Law of Contract: Frustration as an implied term. Last updated 28-Dec-2014

A term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is, if it is such a term that it can confidently be said that if at the time the contract was being negotiated some one had said to the parties, ‘What will happen in such a case', they would both have replied, ‘Of course, so and so will happen; we did not trouble to say that; it is too clear’.
Scrutton LJ in Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592 at p. 605.

Presumed intention of the parties

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 the earliest stage of development of the doctrine of frustration Blackburn J in Taylor v Caldwell (1863) 3 B&S 826 introduced an implied term to discharge the parties from further performance when subject-matter of the contract ceased to exist without fault from either side:

…the contract is not to be construed as a positive contract, but 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.

This discretion of the court was later confirmed by Earl Loreburn in FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397 as the true and main option available for the court:

Sometimes it is put that performance has become impossible and that the party concerned did not promise to perform impossibility. Sometimes it is put that the parties contemplated a certain state of things which fell out otherwise. In most of the cases it is said that there was an implied condition in the contract which operated to release the parties from performing it, and in all of them I think that was at bottom the principle 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.

In Larrinaga & Co, Ltd v Societe Franco-Americaine des Phosphates de Medulla [1923] All ER Rep 1, Lord Atkinson stated that implication is necessary first of all to infer a condition which is not expressed was a foundation upon which the parties contracted, and secondly to effectuate the intention of the parties as revealed by the language they have used.

By the middle of the twentieth century, however, with more cases came to be decided on frustration issue, the theory of implied item was found to be of something artificial nature in a way that it insists on the presumed state of things that parties to the contract would be always agree in case of frustration to say ‘if that happens, of course, it is all over between us’. Vivid examples of this artificiality were quoted by Lord Reid in Davis Contractors Ltd. v Fareham Urban District Council [1956] AC 696:

I may be allowed to note an example of the artificiality of the theory of an implied term given by Lord Sands in James Scott & Sons Ltd. v Del Sel [1922] S.C. 592, 597: "A tiger has escaped from a travelling menagerie. The milkgirl fails to deliver the milk. Possibly the milkman may be exonerated from any breach of contract; but, even so, it would seem hardly reasonable to base that exoneration on the ground that ‘tiger days excepted’ must be held as if written into the milk contract."

I think that there is much force in Lord Wright’s criticism in Denny, Mott & Dickson Ltd. v James B. Fraser & Co. Ltd. [1944] A.C. 265, 275: "The parties did not anticipate fully and completely, if at all, or provide for what actually happened. It is not possible, to my mind, to say that, if they had thought of it, they would have said: 'Well, if that happens, all is over between us.' On the contrary, they would almost certainly on the one side or the other have sought to introduce reservations or qualifications or compensations.

Their Lordships in Davis Contractors reduced the theory of implied term to the very limited number of cases, in favour of the view that ‘frustration depends, at least in most cases, not on adding any implied term, but on the true construction of the terms which are in the contract read in light of the nature of the contract and of the relevant surrounding circumstances when the contract was made’.

Lord Raid and then Lord Radcliffe questioned earlier authorities and especially statement of Lord Loreburn in FA Tamplin Steamship Co. Ltd. v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 A.C. 397 at p.403:

… a court can and ought to examine the contract and the circumstances in which it was made, not of course to vary, but only to explain it, in order to see whether or not from the nature of it the parties must have made their bargain on the footing that a particular thing or state of things would continue to exist. And if they must have done so, then a term to that effect will be implied, though it be not expressed in the contract. … 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.

Lord Radcliffe said, commenting this passage, at p.728:

Lord Loreburn ascribes the dissolution to an implied term of the contract that was actually made. This approach is in line with the tendency of English courts to refer all the consequences of a contract to the will of those who made it. But there is something of a logical difficulty in seeing how the parties could even impliedly have provided for something which ex hypothesi they neither expected nor foresaw; and the ascription of frustration to an implied term of the contract has been criticized as obscuring the true action of the court which consists in applying an objective rule of the law of contract to the contractual obligations that the parties have imposed upon themselves.

Apart from those cases when subject-matter of the contract perished before or at the time of performance, the view that both and either party would be equally eager to bring the contract to an end saying ‘all is over between us’, is hardly true on examples of Horlock v Beal [1916] 1 A.C. 486, Bank Line v Arthur Capel & Co [1919] AC 435, Scottish Navigation Co. Ltd. v W. A. Souter & Co. [1917] 1 KB 222, Societe Franco Tunisienne d'Armement v Sidermar S.P.A.( The Massalia) [1961] 2 Q.B. 278, Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724 and many other cases. In all these instances one party did insisted on further performance of contract when frustrating event occurred. Lord Reid and Lord Somervell in Davis Contractors Ltd. v Fareham Urban District Council [1956] AC 696 preferred the view that the doctrine of frustration rather depends on whether on true construction the contract was wide enough to apply the new situation. In same case Lord Radcliffe at p.729 described frustration as "a thing radically different from that which was undertaken by the contract" - Non haec in foedera veni.

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