Pay up! (or Frustration of Contract Part 3)

Photo by Alex on Unsplash

In a number of previous blogs (Stormy Weather, I’m at the end of my tether! Locking Horns; and Frustration of Contract?), I discussed the issue of termination of contract when unforeseen factors outwith the control of the parties intervene.

It might be the destruction of the subject matter of the contract; death of one of the parties in an agreement involving the provision of personal services; or even particularly bad weather or unforeseen events.

Potentially, these factors may frustrate the contract in the sense that it can no longer be carried out or performed in the manner which the parties originally intended. In such cases of genuine frustration, the contract or agreement is terminated and the parties are discharged from their obligations.

There have been some famous cases over the years with frustration of contract at their heart:

  • Taylor v Caldwell [1863] EWHC QB J1; 122 ER 309;3 B. & S. 826
  • Krell v Henry [1903] 2 KB 740
  • Herne Bay Steam Boat v Hutton [1903] 2 KB 683
  • Vitol S.A. v Esso Australia Ltd. (The Wise) [1989] 1 Lloyd’s Rep. 451

A contract is not frustrated if it becomes more expensive or difficult to perform or if the alleged frustrating event could have been foreseen (and presumably dealt with) (see Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 and Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93).

The Emiliano Sala Affair

This leads me back to a story which I have been following with interest over the last few months: the tragic death of the Argentinian footballer, Emiliano Sala in a plane crash over the English Channel in January 2019.

It will be recalled that Sala’s former Football Club, the French side FC Nantes had just agreed to him transferring to the English Premier League side, Cardiff City FC. The transfer fee was £15 million, but shortly after the accident, Cardiff City claimed that the transfer had not gone through and it had no obligation to pay the first part of this figure. In other words, Sala was never an employee of Cardiff City according to this argument because the paperwork had not been finalised.

In normal circumstances, where a contract involves the provision of personal services (and a contract of employment certainly fits into this category), the death of a new or prospective employee would tend to terminate the agreement. Death is pretty much the ultimate frustrating factor – especially in cases involving unforeseen deaths.

The world of top flight football, however, would seem to be different and does not seem to be bound by the considerations that govern us mere mortals.

FIFA, the governing body, has now spoken and determined that Cardiff City will have to pay the first part of the transfer fee (£5 million in case you’re asking) to FC Nantes. Failure to do so may result in FIFA sanctions being imposed on Cardiff (a signing ban).

Please find a link below to the FIFA press release:

https://www.fifa.com/about-fifa/who-we-are/news/fifa-players-status-committee-renders-decision-on-transfer-of-late-emiliano-sala

It would seem that FIFA rules transcend events such as death which ordinarily would throw a spanner in the works in the context of an ordinary employment contract situation.

Cardiff City can appeal against the decision of FIFA by going to the Court of Arbitration for Sport and, in October 2019, the Club indicated that it would so:

https://www.theguardian.com/football/2019/oct/02/cardiff-appeal-cas-court-of-arbitration-sport-emiliano-sala-transfer-fee-fifa

Ultimately, whatever way this tragic story ends, I can’t help but wonder whether FC Nantes or Cardiff FC had the foresight to insure Sala’s life in the event of untimely and unforeseen death. Sadly, the fact that a young man with a promising future died in a horrible accident seems to have got lost along the way while Nantes and Cardiff polish up their legal arguments.

Links to the story can be found below:

Emiliano Sala: Fifa rules Cardiff must pay first instalment of £5.3m to Nantes

Cardiff City have been told to pay the first instalment of £5.3m to Nantes for striker Emiliano Sala, who died in a plane crash.

https://news.sky.com/story/cardiff-city-face-signing-ban-if-they-dont-pay-emiliano-sala-transfer-fee-11854081

Copyright Seán J Crossan, 23 November 2019

Stormy weather, I’m at the end of my tether!

Photo by J W on Unsplash

We know summer is finally here when people are enthused about the prospect of attending the ever growing list of open air music festivals across the UK and Ireland.

Everyone involved in these events always hopes that the sun will come out, but the reality is that you have to prepare for the likelihood of bad weather. Most of the time, revellers will be able to put up with poorer conditions and it is unlikely that the event will be cancelled.

On occasion, the predicted weather can be very poor, not to say downright dangerous and festival organisers are left with the agonising decision of having to make the call to cancel the event.

This happened at the beginning of August when the Houghton Music Festival in East Anglia was cancelled due to severe weather warnings. Now clearly, by making this decision, the Festival organisers were implementing their duty of care to the artists, the workers and the music lovers.

A link to the story on the Sky News website can be found below:

https://news.sky.com/story/houghton-festival-in-east-anglia-cancelled-due-to-severe-weather-warnings-11780064

I was more interested in the contractual implications of cancelling the event. More specifically: does the cancellation of an event result in frustration of contract? In other words, will the frustrating event lead to termination of the contract?

The Festival organisers were very quick to say that the fans were entitled to seek a refund of the ticket price (no doubt minus the booking fee). Admittedly, I was less interested in this aspect of the story. In particular, I was mulling over the impact of cancelling the Festival on local businesses – particularly the local hotel/accommodation/B&B industry.

In 2016, research published by UK Music (Wish You Were Here) demonstrated a number of things:

  • the number of people attending UK music festivals had risen from 27.7 million to 30.9 million between 2015 and 2016;
  • the number of people travelling between different parts of the UK had increased; and
  • the number of foreign tourists willing to attend UK music festivals had risen by 20% in 2016.

(Source: The Guardian available at https://www.theguardian.com/music/2017/jul/10/uk-music-industry-gets-boost-from-12-rise-in-audiences-at-live-events)

So, what if you’re in the business of running a hotel, B&B or renting out a property on Airbnb and the bad news is announced that the local music festival has been cancelled, where do you stand legally?

Is the contract that you entered into with prospective guests capable of enforcement or has it been cancelled due to frustration?

It really depends on the circumstances …

What if the accommodation provider is aware of the fact that the guests have specifically booked rooms or a property in order to attend the festival? Some hotels go even further and might put together event all inclusive packages for guests – so called ‘special offers’ which might include things like all meals provided, spa treatments and even transport to and from the festival site.

This is quite different from a situation where the guest books rooms or hires a holiday property and does not disclose to the accommodation provider the purpose of his or her visit to the local area.

In the famous case of Krell v Henry [1903] 2 KB 740, Lord Justice Vaughn-Williams was of the opinion that frustration of contract was not limited to either the destruction or non-existence of the subject matter of the contract. It will be important to identify the substance or the purpose of the agreement. The cancellation of an event can frustrate the performance of a contract where that event is an absolutely material term of the agreement.

In Krell, the pursuer was the owner of a flat in the central London district of Pall Mall. The pursuer’s flat was on the route of the proposed coronation procession of the new King, Edward VII, which was scheduled to take place on 26 and 27 June 1902. The pursuer had advertised his flat for rent during the daytime on 26 and 27 June for the purpose of viewing the procession. The defender, who was anxious to view the procession, responded to the advertisement and entered into an agreement to hire the flat on the days specified. An announcement was made on 24 June stating that the procession was to be cancelled owing to the King’s illness. The defender refused to pay the balance of the rent for the flat by reason that events had frustrated performance of the contract. The pursuer brought an action against the defender for payment of the balance of the rent.

The English Court of Appeal stated that the cancellation of the event frustrated the contract and discharged the parties from their obligations under it. The clinching argument in the defender’s favour was that both parties clearly entered into the contract with the same intention. The reason behind the hire of the flat was, therefore, a material term of the contract.

Had the defender failed to communicate his motivation for hiring the flat, then the contract would have remained capable of enforcement by the pursuer. Lord Justice Vaughn-Williams was of the opinion that frustration of contract was not limited to either the destruction or non-existence of the subject matter of the contract. It was also important to identify the substance or the purpose of the agreement. In other words, did the parties share the same intentions?

The illness of King Edward resulted in a second legal action. This time, however, the English Court of Appeal took a completely different approach to the issue of frustration of contract.

The decision in Krell v Henry can be contrasted with the decision below:

Herne Bay Steamboat Co v Hutton [1903] 2 KB 683 the pursuers had entered into a contract to hire a steamship to the defender for two days. The Royal Navy was assembling at Spithead to take part in a naval review to celebrate King Edward’s coronation. The King was to review the fleet personally. The defender wished to transport paying guests from Herne Bay to Spithead to see the naval review. Due to the King’s illness, an official announcement was made cancelling the review. It would still have been perfectly possible for the defender to take his passengers on a cruise to see the assembled fleet. The defender, however, refused to use the vessel claiming that the contract had been frustrated. The pursuers brought an action against the defender for the balance of the fee of £250 owed by the defender who was refusing to pay for the hire of the boat.

The contract was not discharged by reason of frustration. The main purpose of the contract could still be achieved i.e. to take paying guests for a cruise around the fleet.

Conclusion

The difference in approach taken by the Court of Appeal in both cases is sometimes difficult to understand. In Krell v Henry, both parties had clearly intended that the purpose of the contract was to view the procession. Reinforcing this fact, was the fact that the defender was only entitled to use the flat during the daytime. In Herne Bay Steamboat Co v Hutton, the purpose of the defender in hiring the steamship was to see the naval review, but this was not the purpose of the owners who were not the slightest bit interested why the vessel had been hired. Lord Justice Vaughn-Williams compared the situation to someone who hires a carriage to go and see the Epsom Derby, but the outbreak of some unforeseen epidemic means that the races are cancelled. This makes no difference to the owner of the carriage who will still expect to be paid for the hire of his vehicle.

Copyright Seán J Crossan, 28 August 2019 

Frustration of contract?

Photo by Andre Hunter on Unsplash

In Chapter 2 of Introductory Scots Law, I discuss termination of contractual agreements. One way in which a contract can come to an end – albeit in rather an abrupt or unexpected manner – will be when the agreement is said to be frustrated.

Frustration will often arise when unexpected events intervene. Since the formation of the contract, the circumstances surrounding the agreement may have changed dramatically. The contract may now be impossible to perform or the contract may have been rendered illegal by changes in the law.

Physical destruction of the subject-matter of the contract operates to frustrate the agreement (see Taylor v Caldwell (1863) and Vitol SA v Esso Australia 1988).

Frustration as a practical issue came to mind a few months ago, when I was teaching contract law to two groups of students. Some of the more switched on members of the classes highlighted a story which had received a lot of media coverage.

This story involved the sale of a painting (Girl with Balloon) by the artist known as Banksy. In October 2018, the item was being auctioned at Sotheby’s in London. The successful bidder agreed to pay £860,000 – quite a coup  for Sotheby’s. Unfortunately, for the bidder, the artist had other ideas. The frame contained a hidden device which partially shredded the painting.

https://news.sky.com/story/banksy-reveals-he-meant-to-shred-entire-1m-girl-with-balloon-painting-11528598

The artist made a film of the incident:

https://youtu.be/vxkwRNIZgdY

What would have been the legal position?

Would the contract have been capable of enforcement or was this an example of frustration my students wanted to know?

Banksy’s painting is a unique item i.e. it cannot be replaced with a similar item. Arguably, the bidder would have been entitled to use frustration as a means of withdrawing from the agreement. Clearly, the circumstances of the painting being partially destroyed made performance of the contract very different from that which the bidder originally anticipated.

Imagine, for instance, if two parties had agreed terms concerning the sale of a vintage car. What if the car was stolen before it could be delivered to the buyer? It is later found by the Police on waste ground, completely burnt out by the thieves/vandals. Would the buyer really consider herself to be bound by the terms of the agreement concluded with the seller or would it be reasonable to assume that the contract was terminated due to frustration?

Risk

This area of the law of contract involves risk. The issue of risk relates to any harm or damage caused to the goods and, more importantly, who will have to bear the loss should this happen i.e. the seller or the buyer?

In Chapter 4 of Introductory Scots Law, I discuss the implications for transactions involving the sale of physical/corporeal property and the application of risk.

The question to ask is what kind of category of sale does the transaction fall under?

  • Consumer sale (B2C)?
  • Business to business sale (B2B)?
  • A sale between two private individuals (C2C)?

Section 29 of the Consumer Rights Act 2015 now addresses the issue of risk in relation to consumer contracts of sale before and after the physical possession of the goods has been transferred to the buyer (i.e. delivery has taken place). This is an area of the law which has been much simplified over the years in relation to consumer contracts for the sale of goods (the same cannot be said of business to business contracts of sale). The basic rule is that risk will lie with the trader until such time as s/he is able to transfer physical possession of the goods to the consumer or someone identified by her to take possession of the goods.

Presuming that sale of the vehicle was a consumer transaction, I think most reasonable people would opt for frustration of contract in this situation. Presumably, the seller of the car (the trader) has an insurance policy in place to cover such eventualities as theft and destruction.

In business to business sales and private sales, risk will pass from the seller to the buyer when the parties intend that it should pass or depending upon the classification of the goods (as per Section 18 of the Sale of Goods Act 1979 with its 5 rules).

In the strange environment of the international art world, the semi-destroyed Banksy painting became even more valuable and the bidder was happy to pay the purchase price. This, however, is not normal behaviour for most ordinary people.

Football: it’s a funny old game

On a more tragic note, the issue of possible frustration of contract rose once more in relation to the death of the Argentinian footballer, Emiliano Sala who had completed a transfer agreement to leave the French club, FC Nantes and go to Cardiff City, the English Premier League club.

Before he could play his first competitive game with his new club, Mr Sala was killed in a plane crash over the English Channel. This led to demands by Nantes for payment of the first part of the transfer fee of £15 million from Cardiff City FC.

Such a contract i.e. for personal services could conceivably be discharged by the death of the person who was to perform it. Additionally, the incapacity of a person who is to perform a personal contract may discharge it. However, temporary incapacity is not enough unless it affects the performance of the contract in a really serious way. If an employee is killed or permanently incapacitated, it may be very difficult to argue that the employment contract should be allowed to continue.

Sadly, in the Sala tragedy, it looks as if the lawyers will be the only winners here.

Links to media stories about the Sala dispute can be accessed below:

Nantes demand first slice of £15m Emiliano Sala fee from Cardiff

https://www.theguardian.com/football/2019/feb/06/nantes-demand-transfer-fee-from-cardiff-city-for-emiliano-sala

https://www.independent.co.uk/sport/football/premier-league/emiliano-sala-cardiff-city-nantes-transfer-points-deduction-plane-crash-epl-video-a8769076.html

Conclusion

Frustration can only be used to have the contract discharged in situations where neither party is to blame. When one party is to blame for the failure to perform his obligations under the agreement, this represents a breach of contract and the innocent party can raise the appropriate action.

Copyright Seán J Crossan, 10 February 2019