Contract Formation, Breach, and Frustration in English Law

Simon Carver

Welcome to the show everybody! I'm Simon Carver, here with Lachlan Reed. And Lachlan, imagine you are a manufacturing company, you have spent weeks installing specialized packaging machinery for a major client, and you are actually running the assembly line, but you never got around to signing the final written agreement. This isn't a hypothetical -- it's exactly what happened in the UK Supreme Court case of RTS Flexible Systems in 2010, where a multi-million-pound project went ahead on a handshake and some draft emails.

Lachlan Reed

RTS Flexible is a classic example of what we call the objective standard, mate. The courts don't care about the secret thoughts in your head; they look at what you actually did. If you are acting like there is a contract -- installing gear, paying invoices -- the law says, congrats, you have got a contract, even if the "subject to contract" clause is still floating around unsigned. It is a massive contrast to the old-school rules like Carlill and the carbolic smoke ball in 1893, where a wild public advertisement was held to be a binding unilateral offer because they deposited one thousand pounds in the Alliance Bank to show sincerity.

Simon Carver

That one thousand pounds deposit was the ultimate objective proof of intent! And it's so different from the strict mirror-image rule we saw in Hyde versus Wrench back in 1840, where Wrench offered to sell his farm for one thousand pounds, Hyde offered nine hundred and fifty, and when Wrench said no, Hyde tried to accept the original one thousand. The court said, sorry, that nine hundred and fifty pound counter-offer completely killed the original offer.

Lachlan Reed

Spot on. You cannot go crawling back to that one thousand pound offer once you have tried to undercut it. And this strictness is exactly how English law handles the actual terms of a contract once it is formed. Look at the famous opera cases from 1876. In Poussard versus Spiers, the lead singer got sick and missed the first three nights of the opera. The court said that was a breach of a condition -- the very root of the contract -- so the producers could fire her. But in Bettini versus Gye, the singer only missed the first three days of rehearsals because of a temporary illness.

Simon Carver

And because those rehearsal days didn't go to the root of the show, the court classified it as a mere warranty. The show had to go on, and the producer couldn't just sack him; they could only sue for damages for those missed days. But then, in 1962, the Court of Appeal realized this rigid binary of conditions and warranties didn't fit complex commercial realities, which led to the famous Hongkong Fir shipping case.

Lachlan Reed

Ah, the Hongkong Fir. That is a cracker. You have got a twenty-four-month charter party for a vessel, but the crew is completely incompetent and the chief engineer is a drunk. The ship is out of action for twenty weeks out of that two-year charter because of engine breakdowns. The charterers tried to throw the contract out, claiming the "seaworthiness" clause was a condition that had been breached.

Simon Carver

But twenty weeks out of one hundred and four weeks didn't completely deprive the charterers of the whole benefit of the contract. This is where Lord Justice Diplock created the concept of the "innominate term" -- a term that isn't a condition or a warranty at the start, but its status depends on how serious the breach actually turns out to be.

Lachlan Reed

Which makes sense, but commercial traders hated the uncertainty of innominate terms. That is why in Bunge versus Tradax in 1981, when a buyer gave only ten days notice of readiness to load a cargo of soybean meal instead of the required fifteen days, the House of Lords said: nope, in mercantile contracts, time clauses are strictly conditions. A five-day delay on a notice means you can kill the contract right then and there.

Simon Carver

That Bunge decision shows just how much commercial certainty matters on the high seas. But what happens when one party tells you ahead of time they are going to walk away? That brings us back to 1853 and Hochster versus De La Tour, where a courier was hired for a European tour starting in June, but in May, the employer told him his services weren't needed. The court held the courier didn't have to wait around until June to sue; he could claim damages for anticipatory breach immediately.

Lachlan Reed

But that gets incredibly risky if you decide to ignore the breach and push ahead anyway, like they did in White and Carter versus McGregor in 1962. McGregor's sales manager mistakenly signed a three-year contract for advertising on public litter bins, and tried to cancel it the very same day. White and Carter said, "no way, we are holding you to it." They went ahead, printed the ads, displayed them on the bins for three years, and then sued for the full contract price.

Simon Carver

It is a mind-boggling case because White and Carter had no duty to mitigate their losses since they chose to perform rather than sue for damages. But in modern shipping disputes, if a charterer repudiates a charter party, the owner usually has to accept it, mitigate by finding a new cargo, and then claim damages under the Hadley versus Baxendale rule from 1854. Remember the broken mill shaft in Hadley? The carrier delayed delivering the shaft, but because they didn't know the mill was completely shut down without it, they weren't liable for the lost profits.

Lachlan Reed

And that Hadley rule of remoteness got a massive shake-up in 2008 with The Achilleas. A charterer returned a ship nine days late because of port congestion. Because of those nine days, the shipowner lost a follow-on charter that was locked in at a sky-high market rate, costing them a massive one point three six million dollars. Under a simple Hadley analysis, they should have gotten the whole lot, but the House of Lords said the charterer only had to pay the market rate difference for those nine specific days, which was just over one hundred and fifty-two thousand dollars.

Simon Carver

Right, because the majority of the Law Lords introduced the "assumption of responsibility" test. They argued that a charterer wouldn't reasonably assume liability for a volatile, multi-million-dollar follow-on contract unless they specifically agreed to it. And this real-world commercial pragmatism is exactly what we saw in The Golden Victory in 2007. A seven-year charter was breached in 2001, but the court ruled that damages should be cut off in 2003 because the Second Gulf War broke out, which would have triggered a contractual war clause allowing cancellation anyway.

Lachlan Reed

I love the sheer pragmatism of The Golden Victory. Why pay for seven years of damages when we know for a fact the contract would have ended after two? It is the same reality check we see when contracts face unexpected external disasters, like in Tsakiroglou in 1962. A seller agreed to ship Sudanese groundnuts to Hamburg, but the Suez Canal was suddenly closed due to the military crisis. The shipping route went from a straightforward canal transit to a massive voyage all the way around the Cape of Good Hope, doubling the shipping cost.

Simon Carver

Yet the House of Lords held that the contract was NOT frustrated. Groundnuts are tough, they don't rot easily, and while going around Africa was more expensive, it wasn't fundamentally different from what was agreed. Compare that to the strictness of self-induced frustration in The Super Servant Two in 1989. A carrier had two specialized barges, Super Servant One and Super Servant Two, and allocated the second barge to carry a drilling rig. But Super Servant Two sank before the voyage, and because they had already committed Super Servant One to other clients, they tried to claim frustration.

Lachlan Reed

And the court told them to get stuffed because they chose to allocate Super Servant One to other contracts. That choice meant the frustration was self-induced. It is the same uphill battle you face with force majeure clauses. Look at Classic Maritime in 2018. A massive dam burst in Brazil, stopping iron ore production. The shippers claimed force majeure, but the court said they couldn't rely on the clause because they wouldn't have shipped the cargo anyway, even if the dam hadn't burst. You have to prove the event actually caused your failure to perform.

Simon Carver

It all comes down to control and accountability. Even if a contract gives a party an absolute discretion -- like a shipowner deciding whether a crew member's death was a suicide to withhold death benefits, which we saw in the landmark Braganza versus BP Shipping case in 2015 -- the Supreme Court will step in. They applied the "Braganza rationality test," which means you must exercise your contractual discretion in good faith, logically, and without ignoring vital evidence.

Lachlan Reed

It is a brilliant safety valve. You can write whatever strict, absolute clauses you want into your commercial contracts, but English law is always going to demand a baseline of commercial rationality and objective reality when the storms actually roll in.

Simon Carver

And that's the ultimate tension of mercantile law -- balancing the absolute certainty of strict terms against the unpredictable chaos of the real world. Thanks for listening to this quick take, everyone. We will see you next time.

Lachlan Reed

Catch you later, guys.