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Business Law

Whilst upgrading its computer centre, the University of Canberra invited tenders from all the leading computer manufacturers. From these it selected Peerless Computers, as it employed several former UC staff and offered greater price reductions, in comparison to the major firms. A contract was entered into between them, which stipulated that the delivery was to be made a week before the commencement of the next semester. It was communicated to Peerless that these computers were indispensable for the timetable regarding lectures and tutorials.

However, two weeks before the start of the semester, Peerless’ overseas supplier expressed his inability to supply the computers due to a fire at his factory. This information was conveyed by Peerless’ manager to the University, who contended that this delay was not a breach of the contract, because it was caused by circumstances that were beyond his company’s control.

The desperate University immediately made alternate arrangements to procure the computers, and was assured by Fujitsu that the computers would be supplied within time. However, Fujitsu quoted a total cost that was 20% more than what had been agreed upon with Peerless. The hapless University cancelled its contract with Peerless and obtained the computers from Fujitsu. Subsequently, the University

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sent an account to Peerless for the additional cost incurred by it.

If a party to a contract has incurred loss due to the deliberate breach of the contract by the other party, then the injured party can claim damages for such breach. However, such parties have to establish that there had been a breach of the contract, which had caused them loss. Under such circumstances, the claimant party will be in a position to recover damages from the party in breach. All the same, if the loss incurred by the claimant party is found to be unrelated to the contract then the courts would not grant compensation for the damage caused.

The doctrine of frustration does not apply if an alternate method of performance is available. This was the ruling in Tsakiroglou & Co v Noble and Throw. The court opined that one of the parties to a contract had frequently invoked the doctrine of frustration, whenever he had felt that it was unprofitable or burdensome for him to perform the contractual obligations. The doctrine of frustration must be invoked only in the rarest of instances.

In that particular incident, the Suez Canal had been closed and the shipping operator had to adopt another shipping route to complete the contract; and the court refused to accept that the contract had been frustrated[1]. In this case, the court directed that the contract should have been fulfilled by taking recourse to some other shipping route. It was opined by the Law Lord; Lord Radcliff that an event should have occurred that had radically altered the contractual obligations from the original contractual obligation at the time of formation of the contract; if the contract was to be frustrated.

Analogously, Peerless should have arranged for the delivery of the computers to the University, from some other manufacturer. Since, Peerless failed to do so; he had breached part of his contractual obligations. Due to the urgency of the requirement of the computers, the University had been compelled to obtain the computers from the Fujitsu company; but while doing so it had to pay 20% more than what had been agreed upon with Peerless.

Due to lack of time, the University had to pay the extra amount demanded by the Fujitsu company. In some cases, the court had decided that the additional amounts paid were to be reasonable and restricted to a minimum; in order to be recoverable from the defaulting party. Consequently, Peerless has to pay this 20% amount to the University of Canberra. In respect of the breach of the contract by Peerless, the University has to be paid damages by the former.

As such, the extant case law indicates that the doctrine of frustration cannot be invoked; in order to permit a party to a contract to evade it, merely because it is no longer profitable for him, without affecting the fundamental purpose of the contract.

The court had established the rule for claiming damages caused by breach of contract in Hadley v Baxendale. Under this rule, the defendant would be liable only for the damage caused due to the breach of contract. Moreover, such damages should have occurred as a natural result of that breach. In other words, not all losses can be recovered, even though they had transpired due to a breach of the contract. In addition, not all losses are considered to be recoverable damages. The latter are the damages that were anticipated by both the parties to the contract at the time of its formation. Furthermore, such damages should have occurred as a natural result of the breach.

The courts ascertain whether the plaintiff has an opportunity to reduce losses incurred due to breach of contract. If the plaintiff has no such opportunity, then the court would grant the recovery to the extent to which the plaintiff could not recover his loss. As such if the plaintiff can remedy the breach by either purchasing or selling to a third party in the market, then the plaintiff’s claim for damages would be restricted to that extent; and the courts would grant compensation by assuming that the plaintiff had mitigated his losses in this manner, before approaching them. Consequently, damages in contract cannot ensure the anticipated interests of the plaintiff.

The plaintiff cannot recover damages that are remote to the contract. Therefore, the plaintiff cannot recover damages that were contemplated by both the parties at the time of the formation of the contract. This was established in Victoria Laundry Ltd v Newman Industries Ltd. Therein the defendant failed to supply the boiler in time; and the plaintiff argued that had the defendant supplied the boiler well within the agreed upon time, then he could have made greater profits. The plaintiff sued the defendant, for these additional profits, which he had been deprived of due to the failure of the latter to deliver the boiler. The court accepted that the plaintiff could claim his ordinary, and ruled that he could not claim for the unusual profits, since they were remote to the contract.

The courts consider that the plaintiff must take all reasonable steps to mitigate his losses. Accordingly, the award of damages would be to the extent to which the plaintiff could not be reasonably expected to reduce his losses. In Salvage Association v CAP Financial Services Ltd, the court examined the possibility of recovery for damages.

In that case the plaintiff company Salvage Association terminated a system development contract. The reason provided for this termination was the inability of the defendant company CAP Financial Services Ltd to develop and complete the system. The court opined that the plaintiff could recover the expenditure incurred on the project from the defendant.

The doctrine of frustration does not apply when the frustrating event emerges from a deliberate act or choice made by one of the parties to the contract. This was established in the case of Maritime National Fish Ltd v. Ocean Trawlers Ltd. In this case, the defendants entered into a contract with the plaintiff by chartering a steam trawler equipped with an otter trawl.

Both the plaintiff and the defendant were aware that it was illegal to use an otter trawl without possessing a license, issued by the Canadian government. The plaintiff applied for five licenses for their trawlers and the defendant’s trawler. The government granted only three licenses. The plaintiff utilized these licenses for their trawlers and sued the defendant on the basis of frustration. The Court held that there was no frustration; because there had been a choice, which the plaintiff had exercised, in respect of the trawlers.

The doctrine of Frustration does not automatically apply if an inconvenience was caused, which had resulted in expenditure or loss to a person or company. This principle was established in Davis Contractors Ltd v Fareham UDC, wherein there was an agreement to build a council estate at a pre-agreed cost in 8 months.

Subsequently, construction costs increased due to bad weather conditions, strikes and shortage of building materials; and the project was completed in 22 months. The plaintiff company’s claim of partial frustration of the contract was rejected by the court, which held that frustration could be invoked, only if changes had taken place that had rendered the contract a radically different agreement and not in the event of just difficulties, material loss or inconvenience.

In addition to this, the frustrating event should change the very nature of the contractual obligations, and these obligations should have been scrutinized by the parties to the contract at the time of its formation. Moreover, these new events should render it impossible for the parties to carry out their contractual duties. Under such circumstances, the law releases the concerned parties from future performance of the contract.

In our case, the fire in the overseas supplier’s factory does not render Peerless’ contractual obligations impossible to fulfil. As stated in the discussion regarding Tsakiroglou & Co v Noble and Throw, Peerless should have procured the computers from some other manufacturer, in order to make the supplies within the time specified in the agreement.

This measure was not adopted by Peerless, despite the fact that the computers were essentially required by the University within the stipulated time. In accordance with the foregoing discussion, the contract was not frustrated, because supply of the computers by the overseas company was not an essential component of the contract and no such stipulation was made in the contract. The source of the computers was immaterial for the performance of the contract.

In Herne Bay Steamboat Co v Hutton, a vessel was chartered by the defendant. The purpose of hiring the vessel was to enable the passengers of the vessel to witness the coronation naval review by the British Monarch and to visit the Royal Naval Fleet. However, the Monarch cancelled that appointment due to infection with pneumonia. Consequently, the coronation ceremony was cancelled, while the fleet remained in place.

The defendant claimed that the contract had been frustrated, but the plaintiff sued the defendant for the chartered amount. The appellate court decided that the contract was not frustrated because; the basis of the contract was not the tour or the review of the fleet by the Monarch.

There are certain exceptions to the application of the doctrine of frustration in English law. The Law Reform (Frustrated Contracts) Act 1943 has specified the situations in which contractual obligations cannot be circumvented. For instance, if a party owes a sum of money under a contract that subsequently becomes frustrated before the repayment of the amount, then that amount has to be repaid. Similarly, any money that was paid before the frustration of the contract has to be refunded.

The doctrine of frustration allows parties to evade their contractual obligations. However, there should be an occurrence of events, which had not existed at the time of formation of the contract between them, and such events must render the performance of the contract impossible. Under such circumstances, the parties to a contract are relieved from the future performance of the contract. These events should serve to frustrate the purpose of the contract. Whenever the occurrence of an event acts disrupts the performance of a contract, or results in changes to the existing situation, then it can be construed that a frustration of the contract had taken place. In such situations there will not be any contractual breach.

List of References

Davis Contractors Ltd v Fareham UDC (1956) AC 696

Frustration. In Collins Dictionary of Law. 2000. Accessed September 20, 2008 <http://www.credoreference.com/entry/5980121>

Hadley v Baxendale (1854) 9 Exch. 341, 156 Eng. Rep. 145

Herne Bay Steamboat Co v Hutton (1903) 2 KB 683.

Kelly, David et al. Business Law. Cavendish Publishing. 2002. P. 189. ISBN: 1843144875.

Law Reform (Frustrated Contracts) Act 1943.

Maritime National Fish Ltd v Ocean Trawlers Ltd (1935) AC 524

Remedies for Breach of Contract. Accessed 19 September 2008. <http://groups.msn.com/thelawsite/brachofagreement.msnw>

Rowland, Diane & Macdonald, Elizabeth. Information Technology Law. 2005. Pp. 181 – 182. Routledge Cavendish.

Salvage Association v CAP Financial Services Ltd (1995) FSR 654

Tsakiroglou & Co. Ltd. v  Noblee Thorl G.m.b.H. (1962) A.C. 93

Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949) 2 KB 528 

 Kelly, David et al. Business Law. Cavendish Publishing. 2002. P. 189. ISBN: 1843144875.

 Davis Contractors Ltd v Fareham UDC (1956) AC 696

Hadley v Baxendale 9 Exch. 341, 156 Eng. Rep. 145 (1854)

Remedies for Breach of Contract. Accessed 19 September 2008. http://groups.msn.com/thelawsite/brachofagreement.msnw

 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949) 2 KB 528

 Salvage Association v CAP Financial Services Ltd (1995) FSR 654

Rowland, Diane & Macdonald, Elizabeth. Information Technology Law. 2005. Pp. 181 – 182. Routledge Cavendish.

Maritime National Fish Ltd v Ocean Trawlers Ltd [1935] AC 524

Davis Contractors Ltd v Fareham UDC (1956) AC 696

 Frustration. In Collins Dictionary of Law. 2000. Accessed September 20, 2008 <http://www.credoreference.com/entry/5980121>

 Herne Bay Steamboat Co v Hutton (1903) 2 KB 683.

 Law Reform (Frustrated Contracts) Act 1943.

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