Davis Contractors Ltd v Fareham Urban District Council (1956)

This is an English decision, not an Indian one, and it must be cited as such. Its importance for an Indian syllabus is that it supplies the test by which the discharging event is identified — Lord Radcliffe's formulation that performance must have become "a thing radically different from that which was undertaken by the contract" — and, just as usefully, the things which are not frustration.

The facts are deliberately unromantic: no war, no requisition, no destroyed music hall. A builder's job took 22 months instead of eight and cost far more than the contract price. The House of Lords held that this was not frustration at all. Every answer that has to explain why commercial hardship, rising costs and delay do not discharge a contract is built on this case. Indian courts, applying s. 56 after Satyabrata Ghose v Mugneeram Bangur & Co., have taken the same line: the impossibility that discharges is impracticability going to the root of the adventure, not mere onerousness.

Early in 1946 the respondent council, contemplating a building scheme, drew up bills of quantities and a form of tender. On 18 March 1946 the appellants, a firm of building contractors, sent in a signed tender undertaking the erection of 78 houses at Gudgeheath Lane, Fareham, at a price of £92,425, within the time limits specified. With the tender went a covering letter containing the sentence on which much of the argument turned: "Our tender is subject to adequate supplies of material and labour being available as and when required to carry out the work within the time specified."

Negotiations followed. The formal building contract was a short agreement under seal dated 9 July 1946, which identified the documents forming part of it — the tender, the drawings, the general conditions, the specification, the bill of quantities and the schedule of rates. By the general conditions the contractors agreed to build the 78 houses within eight months, completing 40 in six months and 70 in seven, with a penalty of £5 a week for every house uncompleted after the contract period.

Work started on 20 June 1946. Chiefly through lack of skilled labour, it took not eight but 22 months, finishing on 14 May 1948. The contractors were paid the contract price with the stipulated increases and adjustments, £94,424. They contended that owing to the long delay the contract price had ceased to be applicable and that they were entitled to payment on a quantum meruit.

The arbitrator found that at the time of the agreement both parties anticipated that there would be available in the building industry a sufficient labour force and sufficient materials to enable the work to be done substantially within the stipulated time; that at all times there was a serious shortage of skilled labour and difficulty in obtaining bricks, timber and plumbers' goods; that as a result the work could not be completed in time and the council allowed it to continue; and that the actual cost to the contractors was £115,233 14s. 0d. against the £94,424 17s. 9d. they had been paid. Part of the additional cost was attributable to circumstances beyond their control — an unbalanced labour force, unskilled labour used for semi-skilled work, stoppages for want of materials, an exceptionally long frost in the winter of 1946-47 and muddy site conditions — and part to matters for which the contractors were themselves to blame.

In a supplemental award he concluded that because adequate supplies had not been available and the work had unavoidably taken 22 months, "the footing of the contract was removed," and that "the footing of the contract was so changed that it became void and the claimants are entitled to a fair and reasonable price for the work they have done."

Lord Goddard C.J. had thought the letter of 18 March incorporated, but had said of frustration: "I do not think that it is a destruction of the whole foundation of the contract." The Court of Appeal held the letter not incorporated and the contract not frustrated. The contractors appealed.

Viscount Simonds dealt with this shortly. The letter was a covering letter making statements about the basis of the tender. Had it been followed by an immediate acceptance the parties might have been deemed to contract on some such term, "though its precise content and effect would have been extremely difficult to define." But negotiations followed and produced a formal agreement which did not incorporate the letter. "It would, as it appears to me, be contrary to all practice and precedent to hark back to a single term of preceding negotiations after a formal and final agreement omitting that term has been signed." The reference to the letter in the appendix to the tender was confined to the escalator clause. Lord Morton and Lord Somervell agreed.

That disposal matters for examination purposes: the contractors' own attempt to allocate the labour risk by contract failed, and they were left with the general doctrine.

Viscount Simonds accepted that the contractors had tendered in the expectation of doing the work in eight months and priced accordingly, and that the council's expectations were no different; it might therefore be said that both contracted on that "basis" or "footing". "But it by no means follows that disappointed expectations lead to frustrated contracts."

He declined to revive the controversy about the juridical basis of the doctrine. If it rested on an implied term, no ground existed for implying one here, and it was "not enough to say that in the event of something unexpected happening some term must be implied: it must be clear also what that term should be." If instead it rested on the impact of the law on a situation where an unexpected event would make it unjust to hold the parties to their bargain, then "in this aspect the doctrine has been, and must be, kept within very narrow limits."

He asked a question which is itself an examination point: when, in the course of a 22-month contract worked without intermission, did the disruptive event happen which put an end to it? Citing Lord Sumner in Bank Line Ltd v Arthur Capel & Co. — rights "ought not to be left in suspense or to hang on the chances of subsequent events" — he held it wholly inconsistent with that condition for a contractor to work through and then say "A twenty-two month project is not an eight month project"

The rule he drew from British Movietonews Ltd v London and District Cinemas Ltd. is the one to memorise: where, without the default of either party, there has been "an unexpected turn of events, which renders the contract more onerous than the parties had contemplated, that is by itself" no ground for relieving a party of the obligation he has undertaken.

Lord Reid thought it necessary to settle the basis of frustration in order to know how far the arbitrator's findings were reviewable. Reviewing the three suggested grounds — construction, implied term, and the overthrow of the basis of the contract — he rejected the implied-term theory as artificial, quoting Lord Sands's example in James Scott & Sons Ltd v Del Sel: "A tiger has escaped from a travelling menagerie. The milkgirl fails to deliver the milk. Possibly the milkman may be exonerated from any breach of contract; but, even so, it would seem hardly reasonable to base that exoneration on the ground that 'tiger days excepted' must be held as if written into the milk contract."

His own conclusion: "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." Hence, "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."

Applied to a building contract, that yields a clean allocation of risk: "In a contract of this kind the contractor undertakes to do the work for a definite sum and he takes the risk of the cost being greater or less than he expected." Delay through no one's fault may be within contemplation and provided for by extension of time; "to that extent the other party takes the risk of delay. But he does not take the risk of the cost being increased by such delay." On these facts the most that could be said was that the delay "was greater in degree than was to be expected." Then the sentence that decides the case: "the job proved to be more onerous but it never became a job of a different kind from that contemplated in the contract."

Lord Radcliffe began by observing that where the matter is approached by way of implied term, the answer is not found by asking what these parties would have agreed had they been forewarned; the decision must be given "irrespective of the individuals concerned, their temperaments and failings, their interest and circumstances" and the legal effect of frustration "does not depend on their intention or their opinions, or even knowledge, as to the event."

Having dismissed the parties as "so far disembodied spirits that their actual persons should be allowed to rest in peace" and noted that the fair and reasonable man's spokesman "is and must be the court itself" he gave the classic statement:

"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."

The materials for the decision are "the terms and construction of the contract, read in the light of the then existing circumstances, and on the other hand the events which have occurred". Special importance attaches to an unexpected event that "changes the face of things." And then the limiting words that carry as many marks as the test itself: "it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for."

On the facts he was unmoved. The arbitrator's view had in substance been that a substantially extended contract period made the fixed price so unfair that the contractor ought not to be held to it; but if that sort of consideration were enough, "there would be an untold range of contractual obligations rendered uncertain and, possibly, unenforceable." Two things barred the doctrine here. First, "the cause of the delay was not any new state of things which the parties could not reasonably be thought to have foreseen": the possibility of shortage was before their eyes and "could have been the subject of special contractual stipulation. It was not made so." Second, the contractor's tender necessarily took into account his margin of profit and "in that any appropriate allowance for the obvious risks of delay." He added, with sympathy but no relief: "it is useless to pretend that the contractor is not at risk if delay does occur, even serious delay. and I think it a misuse of legal terms to call in frustration to get him out of his unfortunate predicament."

Lord Somervell put the same point as risk allocation, quoting Lord Sumner in Larrinaga & Co. v Société Franco-Américaine des Phosphates de Medulla: "In effect most forward contracts can be regarded as a form of commercial insurance, in which every event is intended to be at the risk of one party or another"; contracts "are made for the purpose of fixing the incidence of such risks in advance, and their occurrence only makes it the more necessary to uphold a contract and not to make them the ground for discharging it." A builder who undertakes to finish by a certain day "is, on the face of it, plainly taking such a risk" — the more so where the parties inserted escalator clauses for wages and prices but made no corresponding provision for labour shortage.

The appeal was dismissed with costs. The letter of 18 March 1946 was not incorporated in the contract; and the contract was not frustrated. The contractors were confined to the contract price and could not recover on a quantum meruit, although the work had taken 22 months instead of eight and had cost some £20,000 more than they were paid.