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Brexit Frustration: Settling Contractual Disputes
by David Gibbs-Kneller Lecturer in Law, University of East Anglia
Introduction: Legal uncertainty
In the build up to the United Kingdom leaving the European Union, Brexit and uncertainty have almost become indistinguishable nouns. Whether one believes the UK should leave or remain, the consequences of exit for UK trade1 remain unknown. Tauwhare states that leaving the single market and customs union “will lead to… the reintroduction of customs procedures, potentially imposing tariffs, increased administration, higher costs and reduced predictability in the flow of goods”.2 Others are less pessimistic. Recently, Economists for Free Trade cite a variety of figures that show the potential benefits of exiting the EU on World Trade Organisation terms.3 For example, they cite the gain to GDP “would be about 7%”. One may be critical of both for their choice of modal verbs “will” and “would”, for what are ultimately predications, but the underlying pretext is that post-Brexit trade is a prediction that will produce winners and losers in private international agreements.
Those “losers” may wish to escape the consequences of contracts entered into prior to Brexit, which now makes them unprofitable. In this blog post I consider how private international parties trading between the UK and third countries4 may use litigation to address the consequences of Brexit for their agreement. In particular, the focus is on the legal doctrine of frustration.5 Frustration allows a party to bring their contractual obligations to an end due to a supervening event that renders contractual performance different from what was agreed. Since these events are factual, it offers an arguable point for a party to escape a bad bargain because it ultimately depends on the circumstances of each case. It is important to state that this will not be exclusive to parties in the UK and EU. It will not just be trade with the EU that may be affected by Brexit. As the UK exits, it is free to set its own rules regarding trade. Brexit may precipitate disputes with private international parties elsewhere depending on how the UK agrees trade should be conducted with other countries.
This post will set out what is frustration to show why it might be argued by parties post-Brexit to escape contractual obligations. It then moves on to discuss the likelihood of parties successfully invoking the doctrine. While those chances of escaping contractual obligations are small, leaving most parties to settle their dispute privately without incurring litigation costs, it considers why it is likely that some cases might come before the courts.
Legal Frustration
Post-Brexit, one party in a private international agreement may lose out because the new circumstances make performing the contractual obligations unprofitable. Reasons for this could include, inflation,6 currency fluctuations such as a fall in the pound or Euro,7 difficulty accessing resources and labour,8 and new or changed tariffs, licences or quotas imposed on imports and exports.9 A hypothetical example may be a contract entered into ‘ex works’ between a UK seller and international buyer. The UK seller only agrees to deliver the goods to their warehouse. Everything else is left to the buyer, such as shipping and insurance. If those prices increase post-Brexit, the buyer will lose out from the increased cost. Those who suffer losses from Brexit might look to litigation to escape their contractual obligations. To do so, parties may turn to the doctrine of frustration.
Whether the doctrine of frustration will apply depends on the parties’ intention as objectively construed by the contract.10 Then, as a rule of law, the supervening event must render performance “radically different” from what was intended.11 This meant there must be a change to the thing to be undertaken that, “if performed, be a different thing from that contracted for”.12 This can be expressed through the following examples. In Davis Contractors Ltd v Fareham UDC the factor alleged to amount to frustration was that adequate supplies of labour were unavailable and consequently the work was much more onerous, took longer and cost more. The House of Lords held that this was not enough. The task being more onerous did not mean they could not do as intended. Conversely, in Taylor v Caldwell,13 the accidental burning down of a music hall frustrated a contract for its hire for the staging of concerts. Here frustration was successfully argued.
Critically, an event that renders something radically different depends on whether that event changes what the parties had intended to be done. This means the same event may render one contract frustrated but not another if their intentions were different.14 For example, in two different contracts one may contract to obtain a licence absolutely, whereas the other may only contract to pursue reasonable endeavours to obtain the licence. In the former contract the party is obligated to obtain the licence come what may. Therefore, an event meaning the licence could not be obtained would not render the contractual performance radically different from what was intended. In Peter Cassidy Seed Co Ltd v Osuustukkukauppa IL15 a contractual term requiring one party to obtain a licence “as soon as” was an absolute duty to obtain a licence. When someone undertakes an absolute obligation it is implicit that they are taking the risk of the supplier’s failure to perform.16 In the latter, the party is only obligated to use reasonable endeavours. If an event occurs that requires the party to take unreasonable steps to obtain the licence then they may be discharged from their obligation becausethe event renders performance radically different from what was intended. As such, a contract being “subject to” a licence being acquired only required reasonable endeavours to obtain it.17 Had the party taken reasonable steps in this case, then the contractual performance would have been discharged.
Will post-Brexit claims be successful?
Whether Brexit produces such circumstances that are radically different from what was intended is ultimately factual and it is impossible to say how frustration could apply in every case. Lord Radcliffe, however, noted that there are numerous examples of supervening events that may render a contract frustrated but “all are intended to express the same general idea”.18 One must always be asking whether the supervening event renders any performance to be undertaken different from what was intended. Despite this, judicial dicta and analogy with previous case law can give a good indication about the probability of successfully arguing frustration.
To start with, judicial proclamations demonstrate that frustration is an exception to sanctity of contract. It is an exception difficult to satisfy. “Radically different” is one expression. The same case said frustration is a conclusion that should be reached “rarely” and “with reluctance”.19 Elsewhere the test has been likened to the test for implied terms: that it only applies when an officious bystander to the contract would reply “but of course” the contract would be frustrated if such an event were to occur.20
This means that courts are very reluctant to allow parties to escape their obligations. Rather straightforward examples of where the courts have applied frustration are where it becomes impossible, due to physical or legal constraints to perform the contract. In WJ Tatem Ltd v Gamboa frustration was successfully argued where a ship was seized destroying the subject matter of the contract.21 If Brexit has such consequences then the doctrine should apply. For example, licences and quotas may make performance impossible. However, even then, as discussed, if the obligation of the party to obtain the licence or quota is absolute, then they are assuming the risk and performance cannot be described as radically different from what they intended if the licence or quota cannot be obtained.
It is unlikely contracts will be impossible to perform from Brexit, but a more difficult scenario from Brexit is one that renders performance less practical for the parties. The answer can be found in Lord Radcliffe’s general point of whether the consequences of Brexit, as a supervening event, renders performance different from what was intended. As such, a mere impracticality, such as increases in the time and cost of importing and exporting goods, would not satisfy the conditions for frustration. In Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93, HL the closure of the Suez Canal was not a frustrating event for either the additional expenditure or time the seller incurred in shipping the goods to the buyer. The parties had agreed to ship the goods via the usual route but where the usual route is unavailable the seller is obligated to ship the goods via the reasonable or practical route.22 The fact the route was unprofitable did not render performance radically different from what was intended.
For impracticalities to amount to frustration, something more is needed. As one judgment puts it, in the circumstances requiring performance would be “not to maintain the original contract, but to substitute a different contract for it”.23 This dicta is in keeping with Lord Radcliffe’s, meaning the impracticality would need to render any performance to be undertaken different from what was intended. This can be demonstrated in Metropolitan Water Board v Dick, Kerr & Co.24 The impracticality, in this case a delay, was not the frustrating event. It was a supervening Ministerial order that made performance illegal for an indefinite period. Resuming performance would have been a contract, for better or worse, under different conditions because the effect of the Ministerial order was to require the contractor to sell off the whole plant and interrupt the work. Continuing performance would have required the contractor to refurnish themselves with a new plant and to recommence the work at some indefinite point where costs could have significantly changed, which, as Lord Dunedin pointed out, is not something that could have been intended by the parties.25 He distinguishes it from F. A. Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd26 where, despite delay from supervening illegality, contractual performance was not rendered radically different because the owner of a ship, who wished to bring the contract to an end, continued to receive all they bargained from the contract.
Since any performance delayed by illegality may be temporal, the delay example described in Metropolitan Water Board bears no distinction from other examples of impossibility and the general principle described by Lord Radcliffe. It was not the impracticality of delay that frustrated the contract but the delay making performance impossible and rendering any future performance radically different from what was intended.
By itself impracticality in performance of contractual obligations that may arise from Brexit, such as delay from “car parks” in Calais and the M2027, additional costs, or difficulty accessing resources or labour, will not amount to frustration. Performance will need to be impossible that renders any future performance radically different from what was intended.
Another problem for the parties, is that Brexit is a supervening event in contemplation of the parties. Frustration arises in those circumstances where it is implicit that “the parties contracted on the basis of the continued existence of a certain state of facts”28 and they cease to exist or, put another way, where “the contract makes no provision” for what is to happen.29 However, where parties foresee a risk they may expressly stipulate for it. In such circumstances, implied terms and frustration cannot operate because express terms trump implied ones.30 The licence example has already shown this. The absolute undertaking to obtain the licence meant the parties had agreed where the risk should lie in the event of not being able to obtain the licence. The courts could not substitute their own term that permitted contractual termination for the failure to obtain one. This can, however, work the other way. In Metropolitan Water Board, the parties had stipulated when contractual extensions were permitted. If the courts had held the contract frustrated to discharge performance it would have extended the scope of the express term.
Therefore, parties are likely to draw up terms to deal with Brexit. However, it will not be until the consequences of Brexit are known as to whether it is effective in dealing with them. Brexit may produce situations like Metropolitan Water Board and frustration can still apply. If that is the case, if Brexit makes performance of what was intended impossible, such as through destruction of subject matter or significant delay and the contract makes no provision for its consequence, then frustration applies even if the parties contemplated the event.31
The likelihood of Brexit frustrating contracts appears slim. The consequences must first make any performance radically different from what was intended. Given that performance may be more impractical for one side, rather than impossible, means that performance will not be radically different. Second, even if those consequences do render performance impossible, it is likely that express terms will prevent frustration being argued. Therefore, frustration will be limited to a very narrow set of circumstances.
Litigation Odds: A lesson from history
Why might we still see litigation on frustration post-Brexit and is it likely to be successful? Post-Brexit, parties may dispute things such as whether performance is impossible from what was intended, the meaning of “radically different”, or whether an express term covers the eventuality. The discussion above shows that the law is clear and odds of success appear to be slim. Rational parties will not wish to incur additional transaction costs32 from their agreement if the litigation odds can be agreed between them. These parties will settle their dispute without it ever reaching the court. For example, imagine a buyer no longer wishes to pay for goods post-Brexit because the cost of the contract has increased. Even though litigation odds would not be in their favour, the seller may agree to new terms, such as paying a lower fee, rather than incurring the higher costs of litigation to enforce the agreement that the buyer may not be able to afford to pay.
It might seem intuitive that litigation will not be brought. The reason litigation may be is that Post-Brexit litigation is likely to commence because one of the parties is overly optimistic about their chances of success. Empirical evidence demonstrates litigation tends to produce a 50/50 split in litigation results between plaintiff and defendant because either party could be over optimistic.33
The model recognises one exception to this where one party has more at risk from litigation than the other. The party with more at risk from litigation may look to settle their dispute to avoid the risk of losing more in court. They will only proceed to litigation where the odds are strongly in their favour. Results of litigation are then predominately dominated by defendant victories from cases brought by overly optimistic plaintiffs.
Consider the example of the Suez Canal cases to demonstrate this.34 Ferdinand-Marie de Lesseps engineered the Suez Canal in 1869. It runs through the Sinai Peninsula separating Africa from the Middle East. The canal provided a direct route for ships from Asia to Europe. The canal was worth millions to the British economy.35 In July 1956, Egypt, under Gamal Abdel Nasser, had nationalised the Suez Canal Company. Under the Protocol of Sevres, the British took part in an offensive against Egypt to retake control of the Canal. The British wanted to keep the canal open to avoid oil supplies drying up. Block ships set up by Nasser were sunk to obstruct traffic through the canal, which, in at least one case, was caused by British air strikes that went off target.36 This resulted in the Canal being closed November 1956 to April 1957. To deliver goods to Europe during this period meant ships had to navigate around Africa via the Cape of Good Hope, South Africa to reach Europe. This was a considerably more costly and time-consuming exercise.
The Suez Canal cases involved sellers who had contracted to sell before the closure of the canal but performance was after it had been closed. Sellers in East African countries had contracted on cost, insurance, freight (CIF) terms. This meant the seller was responsible for the cost of shipping the goods, which increased on the closure of the canal. Recognising the bad bargain, optimistic sellers looked to escape their contractual obligations by arguing the contract had been legally frustrated due to the supervening canal closure. Buyers, with more at risk from non-performance, proceeded to litigation as odds were strongly in their favour. Case law was predominately populated by successful defendants, as the increased cost and time was not deemed to be a frustrating event. The risk of price fluctuations fell upon the seller. They had contractually agreed to organise and pay for the freight and had accounted for this in the cost of selling the goods to the buyer at the time.
Brexit is likely to skew the risk in favour of either the seller or buyer depending on what is, and how the market reacts to, the new trading relationship. If the value of the contract goes down and the buyer loses out, the seller should have more at risk from litigation. In that situation the risk to the seller is not getting paid. They then have to try and sell the goods at a cheaper price. Conversely, if the value of the contract increases, the seller may wish to escape the contract, either to sell the goods elsewhere or avoid higher costs of performance. Here the buyer would have more to risk.37 In either scenario, if the litigation odds can be agreed, the parties may settle the dispute through additional costs lower to those expected from litigation. What we will be left with is a disproportionate amount of buyer or seller victories depending on which way the market goes. Therefore, we can predict the chances of success based on which party has more at risk post-Brexit. If the seller has more at risk we can predict seller victories will populate the case law, and vice-versa for the buyer.
Brexit may cause frustration for many and it appears that frustration may soon reach the court room
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1 As opposed to social or political consequences
2R Tauwhare, ‘Brexit: achieving near frictionless trade’ (2017) International Trade Law & Regulation 89
3Economists for Free Trade, ‘A World Trade Deal: The Complete Guide’ (2018) available at <www.economistsforfreetrade.com/publication/a-world-trade-deal-the-complete-guide/> last accessed 21st Sep 2018
4Contracting under English law
5Parties may also draft specific force majeure clauses that detail what will happen to the contract if Brexit has an affect on contractual performance
6See, for example, F Papadia, ‘The effects of Brexit on UK growth and inflation’ June 1st 2018 <http://blogs.lse.ac.uk/brexit/2018/06/01/the-effects-of-brexit-on-uk-growth-and-inflation/> last accessed 21st Sep 2018
7----, ‘What will happen to the pound after Brexit’ 1st June 2018 <https://www.telegraph.co.uk/financial-services/currency-exchange/international-money-transfers/pound-forecast-post-brexit/> last accessed 21st Sep 2018
8B Chapman, ‘Firms face Brexit skills shortage, forcing up wages in some sectors’ 13th Aug 2018 <https://www.independent.co.uk/news/business/news/brexit-skills-shortage-wages-rise-net-migration-falls-cipd-report-a8489366.html> last accessed 21st Sep 2018
9C Morris, ‘Brexit: What is the ‘no deal’ WTO option?’ 11th Aug 2018 <https://www.bbc.co.uk/news/uk-45112872> last accessed 21st Sep 2018
10Arnold v Britton [2015] UKSC 36
11Davis Contractors Ltd v Fareham UDC [1956] AC 696, 729 (HL)
12Davis Contractors Ltd v Fareham UDC [1956] AC 696, 729 (HL)
13Taylor v Caldwell (1863) 3 B & S 826
14See, for example, Kodros Shipping Corp v Empresa Cubana de Fletes (The Evia) (No 2) [1983] 1 AC 736
15Peter Cassidy Seed Co Ltd v Osuustukkukauppa IL [1957] 1 WLR 273
16CTI Group Inc v Transclear SA [2008] EWCA Civ 856
17Malik Co v Central European Trading Agency Ltd [1974] 2 Lloyd’s Rep 279
18Davis Contractors Ltd v Fareham UDC [1956] AC 696, 727 (HL)
19Davis Contractors Ltd v Fareham UDC [1956] AC 696, 727 (HL)
20Carapanayoti & Co Ltd v ET Green Ltd [1959] 1 QB 131, 148
21WJ Tatem Ltd v Gamboa [1939] 1 KB 132
22See also, Reardon Smith Line v Black Sea and Baltic General Insurance [1939] AC 562, 584
23Distington Hematite Iron Co v Possehl & Co [1916] 1 KB 811, 814; Schmithoff 126-7
24Metropolitan Water Board v Dick, Kerr & Co [1918] AC 119, 139
25Metropolitan Water Board v Dick, Kerr & Co [1918] AC 119, 128-130
26FA Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397
27G Topham ‘Part of M20 to be use as lorry park to counter Brexit jams at Channel’ 21st May 2018 <https://www.theguardian.com/politics/2018/may/21/m20-lorry-park-counter-brexit-traffic-jams-channel-dover> last accessed 21st Sep 2018
28Larrinaga & Co Ld v Societe Franco-Americaine des Phosphates de Medulla, Paris 39 Times LR 316, 318
29WJ Tatem Ltd v Gamboa [1939] 1 KB 132, 138
30Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472
31WJ Tatem Ltd v Gamboa [1939] 1 KB 132, 139
32i.e. the cost of litigation
33G Priest & B Klein, ‘The Selection of Disputes for Litigation (1984) 13 Journal of Legal Studies 1
34Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93, HL; Gaon (Albert D) & Co v Societe Interprofessionelle des Oleagineux Fluides Alimentaires; Carapanayoti & Co Ltd v ET Green Ltd [1959] 1 QB 131; The Eugenia [1964] 2 QB 226, CA; The Captain George K [1970] 2 Lloyd’s Rep 21
35S Morewood, ‘Prelude to the Suez Canal Crisis: The Rise and Fall of British Dominance over the Suez Canal, 1869-1956’, in S Smith (ed), Reassessing Suez 1956: New Perspectives on the Crisis and its Aftermath, (Routledge, 2008) p 30
36A Von Tunzelmann, Blood and Sand: Suez, Hungary and the Crisis that Shook the World, (Simon & Schuster, 2016) p 266; citing A Nutting, No End of a Lesson: Story of Suez, (Constable, 1967) p 132-3
37Ultimately there are myriad variables for determining whether the value of an executory contract goes up or down for one party and this example should not be generalised or definitive. It mainly depends on what the parties have agreed