the Act does is to ensure, as far as possible, that the loss from a frustrated contract falls to both parties fairly.

In Gamerco SA v. ICM/Fair Warning (Agency) Ltd (1995), the claimants, pop-concert promoters, agreed to promote a concert to be performed by the defendant pop group at a stadium in Madrid. However, the stadium was found to be unsafe and the authorities banned its use. The permit issued to the claimants to hold the concert was revoked, a suitable alternative venue could not be found, and the concert was cancelled.

The claimants sought to recover an advance payment made to the defendants. By way of counter-claim, the defendants sought damages for breach of contract by the claimants in failing to secure the permit.

HELD: It was an implied term of the contract that the claimants would use all reasonable endeavours to obtain a permit for the concert. The contract was frustrated, not because the permit had been revoked, but because the stadium, the proposed venue, had been found to be unsafe and its use banned. The 1943 Act, S.1, entitled the claimants to recover the advance payment made to the defendants and in all the circumstances of the case, the court's discretion would be exercised in favour of the claimants. Accordingly, the claimants' claim would succeed and the counter-claim would be dismissed.

The Act does, however, exclude charter-parties, except for time-charter-parties and charterparties by way of demise, and carriage of goods by sea – the reason being that maritime practice has evolved adequate safeguards through the marine insurance industry.

Force Majeure

You may well have heard the term "force majeure" used. Strictly, it is a continental concept which is unknown to the law of England. It is akin to, but perhaps less draconian than, the English doctrine of frustration.

However, the term is recognised and commonly applied, especially in building and engineering contracts. The parties agree in their contract to have what is known as a "force majeure" clause. All this means is that they agree that, in the event of either or both of certain specified events occurring, and any circumstances beyond the control of either party arising, they will act in a specified manner.

It is, therefore, a contractual term and should one of the frustrating events occur, the remedy is agreed upon beforehand. The question, therefore, of frustration arising by operation of law does not occur. Provided the event is covered by the force majeure clause, the agreed remedy is enforceable. If the event is, however, outside the terms of the force majeure clause, the doctrine of frustration can come into play in the normal way.

E. REMEDIES FOR BREACH OF CONTRACT

Damages – General

The principal remedy for breach of contract is an award of damages. Hence, an appreciation of the nature and purposes of damages is important.

The essential point is that damages are compensation to the injured party for the loss she has suffered as a result of the other party's breach of contract – the object being to place her in the same position as she would have been in had the contract been properly performed. Damages are not a punishment, nor are they a means of intimidating a party into properly performing by fear of a penalty.

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In Malik and Others v. Bank of Credit and Commerce International SA (1995), the claimants had held senior positions as employees of the defendant bank at its various branches. They were made redundant when the bank was forced into liquidation following discovery of large-scale fraud at director level within the bank, and were unable to secure work within the financial services industry. They accordingly sought compensation for breach of an implied term within their contracts of employment that their employers would so conduct their business that no stigma would become attached to its employees.

HELD: The claimants’ claim related to harm done to their existing reputations and could not succeed. The court stated, "... damages are not recoverable in contract for damage to or loss of an existing reputation" because such damage or loss is not attributable to a failure to provide consideration for an aspect of the employment contract. Such cases where consideration had failed had been concerned with the nature of the contract itself, for example an apprenticeship contract when the apprentice had been dismissed for the absence of training and instruction which his employer was obliged to provide, or the loss of an opportunity to enhance a reputation in a theatrical artiste's contract because of failure to provide him with prestigious parts or roles (Withers v. General Theatre Corp. Ltd (1993)).

A duty to mitigate or minimise the loss is often presumed by the courts, although the burden of proving that the claimant has not done so is placed on the defendant. The emphasis, however, is on what is "reasonable" in the circumstances. If, for example, a claimant in reasonably attempting to mitigate her loss actually makes it worse, she will not be penalised for her actions. She will be able to recover her actual loss even though she herself has increased it.

In Pilkington v. Wood (1953) a solicitor wrongfully advised Pilkington that the title to his new house was good (in effect this meant there were no legal difficulties in establishing ownership). The solicitor argued that Pilkington should have mitigated his loss by suing the seller for conveying a defective title.

HELD: It was unreasonable to expect Pilkington to embark on a lengthy and complicated action in order to protect his solicitor from the consequences of his own carelessness.

In Abrahams v. Performing Rights Society (1995), the claimant was employed on a fiveyear contract, under which he was entitled to two years' notice of termination of employment, or an equivalent payment in lieu of notice if his employment was terminated at the end of the five-year period.

After the five years had expired, the parties were unable to agree on the terms of a new contract, but it was agreed that the claimant was to remain in his post for a further two years "subject to the same terms as the previous contract". When the claimant was dismissed seven months later, he claimed payment from the defendant for salary for the remainder of the two-year period. The defendant contended that the claimant was obliged to mitigate his losses.

HELD: The provisions of the old contract relating to notice and payment in lieu applied to the two-year contract of employment. As the defendant had elected to terminate the contract before the end of the two-year period, it was bound to pay the claimant the amount due in lieu of notice for the remainder of that period. The claimant had a contractual entitlement to this payment and there was no duty on him to mitigate his losses by seeking employment elsewhere for the remainder of the period.

There are various terms used to describe the different categories of damages.

(a)General and Special Damages

Loss has to be proved in order that damages may be assessed. However, it is not always possible precisely to calculate the exact amount of the loss. How do you exactly quantify loss resulting from pain and suffering"? You cannot – so, the law presumes that loss results from the infringement of certain legal rights or duties. The

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Had the same situation arisen off the Falkland Islands in 1982, the result would, no doubt, have been different. Reasonable people could, probably, not have foreseen the Argentinian invasion.

Damages – Remoteness of Damage

It is all very well to say that the guilty party is responsible for all the damage caused by his/her breach of contract but how far down the line do you carry this? Say, a contractor builds a dam for the water authority. In breach of contract, the dam is breached, and millions of tons of water disappear in the direction of the Atlantic Ocean. Obviously, the cost of rebuilding the dam is one head of damage. Another is the cost of damage to the people and houses in the village downstream which has been swept away. However, say, a local carrier makes her living by carrying produce from the village to the market town. There is, therefore, no produce to carry – so, she has lost his livelihood. Should the contractors have to pay for that?

You can think up endless permutations and combinations on that theme. The classic decision on this question of how far you go, or "remoteness of damage", was given in Hadley v. Baxendale (1854). Here a mill was brought to a standstill when a crankshaft broke. A carrier failed to deliver the broken shaft to the manufacturers when he had promised to. He was sued for loss of profit owing to the unnecessary delay.

In the judgment, the following statement was made.

"Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive should be such as may fairly and reasonably be considered either as arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it".

This rule was restated by the Court of Appeal in 1949, and confirmed by the House of Lords in 1967.

In Victoria Laundry (Windsor) Ltd v. Newman Industries Ltd (1949), the laundry lost a valuable government dyeing contract because of the breach of contract of the manufacturers in late delivery of a new boiler.

The Court of Appeal laid down the following propositions.

"(1) The aggrieved party is entitled to recover only such part of the loss as was at the time of the contract reasonably foreseeable as liable to result from the breach."

"(2) What was at that time reasonably so foreseeable depends on the knowledge then possessed by the parties or, at all events, by the party who later commits the breach."

"(3) For this purpose, knowledge 'possessed' is of two kinds, one imputed, the other actual."

In Ruxley Electronics and Construction Ltd v. Forsyth (1995), the defendant contracted with the claimant company for the construction by the claimant company of a swimming pool in the defendant's garden, specifying a maximum depth for the pool of 7 ft 6 ins. After completion of the work, it was discovered that the maximum depth was only 6 ft 9 ins and only 6 ft where swimmers would normally dive in. The defendant refused to pay the full contract price and counter-claimed against the claimant company for damages for breach of contract amounting to the cost of a new pool.

HELD: Although there had been a breach of contract, the shortfall in depth had not decreased the pool's value as a swimming pool and an entitlement of £2,500 for loss of pleasure and amenity would be awarded to the defendant. The court stated:

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"Damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party, from which it follows that the reasonableness of an award of damages is to be linked directly to the loss sustained .... The defendant has acquired a perfectly serviceable swimming pool, albeit one lacking the specified depth .... His loss is thus not the lack of a usable pool with consequent need to construct a new one. Indeed were he to receive the cost of building a new one and retain the existing one, he would have recovered no compensation for loss but a very substantial gratuitous benefit, something which damages are not intended to provide".

So, the position is that, in general, the full amount can be recovered of all types of damage that were reasonably foreseeable. This is so, even if the amount of damages under a foreseeable type is far more than could reasonably have been anticipated.

Liquidated Damages or Penalties

As we have seen, liquidated damages are permissible; penalties are not. Liquidated damages can be defined as "a genuine pre-estimate of the damage likely to occur in the event of breach of contract or a specific breach of contract". The essential thing is that they must be a genuine pre-estimate. These will be enforced.

If, on the other hand, the agreed sum is, in fact, a penalty to terrorise the other party into performing, then it is unenforceable. This does not mean that the guilty party gets off scotfree. All it means is that the so-called "liquidated damages clause" will be struck out, and the innocent party has to prove his/her actual loss. This could well be more than the supposed liquidated damages or penalty!

The distinction between liquidated damages and penalties was explained in Dunlop Pneumatic Tyre Co. Ltd v. New Garage & Motor Ltd (1915). Here a contract between the parties required the defendants to observe Dunlop's price list for certain products. The contract stated that for every sale other than at a listed price the defendants would be required to pay £5 by way of liquidated damages and not as a penalty.

HELD: The sum was liquidated damages and so was recoverable.

The House of Lords in this case made a number of general points which help to distinguish the two categories:

The terms used by the parties are not conclusive since the distinction is a matter of law.

A sum will be treated as a penalty if it is "extravagant and unconscionable in amount" in comparison with the greatest loss that could conceivably be proved to have followed from the breach.

It will be a penalty if the breach consists of not paying a sum of money and the sum stipulated is far greater than the sum which ought to have been paid.

There is a presumption that it is a penalty when a single lump sum is payable by way of compensation on the occurrence of one or more of several events, some of which may occasion serious and others trifling damage.

On the other hand:

It is no obstacle to the sum stipulated being a genuine pre-estimate of the damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility.

In relation to the five principles stated by the House of Lords in Dunlop Pneumatic Tyre Co. Ltd v. New Garage & Motor Ltd (1915), the following recent case should be noted.

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Nutting v. Baldwin (1995)

The defendant was a member of an association composed of Lloyd's names from certain syndicates who had formed the association in order to bring actions against their managing agents for (inter alia) alleged negligent advice. The association resolved to levy additional subscriptions under powers contained in the association agreement, but the defendant did not pay them, was declared a defaulting member and accordingly disentitled himself from sharing in any damages awarded to the association.

He applied to the court for a declaration that the power to declare him a defaulting member contained in the association agreement was a contractual penalty and therefore unenforceable.

HELD: It was an essential part of the arrangement between the association's members that if a member ceased to contribute his share of the cost of bringing the legal actions against the managing agents, he ran the risk of being excluded from his share of the benefit of the arrangement, and therefore the provision did not constitute a penalty. To allow a member who had not fully undertaken his share of the risk by paying properly all the agreed subscriptions on time to come in after the litigation had been successfully concluded, so that there was no longer any further risk of loss, and still share in the fruits of the litigation, would undermine one of the fundamental objectives of the constitution of the association.

Specific Performance and Injunction

These two orders are equitable remedies which can be sought if damages would not provide an adequate remedy. "Specific performance" is an order by the court compelling one party to perform the contract in accordance with its terms. It is a positive remedy. An injunction is negative. It commands a party not to commit a threatened breach of contract.

Both of these are discretionary, whereas damages are an absolute right. Neither will be granted if the claimant is him-/herself at fault for the breach of contract, or if it would be unfair to grant them. Nor will they be granted if damages would prove an adequate remedy, or if the effect of such an order would be disproportionate to the damage caused by a breach of the contract.

In Jaggard v. Sawyer (1995), the defendant's house was at the end of a private cul-de-sac, and having purchased some land behind his house, he applied for and was granted planning permission for the construction of a house on the land so purchased. Access to this new house could, however, only be gained by use of the private estate road and over the garden of the defendant's house.

The defendant failed to secure the consent of the other estate property owners for use of the private road for access purposes, and the development breached the covenants which bound all the property owners on the estate without such consent. The defendant nonetheless proceeded with the construction of the new house, and after the work had advanced to a substantial extent the claimant, who was one of the other estate property owners, instituted proceedings for an injunction restraining the defendant from continuing with the work to complete the new house.

HELD: An injunction is an equitable remedy granted in the discretion of the court and if the claimant delays instituting proceedings until it is too late, an injunction will be refused. This was the case here, because the construction of the new house had reached an advanced stage before the applicant took steps to lodge proceedings for an injunction. Her only remedy was in damages for the failure by the defendant to secure release of the covenants to enable the owner of the new house to use the private estate road for access purposes. She was awarded £694 damages for use by the new house owner of the private road immediately in front of her property.

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The courts are particularly wary of enforcing contracts for personal services. The fear seems to be that to allow such contracts to be enforced – usually by an injunction – could give an unfair advantage to the claimant.

In Warner Bros Pictures Inc. v. Nelson (1937) the court overcame this problem by deciding that granting an injunction to the applicants would have the effect of encouraging the defendant, a film actress, to perform her contractual obligation to work only for the claimants. Thus, the effect of the injunction was considered not to be to compel her to work for the claimants alone (though it would certainly have been strong encouragement). She could easily obtain employment in other areas of work where the interests of the claimants would not be affected.

By contrast, in Page One Records v. Britton (1968) the court refused to enforce a term in a contract whereby the defendant would employ only the claimants as his manager. The court took the view that if the term were to be enforced it would place the defendant in the difficult position of either employing the claimants or remaining workless.

It is probable that the second case represents a more realistic approach to such a situation and it seems that the courts are more likely to adopt the second approach as the norm.

In Warren v. Mendy (1989) it was held that a boxer could not be obliged to comply with a requirement in his contract to employ Warren as his manager for three years. The court considered that the breakdown in trust between the parties meant that it was unrealistic to seek to enforce it, not least because the contract involved the maintenance of skill and talent.

A special type of injunction which has developed substantially over the last decade or so is the Mareva injunction (now known as a Freeze Order), which is granted to prevent defendants in proceedings before the High Court from removing assets out of the jurisdiction with the aim of avoiding or frustrating the enforcement of any judgment against them.

In "The Mareva" case (1980), the Court of Appeal upheld an injunction to restrain the defendants from removing or disposing out of the jurisdiction money standing to the credit of the defendants in a London bank. The claimants were shipowners and the defendants were charterers under a voyage charter. The defendants had received payments for the freight in that bank account, but they had failed to pay the hire charges due to the claimants. (The term Mareva injunction derives from the name of the ship in this case.)

Such an injunction will normally be granted where it seems likely that the claimant will obtain judgment against the defendant but there is good reason to believe that assets of the defendant will be disposed of or dealt with in such a way as to prevent enforcement of the judgment.

A Mareva injunction will not be made obtain judgment against the defendant but there is good reason to believe that assets of the defendant will be disposed of or dealt with in such a way as to prevent enforcement of the judgment.if its effect would be some considerable interference with the rights of third parties. Any person who has notice or knowledge of a Mareva injunction must do all that is reasonable to safeguard the assets in question. If he/she aids and abets the defendant to dispose of them, he/she will be liable for contempt of court and punished accordingly. For example, if a bank is given notice of the injunction, it may act immediately and automatically to rescind any instructions given by the bank's customer concerning his/her account.

This type of injunction may be granted as regards claims for debts or other liquidated sums. It may be granted in any commercial action and in actions for damages for breach of contract.

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