Contract frustrations scenario. A problem question case study

Example Contract Law Problem Question

Scenario

York Racecourse was to host the Royal race meeting on 10th, 11th and 12th October 2014.

As the race meeting would attract more crowds than usual, York Racecourse contracted with Buildanything Ltd ("Buildanything") for them to build a new car park close to the river. As part of the contract Buildanything were required to resurface and widen the existing access road to the current car park which would then lead onto the proposed new car park. The new car park was to be completed by 8th October 2014. A deposit of £60,000 was payable by York Racecourse before 8th September 2014 and the balance of £100,000 was payable on 8th October 2014.

York Racecourse decided that the seats in the race stands needed renewing before the Royal race meeting. They therefore contracted with Seating Ltd for them to replace all the seats in stands A and B by 30th September for a total cost of £30,000. Seating Ltd underestimated how long it would take them to replace all the seats and when they left the job on 30th September a number of the seats had been poorly fitted. Seating Ltd are claiming the full £30,000 from York Racecourse.

Mr Robinson has let out his house in York for £5,000 for the 3 days of the Royal race meeting to Miss Jones. Miss Jones paid a deposit of £2,000 on entering into the contract with Mr Robinson and the balance was due on 10th October 2014.

During 2nd, 3rd and 4th October 2014 York suffered from exceptionally heavy rain. The racecourse, which is low lying, was flooded so the Royal race meeting had to be cancelled. It cannot be rescheduled. The area where work was underway on the new car park was entirely submerged by water and most of what had been done was washed away by the river. The area is no longer suitable for any development.

Buildanything are claiming the balance of the monies they say are due. They say that their labour costs for installing the new car park and improving the access road amount to £40,000 and they wish to recover from York Racecourse.

Miss Jones has informed Mr Robinson that she no longer want to stay at his house in York as the Royal race meeting has been cancelled.

Explain the relevant law and advise York Racecourse as to their liability to Buildanything and Seating Ltd.

Also advise Mr Robinson who is seeking to recover the balance of £3,000 from Miss Jones.

Answer

The scenario relates to the doctrine of frustration and asks whether the contracts can be set aside on the basis that it is no longer possible for the parties to perform their obligations under the contracts.1 The courts impose stringent restrictions on the use of the frustration doctrine enabling its use only where the performance "would render it a thing radically different from that which was undertaken by the contract".2 With this in mind, each of the contracts will be assessed in terms of whether they fall within the doctrine of frustration thereby entitling the parties to avoid their provisions or whether they are still capable of being performed. Where the frustration doctrine is not available to the parties, an assessment will be made in relation to alternative contract remedies that may be available. The assessment will deal with the two contracts entered into with York Racecourse, namely the building of the car park and adjoining road improvements with 'Buildanything'; and the replacement of chairs at the stadium with Seating Ltd. In addition, the contract between Mr Robinson and Miss Jones for the lease of Mr Robinson's house will also be assessed.

'Buildanything' Contract

Prior to completion of the carpark by Buildanything, the carpark was flooded and the result of the flood means that the area can no longer be used as a carpark. York Racecourse was obligated under the contract to pay a deposit for the works totalling £60,000 by the 8th September which from the available information appears to have been made. The frustration doctrine will only apply in the most exceptional cases where the contract is no longer physically capable to perform.3 The doctrine will not therefore apply in instances where the contract has simply become less advantageous for the parties to perform.4 There is limited detail as to the precise contractual terms that the parties have entered into and thus for the purposes of identifying the parties rights and obligations it is assumed that there is no force majeure clause which would identify the obligations of the parties in the situation of an event that was beyond their control.5

This case appears to be one in which the doctrine of frustration could apply, enabling 'Buildanything' and York Racecourse to avoid any further performance of the contract. The reason for this is that the contract can no longer physically be performed as the car park has been completely destroyed. The leading case is Taylor v Caldwell in which the concert hall was destroyed two days before the concert and the parties were entitled to treat the contract as frustrated.6 Nonetheless, it is noted that in building contracts the builder will typically bear the risk until the building contract is completed.7 Thus, if the construction was destroyed prior to completion, if no other contractual term was present, the builder would generally be liable to rebuild at no additional cost. In this regard, the courts have drawn an odd distinction between new building works and amendments to existing works, whereby the doctrine of frustration applies only to the latter example.8 The carpark in this case is new despite it being constructed alongside amendments to existing developments. It is however argued, that the fact that the carpark can no longer be built in the contracted location must surely render the contract radically different to what the parties had agreed.9 For these reasons, it is likely that the frustration doctrine will apply to this case.

It is noted under the initial contract Buildanything were entitled to a further £100,000 following the completion of the works and a deposit of £60,000 appears to have already have been paid to them. When a contract is set aside on the basis that it can no longer be performed, the contracting parties are required to return any deposit paid and expect no further payment under the contract.10 In this instance it is noted that Buildanything have incurred costs of £40,000 on the basis that the construction work had commenced before the flood occurred. The Law Reform (Frustrated Contracts) Act 1943 makes some provision for expenses incurred prior to the frustrating event. Section 1(2) states that any monies advanced should be repaid, which identifies that the initial £60,000 paid to Buildanything should be returned.11 However, the provision requires the court to determine whether expenses can be claimed, and if this is successful the court will determine the amount can be claimed.12 It may be possible for Buildanything to retain the £40,000 expenses incurred thereby returning £20,000 of the £60,000 paid to date. However, it is not straightforward as to how the court will make an award as to expenses that may be reclaimed. In Gamerco SA v ICM / Fair Warning Agency the court in declining the defendant's expenses claim, assessed the losses incurred by the plaintiff to outweigh the expenses that the defendant had incurred.13 The provisions in section 2(4) of the Law Reform (Frustrated Contracts) Act 1943 may assist Buildanything to claim more than the £40,000 expenses that they have incurred. This section applies where it is possible to separate a part of the contract from the remaining contract to be performed. It may be possible for the road widening and resurfacing of existing car park to be separated from the building of the new car park. If this is the case then Buildanything would be entitled to the sums due under that part of the contract, which may be more than the £40,000 expenses incurred. Nonetheless, despite the Act being in existence for some considerable time there are no reported cases that demonstrate the court's interpretation of section 2(4) and hence it is not possible to state with any certainty whether Buildanything will be entitled to claim under this provision.14

Seating Ltd Contract

Seating Ltd had performed their contract prior to the flooding and from the information available, it appears that the flood has not affected the work that was completed by them. Whilst the seats have been built for a specific event namely the 'Royal race meeting', it is noted that the seating is still capable for being used for future race meetings. The cancellation of a single event will not render the contract as frustrated.15 In the National Carriers case the court ruled that closure of the only access road to a leased premises for a period of 20 months did not frustrate the remaining four years of the lease.16 Furthermore, it is unlikely that the seating was only installed for the Royal race meeting and would be removed following the event. As such the purpose to the contract will still be valid and will not be treated as Frustrated. For these reasons, it will not be possible for York Racecourse to claim that the contract was frustrated.

The fact that the seats that have been poorly fitted reflects defective performance under the contract, which represents a breach of contract.17 It is possible that the defective performance of the contract is due to defective seating that had been supplied to Seating Ltd however, where this is the case Seating Ltd will be considered strictly liable for the chairs that they fitted.18 The action that York Racecourse will be able to take in relation to the breach will depend on whether the quality of the seating and its fitting amounted to a conditional term of the contract or merely represented a warrantee term. A breach of condition will entitle the injured party to terminate the contract. A condition is described as a contractual term that goes to the heart of the contract or is something that the parties specify will be a condition.19 The contract in this instance has been performed by Seating Ltd but the quality of the performance is poor. Defective performance in respect of poorly fitted seats is unlikely to be sufficient to amount to a breach of condition in this case as the beach. York Racecourse will therefore not be able to terminate the contract for the breach. The defective performance will therefore merely represent a breach of warrantee entitling York Racecourse to damages for the breach.

Damages are said to reflect the loss that the injured party suffered as a result of the breach.20 In this regard York Racecourse are likely to be entitled to retain from the contractual sum due to Seating Ltd, the funds required to repair the defect as this would restore them to the position that they would have been in had the contract been correctly performed.21 Whilst it could be argued that Phillips v Ward failed to allow the defect to be repaired, this was on the basis that it would put the parties in a better position than the parties would have been in had the contract been performed. Hence it can be distinguished from the present facts which relate to the provision of new seating.22 York racecourse will be in breach of a contractual condition if they fail to pay the sums owed under the contract. Avoidance of dispute is generally considered preferable in terms of minimising costs and hence York Racecourse should identify the breach to Seating Ltd and ask them to put the defect right. Should Seating Ltd fail to complete the remedial actions then York Racecourse will be entitled to withhold sufficient sums from the contractual payment to repair the defect. Given the scenario resulting in cancellation of the Royal race meeting it is unlikely that further damages will have been suffered. Should the defective seating have been used resulting in injury or the seating not be available at the meeting then it may have been possible for York Racecourse to have also claimed for these losses.23

Lease of Mr Robinson's House

The general principle of the doctrine of frustration is that the contract will not be treated as frustrated if it is still capable of being performed.24 It is noted that the hire of the house was to occur during the three days of the race meeting however, there is no detail that the hire was contingent on the race meeting going ahead.25 Nor is there any detail as to what should happen in the event of the race meeting being cancelled as this would give a clearer understanding of the parties' rights and obligations under the contract. From the available information the house is still capable of habitation and thus both Lisa and Mr Robinson will be expected to perform their respective obligations under the contract. It is noted that a £2,000 deposit has been paid by Lisa under the contract, which will not be returnable. Lisa will still be liable to pay the further £1,000 due under the contract. Mr Robinson will be obligated to provide access to the house for the three days in which the race meeting was due to be held. The race meeting may have been cancelled but Lisa could still enjoy the provision of the house during those three days and hence the contract will not be frustrated.

It is however, entirely possible that the flooding has also affected the house on the basis that it is situated near to the race course. If access to the house is not possible due to the flooding, or the house itself has flooded then it will be possible to treat the contract as frustrated. In this context, Mr Robinson will be required to return the deposit and Lisa will be released from her obligations under the contract.26

Conclusion

The courts are reluctant to allow the doctrine of frustration to be used in all but the most exceptional cases. This is where it is deemed no longer possible to perform the contract as the very nature of performance renders the contract different to that which the parties originally intended. Of the three contracts discussed only one is likely to be deemed frustrated. The Buildanything contract acknowledges the losses that each party to the contract suffers and identifies that the reality is there are no winners under the doctrine of frustration. Many companies and particularly building contractors insert force majeure clauses into their contracts that determine the parties obligations should an unforeseen event occur. Nonetheless the complexity of these clauses and the impossibility to define every potential unexpected event often means that these clauses fail to stand up to the scrutiny of the courts. The courts are also generally reluctant to also contracts to be rescinded and prefer the parties to claim damages in the event of a breach by either party.

Footnotes

1 J Poole, Casebook on Contract Law (11th edn, Oxford University Press 2012) 513.

2 Davis Contractors Ltd. v. Fareham Urban District Council 1956 A.C. 696 per Lord Radcliffe at 729.

3 Pioneer Shipping Ltd v B.T.P. Tioxide Ltd (The Nema) 1982 AC 724 per Lord Roskill at 752).

4 Ocean Tramp Tankers Corporation v V/O Sovfracht, The Eugenia 1964 2 QB 226, per Lord Denning at 239.

5 E McKendrick E, Contract Law: Text, Cases, and Materials (5th edn, Oxford University Press 2012) 397.

6 Taylor v Caldwell (1863) 3 B & S 826.

7 E Peel, Treitel: The Law of Contract (13th edn, Sweet and Maxwell 2011) 19-015.

8 Appleby v Myers (1867) L.R. 2 C.P. 651.

9 Davis Contractors Ltd. v. Fareham Urban District Council 1956 A.C. 696 per Lord Radcliffe at 729.

10 Law Reform (Frustrated Contracts) Act 1943, section 1(2).

11 The Law Reform (Frustrated Contracts) Act 1943, section 1(2).

12 Ibid

13 Gamerco SA v ICM/Fair Warning Agency 1995 1 WLR 1126; Stone R, Modern Law of Contract (9th edn, Routledge 2011) 416.

14 The Law Reform (Frustrated Contracts) Act 1943, section 2(4).

15 Herne Bay Steamboat Co v Hutton 1903 2 KB 683

16 National Carriers case 1981 A.C. 675 at 704).

17 McKendrick, n5, 753; The Stork 1955 2 Q.B. 68

18 Peel, n7, 17-065.

19 Bentsen v Taylor 1893 2 Q.B. 274.

20 Teacher v Calder (1889) 1 F.(H.L.) 39.

21 Demarco v Perkins 2006 EWCA Civ 188.

22 Phillips v Ward 1956 1 W.L.R. 471.

23 Peel, n7, 20-005.

24 Herne Bay Steamboat Co v Hutton 1903 2 KB 683

25 Krell v Henry 1903 2 KB 740.

26 The Law Reform (Frustrated Contracts) Act 1943, section 1(2).