2

OBJECTIVES OF THE UNIT SECTION ONE: LECTURE 1:

LECTURE 2:

LECTURE 3:

TION TWO: LECTURE 4:

TION THREE: TABLE OF CONTENTS

DISCHARGE OF A CONTRACT DISCHARGE UNDER THE DOCTRINE OF FRUSTRATION

1.Historical Development of the Doctrine of Frustration 2.Modification of the Absolute Contract RuleSUMMARY APPLICATION OF THE DOCTRINE OF FRUSTRATION

1.Destruction of the Subject Matter 2.Non-occurrence of a Particular Event 3.Commercial Sterility 4.Escalation Causes 5.Supervening Illegality and Outbreak of War 6.Limitations on the Doctrine 7.Burden of ProofSUMMARY

V

EFFECTS OF FRUSTRATION

1.The Common Law Position 2.The Legal Position in TanzaniaSUMMARY The Law Reform (Frustrated Contracts) Acts 1943 CONTRACT REMEDIES REMEDIES FOR BREACH OF A CONTRACT

1.Meaning of Remedies 2.Types of RemediesSUMMARY DAMAGES

ill

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LECTURE 5:

REMOTENESS OF DAMAGES

33 33 34 35 37 48 49

1.Definition of Damages 2.Types of Damages 3.Principles of the Law of Damages 4.The Law on Remoteness of Damages 5.The Legal Position in TanzaniaSUMMARY LECTURE 6: MEASURE OF DAMAGES OR ASSESSMENT OF DAMAGES Measure of Damages SUMMARY

51 51 55

V

ell how a contract can be terminated,

ntify methods of discharging a contract.

cognize the rights and remedies of the injured party for

GENERAL INTRODUCTION This is the last portion of the study of the Law of Contract. It is being covered at a time'when you have gone through the entire process of how a contract is formed and the various ingredierits which constitute a contract. Since by this time you are supposed to have understood what is a valid contract, it is now opportune for you to study how a contract can be brought to an end. You should also note that rights and obligations created by a contract are not perpetual.

OBEJECTIVES OF THE UNIT

At the end of this unit you will be able to: breach of a contract.

SECTION ONE: DISCHARGE OF A CONTRACTLECTURE 1: DISCHARGE UNDER THE DOCTRINE OF FRUSTRATION

INTRODUCTION In this lecture you will learn how a contract can be discharged by the operation of the doctrine of frustration. This will be achieved by discussing the nature and rationale of the doctrine of frustration, the operation of the doctrine of frustration and the legal effect of frustration.

OBJECTIVES

By the end of this lecture you should be able to:

tell the historical development of the doctrine of frustration, recognize and describe the emergence of the doctrine justification and modification of theContract Rule.

1. HISTORICAL DEVELOPMENT OF THE DOCTRINE OF FRUSTRATION After parties to a contract have made their agreement, unforeseen contingencies may occur which prevent the attainment of the purpose they had in mind. These arc sometimes called supervening events.

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Do these events bring the contract to an end irrespective of the wishes of the parties? Emergence of the Doctrine In the 16th and 17th centuries judges laid down what is sometimes called the rule as to absolute contracts. The rule as to absolute contracts was to the effect that: If a person binds himself by contract absolutely to do a thing he cannot escape liability for damages by proof that as events turned out performance is futile or even impossible.1 Justification for this harsh Rule I am sure that you are wondering why on earth judges should have enshrined such a harsh rule. However, you may wish to know that the justification of this harsh rule laid in the fact that a party to a contract could and still can always guard against unforeseen contingencies by express stipulation; "but if he voluntarily undertakes an absolute and unconditional obligation he cannot complain merely because events turned out to his disadvantage."2 This rule on absolute contracts was enshrined in the case of Paradine v. Jane.3 What then were the facts of the above mentioned case. Briefly stated, the facts were as follows. Jane, tenant ,took land on a lease from a landlord for a number of years. The contract of lease provided that the tenant undertook to pay a certain rent per year absolutely without exception. During the life of the lease England was invaded by Germany and an alien born hostile army of men entered upon the defendant's possession and had her expelled and held out of possession whereby she could not take profits. When the landlord sued for rent, the tenant (the defendant) argued that the rent was not due because by events beyond her control she was not in possession of the land as the King's enemy had occupied it. In arriving at a decision the court asked the question whether the tenant had undertaken ( o pay the rent absolutely. The answer was in the affirmative in the sense that the tenant did not mdcrtake to pay rent so long as she had the land in her possession. The Court held: When the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract4 (Emphasis provided).

1 Cheshire,

Fifoot and Furmston's Law of Contract. M.P.Furmston, 12th Edition, Butterworths, pg. 569. . See also Smith and Thomas. A Casebook on contract. J.C. Smith 8th Edition, 1987, Sweet & Maxwell pg. 406. G.H. Treitel The Law of Contract 7th Edition, 1987, Sweet & maxwell pg. 663.

2 Ibid. 3 1647) K.B.. Aleyn 26; 8? E.R. 897V

This decision was made when the theory of absolute contract was accepted and hence the tenant was forced to pay the rent. We have seen how the absolute contract rule emerged. We have also seen how harsh that rule was. Let us now discuss the steps taken to mitigate the harshness of the absolute contract rule. 2. Modification of the Absolute Contract Rule The first modification of the absolute contract rule concerned cases in which the supervening event made the contract illegal, that is cases of illegality. The effect of this modification of the absolute contract rule was that even if a person had undertaken to perform a contract absolutely, in case a supervening event makes the contract illegal then the contract is frustrated and the parties are discharged of their respective* obligations. The second modification of the absolute contract rule concerned personal contracts. When the performance of a contract required performance by the promisor in person then if he died or was incapacitated by a supervening event the contract was said to have been frustrated. Examples of personal contracts include:

-Contract of a singer to sing in a concert. -Contract by a writer (author) to write a book for the Open University of Tanzania -A contract by C to marry D.

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SUMMARY We have learnt that a contract can be discharged through the operation of the doctrine of frustration. The emergence and justification of the doctrine is based on the fact that if one binds him/herself by an absolute contract, he/she cannot escape liability for damages. However, there are some modifications to the rule.

EXERCISE

You are now in a position to answer the following questions:

a)What were the justifications of the absolute contract rule? b)Why and how was the absolute contract rule modified?

After answering these questions let us continue with the next lecture on the applicatio doctrine rf frustration and the limitation of the application of the doctrine of frustration.

FURTHER READINGS Cheshire, Fifoot and Furmston's, Law of Confrere*, 12th. Ed. 199, Butterwoths. pp. 569/593. Treitel, G.H. Law of Contract, 8th Ed. 1991 Sweet & Maxwell, pp. 763-8181. Hodgin, R.W., Law of Contract in East Africa, (1975) Kenya Literature Bureau, Nairobi, pp. Anson's Law of Contract, 23rd Ed. 1969, Oxford University Press, pp. 353/481. LECTURE 2: APPLICATION OF THE DOCTRINE OF FRUSTRATION INTRODUCTION After introducing the doctrine of frustration in the previous lecture, this lecture will discuss the application of the doctrine under the Common Law and under the Law of contract Ordinance.1

OBJECTIVES By the end of the lecture you should be able to: explain the scope of application of the doctrine of frustion ,

illustrate application of the doctrine through case studies, identify possible risks and supervening events in making absolute contracts.

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1. DESTRUCTION OF THE SUBJECT MATTER The major modification in the absolute contract rule occurred in the case of Taylor v. Caldwell2 concerning a supervening event causing total destruction of the subject matter of the contract. As a matter of fact this case evolved a substantive and particular doctrine whicn mitigates the rigours of the rule in Pradine v. Jane3 by providing that if the further fulfillment of the contract is brought to an abrupt stop by some irresistible and extraneous cause for which neither party is responsible, the contract shall terminate forthwith and the parties be discharged of their respective obligations.

Chapter 433 Ordinance No. 1 of 1961.2 3

(1863) 3 B & S. 826 (1861-73) AH ER Rep. 24. (1903) 2 K.B. 740 (C.A)

The most obvious cause which brings this doctrine into operation and the one which provided the issue in the above mentioned case is physical destruction of the subject matter of the contract before performance. Let us now recite the facts of the above case. The plaintiffs and the defendants in this case entered into a contract by which the defendants agreed to let the plaintiffs have the use of their Surrey Gardens and Music Hall on four days then to come for the purpose of giving a series of four grand concerts, and the plaintiffs agreed to take the Gardens and Hall on those days, and pay 100 for each day What then? What happened was that after the making of the agreement and before the first day on which a concert was to be given, the Hall was destroyed by fire. This destruction was without the fault of either party, and was so complete that in consequence the concerts could not be given as intended. The plaintiff sued the defendant arguing that the defendant should perform the contract for they have carried out an undertaking absolutely. Since there was no music hall (subject matter of the contract) on the first day when the concert was to commence they were in breach of contract. The question which the court had to decide was whether the loss which the plaintiff had sustained was to fall upon the defendant. The court held that the absolute contract rule did not apply here. The question we may wish to ask ourselves is why the court held that the absolute contract rule did not apply in this case. The court reasoned that both parties, that is the plaintiff and the defendant impliedly presumed that the contract will be carried out as long as the music hall was there. If the music hall,

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that is, the subject matter of the contract is destroyed, the contract need not be carried out. We can vividly see here that the court imported the theory of implied term to hold that there was no breach of contract because there was a supervening event which had frustrated and discharged the contract. 2. Non occurrence of a Particular Event Apart from destruction of the subject matter of the contract or what is some times referred to as physical impossibility, it is said that non occurrence of a particular event may also frustrate a contract. This will become clear to you after we have discussed what are called coronation cases. In Krell v. Henry5 King Edward VII was to be coronated and his procession was to pass through certain roads The defendant noticed an announcement on the windows of the plaintiffs flat at 56A Pall Mall to the effect that rooms to view thecoronation procession could be obtained from the premises. The defendant agreed to take the rooms for June 26th and 27th, 1902, the days on which the coronation processions were to take place. On June 20th, the defendant agreed in writing to pay 75 for use of the rooms on the entire two days. The written agreement did not mention the procession. He paid 25 then and agreed to pay 50 on June 24th. The procession did not take place because the king fell seriously sick. The defendant declined to pay 50 the balance as per the written agreement. The plaintiff sued for that sum, and the defendant counterclaimed for the return of the 25 which he had paid. The following were the issues which the court framed. (i) (ii) (iii) What having regard to all the circumstances was the foundation of the contract? Was the performance of the contract prevented? If yes. Was the event which prevented the performance of the contract of such a character that it could not have been reasonably said to have been in the contemplation of the parties at the time of the contract? If yes, then both parties would be discharged from further performance of the contract. Let us now see what were the submissions of the plaintiff and the defendant and how the court went about resolving the three issues it had framed. The plaintiff argued that the rooms together with their windows were there and that they had

5(1903) 2 K.B. 740 (C.A)11

not been destroyed as in Taylor v. Caldwell 6 and that the defendant had taken anabsolute obligation to pay for the rooms and not to pay subject to the procession taking place. The defendant on the other hand argued that the object of the contract was the royal procession which had become non-existent. Having heard the arguments of the plaintiff and the defendant, we are now better placed to follow the holding of the court which was as follows: That the coronation procession was the foundation of this contract and that the non-happening of it prevented the performance of the contract.

That the non-happening of the coronation procession was an event of such a character that itcannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made.7

That physical destruction of the subject matter of the contract is not the only superveningevent which frustrates a contract. If an event happens which makes the contract incapable of being performed because the root (basis) of the contract has been destroyed that event has rendered the contracted frustrated.8 In other words what the court was saying was that apart from physical destruction of the subject matter, non occurrence of a particular event, a supervening event which makes the commercial object impossible to realise or a supervening event which causes what is called commercial sterility of the contract also renders the contract frustrated. Courts have said that a contract will become frustratedand discharged if it becomes impossible to perform it commercially or physically.

The Krell's case shows the latest modification of the absolute contract rule. But we must hasten to point out here that the absolute contract rule has not been swept away completely. The doctrine of frustration operates very rarely as cases below will demonstrate. 3. Commercial Sterility Hardships, inconveniences and increase in prices alone do not frustrate a contract. This was held in the landmark case of Davis Contractors Ltd v. Fareham Urban District Council.9 The digested facts of this case were as follows:

6Op.cit. 7(1903) 2 K.B. 740 op.cit 8See Sir James Hannen in Daily v. De Crespigny (1869) L.R. 4 Q.B. 185 quoted in Smith, andThomas A Casebook on Contract, 8th.. 19th Edition, Sweet & Maxwell, pg. 413. 9(1956) AC 696 (1956) 3 W.L.R. 37 (1956)2 All E.R. 145. 12

In July 1946 the Contractors entered into a contract with the Council to build seventy-eight (78) houses for the sum of 92,425 within a period of eight months. They had attached to their tender in March 1946, a letter stating that the tender was subject to adequate supplies of labour and building materials being available. No such'* provision was included in the written contract entered into in July. Owing to unexpected circumstances and without the fault of either party, there was a serious shortage of skilled labour and of building materials. The work took 22 months to complete, with the result that the contractors properly and unavoidably incurred additional expense amounting to 17,651. The contractors instituted a suit in a court of law contending the following: (i) That the contract was subject to adequate supplies of labour being available, by reason of the letter of March 1946, (ii) (iii) That the contract was frustrated by reason of the long delay. And that they were entitled to a sum in excess of the contract price on a "quantum merit" basis. On a case stated by an arbitrator, it was held that the contractors could recover because the letter was incorporated into the contract; and that the contract was not frustrated. The Court of Appeal held that the letter was not incorporated into the contract and that the contract was not frustrated. The House of Lords affirmed the decision of the Court of Appeal on both points10 and held; Frustration occurs whenever the law recognizes that without the fault of either party a contractual obligation has become impossible of being performed because the circumstances in which performance is called for would render it radically different from that which was undertaken by the contract.11 The Court stated emphatically that it is not hardships or inconvenience or material loss itself which calls the doctrine of frustration into play. There must as well 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. The plaintiffs mounted the argument that the contract had become void because of frustration and hence asked the court to fix a reasonable amount as compensation for the higher expenses the contractors have incurred because of shortage of skilled labour and building materials. The House of Lords held that the contract had neither become void nor frustrated because the doctrine of frustration operates very narrowly. Simple increase in expenses or enormous

10These facts have been extracted from Smith & Thomas, A Casebook of Contract op.cit. at pg.421. 11(1956) AC. 696. 13

burdensome does not frustrate a contract.12 The plaintiff argued further that the commercial importance of the contract was sterile and that commercial sterility can frustrate the contar While the court agreed with this arguments it was quick to point our that commercial sterility operates to frustrate a contract in very special circumstances. The court also made it clear that whether a contract has been frustrated or not is a question of law and not of fact.13 Consequently, it is for the court to decide and not the parties. All that the parties can do is to plead frustration. The issue of increase of expenses, burdensome and inconvenience came out again in the case of Tsakirogolou & Co. Ltd v. Noblee and Thorl G.M.B.H.14 In this case by a written contract dated October 4th 1956, sellers agreed to sell to the buyers Sudanese groundnuts for shipment c.i.f. Hamburg during November/December, 1956. The seller was to bear the cost of the freight from Sudan to West Germany. It was assumed that the freight will pass through the Suez Canal. On November 2nd the Suez Canal was closed to navigation because of war situation. However, goods could have been shipped round the cape of Good Hope. This alternative route was more than twice as long and the freight charges by this route was far more costly by (1/3) one third. The sellers failed to ship the goods, and in arbitration proceedings the Umpire held that the sellers were in default. The Appeal Board found that the performance of the contract by shipping the goods on a vessel routed via the Cape of Good Hope was not commercially or fundamentally different from its being performed by shipping the goods on a vessel routed in the Suez Canal.15 The seller argued that there was frustration because of commercial sterility of the subject matter of the contract. The Court once again emphasized that increase in price, expenses, hardships or inconveniences by themselves do not necessarily frustrate a contract.16 4. Escalation Clauses Whenever a contract is made there are unexpected events which the parties must risk.

12Compare this holding with the decision in the Case of Metropolitan Water Board v. Dick, Kerr &Co. Ltd (1918) AC. 119. 13 See for instance Hirji Mulji v. Cheong Yue Steamship Co. Ltd (1926) A.C. 497, AT PG. 510. 14 (1962) A.C.23. 15'4 (1962) A.C. 23 at pg. 16 See also Heme Bay Steam Boat Company v. Hulton (1903) 2 KB. 683 where the defendant chartered a steam boat to take paying passengers to see the Royal Naval Review at Spithead which was subsequently cancelled. The plaintiffs were allowed to recover the balance of 200 less the profits they had made by the use of the ship on the two days in question. Read also Blackburn Bobbin Co.Ltd. V.T.W. Allen & Sons Ltd. (1981) 2 KB. 467. 14

9renegotiations.

How can parties to a contract apportion the risk amongst themselves?

They can do this by inserting in their contract what are called escalation clauses. Escalation clauses are clauses in a contract which limit the going up of prices. For instance parties to a contract may provide that if prices of the subject matter of the contract go up by more than 20% there will be

5. Supervening Illegality and Outbreak of War A contract may also be frustrated by reason of supervening illegality. What does this mean? By this we mean that a contract could be valid at the time the parties enter into it, but s\ibsequent_thercafter a legislation is passed by parliament which makes the performance of the contract legally impossible either by a change in the law or by a change in the operation of the law by reason of new facts supervening.17 The charge in the law must be such as to strike at the root of the agreement, not merely to suspend or hinder its operation in part.18 Supervening illegality can also arise on outbreak of war resulting in declaration of no agreements between the fighting parties. Such a declaration will make all contracts entered before that declaration illegal hence frustrated. 6. Limitations On the Doctrine A party to a contract .may not rely on self-induced frustration. By that we mean that the event alleged to have frustrated the contract should not arise from the acts and/or omissions of one of the parties to the contract. For the doctrine to apply, frustration of the contract must occur without the fault of either party and that the frustrating event should defeat the intentions of both parties. The above stated limitation on the operation of the doctrine of frustration was affirmed in the case of Maritime national Fish Ltd. v. Ocean Trawlers Ltd.19 The appellants in this case renewed an existing charter - party of the respondents trawler - The St. Cuthbert - In July, 1932 for 12 months from October, 25th, 1932. It was expressly agreed that the trawler should be employed in the fishing industry only. At the time of renewal of the charter-party in 1932 both parties were well aware of a Canadian Statute which in substance, made in an offence to leave a Canadian port with intent to fish with a vessel using an otter trawl, except under licence from the Minister, who issued such licences as he thought fit.

The St. Cuthbert was a vessel which was fitted with, and could only operate as a trawler with an otter trawl. The appellants, who were operating five trawlers in all, applied for five licences. The Minister granted only three and asked the appellants to name the three trawlers which they desired

17 Anson's Law of Contract 23rd Ed. 1969 Oxford University Press, pg. 462. 18 Ibid. pg. 463 19 (1935) AC. 524 (PC).15

to have licenced. The appellants named three trawlers other than the St. Cuthbert. They then claimed that they were no longer bound by the charter. The Supreme Court of Nova Scotia held that if there was a frustration of the adventure it resulted from the deliberate act of the appellants. Lord Wright is on record to have said: The essence of "frustration is that it should not be due to the act or election of the party." ^ Their Lordships were of the opinion that the loss of the St. Cuthbert's license coulc correctly be described as "a self-induced frustration". Lord Summer in Bank Line Ltd v. Arthur Capel & Co.20 is reported to have said. "... I think it is now well settled that the principle of frustration of an adventure assumes that the frustration arises without blame or fault on either side. Reliance cannot be placed on a self-induced frustration. (Emphasis mine)". 7. Burden of Proof One of the cardinal rules of evidence is that he who alleges must prove. This rule applies also in allegations that frustration is self- induced, in the sense that the onus of proving that frustration is self-induced is on the party who alleges that this is the case.21 In Joseph Constantine SS Line v. Imperial Smelting Corporation Ltd22 a ship was disabled by an explosion from performing her obligations under a charter-party. When sued for damages the owners pleaded that the explosion frustrated the charter-party. The charterers on their party argued that the owners had the burden of proving that the explosion was not due to their fault. The House of Lords rejected this argument and affirmed that the onus is on the party alleging that frustration is self-induced.

It may be important to point out here that frustration does apply to negligent acts and that although the doctrine can apply to a lease in practice that will be relatively rare.

20(1935) A.C 524 at pg. (1919) A.C. 435 at pg.Read also Lord Summer in Hirji Mulji v. Cheong Yue Steamship Co. Ltd (1926) A.C. 497 at pg. who refers to "frustration" as being a matter" caused by something for which neither party was responsible." Quoting from Lord Blackburn in Dahl v. Nelson, donkin & Co. (1881) 6 App. Cas. 38 at 93. 21Treitel Law of Contract 8th Edition, 1991 Sweet & Maxwell, pg. 807. 16

22

(1942) A.C. 154

SUMMARY

1 jnJJnfiJzno'J fi;

_________________________________ii hate it ' i r i \ notzoloxs art? JEfil babsoio zisnwo adJ sa^crunb *ioi bov In this lecture we have discussed through the various cases cited and recognizedd that : the doctrine of frustration can be applied when the fulfilment of the contract is stopped by an irresistable and extraneous cause such as the destruction of the subject matter, nonoccurence of a particule revent, supervening illigality and outbreak of war,

however it should be noted that hardships, inconveniences of increase in pricesdone cannot frustrate a contract.

whenever a contract is made there are unexpected events which the parties mustrisk, and therefore the parties can share the risks if they insert escalation clauses in the contract. EXERCISE

We have seen how the doctrine of frustration was established through case law and its application in the Common Law. You should now compare and contrast the facts and holdings of Krell v. Henry (1903) 2 K.J3. 740 and Heme Bay Steam Boat Company v. Hulton (1903) 2 K.B. 683 all of them being Court of Appeal cases. FURTHER READINGS

Cheshire, Fifoot and Furmston's Law>of Contract 12th Ed. 1991 Butterworths pp. 569-593. Smith and Thomas, A Casebook on Contract 8th. Ed. 1987 Sweet & Maxwell, pp. 406-436. Treitel., Law of Contract, 8th Ed. 1991 Sweet & Maxwell, pp. 763-818. Hodgin, R.W., Law of Contract, in East Africa (1975) Kenya Literature Bureau Nairobi, pp. 178187. Law Reform (Frustrated Contracts) Act, 1943, England, SS. 1(2) Joining^) leH Anson's Law of Contract, 23rd Ed. 1969 Oxford University Press, pp. 453/481. Cases: Maclaine Watson & Co. Ltd v. Shah 23 E.A.C.A. 366. Victoria Industries v. Ramanbhai Bros (1961) E.A. 11. Twentsche Overseas Trading Co Ltd v. Uganda Sugar Factory Ltd 12 E.A.C.A I. Howard & Co. (Africa) Ltd. v. Burton (1964) E.A. 42. Neen Norto Signs (Kenya) Ltd v. Alarkhia and Others (1970) E.A. 82.

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\fc DA (d