Introduction
The doctrine of frustration in contract law addresses situations where unforeseen events render a contract’s performance impossible or fundamentally different from what the parties originally intended. This legal principle allows for the discharge of contractual obligations when circumstances beyond the control of the parties alter the foundation upon which the agreement was built. This is not merely a matter of one party finding the contract less beneficial, but an occurrence that strikes at the core of the agreement's purpose. Specifically, the application of frustration requires establishing that the event was unforeseen, that it was not the fault of either party, and that it has caused performance to be impossible or radically different. The judgment in Krell v Henry [1903] 2 KB 740 is pivotal in articulating the concept of "frustration of purpose" where the literal possibility of performance exists, yet the underlying reason for entering the contract has been eliminated. This case demonstrates how an implied term, based on a shared understanding of a contract’s purpose, can discharge a contract despite the physical possibility of performance.
The Facts of Krell v Henry
The case of Krell v Henry arose from a contract made between Mr. Krell, the claimant, and Mr. Henry, the defendant. The contract, executed on June 20, 1902, involved the rental of a flat in Pall Mall for the two days of June 26 and 27. These dates coincided with the planned coronation processions of King Edward VII. Although the contract itself did not mention the coronation, the surrounding circumstances made it clear that the flat was rented specifically to view the procession. Mr. Henry paid a deposit, but, the coronation was postponed due to the King's illness. As a result, the procession was canceled. Mr. Krell claimed the outstanding balance of the rent, while Mr. Henry argued that the cancellation of the procession had frustrated the contract.
The Court of Appeal's Reasoning
The Court of Appeal ruled in favor of Mr. Henry, concluding that the contract had been frustrated. Vaughan Williams LJ delivered the leading judgment, emphasizing that frustration is not limited to cases where the physical subject matter of the contract is destroyed as seen in Taylor v Caldwell (1863) 3 B&S 826. Instead, frustration could also apply where the non-existence of a specific state of affairs, assumed to be the foundation of the contract, made performance impossible. The court noted that the coronation procession was the foundation of the contract. The flat was selected for its “peculiar suitability” for viewing the procession, rather than any general utility. The court inferred that the continued existence of the coronation procession was an implied condition of the contract; neither party contracted with the possibility of the procession not happening. The lack of the procession removed the entire purpose of renting the flat, thus frustrating the contract.
Distinguishing Purpose From Foundation
Vaughan Williams LJ used a helpful analogy to illustrate the distinction between purpose and foundation, a cab hired to go to Epsom on Derby Day. If the Derby were canceled, the cab driver would still be able to perform the contract of conveying the hirer to Epsom. The purpose of the cab hire is to travel to Epsom, but the foundation is the transport service itself, which remains possible regardless of the racing event. The cab has no special characteristics associated with the Derby. In contrast, the flat in Krell v Henry had a “peculiar suitability” for the procession and was chosen for that specific reason. Here, viewing the coronation procession was not simply a purpose but the very foundation of the agreement. This distinction is crucial to understanding why the contract in Krell v Henry was deemed frustrated while the cab contract would not have been.
Implied Terms in Contractual Agreements
The case highlights the significant role of implied terms in contract law. The court reasoned that the continued existence of the coronation procession was an implied condition of the contract, even though it was not explicitly stated. Implied terms are those which are not expressly included in a contract, but which a court considers to be part of the agreement. They can be derived from the presumed intentions of the parties, the customs of the industry, or legal requirements. In Krell v Henry, the implied term arose from the surrounding circumstances and the nature of the agreement. The court determined that both parties contracted on the assumption that the coronation would take place on the scheduled dates, and that this assumption formed an essential, though unstated, part of their agreement.
Comparison With Herne Bay Steam Boat Co v Hutton
It is useful to consider Herne Bay Steam Boat Co v Hutton [1903] 2 KB 683 alongside Krell v Henry. In Herne Bay, a steamboat was hired to view a naval review and cruise around the fleet, also planned for the coronation period. The naval review was canceled due to the same illness, but the court held that the contract was not frustrated. The reason being, that the cruise around the fleet remained a viable objective of the contract, so only part of its purpose was affected. In Herne Bay, the naval review was not the sole foundation of the contract. The ship was hired not for its suitability for viewing a naval review, but for the purpose of transporting passengers for a cruise, which could still be done. This contrasts with the specific suitability of the flat in Krell v Henry. This distinction demonstrates that not every event cancellation frustrates a contract; the cancellation must remove the very basis of the agreement, rather than just one of its objectives.
The Impact and Limitations of Krell v Henry
The decision in Krell v Henry significantly expanded the scope of the doctrine of frustration. It moved beyond physical impossibility to include situations where a fundamental purpose of the contract is eliminated. The case also highlighted the importance of implied terms and how they can be used to determine the true nature of a contractual obligation. The legal test established was whether the supervening event meant that a performance was radically different to what the parties had agreed.
However, it is important to note the limitations of the doctrine. The courts have been wary of allowing parties to escape contracts merely because they have become less beneficial. Davis Contractors v Fareham UDC [1956] AC 696 established that a contract is not frustrated by an event that simply makes performance more difficult or costly. Frustration requires that the intervening event must fundamentally alter the nature of the obligation. The courts also consider whether the parties could have foreseen the event and included provisions within the contract to account for this. In the case of Walton Harvey Ltd v Walker & Homfrays Ltd [1931] 1 Ch 274, it was determined that the contract was not frustrated because one party knew of a potential risk but failed to notify the other. This indicates that where a risk is foreseen or foreseeable, the doctrine of frustration is less likely to apply. This demonstrates that the risk allocation of a contract is integral to whether a contract is frustrated.
Subsequent Cases and Developments
The principles established in Krell v Henry have been referenced in numerous subsequent cases. Blackburn Bobbin Co Ltd v Allen (TW) & Sons Ltd [1918] 1 KB 540 distinguished itself from Krell by stating that extending the Krell ruling to that case would create a rule the results of which nobody could foresee. Similarly, Metropolitan Water Board v Dick Kerr [1918] AC 119 relied on the concept of a different contract being made. Further, the decision in Gamerco v ICM/Fair Warning (Agency) Ltd [1995] 1 WLR 1226 applied the Law Reform (Frustrated Contracts) Act 1943 when awarding monies paid back after frustration occurred, and assessed whether expenses were claimable. These cases reflect the ongoing judicial effort to balance the sanctity of contract with the reality that unexpected events can render a contract's performance pointless. The courts continue to apply a test of "radical change in the obligation" to determine whether frustration should apply, a test derived from the principles in cases such as Davis Contractors, while considering the principles established in Krell.
Conclusion
Krell v Henry is a seminal case in the development of the doctrine of frustration. The judgment made clear that the doctrine extended beyond cases of mere physical impossibility to include situations where a contract’s fundamental purpose was eliminated. This demonstrates the importance of both express and implied terms in a contract. The court’s reasoning highlighted that the basis of a contract is not always the literal performance itself, but the state of affairs which the contract relies upon. This ruling, while expanding the doctrine, does not allow parties to avoid obligations simply because circumstances have changed or have become less beneficial. The tests established are restrictive, with the bar for frustration being set high. The test established by Krell, and later refined in subsequent cases, continues to be applied to determine whether a contractual obligation is truly frustrated. The case remains a critical piece of legal precedent, shaping the modern understanding of contract law and frustration of contract. The case continues to be instructive regarding the balance between commercial certainty and justice in contract performance.
