DISCHARGE OF CONTRACT

Transcription

1 DISCHARGE OF CONTRACT It has been examined in detail how a contract is formed and the circumstances which must exist if it is to be valid. It is now apt to consider how contracts may come to an end. A party who is subject to the obligations of a contract may be discharged or freed from those obligations in one of four ways. The agreement is then at an end. The four ways are: (a) Performance; (b) Agreement; (c) Breach; (d) Frustration. PERFORMANCE: This is the normal method of discharge. If one party completely and perfectly performs what he or they have promised to do, his or their obligations are at an end and the contract is said to be discharged. The question, then, is: what amounts to performance? As a general rule, performance must be precise and exact. In other words, parties must perform precisely and exactly all the terms of the contract in order to discharge their obligations. In Culter v. Powell [1795] 6 Term R. 320 for example: A seaman was engaged to act as second mate on a voyage from Jamaica to Liverpool. He was to be paid 30 guineas, almost four times the going rate, in a single payment upon completion of the voyage. Nineteen days out form Liverpool, when the voyage was nearly completed, he died. His widow sued to recover a proportion of the agreed sum. Her action failed. The seaman s obligation was construed as an entire contract or, more accurately, an entire obligation, that is to say, if the voyage was completed, he was to receive the stipulated sum, but, if it was not, he was to receive nothing. As Sir George Jessel M.R. said; if a shoemaker agrees to make a pair of shoes, he cannot offer you one shoe and ask you to pay half the price. An issue may also arise as to whether a contract must be personally performed. This question was considered in Southway Group Ltd v. Wolff [1991] 57Build L.R. 33 where it was held that a contract under which building operations are to be supervised by an architect whose work is known to the client cannot be vicariously performed. The question was further examined in Edwards v. Newland [1950] 2. K.B. 534 where it was noted that a person who agrees to store another s goods must perform personally, since the owner of the goods relies on his skill and integrity. However, where a person carried out his obligations substantially, though not precisely, he may be freed from his obligations. But in that case, the substantial performer may himself be liable for damages in respect of the obligations not yet performed or partially performed. In Dakin & Co. Ltd. V. Lee [1916] 1 K.B. 566, builders promised to a build a house according to specification and failed to carry out exactly all the specifications, for instance concrete not 4 feet 1

2 deep as specified, wrong joining of certain rolled steel joints and concrete not properly mixed. It was held that the builders were entitled to recover the contract price less so much as ought to be allowed in respect of the items found to be defective. It was concluded in Ateni Maritime Corporation v. Great Marine [1991] Financial Times of 13 th February that in requiring a standard or substantial performance, the Court must not apply an excessively strict standard. Another exception to the rule in Culter v. Powell relates to divisible and separable contracts like building construction contracts. But this must be distinguished from abandonment. The distinction is illustrated by the case of Sumpter v. Hedges [1898] 1Q.B In that case, the plaintiff had agreed to erect upon the defendant s land 2 houses and stables for 565. He did part of the work to the value of 333 and then abandoned the contract. The defendant completed the buildings. The plaintiff could not recover the value of the work done as he had abandoned the contract. Again, where a party to an entire contract is prevented by the promisee from performing all his obligation, then he can recover a reasonable price for what he has in fact done on a quantum meruit (as much as he deserves) basis. In Planché v. Colburn [1883] 8 Bing. 14, the plaintiff had contracted to write a book on custom and ancient armour for a periodical publication, called the Juvenile Library to be published by the defendant. For this he was to receive the sum of 100 on completion. When he had completed half, but not the whole, of his volume, the defendant abandoned the publication. The plaintiff was entitled to retain a verdict for 50 which the jury had awarded him. Tindal C.J. said: the plaintiff ought not to lose the fruit of his labour. Tender of performance is also equivalent to performance. Where goods are tendered, they must be correct in quality and quantity. Where money is tendered as payment, it must be in the form of legal tender or such other form as agreed, for instance a cheque. In many cases a party to a contract cannot complete his obligations without the concurrence of the other party, e.g. without his acceptance of goods when delivered, or his acceptance of money paid over. If the other party refuses to accept performance in such cases, he is preventing the promisor from fulfilling his contractual obligations, and the plea of tender is available to the promisor as a defence to a subsequent action against him for failure to perform. The plea is that the defendant has always been willing to complete his side of the contract, and has in fact done so as fast as possible without the concurrence of the other party. A plea of tender must be established by showing that the promisor made an unconditional offer to perform his promise in terms of the contract but that the promisee refused to accept performance. Time of performance (or stipulations as to time): In the absence of any intentions to the contrary, time is not of the essence of the contract at common law. Where time was fixed for the performance of an undertaking by one of the parties to the contract, the common law as a general rule held this to be of the essence of the contract. If the condition as to time was not fulfilled, the other party might treat the contract as broken and elect to terminate it. For instance, 2

3 in a contract for the sale of a flat where time was stated to be of the essence, the vendor was entitled to terminate when the purchaser tendered the price 10 minutes late (See: Union Eagle Ltd. v. Golden Achievement Ltd. [1997] A.C 514). Equity did not regard a condition as to time. Where it could do so without injustice to the contracting parties it decreed specific performance notwithstanding failure to observe the time fixed by the contract for completion, and as an incident of specific performance relieved the party in default by retraining proceedings at law based on such failure. In mercantile contracts, time will readily be assumed to be of the essence of the contract. For example, if a contract to purchase shares provides for payment by a fixed date, payment must be made on or before that date, and in default the seller can treat the contract as discharged. AGREEMENT: In the opinion of Bondzi-Simpson, what the contracting parties have put together they can put asunder! Contract rests on agreement of the parties: as it is their agreement which binds them, so by their agreement they may be discharged. As a general rule, what has been created by agreement may be extinguished by agreement, which is expressed in the Latin maxim: eodem modo quo oritur, eodem modo dissolvitur. Bondzi-Simpson relied on statements made by Prempeh J. in Fish & Meat Co. Ltd. v. Ichnusa Ltd. [1963] 1 GLR 314 to explain the topic. One such statement is: It is a general rule of law that one of the modes in which an existing contract may be discharged is by the same process and in the same form as that in which it is made, that is by mutual consent of the parties (emphasis added). Prempeh J is also supported to have stressed that an existing contract can only be discharged by mutual agreement and expressly by the parties by another contract or agreement in which a clear intention to discharge the previous contract is shown. Where the parties desire to discharge the contract, their agreement must be under seal or be supported by consideration. There must be accord and satisfaction. Accord and satisfaction is the purchase of a release from an obligation, whether arising under contract or tort by means of any valuable consideration, not being the actual performance of the obligation itself. The accord is the agreement by which the obligation is discharged. The satisfaction is the consideration which makes the agreement operative. In debt obligations, parties may be discharged by NOVATION. Novation of a contract comprises two elements: the annulment of one debt and the creation of a substituted debt in its place. Bondzi-Simpson writes that novation is a specie of discharge of contract by agreement to substitute at least one of the parties or the contractual terms. Or in the words of Abban J. in Japan Motors v. Randolph Motors, novation is a transaction by which, with the consent of all the parties involved, a new contract is adopted in place of another which is already in existence. Quoting Abban J. further, the learned author said, novation primarily involves the discharge of the original obligation under an existing contract and the creation of a new one in its place. 3

4 Bondzi-Simpson explicitly depicts the conditions under which novation can stand as a means to discharge a contract by agreement in Ghana. He writes: For novation to be successfully pleaded, firstly there must be an intention to substitute. Intention may be gleaned by express words or by the conduct of the parties. If conduct is relied upon, such conduct must be clear and unambiguous. Secondly, there must be, in fact, a substitution of the original obligations with a new one. And thirdly, the substituted arrangement must have been mutually agreed to, i.e. it must be with the consent of the parties and not unilaterally undertaken. Consent, too, may be expressly given or determined by the conduct of the parties. The parties may also effect a variation by mutually modifying or altering the terms of the original agreement. In Berry v. Berry [1929] 1K.B. 316, a husband and wife entered into a separation deed whereby the husband covenanted to pay to the wife a certain sum each year for her support. His earnings proved insufficient to meet this obligation, so they agreed in writing to vary the financial provisions. It was held that this variation was valid and enforceable, and that it could be set up by the husband as a defence to an action against him on the original deed. A mere unilateral notification by one party to the other, in the absence of any agreement, cannot constitute a variation of a contract. A party may also waive his right to strict performance of the contract and thereby discharge the other from performance by agreement. This is known as waiver. Where one party voluntarily accedes to a request by the other that he should forbear to insist on the mode of performance fixed by the contract, the court may hold that he has waived his right to require that the contract be performed in this respect according to its original tenor. Waiver may also be held to have occurred if, without any request, one party represents to the other that he will forbear to enforce or rely on a term of the contract to be performed or observed by the other party, and the other party acts in reliance on that representation. A waiver may be oral or written or inferred from conduct even though the provision waived is found in a contract required to be evidenced by writing. The contract can also provide for discharge in its terms upon certain breaches. For unilateral discharge, unless the agreement is under seal, consideration must be furnished in order to make the agreement enforceable. In this context, the agreement is termed the accord and the consideration which makes it binding is known as the satisfaction. BREACH: Where a party fails to perform his obligations or intimates that he does not intend to implement his promise or assurance, he is said to be in breach. Thus a failure to perform the terms of a contract constitutes a breach. A breach, however, does not automatically discharge a contract. A breach does not, of itself, effect a discharge; what it may do is to justify the innocent party, if that party so chooses, in regarding itself as absolved or discharged from further performance of the contract. It does not automatically terminate the innocent party s obligation 4

5 since that party has the option either to treat the contract as still continuing or to regard itself as discharged by reason of the repudiation of the contract by the other party. Where the breach occurs before the time fixed for performance, this is known as anticipatory breach. The innocent party is under no obligation to wait until the date fixed for performance before commencing his action, but may elect to immediately treat the contract as at an end and sue for damages. In the alternative, he may affirm the contract by treating it as still in force. The innocent party is bound by his affirmation. If within a reasonable time he does not indicate that he accepts the other party s repudiation so that the contract is discharged, then the contract remains open for the benefit and risk of both parties. In Hochester v. De la Tour [1853] 2 E. & B. 678, the defendant engaged the plaintiff on 12 April to enter into his service as a courier and to accompany him upon a tour; the employment was to commence on 1 June. On 11 May the defendant wrote to the plaintiff to inform him that his services would no longer be required. The plaintiff at once brought an action, although the time for performance had not yet arrived. The Court held that he was entitled to do so. Where a party elects to treat the contract as continuing, that is he affirms the contract, the affirmation can amount to a waiver. If a party elects to affirm a contract after an anticipatory breach by the other party, he is not absolved from tendering performance of his own obligations under the contract. Whether the anticipatory breach amounts to repudiation depends on the actual circumstances of the case. Conduct would have to be examined to see whether it amounts to a renunciation, to an absolute refusal to perform the contract, and whether the other party may accept it as a reason for not performing his part. FRUSTRATION INTRODUCTION Most legal systems make provisions for the discharge of a contract where, after its formation, a change of circumstances makes contractual performance illegal or impossible. In English law, such a situation is provided for by the doctrine of frustration. Originally, this term was confined to the discharge of maritime contracts by the frustration of the adventure, but it has now been extended to cover all cases where an agreement has been terminated by supervening events beyond the control of either party. But the doctrine is not one of supervening impossibility; some kinds of impossibility may in some circumstances not discharge the contract at all, while impossibility does not accurately describe cases of frustration of a commercial purpose where the fundamentally different situation which has unexpectedly occurred means that performance would be, as a matter of business, radically different from the contractually stipulated performance. In these cases the contract is discharged although performance is not literally impossible. MEANING OF FRUSTRATION: Frustration occurs where after the parties have made the contract it is established that due to some subsequent change in circumstances the contract is 5

6 rendered impossible to perform or it has become commercially sterile. That is, it has been deprived of its commercial purpose by an event not due to the act or default of either party. The doctrine of frustration provides for the discharge of a contract where, after its formation, a change of circumstances makes contractual performance illegal or impossible. Under the doctrine of frustration, a contract may be automatically discharged if, during the currency of the contract, and without the fault of either party, some event occurs which renders further performance an impossibility, renders it illegal or brings about a radical change in the circumstances so that the contract becomes something essentially different from that which was originally undertaken. Absolute Contracts: At one time (before 1863) most contractual duties were regarded as absolute, in the sense that supervening events provided no excuse for non performance. Blackburn J. put it this way: where there is a positive contract to do a thing, not in itself unlawful, the contractor must perform it or pay damages for not doing it, although in consequence of unforeseen accidents, the performance of his contract has become unexpectedly burdensome or even impossible. In Paradine v. Jane [1647], a tenant was sued for rent and pleaded that he had for about two years of his tenancy been dispossessed by acts of the King s enemies. This plea was held bad. The rule as to absolute contracts was thus laid and it amounts to this: when the law casts a duty upon a man which, through no fault of his, he is unable to perform, he is excused for nonperformance; but if he binds himself by contract absolutely to do a thing, he cannot escape liability for damages for proof that as events turned out performance is futile or even impossible. The alleged justification for this somewhat harsh principle is that a party to a contract can always guard against unforeseen contingencies by express stipulation; but if he voluntarily undertakes an absolute and unconditional obligation he cannot complain merely because events turn out to his disadvantage. The rule as to absolute contracts has also been criticized for not applying where a contract called for personal performance by a party who died or was permanently incapacitated; and another early exception to it was recognized in cases of supervening illegality. How the Doctrine of Frustration was evolved: In Taylor v. Caldwell [1863] 3B. &S.826, Blackburn J. used the device of an implied term to formulate the general rule of discharge which have become known as the doctrine of frustration. In that case, the defendant agreed with the plaintiff to hire him a music hall and gardens for the purpose of entertainment. Before the day of performance arrived, the music hall was destroyed by fire. The plaintiff sued the defendant for damages for breach of contract which the defendant, through no fault of his own, was unable to perform. The defendant was held not liable to pay. Blackburn J. said: The principle seems to us that, in contracts in which the performance depends on the continued existence of a given person 6

7 or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance. This became known as the implied term theory and provided a juristic basis for the doctrine of frustration. From this time onwards the Courts showed themselves prepared to hold that, unless a contrary intention appears, the continuance of a contract was conditional upon the possibility of its performance. This used to be the only test for deciding whether a contract has been frustrated. Frustration of the Adventure: Though the doctrine of frustration was first introduced into English Law to cover situations where the physical subject matter of the contract had perished; it was quickly extended to cases where, without any physical destruction, the commercial adventure envisaged by the parties was frustrated. Frustration of common adventure first appeared in Jackson v. Union Marine Insurance Co. Ltd. [1874] L.R. 10 C.P.125. In that case, the plaintiffs ship had been chartered to proceed in January to Newport to load a cargo of iron rails for San Francisco. On the way to Newport she ran aground and it took over a month to refloat her. She was then taken to Liverpool and underwent lengthy repairs lasting until August. In the meantime the charterers had chartered another ship. The plaintiffs claimed from the defendant insurance company for a total loss, by perils of the sea, of the freight to be earned under the charterparty. The jury was asked whether the time necessary for getting the ship off and repairing her so as to be a cargo-carrying ship was so long as to put an end in a commercial sense to the commercial speculation entered upon by the shipowner and the charterers. The jury answered in the affirmative, and the Court of Exchequer Chamber held that the charterparty ended upon the mishap. Bramwell B. said that the jury had found that a voyage undertaken after the ship was sufficiently repaired would have been a different voyage different as a different adventure. Radical Change in the Obligation: There is now general agreement that the appropriate test to apply to determine whether a contract has been frustrated is that of a radical change in the obligation. In Davis Contractors Ltd. v. Fareham U. & C [1956] A.C.696, contractors agreed to build 78 houses for a local authority in eight months for 94,000. Because of labour shortages, the work took 22 months and cost the contractors 115,000. They claimed that the contract had been frustrated and that they were therefore entitled to extra remuneration on a quantum meruit basis. But the House of Lords rejected the claim as the events which caused the delays were within the ordinary range of commercial probability and had not brought about a fundamental change of circumstances. Lord Radcliffe said: frustration occurs where whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because of 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..there must be such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for. This test has sometimes been called construction theory, because it requires the 7

8 Court first to construe the terms of the contract in the light of its nature and the relevant surrounding circumstances when it was made. The test is clearly meant to be a difficult one to satisfy. It is, moreover, easier to state than to apply. Operation of the Doctrine: It is not possible to tabulate or classify the circumstances to which the doctrine of frustration applies, but its operation can be illustrated with decided cases. These cases can be categorized under various heads. IMPOSSIBILITY OF CONTRACT (i) A contract may become impossible to perform where the subject matter is destroyed. The clearest illustration of frustration by the destruction of a particular thing is Taylor v. Caldwell. It must be noted carefully that this case also shows that a contract may be frustrated by the destruction of only part of the subject matter. The contract related to the Surrey Gardens and Music Hall and was discharged though only the Hall was destroyed, while the gardens remained in use as a place of entertainment. The contract was frustrated because its main purpose the giving of the concerts- had been defeated. An agreement for the sale of specific goods is similarly avoided if, without the fault of either party, the goods perish before the risk is passed to the buyer. In Asfar & Co. v. Blundell [1896] 1Q.B.123, a cargo of dates was sunk and so affected by water and sewage as to become for business purposes something else, though it was still sold for 2,400. The cargo-owner s liability to pay freight was discharged as the merchantable character of the cargo had been destroyed. A contract may be frustrated where what is destroyed is not its subject -matter but something essential for its performance. For example, a contract to install machinery in a particular factory can be frustrated by the destruction of the factory, even though its subject-matter is the machinery. (ii) Events such as illness, conscription or internment may interfere temporarily with the performance of long term contracts involving personal service. Thus, in Morgan v. Manser (1948)1K.B.184,a music hall artiste employed a manager for ten years from He was conscripted in 1940 and demobilized in The contract was held to be frustrated since in 1940 it was likely that the artiste would remain in the army for a long time. (iii) Certain personal contracts, such as contracts of employment, apprenticeship or agency, are discharged by the death of either party. In Stubbs v. Holywell Railway Co. [1867] L.R. 2 EX.311, it was held that a contract for personal services was put to an end by the death of the party by whom the services were to be rendered. A contract may also be frustrated by the death or incapacity of third party: for example, a contract between A and B to paint a portrait of C could be frustrated if C died before work on the portrait had begun. 8

9 (iv) A contract may be discharged where the subject-matter was to be obtained from a particular source which, without the fault of either party, becomes unavailable. For this purpose, it is assumed that the contract specifies an exclusive source of supply. Where it refers to several sources, the contract is not frustrated merely because one of them becomes unavailable. (v) In another group of cases, the contract is frustrated due to inordinate or unexpected delay and performance at the end of the delay is no longer of any use to the party to whom it was to be rendered. Performance after the delay could also be significantly onerous for the party who was to render it. In Metropolitan Water Board v. Dick, Kerr & Co. {1918] A.C. 119, wartime restrictions imposed an indefinite delay on the performance of a contract to build a reservoir. It was held that the contract was frustrated since it was likely that there would be a total change in conditions by the time that the restrictions might be lifted. Illegality: If during the currency of the contract, a change in the law renders further performance illegal, the contract will be frustrated. Parliament or another authority may intervene by legislative action, or the Government may exercise the royal prerogative or administrative powers so as to affect the legal situation of the contracting parties. A contract under which a person holds public office can be discharged if the office is abolished by statute. In Reilly v. R [1934] A.C. 176, the appellant was appointed a member of a statutory board in Canada with a specified term of appointment and salary. During the tenure of the appointment, the office was abolished by the repeal of the statute establishing the board. The appellant s claim for damages for breach of contract failed as it was held that the contract was discharged because further performance had become impossible by statute. Again, a solicitor s retainer agreement with a gas company was held to be frustrated by the nationalization effected by the Gas Act of Apart from the effect of an outbreak of war upon a contract with a person who thereby becomes an alien enemy, many wartime cases illustrate the power of the Government under statutory authority to forbid, whether temporarily or permanently, the performance of a contract, and so frustrate it. Radical Change in the Circumstances: Exceptionally, frustration may occur where, due to some extraneous event, further performance, though technically possible, would become something radically different from that originally envisaged by the parties. In Krell v. Henry [1903] 2 K.B. 70, the defendant agreed to hire a flat from the plaintiff for 26 and 27 June 1902; the contract contained no reference to the coronation processions, but they were to take place on those days and to pass the flat. The processions were cancelled. Two thirds of the rent had not been paid when the processions were abandoned and the Court of Appeal held that the plaintiff could not recover it. The Court considered that the processions and the relative position of the flat lay at the foundation of the agreement. The contract was therefore discharged. 9

10 However, in Herne Bay Steamboat Co. v. Hutton [1903] 2 K.B. 740, a contract for the hire of a steamboat for viewing the King s naval review and for a cruise round the fleet was held not frustrated by the cancellation of the review. The review was not regarded as the foundation of the contract. Besides, a tour of the fleet was still possible. Although the review was cancelled, the fleet remained. A contract will not be frustrated where a change of circumstances renders it more onerous to perform but not radically different. In Davis Contractors Ltd. v. Fareham U.D.C. (supra), the House of Lords refused to hold a building contract frustrated where, because of labour shortages, the work took three times longer than had been agreed. Limits to Frustration: The courts have imposed certain limits on the doctrine. In Tsakiroglou & Co. Ltd. v. Noblee Thorl G. m. b. H [1962] A.C. 93, the caution was that the doctrine of frustration must be applied within very narrow limits. Lord Roskill also stated in Pioneer Shipping Ltd. v. BTP Tioxide Ltd. [1982] A.C. 724 that frustration is not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains. It should also be borne in mind that the mere increase in expense or loss of profit is not ground for frustration. Accordingly, a contract is not discharged by frustration in the following circumstances: (i) if an alternative mode of performance is still possible; (ii) if performance becomes suddenly more expensive; (iii) if one party has accepted the risk that he will be unable to perform; (iv) if one party has induced frustration by his own choice between alternatives; (v) if one party foresaw or should have foreseen the frustrating event by reason of his or her own special knowledge. Self Induced Frustration: The principle of frustration assumes that the frustrating event was not caused by the fault of either party to the contract. The essence of frustration is that it should not be due to the act or election of the party. Reliance cannot be placed on a self-induced frustration. Simply put, a party whose act or election has given rise to the event which is alleged to have frustrated the contract cannot invoke the doctrine of frustration; reliance cannot be placed upon a self-induced frustration. The leading authority on the above points is Maritime National Fish Ltd. v. Ocean Trawlers Ltd. [1935] A.C Here, the appellants chartered a trawler, the St. Cuthbert, from the respondents. It was fitted with an otter trawl, and both parties knew that under Canadian Fisheries Act it was forbidden to use an otter trawl without a license from the Minister of fisheries. The appellants were operating four otter trawlers besides the St. Cuthbert, but in reply to their application for five licences, the Minister stated that he could grant only three, leaving it to the appellants to choose three trawlers. They did not include the St. Cuthbert in the three trawlers they named, but later claimed that the charterparty had been frustrated by the Minister s refusal of a licence. The Privy Council held that they could not rely on frustration, since they had by their own voluntary election prevented the St. Cuthbert from being used as an otter trawler. 10

11 The Ghanaian case of Barclays Bank Ghana Ltd. v. Sakari can also explicitly illustrate selfinduced frustration. Here, in September 1981, the plaintiff bank granted a request by the defendant, its long-standing customer, for a loan in the sum of a little over two million cedis (repayable within twenty months) for the purchase of two Mercedes Benz trucks required for the operation of the defendant s business. However, without the consent of the bank, the defendant used the loan to purchase a Saurer tanker, instead of the Mercedes Benz trucks as agreed on with the bank. A week after the purchase of the tanker, i.e. some time in February 1982, the tanker was seized by the government on the grounds that Saurer vehicles were to be operated exclusively by the State and not individuals. The loan remained unpaid. Some years later, i.e. in 1989, the bank, after repeated demands, sued in the High Court in Tamale for, inter alia, recovery of the loan plus the accrued interest thereon. The defendant pleaded the common law defence of frustration of the loan agreement arising from the unexpected seizure of the Saurer tanker by the government. The trial High Court made a finding that it was a term of the loan agreement that the defendant was to operate the Saurer tanker and repay the loan from the proceeds. The trial court therefore dismissed the bank s claim for the recovery of the loan on the grounds that the loan transaction had become frustrated by the unexpected seizure of the tanker by the government. The bank appealed to the Court of Appeal which by a majority decision affirmed the decision of the High Court and upheld the defence of frustration. The bank appealed to the Supreme Court. The appeal was successful. In his leading opinion, Acquah JSC held thus: The trial judge failed to appreciate that the obligation of the defendant under the loan contract is the repayment of the loan; and he also failed to realize that the frustrated event must relate to the obligation owed by one party to the other under the contract. Going by the trial judge s reasoning, it will mean that whenever someone goes for a loan to buy a vehicle and he is obliged to repay the loan from earnings of the vehicle, and unfortunately the vehicle is involved in an accident or other mishap, the loan contract becomes frustrated. Certainly not! Because the operation of the vehicle, though a term of the loan contract, is not the obligation of the borrower to the lender: the borrower can soon after buying the vehicle and before the expiry period, pay off the entire loan together with the agreed interest. Continuing, Acquah JSC stated, An examination of the cases in which frustration had been held to apply, shows that the unexpected event affects the subject-matter of the contract or fundamental obligation created by the contract and not any term of the contract. Above all, Acquah JSC revealed that the defence of self-induced frustration was not open to the defendant. He held that: In the instant appeal, although the records do not disclose whether the defendant knew beforehand the government s ban on the individual s use of the Saurer tanker, nevertheless, he cannot on his own decide to go off the contract condition and still hold the bank bound by his election. If the operation of the vehicles was necessary for the 11

12 performance of his obligation to repay the loan, then, he was in breach thereof by buying a vehicle totally different from what was contracted for. The Burden of Proof: The onus of proving that frustration is self-induced is on the party who alleges that this is the case. The question of the onus of proof was settled by the House of Lords in Joseph Constantine SS Line Ltd. v. Imperial Smelting Corp. Ltd [1942] A.C Here, the rule was laid down that the party relying on frustration need not prove affirmatively that the frustrating event was not caused by his fault. If he proves events which prima facie would frustrate the contract, the onus of proving that the frustration was self-induced is on the other party who denies that the contract has been frustrated: the latter must prove some default by the former which caused the allegedly frustrating event. Consequences of Frustration: Frustration terminates a contract automatically at the time of the frustrating event. At common law, frustration does not rescind the contract ab intio: it brings the contract to an end. Forthwith, without more and automatically, in the sense that it releases both parties from any further performance of the contract, while leaving undisturbed any legal rights already accrued or payments already made in accordance with its terms. In other words, the maxim adopted by the common law is that the loss lies where it falls. This doctrine in connection with cases of frustration seems to have been first applied in Blakeley v. Muller & Co. [1903] 2KB 760 where the plaintiff failed to recover the money he had paid in advance before the time of the frustrating event. Under common law, frustration discharges the parties completely from the balance of the contractual obligation and any losses lie where they fall; that is, each party bears the losses he has sustained up till the time that the contract got frustrated. The common law starts with the principle that frustration discharges the parties only from duties of future performance. Rights accrued before frustration therefore remain enforceable while those which would, but for the frustrating event, have accrued after the time of discharge do not become due. These rules sometimes caused hardship which has been mitigated both by common law developments and by statute. 12