A recap of interruption, non-performance and frustration
By Joseph Dalby and John Yianni
As Cyprus emerges from lockdown, we have with us the experience of having to work from home and the profound impact it has had on Cyprus given the island’s reliance and emphasis on ‘face-to-face’ business dealings and the lack of infrastructure and / or willingness to conduct business by modern technology aided by platforms such as Zoom and Skype. .
Think though of those for whom the opportunity – or necessity – of in-person delivery has been rudely interrupted by lockdown, travel restrictions or social distancing. This economic value of this category expands exponentially when considering Cypriot produce exporters with their workforce on domestic lockdown, farmers and suppliers short on raw material or product, and even tourist service providers unable to operate. r.
If the deliverable you have undertaken to provide – whether product, service or indeed payment – as a sole trader, partnership or company – has been affected by business interruption then here is a reminder of the main tenets of contract law that will inform, if not advise, you of your position.
First of all this article assumes, but you must verify, that you have entered into a valid and enforceable contract with English governing law or similarly consequential Common Law principles. Whether in writing or orally, there must be an intention and one or other of the parties must have promised to give valuable consideration, such as a price to be paid.
Note this does not overlook cases where money is paid on a ’subject to contract’ basis but then not proceeded with; such payments are usually recoverable.
On the other hand, it is largely only of relevance to contracting parties where one or other has yet to fully perform their obligations.
Finally, it is concerned with an event that may or may not bring the contract to an end; hence the premise of this article that the contract has been ‘interrupted’. Whether or not it depends upon the treatment of that event either by the parties, by the contract itself, or by the tenets of law discussed.
A contract can be interrupted by a number of factors that would otherwise bring a contract to an end, except completion. A breach is the most common. Non-performance is a form of breach, and time is also relevant, and this article examines both, but breach can come in a variety of forms that would not constitute an interruption, for example delivering goods not according to description. For the moment one is less concerned with the range of breaches that constitute a cause of action, but more concerned whether there is a continuing obligation or liability that survives an interruption.
Having entered into an enforceable agreement, the parties have agreed to perform their respective obligations under the contract. One may have conditions precedent to the other, such as performance of a service in return for payment, or vice versa, (where payment would be a condition subsequent to the service.
In a simple scenario, non-performance of the condition precedent would normally constitute a total failure of consideration. In these circumstances, the other party would not have to perform his or her own obligations citing the non-performance. If money had though been paid, whether by pre-payment of the price or a deposit then that party is entitled to full recovery.
However, the condition precedent in breach may be one of many on both sides. In more complex scenarios whether non-performance is a total failure is a question of degree. The English authority of Systech International Ltd v PC Harrington Contractors Ltd (139 ConLR 102) usefully breaks down the logical sequence to identify a total failure of consideration.
Whether payment was due under the contract for a service depended on whether there had been a total failure of consideration.
Whether there was a total failure of consideration depended on what the essential contractual performance bargained for was.
If the service provider has performed his service but poorly then the failure of consideration is not a total failure.
The failure has to be total if the consideration is “whole and indivisible”, and the courts will not divide or apportion it unless the parties have done so.
One more incidental note, where the aggrieved party is bound to carry out some condition subsequent that entitles it to additional reward but cannot be performed due the total failure of performance, then mere recovery would not be adequate compensation. Instead the result is a repudiatory breach giving rise to damages for loss.
In many cases, the party that has allegedly not performed at all will argue that he has partially performed the contract, albeit incompletely or even poorly.
The immediate consequence of a partial failure to perform varies on the circumstances. In principle, unless the contract requires consideration to be total, then the test for complete failure of performance will fail, and money paid will not be recoverable as of right.
In England and Wales, there is a statutory exception in cases of frustration which are dealt with later. In some circumstances, equity will step in and allow recovery where payment constitutes an unjust enrichment
That being the case it is then more likely that the party the party seeking recovery may either have already performed some obligation that incurs a right to payment or is bound to carry out some condition subsequent to it.
Performance though, being partial, either in terms of quality or quantity is less than contractually agreed to, so in principle partial performance (a) constitutes a breach of contract and (b) may nevertheless give rise to a right to some payment by the other party.
Any breach of contract entitles the other party to damages. If the breach in question is of the more important ‘conditions’ of the contract (those that go to the root of the bargain), then that party may additionally terminate the contract and sue for damages. The right to terminate does not arise with mere ‘warranties’, so there will arguments either side of whether the breach is of a warranty or a condition, especially when there is mixed use of those terms in a written contract.
In the end, any contract in breach will be resolved by the payment of money as a debt or damages depending upon party receiving it, even if it is to pay less than the contract price or to recover an amount overpaid. In essence the party in breach will often claim or receive a ‘quantum meruit’ (in the case of services) or’ quantum valebat’ (for goods), which is basically an amount that is fair for the value acquired by the other party in the obligations performed. For example, the value of materials and labour in a partly built house.
The quantum may not, of course, be sufficient to set off any loss suffered by the other party for performance that is otherwise in breach, for which he will be entitled to damages.
Having compared total and partial failure of performance, now is a good time to consider time, because it may the element that decides whether non-performance is one or the other.
The general principle is the well-honed phrase: time is not of the essence; meaning that a contract that is silent about time will not require performance of an obligation by a specific time, but within a reasonable time. There is no rule of thumb on what is reasonable except what the parties are objectively assumed they intended from all the circumstances of the contract. So the purchaser of Cyprus potatoes requires delivery of them within say a few days, or weeks if they are on order. It may not be open to the purchaser to complain of a breach later the same day.
Conversely, time may be wholly determinative of time. So long as the deadline for performance is a condition that goes to the root of the bargain, the requirement to failure to perform by that deadline will at least be a breach of contract, will entitle the other party to treat the contract at an end and sue for damages, and may also in effect determine that there has been a total failure of consideration, which will disentitle the party in breach to any fair quantum for work done or goods supplied.
In those in-between cases, time will also determine whether performance has been delayed any by how much. Written agreements often provide for the consequences of delay, even perhaps providing for what remedies the recipient will be entitled to. Otherwise, the amount of delay will be indicative whether the contract has been performed within an unreasonable amount of time.
A contract is said to be frustrated when some circumstance ceases to exist or changes after the contract is concluded, and in so doing destroys the basis upon which the agreement was reached. Where performance Now it may or may not be impossible to perform thereafter, but impossibility is not essential for frustration to apply. At the least – although this does not mean trivially – performance must become radically and essentially different to what was bargained for.
The famous case taught to British student lawyers is the room rented to view the king’s coronation, which then did not take place; the circumstance (the expectation of the coronation) upon which the agreement was based, ceased to exist, and whilst performance (making the room available) was still possible, it would be radically different to what was bargained for.
A sub-species of frustration is force majeure, which has acquired a sense of its own, because it so often appears in written form as agreed between the parties. So, there is no general rule of law, but an acquired understanding of its limits drawn from judicial precedent, but all the same dependent upon the context in which it is agree. E.g. an act of God is commonplace event that will result in a force majeure, and this has been judicially considered to include any extraordinary occurrence or circumstance due to natural causes or which could not have been foreseen and which could not have been guarded against, or could not without any reasonable amount of human care and skill have been resisted
A party relying upon a force major to excuse further performance must first show that the exception (e.g. an act of God) is sufficient certain to apply, and then must show that in consequence performance is impossible. If so then the contract has become frustrated by an intervening event and is not a breach of contract.
The consequence of frustration is that both parties are excused from further performance and must, in so far as possible, be put back into their original positions. Thus, in principle money paid is recoverable. This may prove impossible itself or is complicated by partial performance on one side or the other. In these complex scenarios the parties, or a court if they are in dispute, must fathom a solution to bring about a recovery, or (as they did in the leading case of Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd) treat the case as a total failure of performance.
In Fibrosa, a contract to purchase machinery was frustrated by the advent of hostilities between the UK and Germany, after payment of a deposit. Fibrosa, a German company, sued for delivery which had become impossible. The non-supply was treated as a failure to perform resulting in right (in this imposed) of recovery as opposed to specific performance.
Interestingly the prospect that further claims could be made in the same circumstances led to the Law Reform (Frustrated Contracts) Act 1943. This provides (although not in any contract) that monies paid out before frustration are recoverable afterwards, and monies due before are no longer due afterwards. A party who has obtained a valuable benefit under the contract may have to pay for it if the court considers it just. . A party who has incurred expenses in respect of the contract before the frustrating event may recover such expenses from the other party if the court considers it just.
There will, inevitably, be disputes arising from the current widespread business interruption. In many cases, parties may just let loss lie where it falls. For those that cannot afford to do that, then the issues and points discussed herein will soon be exercised.
A contract may contain a right to terminate on notice which allows either party to terminate the contract at any time or without giving any reason. Some of these might be quite complicated exit mechanisms. The parties remain free to agree variations to the contract, whether pursuant to contract by separate agreement, and whether to service, price or time issues. The will requires the complete willingness of both parties.
Joseph Dalby SC and John Yianni are commercial barristers with the 36 Group, London