Nature of Obligations
Cases
Couturier & Ors v Hastie & Anor
[1856] UKHL J3
Lord Cranworth
….
The cause was tried before Mr. Baron Martin, when his Lordship ruled, that the contract imported that at the time of the sale, the corn was in existence as such, and capable of delivery, and that as it had been sold and delivered by the captain before this contract was made, the Plaintiffs could not recover in the action. He therefore directed a verdict for the Defendants. The case was afterwards argued in the Court of Exchequer before the Lord Chief Baron, Mr. Baron Parke, and Mr. Baron Alderson, when the learned Judges differed in opinion, and a rule was drawn up directing that the verdict found for the Defendants should be set aside on all the pleas except the sixth, and that on that plea judgment should be entered for the Plaintiffs, non obstante veredicto. That the Defendants should be at liberty to treat the decision of the Court as the ruling at Nisi Prius, and to put it on the record and bring a. bill of exceptions (8 Exch. 40). This was done, and the Lord Chief Baron sealed the bill of exceptions, adding, however, a memorandum to the effect that he did so as the ruling of the Court, but that his own opinion was in opposition to such ruling.
The case was argued on the bill of exceptions in the Exchequer Chamber, before Justices Coleridge, Maule, Creswell, Wightman, Williams, Talfourd, and Crompton, who were unanimously of opinion that the judgment of the Court of Exchequer ought to be reversed (9 Exch. 102). The present writ of error was then brought.
The Judges were summoned, and Mr. Baron Alderson, Mr. Justice Wightman, Mr. Justice Creswell, Mr. Justice Erle, Mr. Justice Williams, Mr. Baron Martin, Mr. Justice Crompton, Mr. Justice Willes, and Mr. Baron Bramwell, attended.
Sir F. Thesiger and Mr. James Wilde for the Plaintiffs in Error: The purchase here was not of the cargo absolutely as a thing assumed to be in existence, but merely of the benefit of the expectation of its arrival, and of the securities against the contingency of its loss. The purchaser bought in fact the shipping documents, the rights and interests of the vendor. A contract of such a kind is valid, Paine v. Meller (6 Ves. 349); Cass v. Rudele (2 Vern. 280). The language of the contract implies all this. The representation that the corn was shipped free on board at Salonica, means that the cargo, was the property of, and at the risk of the shipper, Cowasjee v. Thompson (5 Moo. P.C. 165). The Court of Exchequer proceeded on the words of this contract, and gave the correct meaning to them. Mr. Baron Parke (8 Exch. 54) said, ” There is an express engagement that the cargo was of average quality when shipped, so that it is clear that the purchaser was to run the risk of all subsequent deterioration by sea damage or otherwise, for which he was to be indemnified by having the cargo fully insured; for the 27s. per quarter were to cover not merely the price, but all expenses of shipment, freight, and insurance.” In a contract for the sale of goods afloat, there are two periods which are important to be regarded, the time of sale and the time of arrival. If at the time of the sale there is anything on which the contract can attach it is valid, and the vendee bound, Barr v. Gibson (3 Mee. and Wels. 390). The goods are either shipped, as here, “free on board,” when it is clear that they are thenceforward at the risk of the vendee, or they are shipped “to arrive,” which saves the vendee from all risk till they are safely brought to port, Johnson v. Macdonald (9 Mee. and Wels. 600). The intention of the parties is understood to be declared by different terms of expression, and the judgment of the Exchequer Chamber here really violates that intention. The case of Strickland v. Turner (7 Exch. 208), which was referred to by the Lord Chief Baron (8 Exch. 49), is not in point, for there the annuity, which was the subject of the sale, had actually ceased to exist when the sale took place; there was nothing whatever on which the contract could attach; and the principles therefore on which all contracts of sale must proceed, as explained and illustrated by Pothier,[1] whose definitions of a sale are literally adopted by Mr. Chancellor Kent (2 Kent’s Com. 468), applied there, but they do not apply here, for here the parties were dealing with an expectation, namely, the expectation of the arrival of the cargo. As Lord Chief Baron Richards said, in Hitchcock v. Giddings (4 Price, 135), ” If a man will make a purchase of a chance, he must abide by the consequences.” Here, however, the chance was only that of the arrival of the cargo, and that chance was covered by the policy, for the cargo, itself, as stated in the contract, had been actually shipped. Had the cargo been damaged at the time of this contract, the loss thereby arising must have been borne by the purchaser. Suppose the corn had been landed at Tunis, and had remained in the warehouse there, it would have ceased to be a cargo in the strict and literal meaning of the word, but the purchaser would still have been bound by his contract.
The Court of Exchequer Chamber, admitting that the vendee might have recovered an average loss under the policy on this cargo, said that he could not have recovered if a total loss had occurred, and referred to, an admission to that effect supposed to have been made by the present Baron Martin when arguing Sutherland v. Pratt (11 Mee. and Wels. 296). That admission does not mean what is thus supposed; and after the case of Roux v. Salvador (3 Bing. N.C. 266), where there was a total loss, and the Plaintiff recovered on the policy, it is difficult to understand how such an opinion could be entertained. A technical objection arising on the form of the policy would not affect this question. The purchaser’s right on this policy would have been complete, Phillips (1 Phill. Ins. 438), Marshall (1 Marsh. Ins. 333), and March v. Pigott (5 Burr. 2802). By what has happened here, the purchaser has been saved the payment of freight, Vlierboom v. Chapman (13 Mee. and Wels. 230); and Owens v. Dunbar (12 Ir. Law. Rep. 304) shows that he would have been bound to accept the cargo. The contract here was, that the cargo was shipped “free on board.” To that extent the vendor was bound, but he was not bound by any farther and implied warranty, Dickson v. Zizinia (10 Corn. Ben. 602). Mr. Butt and Mr. Bovill for the Defendants in Error were not called on.
The Lord Chancellor: My Lords, this case has been very fully and ably argued on the part of the Plaintiffs in Error, but I understand from an intimation which I have received, that all the learned Judges who are present, including the learned Judge who was of a different opinion in the Court of Exchequer, before the case came to the Exchequer Chamber, are of opinion that the judgment of the Court of Exchequer Chamber sought to be reversed by this writ of error was a correct judgment, and they come to that opinion without the necessity of hearing the counsel for the Defendants in Error. If I am correct in this belief, I will not trouble the learned counsel for the Defendants in Error to address your Lordships, because I confess, though I should endeavour to, keep my mind suspended till the case had been fully argued, that my strong impression in the course of the argument has been, that the judgment of the Court of Exchequer Chamber is right. I should therefore simply propose to ask the learned Judges, whether they agree in thinking that that judgment was right.
Mr. Baron Alderson said: My Lords, Her Majesty’s Judges are unanimously of opinion that the judgment of the Exchequer Chamber was right, and that the judgment of the Court of Exchequer was wrong; and I am also of that opinion myself now, having been one of the Judges before whom the case came to be heard in the Court of Exchequer.
The Lord Chancellor: My Lords, that being so, I have no hesitation in advising your Lordships, and at once moving that the judgment of the Court below should be affirmed. It is hardly necessary, and it has not ordinarily been usual for your Lordships to go much into the merits of a judgment which is thus unanimously affirmed by the Judges who are called in to consider it, and to assist the House in forming its judgment. But I may state shortly that the whole question turns upon the construction of the contract which was entered into, between the parties. I do not mean to deny that many plausible and ingenious arguments have been pressed by both the learned counsel who have addressed your Lordships, showing that there might have been a meaning attached to that contract different from that which the words themselves impart. If this had depended not merely upon the construction of the contract but upon evidence, which, if I recollect rightly, was rejected at the trial, of what mercantile usage had been, I should not have been prepared to say that a long continued mercantile usage interpreting such contracts might not have been sufficient to warrant, or even to compel your Lordships to adopt a different construction. But in the absence of any such evidence, looking to the contract itself alone, it appears to me clearly that what the parties contemplated, those who bought and those who sold, was that there was an existing something to be sold and bought, and if sold and bought, then the benefit of insurance should go with it. I do not feel pressed by the latter argument, which has been brought forward very ably by Mr. Wilde, derived from the subject of insurance. I think the full benefit of the insurance was meant to go as well to losses and damage that occurred previously to the 15th of May, as to losses and damage that occurred subsequently, always assuming that something passed by the contract of the 15th of May. If the contract of the 15th of May had been an operating contract, and there had been a valid sale of a cargo at that time existing, I think the purchaser would have had the benefit of insurance in respect of all damage previously occurring. The contract plainly imports that there was something which was to, be sold at the time of the contract, and something to be purchased. No such thing existing, I think the Court of Exchequer Chamber has come to the only reasonable conclusion upon it, and consequently that there must be judgment given by your Lordships for the Defendants in Error.
Judgment for the Defendants in Error, with costs. Lords’ Journals, 27 June 1856.
Taylor & Anor v Caldwell & Anor
[1863] EWHC QB J1, 3 B & S 826
Blackburn J
There is a class of contracts in which a person binds himself to do something which requires to be performed by him in person; and such promises, e.g. promises to marry, or promises to serve for a certain time, are never in practice qualified by an express exception of the death of the party; and therefore in such cases the contract is in terms broken if the promisor dies before fulfilment. Yet it was very early determined that, if the performance is personal, the executors are not liable; Hyde v. The Dean of Windsor (Cro. Eliz. 552, 553). See 2 Wms. Exors. 1560, 5th ed., where a very apt illustration is given. “Thus,” says the learned author, “if an author undertakes to compose a work, and dies before completing it, his executors are discharged from this contract: for the undertaking is merely personal in its nature, and, by the intervention of the contractor’s death, has become impossible to be performed.”For this he cites a dictum of Lord Lyndhurst in Marshall v. Broadhurst (1 Tyr. 348, 349), and a case mentioned by Patteson J. in Wentworth v. Cock (10 A. & E. 42, 45-46). In Hall v. Wright (E. B. & E. 746, 749), Crompton J., in his judgment, puts another case. “Where a contract depends upon personal skill, and the act of God renders it impossible, as, for instance, in the case of a painter employed to paint a picture who is struck blind, it may be that the performance might be excused.”
It seems that in those cases the only ground on which the parties or their executors, can be excused from the consequences of the breach of the contract is, that from the nature of the contract there is an implied condition of the continued existence of the life of the contractor, and, perhaps in the case of the painter of his eyesight. In the instances just given, the person, the continued existence of whose life is necessary to the fulfilment of the contract, is himself the contractor, but that does not seem in itself to be necessary to the application of the principle; as is illustrated by the following example. In the ordinary form of an apprentice deed the apprentice binds himself in unqualified terms to “serve until the full end and term of seven years to be fully complete and ended,” during which term it is covenanted that the apprentice his master “faithfully shall serve,” and the father of the apprentice in equally unqualified terms binds himself for the performance by the apprentice of all and every covenant on his part. (See the form, 2 Chitty on Pleading, 370, 7th ed. by Greening.) It is undeniable that if the apprentice dies within the seven years, the covenant of the father that he shall perform his covenant to serve for seven years is not fulfilled, yet surely it cannot be that an action would lie against the father? Yet the only reason why it would not is that he is excused because of the apprentice’s death.
These are instances where the implied condition is of the life of a human being, but there are others in which the same implication is made as to the continued existence of a thing. For example, where a contract of sale is made amounting to a bargain and sale, transferring presently the property in specific chattels, which are to be delivered by the vendor at a future day; there, if the chattels, without the fault of the vendor, perish in the interval, the purchaser must pay the price and the vendor is excused from performing his contract to deliver, which has thus become impossible.
That this is the rule of the English law is established by the case of Rugg v. Minett (11 East, 210), where the article that perished before delivery was turpentine, and it was decided that the vendor was bound to refund the price of all those lots in which the property had not passed; but was entitled to retain without deduction the price of those lots in which the property had passed, though they were not delivered, and though in the conditions of sale, which are set out in the report, there was no express qualification of the promise to deliver on payment. It seems in that case rather to have been taken for granted than decided that the destruction of the thing sold before delivery excused the vendor from fulfilling his contract to deliver on payment.
This also is the rule in the Civil law, and it is worth noticing that Pothier, in his celebrated Traite du Contrat de Vente (see Part. 4, § 307, etc.; and Part. 2, ch. 1, sect. 1, art. 4, § 1), treats this as merely an example of the more general rule that every obligation de certo corpore is extinguished when the thing ceases to exist. See Blackburn on the Contract of Sale, p. 173.
The same principle seems to be involved in the decision of Sparrow v. Sowyate (W. Jones, 29), where, to an action of debt on an obligation by bail, conditioned for the payment of the debt or the render of the debtor, it was held a good plea that before any default in rendering him the principal debtor died. It is true that was the case of a bond with a condition, and a distinction is sometimes made in this respect between a condition and a contract. But this observation does not apply to Williams v. Lloyd (W. Jones, 179). In that case the count, which was in assumpsit, alleged that the plaintiff had delivered a horse to the defendant, who promised to redeliver it on request. Breach, that though requested to redeliver the horse he refused. Plea, that the horse was sick and died, and the plaintiff made the request after its death; and on demurrer it was held a good plea, as the bailee was discharged from his promise by the death of the horse without default or negligence on the part of the defendant. “Let it be admitted,” say the Court, “that he promised to deliver it on request, if the horse die before, that is become impossible by the act of God, so the party shall be discharged, as much as if an obligation were made conditioned to deliver the horse on request, and he died before it.” And Jones, adds the report, cited 22 Ass. 41, in which it was held that a ferryman who had promised to carry a horse safe across the ferry was held chargeable for the drowning of the animal only because he had overloaded the boat, and it was agreed, that notwithstanding the promise no action would have lain had there been no neglect or default on his part. It may, we think, be safely asserted to be now English law, that in all contracts of loan of chattels or bailments if the performance of the promise of the borrower or bailee to return the things lent or bailed, becomes impossible because it has perished, this impossibility (if not arising from the fault of the borrower or bailee from some risk which he has taken upon himself) excuses the borrower or bailee from the performance of his promise to redeliver the chattel. The great case of Coggs v. Bernard (1 Smith’s L. C. 171, 5th ed.; 2 L. Raym. 909) is now the leading case on the law of bailments, and Lord Holt, in that case, referred so much to the Civil law that it might perhaps be thought that this principle was there derived direct from the civilians, and was not generally applicable in English law except in the ease of bailments; but the case of Williams v. Lloyd (W. Jones, 179), above cited, shews that the same law had been already adopted by the English law as early as The Book of Assizes. The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance. In none of these cases is the promise in words 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 continued existence of the particular person or chattel. In the present case, looking at the whole contract, we find that the parties contracted on the basis of the continued existence of the Music Hall at the time when the concerts were to be given; that being essential to their performance.
We think, therefore, that the Music Hall having ceased to exist, without fault of either party, both parties are excused, the plaintiffs from taking the gardens and paying the money, the defendants from performing their promise to give the use of the Hall and Gardens and other things. Consequently the rule must be absolute to enter the verdict for the defendants. Rule absolute.
Herman and Others v. Owners of S.S. “Vicia.”
[1942] IR 305
Hanna J.
What is frustration? In the case of Joseph Constantine S.S. Line, Ltd., v. Imperial Smelting Corporation Ltd. (1),various definitions are given of frustrationincidental to the main question involved in that casenamely, upon whom the burden of proof lies. In that case, the ship in question, the “Kingswood,” was chartered to agents of the respondents in a voyage with ores from Port Pirie in South Australia to Europe. Before she became an”arrived ship” at Port Pirie, there was a severe explosion in the neighbourhood of her auxiliary boiler, causing such damage that she could not perform her charter party. As the headnote says (2), that was “a destruction of the essential subject-matter of the contract so as to frustrate the commercial object of the adventure.” In that respect the case differs from the one under consideration. As there was no negligence or default found with either party, it was held to discharge all liability under the charter. At p. 29, Viscount Simon L.C. says that “when ‘frustration’ in the legal sense occurs, it does not merely provide one party with a defence in an action brought by the other. It kills the contract itself and discharges both parties automatically. The plaintiff sues for breach at a past date and the defendant pleads that at that date no contract existed.” He further says that frustration depends on the terms of the contract and the surrounding circumstances of each case, as some kinds of impossibility may not discharge the contract at all.
Lord Maughan says, at p. 31, that “frustration is based on the presumed common intention of the parties,” and he also states that the legal rights already accrued are unaffected.
At pp. 35, 36, Lord Wright, while recognising frustration by the destruction of the subject-matter, gives a wider conception of impossibility and says: “Another illustration is where the actual object still exists and is available, but the object of the contract as contemplated by both parties was its employment for a particular purpose, which has become impossible, as in the Coronation Gases. In these and similar cases, where there is not in the strict sense impossibility by some casual happening, there has been so vital a change in the circumstances as to defeat the contract. . . . The common object of the parties is frustrated. The contract has perished, quoad any rights or liabilities subsequent to the change.” He then cites passages from the judgment in Paradine v. Jane (1); and from the judgments in Hirji Mulji v. Cheong Yue S.S. Co. (2); Couturier v. Hastie (3);and Dahl v. Nelson, Donkin & Co. (4), and then he says:”I have quoted these statements of law to emphasise that the Court is exercising its powers, when it decides that a contract is frustrated, in order to achieve a result which is just and reasonable.”
The converse proposition is that it is not to be held to be frustrated unless it is just and reasonable.
Lord Porter, in the same case, seems to give a larger interpretation to frustration, where he says, at p. 40:”Frustration is the term now in common use in cases in which the performance of a contract becomes impossible because its subject-matter has ceased to be available for the purpose for which both parties intended it to be used.”He points out that in that case no question arises as to the extension of the doctrine to a case where the subject-matter of the contract is not itself destroyed but the underlying purpose alone has been frustrated.
On these principles I am of opinion that the evidence on the part of the owners is not sufficient to justify a finding of frustration of the seamen’s contracts. Adopting the words of Lord Wright, I decline to hold that it would be just and reasonable under the circumstances to decide that the seaman’s contracts had been frustrated. The vessel had gone from Lisbon to Tampa without a convoy and was not interfered with. She sailed for thirteen days alone in the Atlantic without a convoy and without a proper warrant. I can find no case similar in facts to this, where it has been alleged, or held to be, a frustration for the owners of the vessel, apart from any hostile act of an enemy, to be unwilling to send her to sea on account of the risks and perils of war, with possible interception or seizure. It seems to me that the vessel could have reasonably reached Cardiff to obtain bunkers as she had the undertaking of the British Ministry of Shipping to give her facilities to a port in the United Kingdom. As Lord Sumner described the rule in Hirji Mulji v. Cheong Yue S.S. Co. (2) at p. 510: “The rule as to frustration is to reconcile justice with the absolute contract. The seamen’s contract was in this case an absolute contract. If the contingency was known to the parties as something which might happen and they did not provide for it, the contract ought to stand.”
Upon this point of the implied term in the contract, in the case of Emanuel v. La Compagnie Fermière (1), Lord Esher says: “A term which was not actually contained in a written contract could not be implied unless the Court came to a clear conclusion that both parties must have intended that term to be implied. It was not enough that both parties should have contemplated that a certain state of circumstances would exist. The Court must be satisfied that the party against whom the implied term was to be enforced intended to bind himself that that state of circumstances should exist.” A similar principle is stated by Viscount Simon L.C. in the case of Luxor, Ltd. v. Cooper (2),and in Jacob Marcus & Co. v. Credit Lyonnais (3)Bowen L.J. said: “One of the incidents which the English law attaches to a contract is that . . . a person who expressly contracts absolutely to do a thing not naturally impossible, is not excused for non-performance because of being prevented by vis major.” And in the case of Larrinaga & Co. v. Sociétié Franco-Americaine des Phosphates (4),Lord Sumner said: “If the appellants’ own ships were under requisition, they could have fulfilled their contract with other ships, of which they might be able to obtain the disposition.” Applying that principle to this case the agents here might have made arrangements to take the seamen back to America in other vessels, but they did not do so and relied upon frustration.
This case is obviously different on the facts from any other, and the critical point is the British shipping warrant. I am not satisfied that all the four plaintiffs had information as to the British shipping warrant having expired, or that the Captain did not renew it. The Captain knew, and it would have been his duty to anticipate, that if he did not get it renewed to the United Kingdom while in Charleston, or Halifax, or Sydney, there might be some difficulty in Dublin, and, therefore, he should have included in the conditions of the contract the rights of the crew on the kind of frustration which actually occurred as well as frustration by “torpedo, mine or loss.” As he did not, I find as a fact that the alleged frustration in Dublin, if the British shipping warrant was necessary and the letter from the British Ministry of Shipping insufficient, was due to the neglect of the Captain who was responsible to the owners. If the full British warrant was not absolutely necessary and the letter from the British Ministry of Shipping sufficient, then there was no frustration in the Port of Dublin as it would have carried the vessel to Cardiff.
For these reasons I am of opinion, when the case is carefully analysed, that in the Port of Dublin there was no ground for concluding that there was impossibility of performance. There is no evidence that the British Ministry of Shipping definitely refused a new warrant and, in my judgment, Turner Brightman & Company’s concern was really to reduce expenses until arrangements had been made for the trading of the vessel. If the ship had gone to Cardiff she might have got, as previously, a cargo to Lisbon and a British warrant.
If there was frustration I think having regard to the full argument before me, I should investigate the question as to whether frustration, while it might in some cases cover a breach of a charter party, would in any case apply to the seamen’s contracts for repatriation.
Seamen’s contracts have always stood before the law in a peculiarly favourable position, as many
Davis Contractors v Fareham Urban DC
[1956] UKHL 3 [1956] AC 696, [1956] 2 All ER 145
Lord Reid
Frustration has often been said to depend on adding a term to the contract
by implication: for example, Lord Loreburn in Tamplin Steamship Co. Ltd.
v. Anglo Mexican Petroleum Products Co. Ltd. [1916] 2 A.C. 397 at p. 404,
after quoting language of Lord Blackburn, said: ” That seems to me another
” way of saying that from the nature of the contract it cannot be supposed
” the parties, as reasonable men, intended it to be binding on them under
” such altered conditions. Were the altered conditions such that, had they
” thought of them, they would have taken their chance of them, or such
” that as sensible men they would have said: ‘ If that happens, of course,
“‘ it is all over between us”? What, in fact, was the true meaning of the
” contract? Since the parties have not provided for the contingency, ought a
” court to say it is obvious they would have treated the thing as at an end? “.
I find great difficulty in accepting this as the correct approach because it
seems to me hard to account for certain decisions of this House in this way.
I cannot think that a reasonable man in the position of the seaman in Horlock
v. Beal [1916] 1 A.C. 486 would readily have agreed that the wages payable
to his wife should stop if his ship was caught in Germany at the outbreak
of war, and I doubt whether the charterers in the Bank Line case could
have been said to be unreasonable if they had refused to agree to a term
that the contract was to come to an end in the circumstances which occurred.
These are not the only cases where I think it would be difficult to say that a
reasonable man in the position of the party who opposes unsuccessfully
a finding of frustration would certainly have agreed to an implied term
bringing it about.
I may be allowed to note an example of the artificiality of the theory of
an an implied term given by Lord Sands in Scott & Sons v. Del Sel [1922]
S.C. 592 at p. 595: ” A tiger has escaped from a travelling menagerie. The
” milk girl 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 at p. 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 “.
It appears to me 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. There is much
authority for this view. In British Movietonews Ltd. v. London & District
Cinemas, Ltd. [1952] A.C. 166 at p. 185 Lord Simon said: ” If, on the other
” hand, a consideration of the terms of the contract, in the light of the circum-
” stances existing when it was made, shews that they never agreed to be bound
” in a fundamentally different situation which has now unexpectedly emerged,
” the contract ceases to bind at that point—not because the court in its
” discretion thinks it just and reasonable to qualify the terms of the contract,
” but because on its true construction it does not apply in that situation “.
In Parkinson v. Commissioners of Works [1949] 2 K.B. 632 Asquith, LJ.
said (at p. 667): ” In each case a delay or interruption was fundamental
” enough to transmute the job the contractor had undertaken into a job of a
” different kind, which the contract did not contemplate and to which it
“could not apply, although there was nothing in the express language of
” either contract to limit its operation in this way “. I need not multiply
citations but I might note a reference by Lord Cairns so long ago as 1876 to
” additional or varied work so peculiar so unexpected and so different from
” what any person reckoned or calculated upon ” (Thorn v. The Mayor and
Commonalty of London, 1 App. Cas 120 at p. 127). On this view there is
no need to consider what the parties thought or how they or reasonable men
in their shoes would have dealt with the new situation if they had foreseen
it. The question is whether the contract which they did make is, on its
true construction, wide enough to apply to the new situation: if it is not
then it is at an end.
……
The Appellants’ case must rest on frustration, the termination of the con-
tract by operation of law on the emergence of a fundamentally different
situation. Using the language of Asquith, L.J. (as be then was) which I have
already quoted, the question is whether the causes of delay or the delays were
” fundamental enough to transmute the job the contractor had undertaken
” into a job of a different kind, which the contract did not contemplate and to
” which it could not apply “. In most cases the time when the new situation
emerges is clear, there has been some particular event which makes all the
difference. It may be that frustration can occur as a result of gradual change,
but if so the first question I would be inclined to ask would be when the
frustration occurred and when the contract came to an end. It has been
assumed in this case that it does not matter at what point during the progress
of the work the contract came to an end, and that, whatever the time may
have been, if the contract came to an end at some time the whole of the
work must be paid for on a quantum meruit basis. I do not pursue this
matter because the Respondents have admitted that if there was frustration
at any time the Appellants are entitled to the sum awarded. But even so,
I think one must see whether there was any tune at which the Appellants
could have said to the Respondents that the contract was at an end and that
if the work was to proceed there must be a new contract, and I cannot find
any time from first to last at which they would have been entitled to say
that the job had become a job of a different kind which the contract did not
contemplate. There is a difficulty about a party being entitled to go on
and finish the work without raising the question that a new agreement is
necessary and then maintain that frustration occurred at some time while
the work was in progress, but again I do not pursue that matter because it
does not arise in view of the course this case has taken.
In a contract of this kind the contractor undertakes to do the work for a
definite sum and he takes the risk of the cost being greater or less than
he expected. If delays occur through no one’s fault that may be in the con-
templation of the contract and there may be provision for extra time being
given: to that extent the other party takes the risk of delay. But he does
not take the risk of the cost being increased by such delay. It may be that
delay could be of a character so different from anything contemplated that
the contract was at an end, but in this case in my opinion the most that
could be said is that the delay was greater in degree than was to be expected.
It was not caused by any new and unforeseeable factor or event: the job
proved to be more onerous but it never became a job of a different kind
from that contemplated in the contract.
Bush v. Whitehaven Trustees appears to me to be a very special case and
it must be read in light of the development of the law in later cases. I agree
with your Lordships’ comments on it and I can get little assistance from it
for the decision of the present case. I agree that this appeal should be
dismissed.
Krell v Henry
[1903] 2 KB 740
Romer LJ
“With some doubt I have also come to the conclusion that this case is governed by the principle on which Taylor v Caldwell[1] was decided, and accordingly that the appeal must be dismissed. The doubt I have felt was whether the parties to the contract now before us could be said, under the circumstances, not to have had at all in their contemplation the risk that for some reason or other the coronation processions might not take place on the days fixed, or, if the processions took place, might not pass so as to be capable of being viewed from the rooms mentioned in the contract; and whether, under this contract, that risk was not undertaken by the defendant. But on the question of fact as to what was in the contemplation of the parties at the time, I do not think it right to differ from the conclusion arrived at by Vaughan Williams L.J., and (as I gather) also arrived at by my brother Stirling. This being so, I concur in the conclusions arrived at by Vaughan Williams L.J. in his judgment, and I do not desire to add anything to what he has said so fully and completely. ”
McRae v Commonwealth Disposals Commission
[1951] HCA 79; (1951) 84 CLR 377
High Court of Australia
Dixon and Fullagar JJ1
19. The position so far, then, may be summed up as follows. It was not decided in Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); (1853) 9 Ex 102 (156 ER 43); (1856) 5 HLC 673 (10 ER 1065) that the contract in that case was void. The question whether it was void or not did not arise. If it had arisen, as in an action by the purchaser for damages, it would have turned on the ulterior question whether the contract was subject to an implied condition precedent. Whatever might then have been held on the facts of Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); (1853) 9 Ex 102 (156 ER 43); (1856) 5 HLC 673 (10 ER 1065) , it is impossible in this case to imply any such term. The terms of the contract and the surrounding circumstances clearly exclude any such implication. The buyers relied upon, and acted upon, the assertion of the seller that there was a tanker in existence. It is not a case in which the parties can be seen to have proceeded on the basis of a common assumption of fact so as to justify the conclusion that the correctness of the assumption was intended by both parties to be a condition precedent to the creation of contractual obligations. The officers of the Commission made an assumption, but the plaintiffs did not make an assumption in the same sense. They knew nothing except what the Commission had told them. If they had been asked, they would certainly not have said: “Of course, if there is no tanker, there is no contract”. They would have said: “We shall have to go and take possession of the tanker. We simply accept the Commission’s assurance that there is a tanker and the Commission’s promise to give us that tanker.” The only proper construction of the contract is that it included a promise by the Commission that there was a tanker in the position specified. The Commission contracted that there was a tanker there. “The sale in this case of a ship implies a contract that the subject of the transfer did exist in the character of a ship” (Barr v. Gibson (1838) 3 M& W, at pp 399, 400 (150 ER, at pp 1200, 1201) ). If, on the other hand, the case of Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); [1853] EngR 764; (1853) 9 Ex 102 (156 ER 43); (1856) 5 HLC 673 (10 ER 1065) and this case ought to be treated as cases raising a question of “mistake”, then the Commission cannot in this case rely on any mistake as avoiding the contract, because any mistake was induced by the serious fault of their own servants, who asserted the existence of a tanker recklessly and without any reasonable ground. There was a contract, and the Commission contracted that a tanker existed in the position specified. Since there was no such tanker, there has been a breach of contract, and the plaintiffs are entitled to damages for that breach. (at p410)
20. Before proceeding to consider the measure of damages, one other matter should be briefly mentioned. The contract was made in Melbourne, and it would seem that its proper law is Victorian law. Section 11 of the Victorian Goods Act 1928 corresponds to s. 6 of the English Sale of Goods Act 1893, and provides that “where there is a contract for the sale of specific goods, and the goods without the knowledge of the seller have perished at the time when the contract is made the contract is void”. This has been generally supposed to represent the legislature’s view of the effect of Couturier v. Hastie [1852] EngR 774; (1852) 8 Ex 40 (155 ER 1250); (1853) 9 Ex 102 (156 ER 43); [1856] EngR 713; (1856) 5 HLC 673 (10 ER 1065) . Whether it correctly represents the effect of the decision in that case or not, it seems clear that the section has no application to the facts of the present case. Here the goods never existed, and the seller ought to have known that they did not exist. (at p410)
21. The conclusion that there was an enforceable contract makes it unnecessary to consider the other two causes of action raised by the plaintiffs. As to each of these, the plaintiffs would have been, to say the least, faced with serious obstacles. We have already referred to the evidence bearing on the issue of fraud. And the claim based on negligence would have encountered the difficulties which were held by a majority of the Court of Appeal to be fatal to the plaintiff in Candler v. Crane Christmas & Co. (1951) 1 All ER 426 . (at p410)
Solle v Butcher
[1950] 1 KB 671
Denning LJ
“ It is quite plain that the parties were under a mistake. They thought that the flat was not tied down to a controlled rent, whereas in fact it was. In order to see whether the lease can be avoided for this mistake it is necessary to remember that mistake is of two kinds: first, mistake which renders the contract void, that is, a nullity from the beginning, which is the kind of mistake which was dealt with by the courts of common law; and, secondly, mistake which renders the contract not void, but voidable, that is, liable to be set aside on such terms as the court thinks fit, which is the kind of mistake which was dealt with by the courts of equity. Much of the difficulty which has attended this subject has arisen because, before the fusion of law and equity, the courts of common law, in order to do justice in the case in hand, extended this doctrine of mistake beyond its proper limits and held contracts to be void which were really only voidable, a process which was capable of being attended with much injustice to third persons who had bought goods or otherwise committed themselves on the faith that there was a contract. In the well-known case of Cundy v Lindsay, Cundy suffered such an injustice. He bought the handkerchiefs from the rogue, Blenkarn, before the Judicature Acts came into operation. Since the fusion of law and equity, there is no reason to continue this process, and it will be found that only those contracts are now held void in which the mistake was such as to prevent the formation of any contract at all.
Let me first consider mistakes which render a contract a nullity. All previous decisions on this subject must now be read in the light of Bell v Lever Bros Ld. The correct interpretation of that case, to my mind, is that, once a contract has been made, that is to say, once the parties, whatever their inmost states of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good unless and until it is set aside for failure of some condition on which the existence of the contract depends, or for fraud, or on some equitable ground. Neither party can rely or his own mistake to say it was a nullity from the beginning, no matter .that it was a mistake which to his mind was fundamental, and no matter that the other party knew that he was under a mistake. A fortiori, if the other party did not know of the mistake, but shared it. The cases where goods have perished at the time of sale, or belong to the buyer, are really contracts which are not void for mistake but are void by reason of an implied condition precedent, because the contract proceeded on the basic assumption that it was possible of performance. So far as cases later than Bell v Lever Bros Ld are concerned, I do not think that Sowler v Potter can stand with King’s Norton Metal Co Ld v Edridge, which shows that the doctrine of French law as enunciated by Pothier is no part of English law. Nor do I think that the contract in Nicholson and Venn v Smith-Marriott,[6] was void from the beginning.
Applying these principles, it is clear that here there was a contract. The parties agreed in the same terms on the same subject-matter. It is true that the landlord was under a mistake which was to him fundamental: he would not for one moment have considered letting the flat for seven years if it meant that he could only charge 140l. a year for it. He made th fundamental mistake of believing that the rent he could charge was not tied down to a controlled rent; but, whether it was his own mistake or a mistake common to both him and the tenant, it is not a ground for saying that the lease was from the beginning a nullity. Any other view would lead to remarkable results, for it would mean that, in the many cases where the parties mistakenly think a house is outside the Rent Restriction Acts when it is really within them, the tenancy would be a nullity, and the tenant would have to go; with the result that the tenants would not dare to seek to have their rents reduced to the permitted amounts lest they should be turned out.
Let me next consider mistakes which render a contract voidable, that is, liable to be set aside on some equitable ground. Whilst presupposing that a contract was good at law, or at any rate not void, the court of equity would often relieve a party from the consequences of his own mistake, so long as it could do so without injustice to third parties. The court, it was said, had power to set aside the contract whenever it was of opinion that it was unconscientious for the other party to avail himself of the legal advantage which he had obtained: Torrance v Bolton per James L.J.
The court had, of course, to define what it considered to be unconscientious, but in this respect equity has shown a progressive development. It is now clear that a contract will be set aside if the mistake of the one party has been induced by a material misrepresentation of the other, even though it was not fraudulent or fundamental; or if one party, knowing that the other is mistaken about the terms of an offer, or the identity of the person by whom it is made, lets him remain under his delusion and concludes a contract on the mistaken terms instead of pointing out the mistake. That is, I venture to think, the ground on which the defendant in Smith v Hughes would be exempted nowadays, and on which, according to the view by Blackburn J of the facts, the contract in Lindsay v Cundy, was voidable and not void; and on which the leas in Sowler v Potter, was, in my opinion, voidable and not void.
A contract is also liable in equity to be set aside if the parties were under a common misapprehension either as to facts or as to their relative and respective rights, provided that the misapprehension was fundamental and that the party seeking to set it aside was not himself at fault. That principle was first applied to private rights as long ago as 1730 in Lansdown v Lansdown. There were four brothers, and the second and third of them died. The eldest brother entered on the lands of the deceased brothers, but the youngest brother claimed them. So the two rival brothers consulted a friend who was a local schoolmaster. The friend looked up a book which he then had with him called the Clerk’s Remembrancer and gave it as his opinion that the lands belonged to the youngest brother. He recommended the two of them to take further advice, which at first they intended to do, but they did not do so; and, acting on the friend’s opinion, the elder brother agreed to divide the estate with the younger brother, and executed deeds and bonds giving effect to the agreement. Lord Chancellor King declared that the documents were obtained by a mistake and by a misrepresentation of the law by the friend, and ordered them to be given up to be cancelled. He pointed out that the maxim ignorantia juris non excusat only means that ignorance cannot be pleaded in excuse of crimes. Eighteen years later, in the time of Lord Hardwicke, the same principle was applied in Bingham v Bingham.
If and in so far as those cases were compromises of disputed rights, they have been subjected to justifiable criticism, but, in cases where there is no element of compromise, but only of mistaken rights, the House of Lords in 1867 in the great case of Cooper v Phibbs, affirmed the doctrine there acted on as correct. In that case an uncle had told his nephew, not intending to misrepresent anything, but being in fact in error, that he (the uncle) was entitled to a fishery; and the nephew, after the uncle’s death, acting in the belief of the truth of what the uncle had told him, entered into an agreement to rent the fishery fl om the uncle’s daughters, whereas it actually belonged to the nephew himself. The mistake there as to the title to the fishery did not render the tenancy agreement a nullity. If it had done, the contract would have been void at law from the beginning and equity would have had to follow the law. There would have been no contract to set aside and no terms to impose. The House of Lords, however, held that the mistake was only such as to make it voidable, or, in Lord Westbury’s words, “liable to be set aside” on such terms as the court thought fit to impose; and it was so set aside.
The principle so established by Cooper v Phibbs has been repeatedly acted on: see, for instance, Earl Beauchamp v Winn,[11] and Huddersfield Banking Co Ld v Lister.[12] It is in no way impaired by Bell v Lever Bros Ld, which was treated in the House of Lords as a case at law depending on whether the contract was a nullity or not. If it had been considered on equitable grounds, the result might have been different. In any case, the principle of Cooper v Phibbs has been fully restored by Norwich Union Fire Insurance Society Ld v William H. Price Ld.[13]
Applying that principle to this case, the facts are that the plaintiff, the tenant, was a surveyor who was employed by the defendant, the landlord, not only to arrange finance for the purchase of the building and to negotiate with the rating authorities as to the new rateable values, but also to let the flats. He was the agent for letting, and he clearly formed the view that the building was not controlled. He told the valuation officer so. He advised the defendant what were the rents which could be charged. He read to the defendant an opinion of counsel relating to the matter, and told him that in his opinion he could charge 250l. and that there was no previous control. He said that the flats came outside the Act and that the defendant was “clear.” The defendant relied on what the plaintiff told him, and authorized the plaintiff to let at the rentals which he had suggested. The plaintiff not only let the four other flats to other people for a long period of years at the new rentals, but also took one himself for seven years at 250l. a year. Now he turns round and says, quite unashamedly, that he wants to take advantage of the mistake to get the flat at 140l. a year for seven years instead of the 250l. a year, which is not only the rent he agreed to pay but also the fair and economic rent; and it is also the rent permitted by the Acts on compliance with the necessary formalities. If the rules of equity have become so rigid that they cannot remedy such an injustice, it is time we had a new equity, to make good the omissions of the old. But, in my view, the established rules are amply sufficient for this case.
On the defendant’s evidence, which the judge preferred, I should have thought there was a good deal to be said for the view that the lease was induced by an innocent material misrepresentation by the plaintiff. It seems to me that the plaintiff was not merely expressing an opinion on the law: he was making an unambiguous statement as to private rights; and a misrepresentation as to private rights is equivalent to a misrepresentation of fact for this purpose: MacKenzie v Royal Bank of Canada. But it is unnecessary to come to a firm conclusion on this point, because, as Bucknill LJ has said, there was clearly a common mistake, or, as I would prefer to describe it, a common misapprehension, which was fundamental and in no way due to any fault of the defendant; and Cooper v Phibbs affords ample authority for saying that, by reason of the common misapprehension, this lease can be set aside on such terms as the court thinks fit.
The fact that the lease has been executed is no bar to this relief. No distinction can, in this respect, be taken between rescission for innocent misrepresentation and rescission for common misapprehension, for many of the common misapprehensions are due to innocent misrepresentation; and Cooper v. Phibbs66 shows that rescission is available even after an agreement of tenancy has been executed and partly performed. The observations in Seddon v North Eastern Salt Co Ld, have lost all authority since Scrutton L.J., threw doubt on them in Lever Bros Ld v Bell, and the Privy Council actually set aside an executed agreement in Mackenzie v Royal Bank of Canada. If and in so far as Angel v Jay decided that an executed lease could not be rescinded for an innocent misrepresentation, it was in my opinion, a wrong decision. It would mean that innocent people would be deprived of their right of rescission before they had any opportunity of knowing they had it. I am aware that in Wilde v Gibson, Lord Campbell said that an executed conveyance could be set aside only on the ground of actual fraud; but this must be taken to be confined to misrepresentations as to defects of title on the conveyance of land.
In the ordinary way, of course, rescission is only granted when the parties can be restored to substantially the same position as that in which they were before the contract was made; but, as Lord Blackburn said in Erlanger v New Sombrero Phosphate Co: “The practice has always been for a court of equity to give this relief whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract.” That indeed was what was done in Cooper v Phibbs. Terms were imposed so as to do what was practically just. What terms then, should be imposed here? If the lease were set aside without any terms being imposed, it would mean that the plaintiff, the tenant, would have to go out and would have to pay a reasonable sum for his use and occupation. That would, however, not be just to the tenant.
The situation is similar to that of a case where a long lease is made at the full permitted rent in the common belief that notices of increase have previously been served, whereas in fact they have not. In that case, as in this, when the lease is set aside, terms must be imposed so as to see that the tenant is not unjustly evicted. When Sir John Romilly MR, was faced with a somewhat similar problem, he gave the tenant the option either to agree to pay the proper rent or to go out: see Garrard v Frankel; and when Bacon V-C. had a like problem before him he did the same, saying that “the object of the court is, as far as it can, to put the parties into the position in which they would have been in if the mistake had not happened”: see Paget v Marshall.[19] If the mistake here had not happened, a proper notice of increase would have been given and the lease would have been executed at the full permitted rent. I think that this court should follow these examples and should impose terms which will enable the tenant to choose either to stay on at the proper rent or to go out.
The terms will be complicated by reason of the Rent Restriction Acts, but it is not beyond the wit of man to devise them. Subject to any observations which the parties may desire to make, the terms which I suggest are these: the lease should only be set aside if the defendant is prepared to give an undertaking that he will permit the plaintiff to be a license of the premises pending the grant of a new lease. Then, whilst the plaintiff is a licensee, the defendant will in law be in possession of the premises, and will be able to serve on the plaintiff, as prospective tenant, a notice under s. 7, sub-s. 4, of the Act of 1938 increasing the rent to the full permitted amount. The defendant must further be prepared to give an undertaking that he will serve such a notice within three weeks from the drawing up of the order, and that he will, if written request is made by the plaintiff, within one month of the service of the notice, grant him a new lease at the full permitted amount of rent, not, however, exceeding 250l. a year, for a term expiring on September 29, 1954, subject in all other respects to the same covenants and conditions as in the rescinded lease. If there is any difference of opinion about the figures stated in the notice, that can, of course, be adjusted during the currency of the lease. If the plaintiff does not choose to accept the licence or the new lease, he must go out. He will not be entitled to the protection of the Rent Restriction Acts because, the lease being set aside, there will be no initial contractual tenancy from which a statutory tenancy can spring.
In my opinion, therefore, the appeal should be allowed. The declaration that the standard rent of the flat is 140l. a year should stand. An order should be made on the counterclaim that, on the defendant’s giving the undertakings which I have mentioned, the lease be set aside. An account should be had to determine the sum payable for use and occupation. The plaintiff’s claim for repayment of rent and for breach of covenant should be dismissed. In respect of his occupation after rescission and during the subsequent licence, the plaintiff will be liable to pay a reasonable sum for use and occupation. That sum should, prima facie, be assessed at the full amount permitted by the Acts, not, however, exceeding 250&L a year. Mesne profits as against a trespasser are assessed at the full amount permitted by the Acts, even though notices of increase have not been served, because that is the amount lost by the landlord. The same assessment should be made here, because the sums payable for use and occupation are not rent, and the statutory provisions about notices of increase do not apply to them. All necessary credits must, of course, be given in respect of past payments, and so forth.
Great Peace Shipping Ltd. v Tsavliris (International) Ltd
[2002] EWCA Civ 1407 [2002] 2 LLR 653, [2002] 4 All ER 689, [2003] QB 679, [2002] 3 WLR 1617 [2002] 2 Lloyd’s Rep 653
Phillips MR
…..
The foundation of the law of frustration was Blackburn J’s famous judgment in Taylor v Caldwell (1863) 3 B.& S. 826. 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., 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 performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance 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 continued existence of the particular person or chattel.”
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.
The first such case was Jackson v Union Marine Insurance Co Ltd (1874) LR 10 CP 125. 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.
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 cancelled. 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 contemplated 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.”
Subsequently in Clark v Lindsay (1903) 19 TLR 202, after hearing submissions from Mr Scrutton QC, Lord Alverstone CJ 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’.
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 £100.”
In Krell v Henry, 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 assumption 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 parties as the foundation of the contract, there will be no breach of the contract thus limited.”
Cases where frustration was alleged proved a fruitful source of litigation and, by 1916, Lord Loreburn was able to advance the following proposition in Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Company Ltd [1916] 2 AC 397 at p.403:
“…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 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.”
Despite Lord Loreburn’s words, the doctrine of frustration was patently judge made law. In National Carriers v Panalpina [1981] AC 675 the House of Lords considered five different explanations for the doctrine of frustration. Lord Hailsham and Lord Roskill favoured the exposition of the doctrine given by Lord Radcliffe in Davis Contractors Ltd v Fareham UDC [[1956] AC 696 at 728 and Lord Simon 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 outstanding 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.”
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 normally preclude the application of the doctrine of frustration.
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 the Fibrosa case [1943] AC 32 and to a greater degree by the Law Reform (Frustrated Contracts) Act 1943.
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.
In considering whether performance of the contract is impossible, it is necessary to identify what it is that the parties 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 adventure’ which go beyond the terms that are expressly spelt out, in others it will not.
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.
If one applies the passage from the judgment of Lord Alverstone CJ in Hobson v Pattenden, 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.
The second and third of these elements are well exemplified by the decision of the High Court of Australia in McRae v Commonwealth Disposals Commission (1951) 84 CLR 377. The Commission invited tenders for the purchase of “an oil tanker lying on the Jourmaund Reef…said to contain oil”. The plaintiff tendered successfully for the purchase, fitted out a salvage expedition at great expense and proceeded to the reef. No tanker was to be found – it had never existed. The plaintiff claimed damages for breach of contract. The Commission argued that the contract was void because of a common mistake as to the existence of the tanker.
In the leading judgment Dixon and Fullagar JJ expressed doubt as to the existence of a doctrine of common mistake in contract. They considered that whether impossibility of performance discharged obligations, be the impossibility existing at the time of the contract or supervening thereafter, depended solely upon the construction of the contract. They went on, however, to consider the position if this were not correct. They observed that the common assumption that the tanker existed was one that was created by the Commission, without any reasonable grounds for believing that it was true. They held at p.408:
“…a party cannot rely on mutual mistake where the mistake consists of a belief which is, on the one hand, entertained by him without any reasonable ground, and, on the other hand, deliberately induced by him in the mind of the other party.”
They held at p.410 that, on its proper construction the contract included a promise by the Commission that the tanker existed in the position specified. Alternatively, they held that if the doctrine of mistake fell to be applied:
“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 £100.”
This seems, if we may say so, an entirely satisfactory conclusion and one that can be reconciled with the English doctrine of mistake. That doctrine fills a gap in the contract where it transpires that it is impossible of performance without the fault of either party and the parties have not, expressly or by implication, dealt with their rights and obligations in that eventuality. In Associated Japanese Bank (International) Ltd v. Credit du Nord [1994] 1 WLR 255 at p.268 Steyn J. observed:
“Logically, before one can turn to the rules as to mistake, whether at common law or in equity, one must first determine whether the contract itself, by express or implied condition precedent or otherwise, provides who bears the risk of the relevant mistake. It is at this hurdle that many pleas of mistake will either fail or prove to have been unnecessary. Only if the contract is silent on the point, is there scope for invoking mistake.”
In William Sindall Plc v Cambridgshire CC [1994] 1 WLR 1016 at p. 1035, Hoffman LJ commented that such allocation of risk can come about by rules of general law applicable to contract, such as ‘caveat emptor’ in the law of sale of goods or the rule that a lessor or vendor of land does not impliedly warrant that the premises are fit for any particular purpose, so that this risk is allocated by the contract to the lessee or purchaser.
Thus, while we do not consider that the doctrine of common mistake can be satisfactorily explained by an implied term, an allegation that a contract is void for common mistake will often raise important issues of construction. Where it is possible to perform the letter of the contract, but it is alleged that there was a common mistake in relation to a fundamental assumption which renders performance of the essence of the obligation impossible, it will be necessary, by construing the contract in the light of all the material circumstances, to decide whether this is indeed the case. In performing this exercise, the test advanced by Lord Diplock, applicable alike to both frustration and to fundamental breach, in Hong Kong Fir Shipping Co. Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at p.65 can be of assistance:
“Every synallagmatic contract contains in it the seeds of the problem: in what event will a party be relieved of this undertaking to do that which he has agreed to do but has not yet done. The contract may itself expressly define some of these events, as in the cancellation clause in a charterparty; but, human prescience being limited, it seldom does so exhaustively and often fails to do so at all. In some classes of contracts such as sale of goods, marine insurance, contracts of affreightment evidenced by bills of lading and those between parties to bills of exchange, Parliament has defined by statute some of the events not provided for expressly in individual contracts of that class; but where an event occurs the occurrence of which neither the parties nor Parliament have expressly stated will discharge one of the parties from further performance of his undertakings, it is for the court to determine whether the event has this effect or not.
The test whether an event has this effect or not has been stated in a number of metaphors all of which I think amount to the same thing: does the occurrence of the event deprive the party who has further undertakings still to perform of substantially the whole benefit which it was the intention of the parties as expressed in the contract that he should obtain as the consideration for performing those undertakings.
This test is applicable whether or not the event occurs as a result of the default of one of the parties to the contract, but the consequences of the event are different in the two cases. Where the event occurs as a result of the default of one party, the party in default cannot rely upon it as relieving himself of the performance of any further undertakings on his part, and the innocent party, although entitled to, need not treat the event as relieving him of the further performance of his own undertakings. This is only a specific application of the fundamental legal and moral rule that a man should not be allowed to take advantage of his own wrong. Where the event occurs as a result of the default of neither party, each is relieved of the further performance of his own undertakings, and their rights in respect of undertakings previously performed are now regulated by the Law Reform (Frustrated Contracts) Act, 1943.”
This test may not, however, be adequate in the context of mistake, for there are cases where contracts have been held void for mistake, notwithstanding that the effect of the mistake was that the consideration proved to have substantially greater value than the parties had contemplated.
Once the court determines that unforeseen circumstances have, indeed, resulted in the contract being impossible of performance, it is next necessary to determine whether, on true construction of the contract, one or other party has undertaken responsibility for the subsistence of the assumed state of affairs. This is another way of asking whether one or other party has undertaken the risk that it may not prove possible to perform the contract, and the answer to this question may well be the same as the answer to the question of whether the impossibility of performance is attributable to the fault of one or other of the parties.
Circumstances where a contract is void as a result of common mistake are likely to be less common than instances of frustration. Supervening events which defeat the contractual adventure will frequently not be the responsibility of either party. Where, however, the parties agree that something shall be done which is impossible at the time of making the agreement, it is much more likely that, on true construction of the agreement, one or other will have undertaken responsibility for the mistaken state of affairs. This may well explain why cases where contracts have been found to be void in consequence of common mistake are few and far between.
Lord Atkin himself gave no examples of cases where a contract was rendered void because of a mistake as to quality which made ‘the thing without the quality essentially different from the thing as it was believed to be’. He gave a number of examples of mistakes which did not satisfy this test, which served to demonstrate just how narrow he considered the test to be. Indeed this is further demonstrated by the result reached on the facts of Bell v Lever Brothers itself.
Two cases where common mistake has been held to avoid the contract under common law call for special consideration. A case which is by no means easy to reconcile with Bell v Lever Brothers is Scott v Coulson [1903] 2 Ch 249. A contract for the sale of a life policy was entered into in circumstances in which both parties believed that the assured was alive. The price was paid and the policy assigned. The contract price was little more than the surrender value of the policy. In fact, the assured had died before the contract was concluded and the policy thus carried with it entitlement to the full sum assured. The vendors succeeded, in proceedings in the Chancery Court, in having the transaction set aside. In the Court of Appeal, Vaughan Williams LJ described the position as follows:
“If we are to take it that it was common ground that, at the date of the contract for the sale of this policy, both the parties to the contract supposed the assured to be alive, it is true that both parties entered into this contract upon the basis of a common affirmative belief that the assured was alive; but as it turned out that this was a common mistake, the contract was one which cannot be enforced. This is so at law; and the plaintiffs do not require to have recourse to equity to rescind the contract, if the basis which both parties recognised as the basis is not true.”
This case is often erroneously treated as being on all fours with Strickland v Turner – see for example in Bell v Lever Brothers Wright J. at p.565, Greer LJ at p.595, and Lord Warrington at pp.206-7. The two cases were, however, very different. An annuity on the life of someone deceased is self-evidently a nullity. The policy in Scott v Coulson was very far from a nullity. The only way that the case can be explained is by postulating that a life policy before decease is fundamentally different from a life policy after decease, so that the contractual consideration no longer existed, but had been replaced by something quite different – ergo the contract could not be performed. Such was the explanation given by Lord Thankerton in Bell v Lever Brothers at p.236.
The other case is the decision of Steyn J. in Japanese Bank v Credit du Nord [1989] 1 WLR 257. The plaintiff bank entered into an agreement with a rogue under which he purported to sell and lease back four specific machines. The defendant bank agreed with the plaintiff bank to guarantee the rogue’s payments under the lease-back agreement. The machines did not, in fact, exist. The rogue defaulted on his payments and the plaintiffs called on the guarantee. The defendants alleged (1) that on true construction of the agreement it was subject to an express condition precedent that the four machines existed; if this was not correct: (2) that the agreement was void at law for common mistake; if this was not correct the agreement was voidable in equity on the ground of mistake and had been avoided.
The first head of defence succeeded. Steyn J. went on, however, to consider the alternative defences founded on mistake. After reviewing the authorities on common mistake, he reached the following formulation of the law:
“The first imperative must be that the law ought to uphold rather than destroy apparent contracts. Secondly, the common law rules as to a mistake regarding the quality of the subject matter, like the common law rules regarding commercial frustration, are designed to cope with the impact of unexpected and wholly exceptional circumstances on apparent contracts. Thirdly, such a mistake in order to attract legal consequences must substantially be shared by both parties, and must relate to facts as they existed at the time the contract was made. Fourthly, and this is the point established by Bell v Lever Brothers Ltd [1932] AC 161, the mistake must render the subject matter of the contract essentially and radically different from the subject matter which the parties believed to exist. While the civilian distinction between the substance and attributes of the subject matter of a contract has played a role in the development of our law (and was cited in speeches in Bell v Lever Brothers Ltd.), the principle enunciated in Bell v Lever Brothers Ltd is markedly narrower in scope than the civilian doctrine. It is therefore no longer useful to invoke the civilian distinction. The principles enunciated by Lord Atkin and Lord Thankerton represent the ratio decidendi of Bell v Lever Brothers Ltd. Fifthly, there is a requirement which was not specifically discussed in Bell v Lever Brothers Ltd. What happens if the party, who is seeking to rely on the mistake, had no reasonable grounds for his belief? An extreme example is that of the man who makes a contract with minimal knowledge of the facts to which the mistake relates but is content that it is a good speculative risk. In my judgment a party cannot be allowed to rely on a common mistake where the mistake consists of a belief which is entertained by him without any reasonable grounds for such belief: cf McRae v Commonwealth Disposals Commission (1951) 84 C.L.R. 377, 408. That is not because principles such as estoppel or negligence require it, but simply because policy and good sense dictate that the positive rules regarding common mistake should be so qualified.”
The detailed analysis that we have carried out leads us to concur in this summary, subject to the proviso that the result in McRae can, we believe, be explained on the basis of construction, as demonstrated above. In agreeing with the analysis of Steyn J., we recognise that it is at odds with comments that Lord Denning made on more than one occasion about Bell v Lever Brothers Ltd to the effect that ‘a common mistake, even on a most fundamental matter, does not make a contract void at law’. As to this Steyn J. said at p.267:
“With the profoundest respect to the former Master of the Rolls I am constrained to say that in my view his interpretation of Bell v Lever Brothers Ltd does not do justice to the speeches of the majority.”
We share both the respect and the conclusion. We shall shortly consider in some detail the effect of Lord Denning’s treatment of the decision in Bell v Lever Brothers Ltd.
Steyn J. held that the test of common mistake was satisfied. He held, at p.269:
“For both parties the guarantee of obligations under a lease with non-existent machines was essentially different from a guarantee of a lease with four machines which both parties at the time of the contract believed to exist. The guarantee is an accessory contract. The non-existence of the subject matter of the principal contract is therefore of fundamental importance. Indeed the analogy of the classic res extincta cases, so much discussed in the authorities, is fairly close. In my judgment the stringent test of common law mistake is satisfied: the guarantee is void ab initio.”
Our conclusions have marched in parallel with those of Toulson J. We admire the clarity with which he has set out his conclusions, which emphasise the importance of a careful analysis of the contract and of the rights and obligations created by it as an essential precursor to consideration of the effect of an alleged mistake. We agree with him that, on the facts of the present case, the issue in relation to common mistake turns on the question of whether the mistake as to the distance apart of the two vessels had the effect that the services that the “Great Peace” was in a position to provide were something essentially different from that to which the parties had agreed. We shall defer answering that question until we have considered whether principles of equity provide a second string to the defendants’ bow.
Summary
……
We can understand why the decision in Bell v Lever Brothers Ltd did not find favour with Lord Denning. An equitable jurisdiction to grant rescission on terms where a common fundamental mistake has induced a contract gives greater flexibility than a doctrine of common law which holds the contract void in such circumstances. Just as the Law Reform (Frustrated Contracts) Act 1943 was needed to temper the effect of the common law doctrine of frustration, so there is scope for legislation to give greater flexibility to our law of mistake than the common law allows.
The result in this case
We revert to the question that we left unanswered at paragraph 94. It was unquestionably a common assumption of both parties when the contract was concluded that the two vessels were in sufficiently close proximity to enable the “Great Peace” to carry out the service that she was engaged to perform. Was the distance between the two vessels so great as to confound that assumption and to render the contractual adventure impossible of performance? If so, the appellants would have an arguable case that the contract was void under the principle in Bell v Lever Brothers Ltd.
Toulson J addressed this issue in the following paragraph:
“Was the “Great Peace” so far away from the “Cape Providence” at the time of the contract as to defeat the contractual purpose – or in other words to turn it into something essentially different from that for which the parties bargained? This is a question of fact and degree, but in my view the answer is no. If it had been thought really necessary, the “Cape Providence” could have altered course so that both vessels were heading toward each other. At a closing speed of 19 knots, it would have taken them about 22 hours to meet. A telling point is the reaction of the defendants on learning the true positions of the vessels. They did not want to cancel the agreement until they knew if they could find a nearer vessel to assist. Evidently the defendants did not regard the contract as devoid of purpose, or they would have cancelled at once.”
Mr Reeder has attacked this paragraph on a number of grounds. He has submitted that the suggestion that the “Cape Providence” should have turned and steamed towards the “Great Peace” is unreal. We agree. The appellants were sending a tug from Singapore in an attempt to salve the “Cape Providence”. The “Great Peace” was engaged by the appellants to act as a stand-by vessel to save human life, should this prove necessary, as an ancillary aspect of the salvage service. The suggestion that the “Cape Providence” should have turned and steamed away from the salvage tug which was on its way towards her in order to reduce the interval before the “Great Peace” was in attendance is unrealistic.
Next Mr Reeder submitted that it was not legitimate for the Judge to have regard to the fact that the appellants did not want to cancel the agreement with the “Great Peace” until they knew whether they could get a nearer vessel to assist. We do not agree. This reaction was a telling indication that the fact that the vessels were considerably further apart than the appellants had believed did not mean that the services that the “Great Peace” was in a position to provide were essentially different from those which the parties had envisaged when the contract was concluded. The “Great Peace” would arrive in time to provide several days of escort service. The appellants would have wished the contract to be performed but for the adventitious arrival on the scene of a vessel prepared to perform the same services. The fact that the vessels were further apart than both parties had appreciated did not mean that it was impossible to perform the contractual adventure.
The parties entered into a binding contract for the hire of the “Great Peace”. That contract gave the appellants an express right to cancel the contract subject to the obligation to pay the ‘cancellation fee’ of 5 days hire. When they engaged the “Nordfarer” they cancelled the “Great Peace”. They became liable in consequence to pay the cancellation fee. There is no injustice in this result.
For the reasons that we have given, we would dismiss this appeal.
Zuphen v. Kelly Technical Services (Ireland) Ltd.
[2000] IEHC 117 Murphy J
46 The Plaintiffs submit that the theoretical basis for the doctrine of frustration is disputed. There are contradictory Irish authorities providing alternative explanations as between the implied contract theory and/or the true construction theory ( Cummins -v- Stewart (No 2) 1913] IR 95 and Mulligan -v- Browne (High Court, Kenny J. unreported, 9th July, 1976)).
47. Notwithstanding the uncertainty as to its theoretical basis, the doctrine itself is straightforward. A contract may be discharged on the grounds of frustration when something occurs after the formation of the contract which renders it impossible to fulfil the contract or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entry into the contract. The doctrine is subject to the limitation that the frustrating circumstances must arise without fault of either party ( Maritime National Fish Limited -v- Ocean Trawlers [1935] AC 5 24 and Constantine Lion -v- Imperial Smelting Corporation [1941] 2 All ER 165.
48. The Plaintiffs submit that the doctrine of frustration can never be applied in order to discharge a party to a contract from performing its contractual obligations in circumstances where it may be extremely difficult or even impossible to do so. In Leeson -v- North Bristol Oil and Candle Limited [1974] 8 IR CL 309, it was held that the fact that the Defendants could not obtain paraffin from their own supplier because of a strike did not excuse their failure to supply the Plaintiff. In Paradine -v- Jane [1647] Aleyn 26, the Plaintiff had let lands to the Defendant under the terms of a lease which required the lessee to pay rent on a quarterly basis. The lessees were ejected from possession by armed force, the lands then being occupied by the military during the English Civil War. In an action for arrears of rent, the lessee pleaded that the circumstances excused non-payment of rent. However, this plea was rejected and a distinction was drawn between a general duty imposed by law upon a lessee and a duty undertaken by way of contract. In respect of duty taken on by way of contract the Court stated that:
“When the party by his own conduct creates a duty or a 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 contract.”
49. The Plaintiff submits that the Defendants could have included the term in this contract specifically dealing with the situation which would arise if the Eircom work was no longer available. They did not do so under the section dealing with termination of contract. However, if such a term had been included the Plaintiffs would not have accepted such a precarious and unguaranteed offer of employment.
50. Besides the requirement in relation to provision against a third party not providing work, an element of mutuality is necessary.
51. The advertisements and the letter of offer and letter containing the contract did not expressly or impliedly provide that the agreement would be terminated should Eircom work not be available.
52. The fact that the Defendants had been able to provide work for 39 of the Plaintiffs who remained in Ireland disproves the contention that the contracts of employment entered into could not be fulfilled should the Eircom work no longer be available.
53. The Plaintiffs submit that the Courts do not allow the doctrine of frustration to apply where increased costs or a limited amount of work make it impossible for one party to perform the contract without incurring serious financial losses and refer to Clarke: Contract Law in Ireland, 3rd Edition, 425:
“It would be undesirable for a business man to agree to perform a contract for a fixed amount and permit him to seek relief through the doctrine of frustration if, during performance, unanticipated difficulties arise.”
54. Reference was also made to Revell -v- Hussey [1813] 2 Ball and B 280 and Davis Contractors -v- Fareham UDC [1956] AC 696.
55. The Plaintiffs contend that the cessation of Eircom work was not unforeseen or unexpected and referred to paragraph 2.1 of the contract whereby work would be allocated “as the need arises” by the head of outsourcing or his duly authorised representative. Moreover, paragraph 2.2 provides a forecast and projection of work that would be required on the “best estimates of anticipated demand for the services as required and are therefore provided for information only and no commitment as to the level of business eventually awarded during the term of the contract is to be inferred, either in its entirety or the relative size or category of work”.
56. Counsel for the Plaintiffs also referred to Neville & Sons Limited -v- Guardian Builders Limited [1995] 1 ILRM 1 where the Supreme Court held that frustration of a contract takes place when a supervening event occurs without the default of either party and for which the contract makes no sufficient provision. The event must so significantly change the nature of the outstanding contractual rights and obligations from what the parties could reasonably have contemplated at the time of the contract’s execution that it would be unjust to hold them to its terms in the new circumstances.
57. The Plaintiffs submit that the failure of Eircom to continue to provide work has not significantly changed the contractual rights entered into by the parties who remain employees of the Defendants. Some are continuing to work while others are available for work. They say that the Defendants do not wish to continue paying the Plaintiffs money for work which is not as abundant as they thought would be the case. Frustration in this circumstance would provide an alternative to redundancy in which an employer would no liability or responsibility to the employee.
SUBMISSIONS ON BEHALF OF THE DEFENDANTS.
58. The Defendants submit that no contractual obligations arose on the part of the last two named Defendants. Any contract with the Plaintiffs arose from the first or second named Defendant against whom any liability which attaches in the present claim arises. I would agree with this submission.
59. The Defendants submitted that a small number of the Plaintiffs have, in fact, resigned from employment with the Defendants and have therefore terminated their contracts with the Defendants. As to the balance of the Plaintiffs the issue is whether the contract between the first and/or second named Defendants and the Plaintiffs was effectively discharged by virtue of frustration of the contract.
60. The Defendants case is that at all material times the contracting of the Plaintiffs for the carrying out of work on their behalf was in the context of doing work on behalf of Eircom Plc; and when Eircom indicated to the Defendants in late December 1999 that no further work was available for the first named Defendants to carry out, the contract was effectively terminated from that point onwards. The contracts commenced with a written contract document on the 27th September 1999 and the Plaintiffs were paid appropriate remuneration and expenses during the currency of that contract and appropriate remuneration and expenses on the termination of the contract by virtue of the withdrawal of the availability of work by Eircom on the aspect of the project on which the first named Defendants were working.
61. The Defendants submit that the relevant law as stated in Halsbury’s Laws of England (4th Edition, Vol 9 at par. 450) is as follows:-
“It frequently happens that a contract is silent as to the position of the parties in the event of performance becoming literally impossible or only possible in a very different way from that originally contemplated. In such cases the law excuses further performance under the doctrine of impossibility or frustration. “
62. Counsel for the Defendants referred to the origin of the doctrine in the old case of Taylor -v- Caldwell (1863) 3 B. & S. 826. There a contract for a musical performance was discharged by frustration of the contract when the intended music hall venue was destroyed by fire. Counsel mentioned that while there are a number of academic theories as to the basis of the doctrine, the approach of the Courts to commercial arrangements between parties are more instructive. Where events arise which effectively change the basis for the performing of a contract so that what is in place is a materially different contract from that which is originally envisaged by the parties the Courts will alleviate the harshness of the contractual obligation by treating the original contract as being frustrated if its original purpose and intention cannot be met by virtue of outside circumstances with no wrong on the part of the contracting parties. The opposite extremes of the interpretation of the doctrine are to be found in the “Coronation cases” of Krell. v. Henry (1903) 2 K. B. 740 and Heron Bay Steambot Co . v. Hutton (1903) 2 K. B, 683.
63. It is submitted by the Defendants that the cancellation of the Eircom contract effectively gave rise to a situation analogous to that in Krell where the procession which was to be viewed from particular rooms was no longer to take place rather than in Heron Bay where the hirers had at least the benefit of a trip around the port.
64. The Defendants also referred to Neville .v. Guardian Builders (1990) ILRM 601 and (1995) 1 LLRM 1 , where the Defendants purchased a plot of land for development purposes. The only access to the site was through a narrow road which was inadequate for the purpose of proceeding with the intended development. While the High Court determined that the contract had been discharged by frustration, in the Supreme Court overturned this decision on the facts of the case. Blayney J. determined that the contract, while more onerous on the parties, was not completely discharged by frustration owing to the failure to obtain land from the Local Authority to provide sufficient access for development purposes on to the site.
65. The net position as emerges from the Neville case is as follows (as appears from headnote no. 1 of the High Court Report) and echoes Lord Radcliffe in Davis Contractors -v- Farnham UDC [1956] AC 696 at 778/9:
“A contract will be deemed to be frustrated whenever the law recognises without the default of either party a contractual obligation has become incapable of being performed because the circumstances in which it is called for would render it a thing radically different from that which was undertaken by the contract. “
66. The Defendants say that in the present case Eircom were limited under the terms of their contractual arrangement with the Defendants to terminate the contract only for a stipulated breach. The contract between the Plaintiffs and the Defendants as reflected in the letter of 27th September 1999 and any of the surrounding documents did not provide for a “force majeure”: in fact the contracts did not provide as to what had to happen in the event that what apparently was the basis or cornerstone of the contract was to be removed.
67. In the initial advertising for the contract which is sought to be enforced by the Plaintiffs herein it was specifically indicated that work was to be carried out “At a large telecommunications company in Ireland”. The document of the 1 7th September 1999 to the Plaintiffs specifically indicated that the offer was for a twelve month contract “Working on … the Eircom network”. The document indicated that Telecom Eireann (as it was then known) was Ireland’s national telecommunications company. The document went on specifically to indicate that an orientation course would be required to meet the requirements of Eircom representatives as to sufficiency of competence on the part of the Plaintiffs. These matters were echoed in the letter of the 27th September 1999 which the Plaintiffs contend comprises the contract of obligation on the part of the Defendants. Again reference was made to a twelve month contract working on a particular aspect of the Eircom network (indicating that Eircom is Ireland’s national telecommunications company). The document indicated that the contract could be terminated by the Defendants only in the event that the Plaintiffs fail to meet Eircom accreditation within a fixed period of time and specifically also requires that a good working relationship will be needed with the Eircom staff. The work permit available for the Plaintiffs was only for work in Ireland. The only work in Ireland with the Defendants was to work on the Eircom contract. The contract between the Plaintiffs and the Defendants never envisaged the Plaintiffs being paid for not doing any work. Accordingly it is the contention of the Defendants that once their was no work available on the Eircom contract, they had no other work available and the Defendants were not obliged to pay the Plaintiffs for doing no work. All of the present Plaintiffs were required to attend training programmes which were relevant only to the aspect of the Eircom contract which was subsequently cancelled by Eircom. In these circumstances it is the contention of the Defendants that the contract was discharged by frustration and without any wrongdoing or fault on the part of the Defendants.
Applying the Neville criteria to the facts of the present situation Counsel for the Defendants submitted that all of the considerations determined in the Neville case to give rise to an effective application of the doctrine of discharge by frustration were met:-
(a) There was no default on either the part of the Plaintiffs or the Defendants.
(b) The contract has become incapable of being performed. Eircom have ceased requiring the Defendants to carry out the relevant work for them and therefore the Defendants have no work for the Plaintiffs with Eircom or on the relevant aspect of the Eircom network.
(c) What is now involved in continuing with the contractual obligation is to put in place a contract which is radically different from that which was intended between the parties.
68. It was never intended that the Defendants would pay the Plaintiffs for doing no work. The Defendants have no other work for the Plaintiffs in Ireland except on the identified aspect of the Eircom contract. There is no further Eircom work available with the Defendants to be carried out by the Plaintiffs. Any requirement of the Plaintiffs to do work for the Defendants other than in accordance with the Eircom contract has been in the context of seeking to mitigate the Plaintiffs loss and not otherwise. This work (mainly in the U.K.) was not what was envisaged between the Plaintiffs and the Defendants at the inception of the original contract.
69. In the circumstances the Defendants submitted that the contract was discharged by frustration.
Determination
70. The issue before the Court is whether the contracts entered into on the 17th September, 1999 between the second named Defendant (whether on its own behalf or on behalf of the first named Defendant is not material) and the several Plaintiffs was frustrated by the termination of work by Eircom in January, 2000.
71. It is common case that the Plaintiffs were employed by the Defendant companies and not by Eircom nor by the South African agencies.
72. It is significant that the letter of 27th September, 1999 was conditional only on being available for work in Dublin on the 29th October, 1999, or earlier as arranged, and not being refused a work permit by the Department. There was no condition about availability of work. Such a condition could have been inserted as would be provided in an engineering sub-contract and could have been provided for in a carefully drafted contract of employment.
73. The contract would be terminated by the employee on giving one month’s notice at any time and could be terminated by the Defendant companies where the employee had not passed the accreditation course within three attempts or had unsatisfactorily performed his duties.
74. There is no evidence of either eventuality. Indeed, it is clear that it is not a matter of termination that is before the Court by of frustration of the contract without fault.
75. I accept that the evidence of complaints by Eircom did not amount to a basis for termination of the contract between Eircom and the Defendant companies.
76. The basis of the doctrine of frustration would appear from the authorities is that there is a supervening event which must be so unexpected and beyond the contemplation of the parties, even as a possibility, that neither party can be said to have accepted the risk of the event taking place when contracting.
77. The clear evidence of Mr O’Flaherty was, while there was no form of commitment from Eircom, he did not feel it improper to rely on Eircom and felt able to make a judgment call.
78. The general agreement of the Defendant companies with Eircom as to work being “allocated as the need arises” points to the possibility of such work not arising. It was certainly not so unexpected as to be beyond the contemplation of the parties, even as a possibility.
79. Mr Raymond Kelly believed that Eircom intended to upgrade all exchanges and that, accordingly, the Defendant companies made a commercial judgement accordingly.
80. The memorandum of the 30th September, 1999 related to a meeting between the first named Defendant and Eircom. Mr Martin Cooper of Eircom did not describe it as a contract document but as a reflection of what was discussed. It seems to me that it was on the basis of this document that the Defendant companies proceeded. Indeed, Mr Cooper agreed that the memo gave an indication that there was work even if there was no contractual commitment. Significantly, however, Mr Hartnett had sent letters to prospective employees with draft terms and conditions before that date.
81. The clear evidence was that, notwithstanding the non-finalisation of the contract with Eircom, the Defendant companies sought to engage technicians on one year contracts.
82. The Defendants were aware in making a commercial judgement call that this was conditional on work being available.
83. The Court must accordingly on a general impression of what the rule in relation to frustration requires. It is for that reason that special importance is necessarily to the occurrence of an unexpected event that, as it were, changes the face of things. It seems to me that this is not the case. It is not hardship or inconvenience or a material loss itself which calls the principles of frustration into play. There must have been such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.
84. Moreover, it does not seem to me that the contract had become entirely incapable of being performed. Indeed, the Defendant companies, in order to mitigate loss or damage, have obtained work for some of the workers concerned.
85. Indeed, the very commendable attempt by the Defendant companies to procure such work for the technicians they had employed is to my mind an indication that a contractual relationship survived which would be inconsistent with the contract being frustrated.
86. Moreover, the relationship entered into with the Plaintiffs was one of master and servant, to use the old fashioned term. It seems to me to be inappropriate in that circumstance to apply a strict contract law approach to employment disputes. Attempts to so apply tend to obscure the social implications of certain kinds of conduct or events by reducing them to legalistic principles. However, it is not for this reason alone that I find that the contract was not frustrated in the circumstances.
87. Furthermore, I am satisfied from the evidence given by the four Plaintiffs that they would not have entered into the contracts had there been a condition that the contract could be terminated if work were not available. Those Plaintiffs gave evidence which showed a commitment to coming to Ireland for a period of one year with hope of continuing further in reliance on the first letter of 17th September, 1999 in relation to the renewal of the contract after a period of one year.
88. In the circumstances and for the foregoing reasons it does not seem to me that the contract was frustrated by the loss of the specific Eircom contract.
Blackall v. Blackall
[2000] IEHC 151; [2000] 3 IR 456 (6th June, 2000)
JUDGMENT of Finnegan J. delivered 6th June, 2000.
1. This Matter comes before the Court by way of an appeal from the decision of the Circuit Court on an application for directions by the Solicitor having carriage of a sale pursuant to an Order of the Circuit Court the original order for sale having been made on the 23rd July, 1991. While the factual matrix is clear and undisputed save in one particular, namely whether the purchaser (who was added as a co-Defendant to the application for directions) Chesington Limited (“the purchaser”) was at any material time in sufficient funds to enable it to comply with its obligations under the order for sale. A number of legal issues arise upon which the law or the application of the law to the facts is uncertain.
FACTUAL BACKGROUND
2. The Action commenced on the 21st January, 1991 by Equity Civil Bill issued by Gerard Blackall, Plaintiff against Eileen Blackall and Rose Blackall, Defendants (together called “the parties”) seeking partition or sale of premises Marino Park, Blackrock, Co. Dublin (“the premises”). The parties are entitled to the premises as tenants in common, the Plaintiff as to one undivided quarter share, the first named Defendant as to one undivided quarter share and the second named Defendant as to one undivided half share. By Order dated the 23rd July, 1991 it was ordered that the premises be sold by public auction subject to the approval of the Court and to such conditions of sale as should be settled by the Court and carriage of the sale was given to the Plaintiff’s Solicitor Mr James O’Higgins. This Order was appealed to the High Court and on the 20th July, 1992 the High Court ordered the sale of the premises subject to the approval of the Court and to such conditions of sale as should be settled by the Court. The matter again came before the High Court on the 30th October, 1992 when it was ordered that the Solicitor for the first named Defendant Brendan Moloney (“the Solicitor having carriage”) should have carriage of the sale. The first named Defendant discharged the Solicitor having carriage and a Notice of Change of Solicitor was filed in the matter on the 16th June, 1993. The High Court by order dated 15th December, 1993 confirmed that the Solicitor having carriage should have carriage of the sale notwithstanding the circumstance that he no longer acted for any party to the Action. By Order of the Circuit Court made on the 19th July, 1995 it was ordered that the premises be sold to the purchaser for the sum of £400,000 and liberty was given to the County Registrar or his authorised officer to sign the contract for sale in default of signing by any of the parties.
3. The contract of sale was available in Court on that day and it was signed on behalf of the purchaser. It was not however, signed by or on behalf of the Plaintiff or the Defendants then or at any later time. By that order the Defendants were allowed six months from the date of signing the contract to deliver vacant possession.
4. That order in turn was appealed to the High Court and by order of the High Court made on the 12th February, 1997 the order for sale was confirmed.
5. As the contract for sale was exhibited on affidavit before the Circuit Court on the 19th July, 1995 and as the order expressly refers to “the contract” it is indisputable that the sale approved by the Court was a sale upon the terms of that contract.
6. The delay in progressing the matter from the 19th July, 1995 to date was due to a determination by the Defendants that the sale should not be completed and in addition to appealing the order they refused to yield up vacant possession so that it was necessary inter alia to have them evicted by the Sheriff to make vacant possession available for the purchaser. The Defendants refused to sign an assurance to the purchaser. The delay in completing the sale was not in any way attributable to the Plaintiff or to the purchaser.
7. During the period of delay the premises have appreciated greatly in value. On the 7th December, 1998 the Defendants had obtained an offer of £1,040,000 for the premises. On the 11th December, 1998 the Solicitors to the Defendants wrote to the Solicitors to the purchasers in which they said –
“We would respectfully remind you that there is no contract for sale signed herein by the vendors or otherwise. Nor indeed, a contract deposit paid.”
8. The Solicitors to the purchaser replied on the 16th December, 1998 in effect stating that their client had an enforceable agreement to purchase the premises. By letter dated 17th December, 1998 the Solicitors to the Defendants wrote to the Solicitors to the purchasers as follows –
“Many thanks for your letter of 16th December, 1998 re the above. Our clients Eileen and Rose Blackall have no contractual or legally cognisable obligations to your clients.
Without prejudice to our entitlement to so contend, insofar as there may be some contractual obligations to your client in respect of the transfer of the above lands take notice that we rescind the contract because your client does not comply with such obligations as he may have under it. We shall endeavour to ensure that such deposit as may have been paid is returned to your client promptly.”
9. The Plaintiff at that time was willing to complete the sale to the purchaser and maintained this position at all times up to and including the hearing before me. On the evidence given by the purchaser’s Solicitor I am satisfied that he was in funds to pay the deposit as of the 19th July, 1995 but was awaiting confirmation of the contract being signed by the parties. The deposit was tendered by him on the 18th May, 1999.
THE CONTRACT FOR SALE
10. The contract for sale in is the Incorporated Law Society of Ireland standard form 1991 edition and is signed on behalf of the purchaser. It provides in the memorandum for a deposit of £40,000. The special conditions are not relevant to the issues raised on this application. The following general conditions are relevant.
11. General Condition 2
“Date of sale” means the date of the auction when the sale shall have been by auction and otherwise means the date upon which the contract for the sale shall have become binding on the vendor and the purchaser.
12. General Condition 3
13. The words “vendor” and “purchaser” respectively include (where appropriate) parties deriving title under them or either of them and shall apply to any one or more of several vendors and purchasers as the case may be so that the stipulations and the conditions contained shall be capable of being enforced on a joint and several basis.
14. General Condition 5 (a)
15. Where the sale is by private treaty the purchaser shall on or before the date of the sale pay to the vendor’s Solicitor as stake holder a deposit of the amount stated in the memorandum in part payment of purchase price.
16. General Condition 31
17. The failure by the purchaser to pay in full the deposit hereinbefore specified as payable by him shall constitute a breach of condition entitling the vendor to terminate the sale or to sue the purchaser for damages or both but such entitlement shall be without prejudice to any rights otherwise available to the vendor.
THE LEGAL ISSUES
(a) Was an enforceable contract concluded
18. No issue as to the Statute of Fraud was raised in these proceedings and while the question of whether a memorandum to satisfy the statute is necessary remains an open question in this jurisdiction there are a number of authorities for the proposition that on a Court sale none is necessary and that the Court will enforce its order; Daniell’s Chancery Practice 7th Ed Vol. 1, 415, Sugden Vendor & Purchaser p. 109, A.G. -v- Day [1749] 1 Ves Sen. 466. The agreement here is contained in the Court order of the 19th July, 1995 as amended by subsequent orders the only relevant amendment being as to the Solicitor having carriage and the contracts signed by the purchaser. Upon the making of the order for sale on the 19th July, 1995 there was a binding contract for sale which the Court would enforce.
19. In a Court sale the Court is not the vendor Bank of Ireland -v- Smith & Ors [1966] IR 646 at 655-656. In that case and in Bank of Ireland -v- Waldron [1944] IR 30 the Court held that the party to the action having conduct of the sale was the vendor and that their Solicitors and auctioneers were their agents for whose acts they were liable. Insofar as it was so held the statements were obiter and not in accordance with authority. The Solicitor having carriage is agent for all the parties to the suit: see Daniell’s Chancery Practice 7th Ed. Vol. 1 p. 876 and Dalby -v- Pullen [1831] Russ & M 296, Re Bannister, Broad -v- Munton [1879] 12 Ch. D.131. Again see Hallsbury 4th Ed. reissue Vol. 42 para 135 –
“As between the vendor and the purchaser the Solicitor for the party or person having the conduct of the sale is deemed to be agent of all parties to the action”
20. Again the effect of the Rules of the Superior Courts Order 51 Rule 1 is that all parties to the suit are bound by the sale. In these circumstances I am satisfied that the parties i.e. the Plaintiff and the Defendants jointly are the vendors and that the Solicitor having carriage is their agent so that they are bound by his acts of defaults. Thus while in both Bank of Ireland -v- Smith and Bank of Ireland -v- Waldron the party having conduct was held liable to the purchaser he being the vendor named in the agreement for sale it is clear that that party would be entitled to recover over all or a proportion of the expense incurred against the other parties to the suit depending on the circumstances: Smith -v- Nelson 2 Sim and Stu. 557, Berry -v- Johnson 2 Yo and Col. 564. In arriving at the view as to who is the vendor I have considered the judgments in Connolly -v- Keating (No 2) [1903] 1 IR 356, Union Bank -v- Munster 37 Ch. D 51 and the statements of Jessel M.R. In Re Bannister, Broad -v- Munton 12 Ch. D 131 each of which suggest that vendor’s equivalent to the party having conduct but in each case I am satisfied that the use of such language was appropriate and sufficient for dealing with the rights of a purchaser under an order for sale seeking compensation or to be released from his contract but was not intended to define “vendor” contrary to existing authorities as consisting of some only of the parties to the suit in which the order for sale was made.
(b) Payment of the deposit as a condition precedent
21. It was argued on behalf of the Defendants that the general conditions of sale condition 5(a) is a condition precedent to any contractual liability being incurred. The Defendants relied upon Myton Limited -v- Schwab-Morris [1974] 1 WLR 331 where a condition as to payment of deposit was so held to be. The question whether such condition was a condition precedent or a condition of the contract was left open by the Supreme Court in Kramer -v- Arnold [1997] 3 IR 43 at 60 and in Damon S.A. -v- Hapag-Lloyd S.A. [1985] 1 WLR 435. The contrary view namely that the obligation to pay a deposit was a term of the contract was taken in Millichamp -v- Jones [1983] 1 All ER 267 and in his judgment Warner J. reviewed the authorities in arriving at this conclusion. I prefer the view expressed by Warner J. and accordingly I construe clause 5(a) as a term of the contract non-performance of which would entitle the vendors to rescind immediately but so long as they refrain from so doing the contractual obligations of both vendor and purchaser remain. I am fortified in this view by the terms of general condition 31 which provides that failure to pay the deposit in full constitutes a breach of condition entitling the vendor to terminate the sale and recover damages: the damages can only be for breach of contract. See also the definition of sale in general condition 1 – “means the transaction evidenced by the memorandum the particulars and the conditions”
(c) Time for payment of the deposit
22. The obligation under condition 5(a) is to pay the deposit on or before “the date of the sale”. “Date of sale” but not “date of the sale” is defined in general condition 2. Insofar as “date of sale” is concerned it is defined as the date upon which the contract becomes binding on the vendor and the purchaser. I hold that the same was the date upon which the order for sale to the purchaser was made namely the 19th July, 1995. As of that date the Court had power to enforce the sale against the parties and the purchaser notwithstanding the absence of any memorandum: Daniell’s Chancery Practice 7th Ed. Vol. 1 p. 415, Sugden Vendor and Purchaser p. 109, A.G. -v- Day 1 Ves. Sen. 218. However, there is an inconsistency in that general condition 5(a) refers not to “date of sale” but to “date of the sale”. In the event of an inconsistency a clause in the contract must be construed contra proferentem . Reading the agreement in conjunction with the order of 19th July, 1995 it is arguable that it was envisaged that the contract would be signed by the parties to the action and the purchaser. This would suggest a misapprehension by all concerned that it was necessary for the agreement to be effective that it should be so signed. The agreement was not in fact signed by the Plaintiff or the Defendants although the Plaintiff was at all times willing to perform the agreement. On this basis it would be open to take the view that the obligation to pay the deposit in this case would only arise when the purchaser was notified that the agreement had been executed by the parties to the action. Support for this view is to be found in Kramer -v- Arnold [1997] 3 I.R. at p. 55 where Keane J. said –
“In this case as in any case where the parties are in disagreement as to what a particular provision of a contract means, the task of the Court is to decide what the intention of the parties was, having regard to the language used in the contract and the surrounding circumstances.”
23. Adopting this approach it may well have been the intention of the parties that the deposit should have been paid immediately the agreement was signed by the parties to the suit the same having already been signed by the purchaser. However, the intention of the parties in the case of a sale by the Court is not paramount. A sale by the Court is a sale on the terms approved by the Court and any variation in such terms must be approved by the Court and not by the Solicitor having carriage: Daniell’s Chancery Practice 7th Ed. Vol. 1 p. 904-905. Accordingly, neither the parties nor the purchaser had power to vary the requirement that a deposit should be paid in accordance with the terms of the agreement approved by the Court. It seems to me to follow from this that there can be no question of waiver or acquiescence in breach or estoppel operating to alter the terms of the agreement approved by the Court.
24. I have come to the conclusion that the word “the” in general condition 5(a) is included in error and in construing the contract I am entitled to reject the same and should do so: Norton on Deeds 2nd Ed. p. 91. Accordingly, I hold that the deposit was payable on or before the date of sale, the 19th July, 1995; it was not paid.
25. Having regard to the finding that the deposit was not paid in accordance with general condition 5(a) there was a breach of condition and the provisions of general condition 31 apply; the vendor became entitled to terminate the sale but until such time as the sale was terminated the agreement remained in force. “Vendor” is defined in general condition 3 and the definition is of assistance in determining whether one or more of the several vendors but not all can serve a valid and effective notice under the agreement insofar as it stipulates that liability is joint as well as several. The Defendants contend that they were entitled to serve such a notice and relied by way of analogy on a number of cases relating to the giving of notice to quit. There is authority for the proposition that one of several joint lessors can serve a valid and effective notice to quit although there are also authorities to the contrary. The cases tend to turn on the wording of the lease in question or in some cases on agency. However, insofar as tenants in common are concerned signature by one of two was held to be bad in Moroney -v- Moroney IR 8 CL 174. It is best to regard cases on signature of notices to quit as sui generis . The general law as between landlord and tenant and the rights of joint tenants and a fortiori tenants in common is as set out by a strong Court of Appeal in Leek and Moorlands Building Society -v- Clarke and Ors [1952] 2 All ER 492, which held that where two joint tenants had a right to surrender rights held by them jointly such rights could not be exercised by one of their number. In short, there the Court refused to hold that a clause giving rights to lessees should be read as giving such rights to either of the lessees. More strongly against the entitlement of one or some but not all the parties to a suit intervening is Dean -v- Wilson 10 C.D. 136 where it was held that interference in a Court sale by a party to the suit who had not been given carriage was a special contempt (i.e. a contempt not coming within the Rules of the Superior Courts Order 41 Rule 7); see Daniell’s Chancery Practice 7th Ed. Vol. 1 at 716-717. On the basis of the authorities I am satisfied that the Defendants here had not power or authority to interfere in the sale. In the event of their being dissatisfied with the manner in which the sale was proceeding the proper course for them to adopt was to apply to the Court. Likewise, where an issue such as the failure of the purchaser to pay the deposit arises the party having conduct or the Solicitor having carriage should apply to the Court for directions. It is not necessary for me to decide whether a notice given by all the parties through the Solicitor having carriage would have been effective but I take the view in the circumstances of this case that it would. Without authority of all the parties or the approval of the Court the Solicitor having carriage has no authority actual, implied or apparent to give such notice. However, the purchaser having tendered the deposit it is not now open to take any of these courses. In these circumstances I hold that the purported termination by the Defendants by the letter dated 17th December, 1998 was of no effect and that the contract remains in existence.
(d) Opening Biddings
26. The Defendants in this matter referred to the power of the Court to open biddings. The practice was widespread prior to the Sale of Land by Auction Act, 1867 which Act also applied to Court sales by private treaty; In Re Oriental Bank Corporation 56 NTLS 868 and Wiley Judicature Acts and Re Bartlett 16 Ch. D. 561. It is now well settled however, that bidding may only be reopened on the ground of fraud or improper conduct in the management of the sale; Munster Bank -v- Munster Motor Company [1922] IR 15. The Defendants argue that the failure of the purchaser to pay the deposit was improper conduct. The power has been exercised where there has been a misstatement in the conditions of sale. It was held in Longvale Brick and Lime Works Limited [1917] 1 Ch. 321 that improper conduct does not mean something bordering on fraud. However, having considered the cases I am satisfied that this jurisdiction was exercised when something occurred in the course of the sale which resulted in a sale at an undervalue to the detriment of the parties interested in the suit or a sale at an overvalue to the detriment of the purchaser e.g. where there had been puffing at the auction to the detriment of the purchaser. The practice of opening bidding does not apply in the present case nor is it any necessity that it should as the terms of the contract for sale adequately protect the parties who in the event of a failure to pay the deposit can (as can the Solicitor having carriage) apply to the Court which has full power to terminate the contract.
CONCLUSION
27. Accordingly, I find that the contract has not been terminated but remains in full force and effect. In addition to the purchase price the purchaser must pay interest on the deposit (less the sum of £5,000 already paid to the Solicitor having carriage) at the contract rate from the date of sale, the 19th July, 1995 to date of completion. I will hear Counsel for the Solicitor having carriage as to the directions which are required. I require to be addressed as the appropriate order as to costs.
Maloney -v- Danske Bank A/S
[2014] IEHC 441 (06 October 2014)
RESPONDENT
JUDGMENT of Mr. Justice Cregan delivered the 6th day of October, 2014
Introduction
1. This is an application by the official liquidator of RQB Limited (in liquidation) pursuant to s. 280 of the Companies Acts for directions to determine the legal status of a floating charge dated 10th September, 2008, entered into between RQB Limited (in liquidation) (“the company”) and Danske Bank (“the Bank”).
2. Although the notice of motion originally sought an order pursuant to O. 74, r. 126 of the Rules of the Superior Courts and s. 231(1) of the Companies Act 1963, this was amended on consent to an application seeking an order pursuant to s. 280 of the Companies Acts 1963 – 2012, at the commencement of the hearing.
3. The liquidator filed an affidavit of 24th September, 2013, (together with various exhibits) and a supplemental affidavit of 1st April, 2014. Michael Leonard on behalf of Danske Bank filed a replying affidavit with exhibits on 15th November, 2013. Both parties also filed written legal submissions on this issue.
4. The liquidator, in his affidavits and written submissions, has submitted that the floating charge is not valid or enforceable; the Bank for its part, has claimed that the floating charge is enforceable. I will address the substance of these submissions in greater detail in a later section of this judgment.
Factual Background to this Application
The 2005 facility
5. On 19th December, 2005, National Irish Bank, (the predecessor of Danske Bank,) provided RQB Limited with an overdraft facility of €12 million on agreed terms. This overdraft facility was stated to be repayable on demand but subject to review on 21st December, 2006. Clause 7 of the overdraft facility letter provided that the only security for the overdraft facility was a joint and several guarantee in the sum of €12 million from Patrick Kelly, Niall McFadden and Paul Pardy.
6. The personal guarantees were signed by the three guarantors on 23rd December, 2005. Mr. Leonard (for Danske Bank) states in his affidavit that in December 2006 there was an agreement between the Bank and the company to continue the 2005 overdraft facility on the understanding that it was repayable on demand.
The 2008 facility
7. In early 2008 the company requested a restructuring of the 2005 facility and discussions took place between the parties. The restructuring of the 2005 overdraft facility involved:-
(a) a new loan facility of €8 million; and
b) an additional overdraft facility of €2 million
8. On 4th September, 2008, the Bank wrote to the company offering a new loan facility of €8 million on the terms set out in that loan facility letter.
9. In addition, on 4th September, 2008, the Bank also offered an overdraft facility to the company in the amount of €2 million on similar terms.
10. This offer of a loan facility by the Bank was signed and accepted by the company on 10th September, 2008. (It appears to be accepted by all sides that the overdraft facility was also accepted and signed by the company on the same date.) Thus a contract between the parties came into being on that date (ie 10th September, 2008).
11. It is also agreed between the parties that these two agreements (i.e. the loan facility agreement of 4th – 10th September, 2008 and the overdraft facility agreement of 4th – 10th September, 2008), are to be construed together as they refer to each other. Indeed the relevant provisions of the loan agreement and the overdraft agreement are identical.
Security for the 2008 loan facility
12. Section 5 of the loan agreement (dated 4th September 2008 and signed on 10th September 2008) provided as follows:
The loan facility will be secured by:-
“(a) Joint and Several Guarantee in the amount of €8 million from Patrick (Paddy) Kelly, Niall McFadden and Paul Pardy (“The Guarantors”;) (to be provided)
(b) First Fixed and Floating charge over assets and undertaking of the company (to be provided).” (Emphasis added).
13. On 10th September, 2008 personal guarantees were executed by Patrick Kelly, Niall McFadden and Paul Pardy.
14. On 10th September, 2008 the floating charge was also executed by the company.
Subsequent Developments
15. However the loan agreement quickly ran into difficulties and on 17th September, 2008 National Irish Bank sent an email to the company in relation to the loan facilities which stated inter alia as follows:
“Further to our discussions in relation to the new and restructured facilities to the above.
The file has been reviewed within the bank and a decision has been made that we cannot proceed with the new facilities until such time as all the security is in place, all preconditions attended to and all outstanding matters have been attended to. This decision has been made on foot of the recent and protracted guarantor problem and also due to the fact that the required personal asset statements are not in a satisfactory format.”
16. It is an agreed fact that although the bank was provided with personal asset statements of the guarantors, these statements were not satisfactory to the bank. Thus the loan facility and overdraft facility were not advanced by the bank to the company.
17. It is also an agreed fact that after the 30th September, 2008 further discussions and negotiations took place between the company and the bank in respect of the facilities, the personal asset statements of the guarantors and the security.
18. On 22nd December, 2008 the bank wrote to the company referring to the bank’s facility letter of 4th September, 2008 and suggesting that the security clause would be amended so that the loan facility should be secured by
(a) A joint and several guarantee from the three guarantors.
(b) A First Fixed and Floating charge over the assets and undertaking of the company.
(c) An assignment in a format acceptable to the Bank over the borrower’s interest shareholding and/or investment in other properties in Florida.
(d) An assignment in a form acceptable to the Bank over the borrower’s interest shareholding and/or investment in certain properties in London.
19. However, it is agreed between the parties that this letter of the 22nd December, 2008, was not signed either by the Bank or the company and is therefore of no legal effect.
20. As Mr. Leonard (for Danske Bank) has averred to in his affidavit, discussions in relation to the refinancing were ongoing between the parties between September 2008 and February 2009, but the additional facilities, as provided for under the 2008 facility agreements were never advanced and the envisaged restructuring was never completed.
21. As time went on the financial position of the company deteriorated and on 11th June, 2009, 22nd July, 2009 and 24th July, 2009, the Bank made formal demands for repayments of the amount outstanding under the 2005 facility.
22. On 11th June, 2009 the Bank issued a letter of demand for €8.5 million approximately in respect of the 2005 loan which it had advanced to the company. In this letter of demand the Bank stated inter alia as follows:
“Dear Sirs,
With reference to recent dialogue with the Bank and your request for variation of facilities, I confirm that the Bank is not in a position to grant the requested variation to facilities.”
23. The letter went on to demand repayment of the existing loan of €8.5m and stated that the Bank would also seek to rely on its security (i.e. the joint and several guarantees of the three directors dated the 23rd December, 2005 and the floating charge dated the 10th September, 2008.)
24. By letter dated the 23rd June, 2009 the company replied to this letter and stated that the floating charge dated the 10th September, 2008 was only signed in the context of the loan agreement dated the 4th September, 2008 and was intended to satisfy the security requirements of that facility letter. It also stated that as the Bank never advanced the new loan facility and as the company never enjoyed the benefits of the new loan facility the Bank could not now seek to rely on the floating charge.
25. Subsequently, because the company failed to comply with the formal demands, the Bank issued proceedings on 30th July 2009 seeking judgment against the company and the guarantors.
26. On 12th August, 2009, judgment was entered against Patrick Kelly and Paul Pardy in the sum of €8,577,105.93, on foot of their personal guarantees.
27. On 23rd September, 2009, the Bank obtained judgment in the High Court against the company in the sum of €8,615,830.31.
28. On 24th September, 2009, Boundary Services Limited, a creditor of the company, presented a petition to wind up the company and by order of the High Court the company was wound up on 2nd November, 2009.
29. The Bank also brought proceedings against Mr. Niall McFadden on foot of his personal guarantees. These proceedings were defended by Mr. McFadden at the summary stage and on 16th October, 2009 the Bank’s proceedings against Mr. McFadden were adjourned to plenary hearing. The plenary hearing in respect of this matter came on before the High Court in July 2010 and oral evidence was given on behalf of the Bank. At the conclusion of the case, the High Court (McGovern J.), in a reserved judgment, granted judgment in favour of the Bank against Mr. McFadden on foot of his personal guarantee. (See Danske Bank T/A National Irish Bank v. RQB Limited (formerly known as Redquartz Boundary Limited) & Ors [2010] IEHC 347, 23rd July, 2010.)
30. On 18th November, 2010 McCann Fitzgerald acting on behalf of the Bank wrote to the liquidator, stating that the Bank had obtained judgment against the company in the sum of €8.6 million on 23rd September, 2009 and stating that the Bank had obtained the benefit of the floating charge executed by the company in its favour on 10th September, 2008. It also stated that, in its view, the charge was valid and secured the liabilities of the company to the Bank.
31. On 24th June, 2011 Whitney Moore Solicitors on behalf of the liquidator replied to this letter seeking further comments on the question of the enforceability of the floating charge.
32. Further correspondence then ensued between the parties until eventually in September, 2013 the liquidator issued a motion for directions seeking the directions of the High Court to determine the status of the floating charge.
The terms of the loan agreement of 4th September, 2008
33. In order to consider the issue of the enforceability of the floating charge, it is necessary to have regard to the architecture of the agreements between the parties and to review the main terms of each agreement.
34. The terms of the loan agreement entered into between the Bank and the Company are set out in the letter dated 4th September, 2008, signed on behalf of the company on 10th September, 2008. The key terms of this agreement are as follows:-
(i) Clause 1 states that the amount of the facility is €8 million.
(ii) Section 2 of the agreement provides that the purpose of the facilities is:-
“restructure of existing facilities to assist with the rationalisation of the business.
(iii) Section 3 of the agreement is headed “Availability and Repayment” and sets out the repayment terms.
(iv) Section 4 of the agreement sets out the rate of interest.
(v) Section 5 of the agreement dealing with security provides as follows:-
Security
“The loan facility will be secured by:
(a) Joint and Several Guarantee in the amount of €8 million from Patrick (Paddy) Kelly, Niall McFadden and Paul Pardy (‘the Guarantors’) (to be provided);
(b) First Fixed and Floating charge over assets and undertaking of the company (to be provided).
Any security held now or at any future time shall be security for all the Borrower’s liabilities to the Bank (actual or contingent) and whether as principal or surety. (Emphasis added).
(It should be noted that the agreement itself provides that it is the loan agreement itself which is to be secured by the personal guarantees and the floating charge.)
(vi) Section 7 headed “Special conditions” provides at s. 7(c):-
“This offer of facilities is contingent on acceptance by the Borrower of the facilities granted under the terms and conditions of the Bank’s letter dated 4th September, 2008, in respect of overdraft facilities”.
(vii) Most importantly, Condition 8 of the agreement headed “Conditions Precedent” provides as follows:-
“Prior to utilisation of the facilities referred to at clause 1 above, the Bank is to be provided with Personal Asset Statements of the Guarantors. Such personal asset statements are to be satisfactory to the Bank. (Emphasis added)
(viii) Paragraph 11 of the agreement provides:-
“The offer will remain open until 30th September, 2008 and will be subject to renegotiation if acceptance is not received by that date.”
(ix) Paragraph 12 of the agreement provides:-
“The facilities will be made available on completion of the security arrangements and on compliance with the provisions of clause 11 and will be subject to renegotiations if utilisation has not commenced by 30th September, 2008.” (Emphasis added)
(x) Paragraph 14 provides that:-
“This letter is supplemental to the Bank’s letter dated 4th September, 2008, in respect of overdraft facilities.”
The terms of the overdraft facility letter of 4th September, 2008
35. The overdraft facility letter – at condition 11 – also contains a similar condition precedent to that contained in the loan agreement:-
36. Moreover Clause 7 of the overdraft facility letter refers to the fact that what is secured by the guarantee and the floating charge is the overdraft facility.
The terms of the floating charge dated 10th September, 2008
37. The floating charge, dated 10th September, 2008 was entered into between RQB Limited and Danske Bank A/S.
38. Paragraph 1 of the floating charge agreement provides as follows:-
“In consideration of the Bank from time to time making or continuing advances or otherwise giving credit or affording banking facilities or granting time for as long as the Bank may think fit to the company solely and/or to the company jointly with any other person, firm or company and/or to any other person, firm or company for the liabilities of which said person, firm or company the company may now be surety or hereafter become surety upon the terms that the Bank shall, be secured as hereinafter appearing the Company pursuant to every power and by force of every estate enabling it in this behalf HEREBY CHARGES in favour of the Bank, the undertaking of the company and all its property whatsoever and wheresoever both present and future, including its uncalled capital for the time being (hereinafter referred to as ‘the assets’) as a security for all monies the payment whereof is intended to be hereby secured such charge to be a floating security…[the clause then sets out certain restrictions].”
39. Clause 11 of the floating charge also provides as follows:-
“This security shall be in addition to and shall not be in anywise prejudiced or affected by any collateral or other security now or hereafter held or judgment or order obtained by the Bank for all or any part of the monies hereby secured nor shall such collateral or other security judgment or order or any lien to which the Bank may be otherwise entitled (including any security charge or lien prior to the date of these presents on the assets or any part thereof) or the liability of any company or companies, person or persons not parties hereto for all or any part of the monies hereby secured be in anywise prejudiced or affected by this security.”
40. The judgment in ICDL GCC Foundation v. European Computer Driving Licence Foundation Ltd [2012] IESC 55 was accepted by counsel on both sides as representing the appropriate approach which this Court should take in the interpretation of these contracts. It was also agreed by both parties that the court should construe the 2008 loan facility letter and the 2008 overdraft facility letter together as they refer to each other.
Summary of arguments in relation to the enforceability of the floating charge
41. It is against that background that I now turn to consider the issue in this case i.e. whether the floating charge is enforceable or not. Counsel on behalf of the liquidator submits that the floating charge is not enforceable for the following reasons:
1. The 2008 loan agreement contains a condition precedent which was not fulfilled. As a result, the agreement of the 4th-10th September, 2008 lapsed on 30th September, 2008. Although further negotiations took place no loan facilities or overdraft facilities were ever advanced by the Bank to the company. As a result there was no obligation on the company to repay any loans. It follows therefore that the security provisions in the agreement including the guarantee and the floating charge are of no legal effect. They are unenforceable. They lapsed with the agreement on the 30th September, 2008.
2. In the alternative, it was an implied term of the floating charge that if no funds were advanced by the Bank then the floating charge came to an end.
3. In the alternative there was no consideration for the floating charge.
4. In the alternative even if no consideration was required because the contract was under seal, as a matter of law a contract under seal must be signed , sealed and “delivered” by the company and the floating charge in this case was not “delivered” in the legal sense.
5. That, having regard to the decision of McGovern J. in the guarantee case, a similar result should apply in relation to the floating charge in this case.
42. The Bank, in its submissions both in writing and to the Court, submitted as follows:
(i) The floating charge was valid and enforceable. It was valid on its face; it was signed by both parties; it was not subject to the condition precedent and was, in effect, a stand alone security.
(ii) There was no implied term in the floating charge that it could not come into effect if the facilities under the 2008 facility letter were not advanced.
(iii) There was consideration for the floating charge in that the Bank continued to afford banking facilities to the company under the 2005 facility and it continued to grant time to the company until June, 2009 when the demand for repayments were ultimately made. This consideration in respect of loans already advanced and/or the Bank’s continued forbearance was sufficient consideration to support the floating charge.
(iv) Even if there was no consideration, the floating charge was made under seal and as such the floating charge did not need to be supported by consideration.
(v) The floating charge had been registered in the Companies Registration Office and as such was valid in law.
(vi) That the judgment in the guarantee proceedings before McGovern J. was not relevant in this case. The evidence given in that case could not be used as evidence in this case in aid of the liquidator’s case. No question of issue estoppel arose and the doctrine of res judicata did not apply.
I will now consider each of these arguments in turn.
The Condition Precedent argument
The Nature of Conditions Precedent
43. The phrase “condition precedent” is itself a curious phrase. Lawyers are familiar with the word “precedent” used as a noun to mean previous judicial decisions which may serve as an authoritative rule in similar cases. However in the phrase “condition precedent” the word “precedent” is not used as a noun but as an adjective. The Oxford English Dictionary gives different definitions and descriptions of the word “precedent” depending on whether it is used as a noun or as an adjective. It observes that the use of the word “precedent” as an adjective is “now rare”. It also notes that the adjective “precedent” has now been largely replaced by ‘preceding’ and that its origins are derived from the Latin verb “praecedere”, to “precede”. The adjective “precedent” means, according to the Oxford English Dictionary, “preceding in time; existing or occurring before something express or implied”.
44. Indeed, if the phrase “condition precedent” were replaced by the phrase “preceding condition” it might clarify what is, in fact, meant by this phrase. It means that it is a condition which precedes other conditions. Therefore it must be fulfilled before other conditions are fulfilled. It also means that if this condition is not fulfilled then the other conditions fall away or become unenforceable.
45. The exact nature of a condition precedent has been the subject of some academic consideration. As is stated in Contract Law, McDermott, (p. 993):
“Conditions Precedent
Preventing a Contract coming into Existence
[19.48] A condition precedent may prevent the coming into being of a contract at all, rather than merely suspending its obligations . . .
[19.52] ‘The subject to contract’ cases in real property transactions are the best examples of such a process, for until the contract is signed or exchanged, the majority of property sales do not have any force at all.
Suspending Obligations or Remedies
[19.53] A condition precedent may not prevent the coming into existence of a contract but may merely suspend its obligations. The effect of such a condition precedent is thus to suspend, not the creation of a binding contract, but rather the enforceability of the parties’ reciprocal primary obligations.
46. A similar analysis is given in Furmston Law of Contract, (4th Ed. at p. 699). Thus, Furmston, at para. 330, states as follows:
Distinguishing the two
“When there is no contract in existence prior to the fulfilment of the condition precedent, it might be referred to as the situation in which there is a ‘condition precedent to the contract’, whilst the situation in which the contract exists but obligations are suspended could be distinguished by referring to it as a ‘condition precedent to the performance’. In whatever way the two categories are referred to, it has been said that there is not a “method by which it can readily be determined into which category a particular collection of words falls”. However, it can be suggested that the question which should be focused on is whether the parties intended there to be any obligations prior to the fulfilment of the condition.”
47. However, in my view, the distinction between a condition precedent which prevents a contract coming into existence, and a condition precedent which suspends other contractual obligations is an illogical distinction. It is difficult, as a matter of logic, to understand the concept of a “condition precedent” as meaning a condition which may prevent the coming into being of a contract at all. There is either a contract in being or there is no contract. The very concept of a “condition precedent” means that the parties have agreed on a condition precedent. If they have agreed on a condition precedent then they have reached an agreement. Thus there is a contract in being. If that is so, the concept of a condition precedent which prevents a contract coming into existence is meaningless.
48. As part of that agreement the parties might agree that a certain condition must be fulfilled before the rest of the contractual conditions can be fulfilled or become enforceable. That condition could be called a “condition precedent”. It is a condition which must be fulfilled before the rest of the contract can be performed. It is, in effect, a condition which precedes the other contractual obligations being performed or becoming enforceable.
49. The term “condition precedent” means, as a matter of logic, that the parties have agreed that the obligations in the contract must occur in a certain sequence over a certain period of time. Thus one condition precedes another and if the earlier condition is not fulfilled then the other conditions do not have to be fulfilled or are unenforceable.
50. This issue was also considered by the Supreme Court in O’Connor v. Coady [2004] 3 I.R. 271 in the context of the differences between conditions precedent and conditions subsequent.
51. In the course of his judgment, Geoghegan J. considered the distinction between conditions precedent and conditions subsequent and stated as follows (at p 282):
“On the hearing of the appeal before this court, counsel for the plaintiff and the defendant seemed to assume that the expression ’condition precedent’ necessarily and exclusively refers to a condition the effect of non-compliance with which means that no contract of any kind comes into existence. They seemed to take the view that every other kind of a condition that might be said to render the contract ‘conditional’ was a condition subsequent. Gibbs C.J. in Perri v. Collangatta Investments Pty. Ltd. (1982) 129 C.L.R. 537 considered that the completion of the sale of the other property was a ‘condition precedent to the performance of certain of the obligations of the parties under the contract including the obligation of the defendant to complete the sale’. He goes on to make the following observation at p. 541:-
‘”It has sometimes proved difficult to decide whether a particular condition of a contract should be classified as a condition precedent or a condition subsequent, and as Professor Stoljar has pointed out in ‘the Contractual Concept of Condition’ Law Quarterly Review Volume 69 (1953) 485 at p. 506 if the words ‘precedent’ and ‘subsequent’ are to make sense they must be connected with a definite point of reference since they express a relationship in time, the question which must be asked is ‘precedent to what? Subsequent to what?’. However, provided the effect of a condition is clearly understood, its classification may be merely a matter of words. The condition in the present case was not a condition precedent to the formation of a binding contract. It is clear that a binding contract came into existence immediately upon signature, and that the parties to it were from that moment subject to certain obligations.’ (Emphasis added).
Later in his judgment Geoghegan J. stated:
“In my view the more helpful terminology is the distinction between a “conditional contract” and “unconditional contract”. As we all know, by a strange quirk of the law, ordinary terms of an unconditional contract, if they are of sufficient importance, will themselves be described as “conditions” but that does not mean that the contract is conditional. Normally a conditional contract will not mean a contract which comes into existence only upon fulfilment of the condition but rather a contract which can be enforced only upon fulfilment of the condition. That is what this contract was”
52. In my view, the essence of a condition precedent is that it is a condition which precedes other conditions or contractual obligations contained in the contract. By calling it a condition precedent the parties intend to mean that if this condition is not fulfilled then the other conditions of the contract are unenforceable.
Application to present case.
53. In order to consider the legal status of the floating charge it is necessary to consider not only the provisions of the floating charge itself but also of the loan agreement of the 4th-10th September, 2008 and the condition precedent in the loan agreement.
54. The essential terms in the loan agreement were
(i) that the Bank agreed to advance a loan of €8 million to the company;
(ii) that the company agreed to repay the money according to an agreed schedule and to pay interest on the said loan at an agreed rate;
(iii) that the parties agreed that the security for this loan was to be the director’s personal guarantees and the floating charge.
55. However the critical condition in this agreement is condition 8 headed “Conditions Precedent” which provides that
“Prior to utilisation of the facilities referred to at clause 1 above, the Bank is to be provided with Personal Assets Statements of the Guarantors. Such Personal Asset Statements are to be satisfactory to the Bank.”
56. It is an agreed fact that the personal assets statements which were provided to the Bank were not satisfactory to the Bank. Therefore the condition precedent was not fulfilled. Therefore the Bank did not advance the loan.
57. The failure of the Condition Precedent must also be considered in the light of clause 12 of the agreement. Clause 12 provides as follows:
“The facilities will be made available on completion of the security arrangements and on compliance with the provisions of clause 11 and will be subject to renegotiation if utilisation has not commenced by 30th September, 2008.”
58. Thus clause 12 provided that the agreement would be subject to renegotiation if the utilisation of the loan facilities had not commenced by 30th September, 2008. It is an agreed fact that the utilisation of the loan facility did not commence by 30th September, 2008 because of the fact that personal asset statements in a form which was satisfactory to the Bank were not received.
59. It is clear from clause 12 of the agreement that if utilisation had not commenced by 30th September, 2008, then the agreement would be subject to renegotiation. This means, in effect, that the parties agreed that if utilisation of the facility had not commenced by 30th September, 2008, then the agreements entered into between them on 4th-10th September, 2008 would come to an end. In effect, it lapsed because of the failure to provide satisfactory Personal Asset Statements.
60. However despite this, the Bank seeks to argue that although the loan was not advanced nevertheless the floating charge remains as a security in respect of all loans previously advanced to the company i.e. the 2005 loan.
61. In my view this argument is completely unsustainable. It is clear – both as a matter of logic and as a matter of common sense, – that if no loan has been advanced there is therefore no obligation on the company to repay a non- existent loan. It must also follow – again as a matter of logic and of common sense – that, if no loan has been advanced, there can be no enforceable security in respect of a non-existent loan.
62. Moreover, apart from considerations of logic and common sense, the wording of the loan agreement itself puts the matter beyond all doubt. The express terms of clause 5 of the loan agreement specifically provide that it is the “loan facility” which is secured by the floating charge.
63. It is clear therefore from the obvious meaning of these words that the loan which is to be secured by the floating charge is the loan facility of 4th-10th September, 2008 (and the corresponding overdraft facility of the same date). There is no express or implied language to the effect that the floating charge would be a charge for the 2005 loan facility.
64. Thus, by virtue of the failure to comply with the condition precedent, the agreement by the Bank to provide a loan lapsed, the agreement by the company to repay the loan also lapsed and the agreement between the parties in relation to the security also lapsed. Thus the floating charge signed on 10th September, 2008 lapsed. In the circumstances the floating charge of 10th September, 2008 is, in my view, unenforceable by the Bank against the company.
65. It was submitted by counsel for the Bank that the fixed charge was a stand alone security and/or in the alternative that it survived the lapsing of the loan agreement, because, on its face, it did not refer to the loan agreement and also because, on its face, it referred to all continuing advances by the Bank to the company.
66. In my view however, this argument cannot succeed for the following reasons:
(i) The floating charge only came into existence because it was offered as security under the loan agreement of 4th – 10th September, 2008. It did not come into being for any independent reason.
(ii) Clause 5 of the loan agreement (and the corresponding clause of the overdraft facility agreement ) specifically provided that the loan facility “will be secured by” the floating charge. Thus it was expressly agreed between the parties that the floating charge would be a security for the loan facility. Thus, as a matter of construction of the contract, the floating charge was security for the loan facility of September, 2008 only and was not in any way intended to be a stand alone security.
(iii) Whilst it is true that the floating charge on its face does not make any reference to the loan agreement (or the overdraft facility agreement) nevertheless the loan agreement makes reference to the floating charge. It stands therefore to be construed as one of the suite of agreements entered into by the parties at that time. The floating charge itself was signed by the company on 10th September, 2008 (i.e. on the same day that the company signed the loan agreement and the directors signed the personal guarantees.)
67. Counsel for the Bank also sought to lay considerable emphasis on the second paragraph of paragraph 5 of the loan agreement which provides that “Any security held now or any future time shall be security for all the borrowers liabilities the Bank (actual or contingent) and whoever as principle or surety. However that argument begs the question at issue in this case. The only security which the Bank could hold either “now or any future time” is a valid and enforceable security. In the present case the floating charge was valid at the time of its creation but it lapsed by virtue of the fact that it was subject to a condition precedent and that condition precedent was not fulfilled. Because the condition precedent was not fulfilled the remainder of the contract lapsed.
68. Counsel for the Bank also sought to rely on the wording of the floating charge itself (in particularly clause 1 thereof) to argue that the floating charge had an independent and stand-alone existence. He submitted that as the Bank had, in effect, continued to permit the advancement of facilities under the 2005 loan to the company (and the accumulation of interest thereon) and as the Bank had exercised forbearance in not making any demand on the company that that constituted consideration for the floating charge and proved that it had a stand alone existence.
69. However in my view this argument is also not sustainable. Firstly it strains the language of clause 1 of the floating charge to breaking point because it is clear that the parties intended to grant the floating charge as a security for the 2008 loan not as security for the 2005 loan; secondly it ignores the express language of the loan agreement that it was the “loan facility” (in 2008) which is to be secured by the floating charge (and not any previous loan); thirdly it is clear that the 2005 loan was only secured by the personal guarantees of the three directors; By contrast the 2008 loan was to be secured by the personal guarantees and the floating charge. Thus the Bank was seeking, and getting, an additional security for the 2008 loan.
70. Moreover there is no evidence whatsoever that the company ever agreed that the floating charge was to cover the 2005 loan or that it should be applied retrospectively. If the parties intended the floating charge to have retrospective effect, or to apply to the 2005 loan from 10th September, 2008 onwards there would have to be clear and unambiguous language in the agreement between the parties to that effect. There is no such language here.
71. For all the above reasons I am of the view that the Bank’s submissions that the floating charge is enforceable cannot be sustained.
The implied term argument
72. It was also argued by the liquidator, in the alternative, that it was an implied term of the loan agreement that if the loans were not advanced then the security would not be maintained. The Bank, by contrast, deny that this is an implied term in the agreement.
73. It is clear that terms can be implied into a contract either by custom or by law or terms can be implied by fact. As is stated in McDermott on Contract Law (page 308).
Terms implied by fact
The business efficacy test and the officious bystander test
“In addition to the terms implied into contract as a matter of law, the courts may also imply in a term in order to repair what it perceives to be in “an intrinsic failure of expression” by the parties. The written document may have a clear purpose but may have omitted, through poor craftsmanship or mere inadvertence or “mischance”, to cover an incidental contingency. This omission, unless remedied by the Court, may frustrate the purpose of the contract. If a judge adds a term to the contract in such circumstances he will say that he is doing it to give the contract “business efficacy”. The aim of the process is to ascertain the presumed intention of both the parties to the contract, deduced from the words of the agreement and the surrounding circumstances. It must be emphasised that the aim of the Court in this process is not to “improve the contract which the parties have made for themselves, however desirable the improvement might be.”
74. The learned author then sets out the leading statement of the business efficacy test as set out in The Moorcock [1899] 14 PD 64, the leading statement of the officious bystander test in Shirlaw v. Southern Foundries Ltd [1939] 2 KB 206 and also the Irish cases of Tradax (Ireland) Ltd v Irish Grain Board [1984] IR 1 at 14 and also Carna Foods Ltd v. Eagle Star Insurance [1997] 2 ILRM 499.
75. However on the facts of this case there is, in my view, no need to imply a term into the contract. The contract is clear on its face and the issue can be decided as a matter of construction. This is because section 5 of the loan agreement specifically provides that it is the loan facility which is to be secured by the floating charge. Thus it follows that if the loan facility was not advanced then the floating charge has lapsed. Thus the clear wording of the contract is that the floating charge is only a security for the loan facility which was to be advanced in 2008. It follows inexorably therefore that if the loan facility was not advanced then the security itself also falls away.
76. It is, in fact, the Bank itself which would have to make an argument that it is an implied term of the contract that the floating charge applies to the 2005 loan. However such an argument would be wholly unsustainable on the evidence before the Court, and also based on the applicable legal principles.
The consideration argument
77. Counsel for the liquidator also submitted that the floating charge was unenforceable because there was no consideration given for it. In my view however that argument must fail. In this case the Bank agreed to advance a loan of €8 million and the company agreed to repay the loan with interest and also to provide security of personal guarantees and the floating charge. There was therefore clearly consideration provided for the loan agreement. The floating charge itself constituted part of the consideration for the loan agreement.
78. Conversely, the consideration for the creation of the floating charge on the part of the company was the agreement by the Bank to advance monies to the borrower.
79. Therefore it is clear that there was consideration for the floating charge and it could not be held to be unenforceable on that basis.
80. I am satisfied therefore that there was consideration for the floating charge and as such, it validly came into existence on 10th September, 2008. However its existence subsequently lapsed on 30th September, 2008 when the underlying loan agreement also lapsed because of the failure of the condition precedent.
81. Counsel for the Bank also contended in the alternative that there was no need for consideration as the agreement was given under the seal of the company. Counsel for the liquidator submitted in response that an agreement under seal had to signed sealed and “delivered” to be enforceable. He argued that in this case the floating charge had not been properly “delivered” and therefore was not enforceable.
82. The hearing was adjourned on two separate occasions to permit the company to investigate this issue further but in the event no further submissions were made on this point. In the circumstances, and given my findings above that there was valid consideration, I do not think it is necessary to consider this issue any further.
Registration in the Companies Registration Office
83. The Bank also submitted that because the charge was registered with the CRO under S.99 of the Companies Act, it was therefore a valid and enforceable charge. However this argument again assumes the very point at issue in these proceedings. The floating charge was, validly created. It was created pursuant to the loan agreement entered into between the parties on 4th – 10th September, 2008. It was therefore entirely reasonable to register the floating charge in the Companies Registration Office. However given that the agreement between the parties subsequently lapsed on 30th September, 2008 because the condition precedent was not fulfilled, I am of the view, for the reasons set out above, that the floating charge also lapsed at that time and therefore is not enforceable. Therefore the question of whether the charge was registered at the CRO is not relevant to the question of whether it is enforceable.
The judgement of the High Court (McGovern J.) in Danske Bank T/A National Irish Bank v. RQB Paddy Kelly, Niall McFadden and Paul Pardy
84. I have also considered the judgment of the High Court (McGovern J.) delivered on 23rd July, 2010 in respect of Danske Bank’s claim against the third named defendant Niall McFadden in relation to his personal guarantee. The issue in those proceedings was whether the Bank could pursue Mr. McFadden pursuant to his guarantee dated 23rd December, 2005 or pursuant to the personal guarantee given by Mr. McFadden on 10th September, 2008. Mr. McFadden accepted that he executed both guarantees and the question was whether it was the 2005 guarantee or the 2008 guarantee which was applicable.
85. However having considered the judgment of McGovern J., I do not believe that it is appropriate for me to make any findings in this case either relying on what he stated in that case or by analogy from his findings in that case. That was a case in which the plaintiff gave oral evidence and was cross examined on that evidence. That is not the case here. Moreover that case involved the issue of personal guarantees and not the issue of the floating charge. It appears from the judgment that different considerations applied in relation to the wording and extent of the personal guarantees given in 2005 and 2008. In those circumstances it is not either necessary or appropriate for me to consider that judgment further.
Conclusion
86. I would therefore conclude that the floating charge is unenforceable for the reasons set out above