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Common Mistake


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Frustration as an implied term

The traditional justification for the implication of terms is that the court is giving effect to the presumed intention of the parties on its view of the reasonable expectations of the parties to the transaction. Necessity test was stated by Scrutton LJ in Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592 at p. 605.

Frustration and Common Mistake
Last updated: 21-Jun-2015

Comprehensive analysis given in Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407, [2002]  2 All ER (Comm) 999 by Lord Phillips of Worth Matravers MR at p.1018:

[61] … At the time of Bell v Lever Bros Ltd the law of frustration and common mistake had advanced hand- in-hand on the foundation of a common principle.  Thereafter frustration proved a more fertile ground for the development of this prin-ciple than common mistake, and consideration of the development of the law of frustration assists with the analysis of the law of common mistake.

[62] The foundation of the law of frustration was Blackburn J’s famous judgment in Taylor v Caldwell (1863) 3 B&S 826, [1861-73] All ER Rep 24.  The parties had entered into an agreement for the hire of a music hall for concerts on four specified nights.  The hall burnt down before the first of these.  Blackburn J ((1863) 3 B&S 826 at 833-834, 839, [1861-73] All ER Rep 24 at 27, 29), giving the judgment of the Court of Queen’s Bench, held that performance of the contract was excused by reason of an implied term:

"… as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor … The principle seems to us to be that, in contracts in which the per-formance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of perform-ance arising from the perishing of the person or thing shall excuse the performance.  In none of these cases is the promise other than positive, nor is there any express stipulation that the destruction of the person or thing shall excuse the performance; but that excuse is by law implied, because from the nature of the contract it is apparent that the parties contracted on the basis of the contin-ued existence of the particular person or chattel."

[63] Taylor v Caldwell was a case in which the subject matter of the contract was destroyed, so that performance of the letter of the contract was rendered impossible.  The principle of frustration thus established, its ambit of operation was then extended. Claims for frustration were advanced, not where a supervening event had made it impossible to perform the letter of the contract, but where performance of the letter of the contract had become something radically different from that which the parties contemplated when it was concluded.

[64] The first such case was Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125, [1874-80] All ER Rep 317. There a voyage charterparty from Liverpool to San Francisco was delayed for over six months as a result of the vessel stranding before loading her cargo.  The charter was held to have been frustrated upon the jury finding that a voyage undertaken after the ship had been repaired would have been a different adventure from that to which the parties had agreed.

[65] Particularly instructive in the present context are the 'coronation cases'.  Many rooms were leased, or seats in stands sold, along the route planned for the coronation procession of King Edward VII.  He fell ill and the coronation was can-celled.  Spectators who had contracted before he fell ill claimed that their contracts were frustrated.  In at least one case, a spectator who had contracted in ignorance of his illness claimed that his contract was void for mistake.  These claims succeeded. In Hobson v Pattenden & Co (1903) 19 TLR 186, Lord Alverstone CJ provided the following statement of the test of frustration:

… where there was a contract to do a thing, not in itself unlawful, and the parties when entering into the contract must have con-templated the occurrence of a specified event or the continued existence of a specified thing as the foundation of what was to be done, and the performance became impossible from some cause for which neither party was responsible, and the party sued had not contracted or warranted that the event or thing, the non-occurrence or non-continued existence of which had caused the contract not to be possible of performance, should take place or continue to exist, then the parties were excused from further performance of the contract.

[66] Subsequently in Clark v Lindsay (1903) 19 TLR 202, after hearing submissions from Mr Scrutton KC, Lord Alver-stone CJ (at 202-203) drew the distinction between an assumption embodied in the contract and one that was no more than the purpose leading to the conclusion of the contract:

If the event that had affected the performance only had relation to the purpose that led to the contract, then the happening of that event which prevented the contract being carried out could not affect the rights of the parties in the same way as when it formed part of the subject-matter of the contract.  Looking at this contract it was impossible to say that the procession was only the object and motive that induced people to enter into this contract.  It really was the happening of the event that was the substance of that which was contracted about and for.

Thus the coronation cases are to be explained on the basis that each contract was for 'a room with a view'.

[67] In Griffith v Brymer (1903) 19 TLR 434 the same principle was applied to a situation where there was a common mistake at the time of conclusion of the contract.  The parties entered into an agreement for the hire of a room to view the coronation in common ignorance of the fact that a decision had already been taken to operate on King Edward, which rendered the coronation impossible.  Wright J applied the law as stated in Clark v Lindsay:

The agreement was made on the supposition by both parties that nothing had happened which made performance impossible.  This was a missupposition of the state of facts which went to the whole root of the matter.  The contract was therefore void, and the plaintiff was entitled to recover his Ј 100.

[68] In Krell v Henry [1903] 2 KB 740 at 749, [1900-3] All ER Rep 20 at 23, the coronation case to which Lord Atkin referred, Vaughan Williams LJ advanced the following proposition:

I do not think that the principle of the civil law as introduced into the English law is limited to cases in which the event causing the impossibility of performance is the destruction or non-existence of some thing which is the subject-matter of the contract or of some condition or state of things expressly specified as a condition of it.  I think that you first have to ascertain, not necessarily from the terms of the contract, but, if required, from necessary inferences, drawn from surrounding circumstances recognised by both contracting parties, what is the substance of the contract, and then to ask the question whether that substantial contract needs for its foundation the as-sumption of the existence of a particular state of things.  If it does, this will limit the operation of the general words, and in such a case, if the contract becomes impossible of performance by reason of the non-existence of the state of things assumed by both con-tracting parties as the foundation of the contract, there will be no breach of the contract thus limited.

[69] Cases where frustration was alleged proved a fruitful source of litigation and, by 1916, Earl Loreburn was able to advance the following proposition in FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397 at 403-404, [1916-17] All ER Rep 104 at 107:

… when our Courts have held innocent contracting parties absolved from further performance of their promises, it has been upon the ground that there was an implied term in the contract which entitled them to be absolved.  Sometimes it is put that performance has become impossible and that the party concerned did not promise to perform an impossibility.  Sometimes it is put that the par-ties contemplated a certain state of things which fell out otherwise.  In most of the cases it is said that there was an implied condi-tion in the contract which operated to release the parties from performing it, and in all of them I think that was at bottom the princi-ple upon which the Court proceeded.  It is in my opinion the true principle, for no Court has an absolving power, but it can infer from the nature of the contract and the surrounding circumstances that a condition which is not expressed was a foundation on which the parties contracted.

[70] Despite Earl Loreburn’s words, the doctrine of frustration was patently judge-made law.  In National Carriers Ltd v Panalpina (Northern), Ltd [1981] 1 All ER 161, [1981] AC 675 the House of Lords considered five different explanations for the doctrine of frustration.  Lord Hailsham of St Marylebone LC and Lord Roskill favoured the exposition of the doctrine given by Lord Radcliffe in Davis Contractors Ltd v Fareham UDC [1956] 2 All ER 145 at 160, [1956] AC 696 at 729 and Lord Simon of Glaisdale ([1981] 1 All ER 161 at 175, [1981] AC 675 at 700) advanced the following refinement of that test:

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 out-standing 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 case the law declares both parties to be discharged from further performance.

[71] Lord Simon’s formulation of the doctrine must be read subject to the proviso that the parties may make express provision for what is to happen in the event of what would otherwise be a frustrating event.  Such a provision will nor-mally preclude the application of the doctrine of frustration.

[72] Initially the effect of frustration was to terminate the parties' respective obligations from the date of the frustrating event, but to leave outstanding any accrued obligations.  This harsh result was mitigated to a degree by the decision of the House of Lords in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] 2 All ER 122, [1943] AC 32 and to a greater degree by the Law Reform (Frustrated Contracts) Act 1943.

[73] What do these developments in the law of frustration have to tell us about the law of common mistake? First that the theory of the implied term is as unrealistic when considering common mistake as when considering frustration.  Where a fundamental assumption upon which an agreement is founded proves to be mistaken, it is not realistic to ask whether the parties impliedly agreed that in those circumstances the contract would not be binding.  The avoidance of a contract on the ground of common mistake results from a rule of law under which, if it transpires that one or both of the parties have agreed to do something which it is impossible to perform, no obligation arises out of that agreement.

[74] In considering whether performance of the contract is impossible, it is necessary to identify what it is that the par-ties agreed would be performed.  This involves looking not only at the express terms, but at any implications that may arise out of the surrounding circumstances.  In some cases it will be possible to identify details of the 'contractual ad-venture' which go beyond the terms that are expressly spelt out, in others it will not.

[75] Just as the doctrine of frustration only applies if the contract contains no provision that covers the situation, the same should be true of common mistake.  If, on true construction of the contract, a party warrants that the subject matter of the contract exists, or that it will be possible to perform the contract, there will be no scope to hold the contract void on the ground of common mistake.

[76] If one applies the passage from the judgment of Lord Alverstone CJ in Hobson v Pattenden & Co (1903) 19 TLR 186, which we quoted above to a case of common mistake, it suggests that the following elements must be present if common mistake is to avoid a contract: (i) there must be a common assumption as to the existence of a state of affairs; (ii) there must be no warranty by either party that that state of affairs exists; (iii) the non-existence of the state of affairs must not be attributable to the fault of either party; (iv) the non-existence of the state of affairs must render performance of the contract impossible; (v) the state of affairs may be the existence, or a vital attribute, of the consideration to be provided or circumstances which must subsist if performance of the contractual adventure is to be possible.

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