Cases in Contract and Sale of Goods

Frustration

CTI Group v Transclear SA [2008] EWCA Civ 856
Court of Appeal

This is an appeal against an order of Field J. varying an award made by an arbitration tribunal dismissing a claim by the respondent, CTI Group Inc. ("the buyers"), against the appellant, Transclear S.A. ("the sellers"), for damages for non-delivery of a cargo of cement. The dispute between the parties arose out of a contract made between the buyers and the sellers on 7 th May 2004 for the sale of 27,000 m.t. of Indonesian cement in bulk f.o.b. the 'Mary Nour' at Padang. The sellers were unable to provide a cargo for the vessel at Padang and on 17 th May the parties entered into a substitute contract for the sale of the same quantity of cement on substantially the same terms save that shipment was to be made in Taiwan. In the event, however, the sellers failed to provide a cargo for the vessel in Taiwan either, and as a result the buyers made a claim against them for damages in the sum of US$449,726.96 representing the loss incurred in obtaining a cargo from an alternative source in Russia.

Arbitrators found the contract had been frustrated. Mr Justice Field in the High Court held that contract had not been frsutrated because it had become impossible to perform. The Court of Appeal dismissed the appeal and held the contract had not been frustrated,.

The case illustrates the principle that Frustration, as a doctrine, is very narrowly applied. To show frsutration it would be necessary to demonstrate that performance of the new contract would be fundamentally different from that originally contemplated.

The Court of Appeal also confirmed that frustration can apply to a contract for the sale by description of unascertained goods of a specified origin.

Lord Justice Moore-Bick: ".....In my view it is impossible to hold that the contract in this case was frustrated. As the decided cases show, the fact that a supplier chooses not to make goods available for shipment, thus rendering performance by the seller impossible, is not of itself sufficient to frustrate a contract of this kind. In order to rely on the doctrine of frustration it is necessary for there to have been a supervening event which renders the performance of the seller's obligations impossible or fundamentally different in nature from that which was envisaged when the contract was made.

Lord Justice Moore-Bick

# The dictum of Lord Radcliffe in Davis v Fareham at page 729 that:

"frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do."

is generally accepted as encapsulating the modern law on frustration. However, not every supervening event which prevents performance of the contract will result in its being frustrated because it may be apparent from the general nature of the contract, its particular terms and the context in which it was made that it was intended to apply in the circumstances that have arisen. Thus in Davis v Fareham Lord Reid said at page 720:

"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. . . . . . 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."

# As each of these passages makes clear, it is essential to the doctrine of frustration that the performance of the contract in the new situation should be fundamentally different from that originally contemplated. In deciding whether that is the case it is necessary to have regard to the general nature of the contract as well as its specific terms, the context in which it was made and the contemplation of the parties as to the range of circumstances in which it might come to be performed. Having regard to the nature of the arbitrators' findings it is important to recognise that a contract will not necessarily be frustrated simply because performance has become impossible, as some of the cases to which our attention was drawn show, and that it will not be frustrated simply because one party is prevented from performing in the manner originally intended if performance in some other manner is possible.

# A good example of this latter point is to be found in J. Lauritzen A.S. v Wijsmuller B.V. (The 'Super Servant Two') [1990] 1 Lloyd's Rep. 1, in which this court considered the position of a contracting party placed, as a result of a supervening event for which he had no responsibility, in the position of being unable to perform one or other of two contracts. In that case Wijsmuller had agreed to transport a drilling rig belonging to Lauritzen from Japan to Rotterdam using one or other of two specialised vessels, 'Super Servant One' and 'Super Servant Two'. Wijsmuller intended to perform the contract using 'Super Servant Two', but after the contract had been made 'Super Servant Two' sank. Wijsmuller had entered into other contracts which they could only perform with 'Super Servant One' and in the event they chose to perform those contracts instead of their contract with Lauritzen. In proceedings brought by Lauritzen Wijsmuller contended that the contract had been frustrated as a result of the sinking of 'Super Servant Two', but that was rejected on the grounds that since the contract provided for the use of either vessel, the loss of 'Super Servant Two' did not render performance impossible or fundamentally different.

# Having regard to the nature of the present case, it is not surprising that Mr. Nolan and Mr. Kenny each drew our attention to a number of authorities relating to contracts for the sale of unascertained goods by description where a failure by the ultimate supplier had led to the seller's failing to perform the contract. In most, but not all, of those cases the supplier's failure to make goods available to the seller did not have the effect of frustrating the contract. The first of these was Blackburn Bobbin v T.W. Allen [1918] 2 KB 467 in which the defendant had agreed to sell the plaintiff a certain quantity of Finnish timber free on rail Hull to be delivered between June and November 1914. It was the practice of timber merchants not to keep stocks of Finnish timber in this country but to ship timber from Finland to meet contracts of that kind. At the outbreak of war in August 1914 the defendants had not made any deliveries under the contract and after that date it became impossible due to the disorganisation of traffic for them to obtain Finnish timber for delivery to the plaintiffs. The court rejected the submission that the contract had been frustrated. Pickford L.J. held that having regard to the nature and terms of the contract the continuance of the usual shipping arrangements (which were unknown to the plaintiffs) was not fundamental to the existence of the contract. Another way of putting it might be to say that, having contracted in unqualified terms, the seller took the risk of being able to obtain the goods needed to perform his contract.

# In Lebeaupin v Crispin [1920] 2 K.B. 714 the defendant entered into two contracts with the plaintiff, one for the sale of the first 2,500 cases of ½ lb. tins of Fraser river salmon packed by the St. Mungo Cannery during the season of 1917 and one for the sale of the first 2,500 cases of ½ lb. tins of Fraser river salmon packed by the Acme Cannery during the same season. Each contract contained a wide exception clause and a force majeure clause. The St. Mungo cannery failed to produce more than a small number of ½ lb. tins because the tins it had purchased for the purpose proved defective and by the time it had acquired a new stock the run of salmon had finished. The Acme cannery failed to produce sufficient ½ lb. tins because it chose to use its 1 lb. tins first and before it could fill its ½ lb. tins the run of fish had ceased. McCardie J. held that the sellers were in the same position as the canneries and could not rely on any defence by way of frustration that would not have been available to them. There was no failure of the fish run and clearly neither a lack of sound tins nor a decision to pack a larger size first would provide a defence to the canneries if the contracts had been made with them.

# In Re Thornett & Fehr and Yuills Ltd [1921] 1 K.B. 219 Yuills agreed to sell Thornett & Fehr 200 tons of Australasian beef tallow of specified brands, 1919 make. In the event the manufacturer produced no tallow at one of its works, although it could have done so, and produced only 161 tons of the specified brand at the other because of a strike. The seller claimed that the contract had been frustrated, but the court rejected that argument. Lord Reading C.J., with whom Darling J. and Acton J. agreed, held that since the contract was one for the sale by description of unascertained goods, the failure of the manufacturer to produce the goods did not result in its frustration.

# Lewis Emanuel & Son Ltd v Sammut [1959] 2 Lloyd's Rep. 629 concerned a contract made on 14th April 1958 for the sale of Maltese potatoes c.i.f. London, shipment on or before 24th April 1958. The seller was unable to obtain space on the only vessel that called at Malta between 14th and 24th April and was therefore unable to perform the contract. The seller argued that the contract was frustrated, or that it was subject to an implied term that if shipping space could not be obtained it should be discharged. Pearson J. rejected both arguments. He expressed the view that there is nothing exceptional in principle about c.i.f. contracts for unascertained goods, but recognised that the very nature of such contracts is likely to make frustration less likely than in the case of other types of contract. Applying the principles enunciated in Davis v Fareham he held that the contract was not frustrated because under a contract of that kind the seller undertakes an obligation to find or provide a cargo, shipping space and insurance and that nothing distinctive, unusual or extraordinary had occurred that would constitute a frustrating event.

# In Intertradex v Lesieur-Tourteaux S.A.R.L. [1978] 2 Lloyd's Rep. 509 the sellers agreed to sell to the buyers 800 tons of Mali groundnut expellers c.i.f. Rouen, shipment in March 1973. A breakdown of the machinery at the supplier's factory resulted in the sellers' being able to deliver only 511 tons and the sellers contended that the contract was frustrated. Donaldson J. at first instance and this court on appeal rejected that argument on the grounds that in the absence of a term to the contrary in the contract the seller takes the risk of disruption resulting from commonplace occurrences of that kind.

# In Atisa S.A. v Aztec A.G. [1983] 2 Lloyd's Rep. 579 the parties entered into a contract for the sale of 13,000-14,000 tonnes of Kenyan sugar f.o.b. stowed Mombasa. The sellers intended to fulfil the contract using sugar purchased from the Kenyan government, which was the sole exporter. In the event, however, the Kenyan government decide not to perform the contract which it contended was invalid. In an arbitration brought by the buyers the sellers maintained that the contract had been frustrated. The arbitrators found that the Kenyan government had simply been unwilling to deliver the goods and had decided that the contract should be cancelled, acting under private law rather than in the exercise of its sovereign powers. They therefore rejected the sellers' argument. On appeal Parker J. upheld their decision. He put the matter in this way at page 585 col. 2:

"It is to be observed that for the question to be answered in the affirmative it is not enough to show that without default of either party the contract has become incapable of being performed. It must be shown that the incapability is because the circumstances at the time would render performance radically different from that which was undertaken by the contract.

. . . . . . . . . .

There was, here, no change in the law and nothing of the nature of a failure or destruction of the subject matter. . . . . . . In essence no more has happened than that (1) the sellers' supplier which was the sole supplier did not wish to supply partly for financial reasons and partly to preserve the build up of stocks and (2) that, having been advised that the contract was not binding, the supplier refused to perform. If the Attorney-General's advice was correct the sellers failed to make a proper supply contract. If it was incorrect then they will have an action upon the supply contract."

# Finally it is necessary to refer to the case of Société Co-operative Suisse des Céréales et Matières Fourragères v La Plata Cereal Company S.A. (1946) 80 Ll. L. Rep 530 on which Mr. Nolan placed some reliance. In that case the buyers and the sellers entered into two contracts in December 1944 and January 1945 respectively for the sale of Plate maize f.o.b. Buenos Aires for shipment 16th May/June 1945. On 30th April and 2nd May 1945 the Argentine government promulgated two decrees which provided that all maize destined for export must be purchased exclusively from the Agricultural Products Regulating Board. There was no formal prohibition on the export of maize during 1945, but the Agricultural Products Regulating Board did not have goods of the contract description which they were willing to sell for export before 30th June 1945. Morris J. held that the contract had been frustrated. He said at page 543 col. 1:

"In my judgment, the basis of the contract did become overthrown. Although there was no prohibition of export in the sense that any exporting was absolutely forbidden, there was on the facts as found a de facto prohibition which prevented the sellers from exporting. They were by law prohibited from exporting any maize that they had not purchased from the Argentine Agricultural Products Regulating Board, and that Board had no maize which they were willing to sell. The sellers had 6750 tons of maize. It became illegal for them to export it. The new conditions created by the changes in the law fundamentally altered the situation. Exportable maize was, by law, removed from the scope of private obligation. The parties ought not to be regarded as having contracted to impose upon the sellers a continuing obligation to export goods, even at a time when such exporting would be contrary to the law of the land."

# These authorities, in particular Société Co-operative Suisse des Céréales et Matières Fourragères v La Plata Cereal Company S.A. and Lewis Emanuel & Son Ltd v Sammut, make it clear that the principles of frustration are capable of applying to a contract for the sale by description of unascertained goods of a specified origin, a conclusion that is also supported by the observations of Russell J. in In re Badische Co Ltd [1921] 2 Ch. 331 at pages 381-383, another case on which Mr. Nolan relied. However, they also make it clear that, in the absence of some exceptional supervening event, such a contract will not be frustrated simply by a failure on the part of the ultimate supplier to make goods available for delivery. The reason for that is not far to seek: it is implicit in a contract of this kind that the seller will either supply the goods himself or (more likely) will make arrangements, directly or indirectly, for the goods to be supplied by others. In other words, he undertakes a personal obligation to procure the delivery of contractual goods and thereby takes the risk of his supplier's failure to perform. That obligation will be discharged by frustration if a supervening event not contemplated by the contract renders that performance impossible or fundamentally different from what was originally envisaged, but most events which result in the failure of a supplier to provide the goods will not fall into that category. A few, however, such as a prohibition of export rendering the shipment of the goods unlawful, usually will. It is not surprising, therefore, that the authorities support Mr. Kenny's submission that the contract will not be frustrated if, although delivery remains physically and legally possible, the seller's supplier chooses (for whatever reason) not to make the goods available.

.............

......In my view it is impossible to hold that the contract in this case was frustrated. As the decided cases show, the fact that a supplier chooses not to make goods available for shipment, thus rendering performance by the seller impossible, is not of itself sufficient to frustrate a contract of this kind. In order to rely on the doctrine of frustration it is necessary for there to have been a supervening event which renders the performance of the seller's obligations impossible or fundamentally different in nature from that which was envisaged when the contract was made.