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Court provides insight on the difficulty of relying on the doctrine of frustration

  • United Kingdom
  • Construction and engineering - Articles

19-04-2018

Summary

The contract negotiations at the heart of this case took place against a backdrop of a nation in turmoil. Simmering anger and chaos were the order of the day, with riots and protests raging throughout the streets of Greece. Despite these events and notwithstanding their occurrence in the mythical land of the gods, the judge in Flying Music Company Ltd v Theater Entertainment SA & Ors [2017] EWHC 3192 (QB) ruled that consistent levels of civic unrest and violence were not enough to frustrate a contract relating to a theatre production.

Facts

Theatre Entertainment (TE) is a theatrical promoter based in Greece who contracted with Flying Music Company (FMC) on 21 May 2010 to put on a series of shows of “Thriller Live” in June 2010 in Athens and Thessaloniki.

Contractual negotiations took place throughout April and May 2010 and during this time TE had spent money on advertising and ticket sales. During the negotiation civil unrest broke out in both cities as a result of Greece’s economic woes and impending emergency austerity.

The contract required payment by instalments and allowed for FMC to terminate in the event of non-payment. Ticket sales were minimal despite subsequent agreement to reduce the tickets sales to a base price that TE would struggle to make a profit on, even in the event of sell out performances. FMC also agreed to delayed payments and smaller more regular instalments. As a result of missing several instalments, however,  FMC cancelled the contract half way through the performance run and sued for the rest of the money. TE claimed that the contract had been frustrated, with the result being that losses lay where they fell i.e. FMC would lose the right to claim for the outstanding payments.

Decision

The judge reviewed the case law on frustration and confirmed the principles of the doctrine that a frustrating event “automatically terminates a contract without fault or recourse on either side”.

Based on the events in Greece during the negotiation of the contract in April and May, however, the judge held that the contract had not been frustrated. It was found that according to Greek police reports, the civil unrest was no worse in June than it had been during April and May meaning that the frustrating event had not occurred after the contract had been formed and that the future obligations of the parties had not been radically altered. The judge stated:

“Ticket sales had already begun, and they were low. There were already road closures. There were already demonstrations. There was already violence. The Troika had already arrived. Thessaloniki and Athens had already erupted. The parties both knew enough about the risks that this posed to the success of the production for it to be wrong, now, with the benefit of hindsight, to re-allocate those risks by releasing the Theater Entertainment from its Contract obligations

…To say that things did not improve is not to say that they got worse, or even changed. If a bad situation becomes protracted, the consequences may be increased by the passage of time. But that does not mean that there has been a frustrating event

Practical Considerations

Whilst this case is not specifically related to construction, it does provide a useful summary of the case law on the doctrine of frustration, which is potentially relevant to all construction practitioners, particularly in view of the current climate of uncertainty that continues to prevail around the world.

The doctrine of frustration has been narrowly defined and applied over the years meaning that it  is rarely successful in court. The standard position that parties are strictly liable for the performance of their contractual positions is not a position from which the court deviates easily, even where there is trouble in paradise!

Frustration will rarely be an issue in most building contracts, where the parties have usually given thought to the impact of force majeure events and drafted detailed force majeure provisions (or other similar extension of time provisions) to reflect an agreed allocation of risk. However, it could potentially be an issue in the context of professional appointments, where there is commonly no express provision for force majeure. For long-term professional appointments relating to large projects, legal advisors may therefore wish to include express provisions to deal force majeure and frustration-type events, rather than relying on the general position at law. In this way, express agreement can be reached in advance as to the responsibilities and liabilities of each party if a frustrating event should occur.

In any event, legal advisors may also wish to review the list of force majeure events that are included in all of their contracts to ensure that they cover all the eventualities and potential events that they should, particularly in view of the climate that exists (both naturally and politically) in the place of performance. 

Flying Music Company Ltd v Theater Entertainment SA & Ors [2017] EWHC 3192 (QB)

http://www.bailii.org/ew/cases/EWHC/QB/2017/3192.html

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