Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd

Frustration occurs automatically when a supervening event, arising without either party’s default, makes performance illegal or defeats the substantial purpose of the contract. The contract must be considered as a whole. Subsidiary stipulations do not survive merely because they remain lawful or physically possible to perform where their enforcement would be inconsistent with the parties’ contractual scheme.

A contractual option arising only upon voluntary termination by notice cannot be exercised after frustration has already discharged the agreement. The frustrating event removes future obligations without constituting a breach, although accrued obligations remain enforceable.

The parties made an indefinite agreement for the supply of imported timber. It also permitted the appellants to occupy the respondents’ timber yard and gave them an option to purchase or take a long lease of it if either party terminated the trading agreement by the prescribed notice.

Wartime timber controls made the contemplated supplies illegal and impossible for an indefinite period. The Lord Ordinary treated the land provisions as separable, but a majority of the Second Division of the Court of Session reversed him. The appellants appealed, contending that the option survived or that the contract as a whole remained operative.

The central questions were whether the interruption frustrated the entire contract and whether an option conditioned upon voluntary termination could arise after automatic discharge by frustration.

1. The appeal was dismissed unanimously and the interlocutor of the Second Division affirmed. Viscount Simon, Lord Thankerton, Lord Macmillan, Lord Wright and Lord Porter concluded that the wartime controls frustrated the contract before the appellants purported to terminate it and exercise the option.

2. Per Viscount Simon, the timber trading was the principal object disclosed by the preamble and operative clauses. Its frustration brought the agreement to an end. The option arose only where a living and operative trading agreement was terminated voluntarily by notice under clause 5. Notice could not terminate an agreement already discharged by supervening illegality.

3. Per Lord Macmillan, frustration applies where performance depends upon a particular thing or state of affairs whose failure, without either party’s default, defeats the contractual purpose. A contract must be examined as a whole. A subsidiary stipulation which remains lawful and physically possible cannot be segregated and enforced where that would produce an arrangement the parties never intended. The option was ancillary to the trading arrangements and had no severable consideration.

4. Per Lord Wright, frustration is a substantive rule of law rather than merely an exception to liability for breach. It operates automatically when the frustrating circumstances supervene. It does not depend upon either party’s election or upon speculation about what the parties would have agreed. Future obligations cease, although obligations already accrued remain effective.

5. Lord Wright further held that a commercial interruption reasonably likely to continue for an indefinite period may frustrate an adventure. Business people need not leave their assets and operations indefinitely committed to a sterile arrangement. The relevant assessment is made when the cause and probable duration of the interruption become known, although events established by trial may assist in evaluating the original probabilities.

6. Per Lord Porter, governmental controls directed at temporary interference could not preserve a contract when the underlying timber-supply scheme had been completely prevented. Considered as a whole, the land provisions were part of that scheme and did not constitute an independent contractual basis. Questions of restitution or other relief following frustration were not before the House.

1. House of Lords: Dismissed the appeal unanimously and affirmed the interlocutor of the Second Division of the Court of Session.
2. Court of Session, Second Division: By a majority comprising the Lord Justice-Clerk, Lord Mackay and Lord Wark, with Lord Jamieson dissenting, reversed the Lord Ordinary and held that the appellants could not exercise the option after frustration.
3. Lord Ordinary: Lord Robertson treated the land provisions as a separate, surviving agreement and decided in favour of the appellants.