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Case note: Air Transport Limited v Island Construction Management Ltd, unreported, Court of Appeal, Solomon Islands, CAC 1/1999, 4 June 1999 Frustration - Law Reform (Frustrated Contracts) Act 1943 (UK) - repudiation by conduct - misrepresentation

AIR TRANSPORT LIMITED v ISLAND CONSTRUCTION MANAGEMENT LTD,

unreported
Court of Appeal, Solomon Islands
CAC 1/1999, 4 June 1999

FACTS:

The plaintiff was a company, which conducted saw-milling and logging in Solomon Islands. It did not have its own milling licence, but entered into a sub-contract to fell and extract logs from Mono Island for Mubu Saw-Milling (‘Mubu’), which did have a milling licence. The licence had a footnote purporting to authorise the export of an annual quota of logs. The defendant ran a helicopter service and hire business. The plaintiff and defendant entered into a written agreement dated 16 May 1995, according to which the defendant would supply one Ka32 helicopter for haulage of logs on Mono Island. On 18 July 1995, the helicopter was positioned in Papua New Guinea ready to be shipped to Solomon Islands. On the same date Muria CJ granted an ex parte interim injunction in a separate case brought by customary landowners, restraining the plaintiff’s managing director and Mubu from entering Mono Islands to carry out felling, extraction, or saw-milling.

The interim injunction came to the knowledge of the Managing Director of the defendant who had, in the meantime, brought the helicopter from Singapore to Papua New Guinea. With the agreement of the plaintiff, he re-deployed the helicopter in Papua New Guinea to minimise any loss to the parties.

On 12 September the High Court upheld the injunction, but ordered that trees already felled could be removed. The basis for the injunction was that the holder of a milling licence was still required to obtain a grant of timber rights and the consent of the Minister under s 5 of the Forest Resources and Timber Utilisation Act, before it could export timber. On 23 November the plaintiff’s Managing Director asked the defendant’s Managing Director to bring the helicopter to Solomon Islands, with a view to starting to remove the logs on 14 December 195. At this stage the helicopter was not available, as it was still committed to contracts in Papua New Guinea. In view of the this, the parties agreed to negotiate with a third party for the supply of a larger helicopter, with a view to extracting logs that had been ordered from the plaintiff by a purchaser. Agreement was reached between the plaintiff and defendant subject to agreement by the third party, which required certain advance payments. The plaintiff made certain payments to the defendant in this respect, but the approval of the third party was not forthcoming, and the arrangement was abandoned.

On 7 November application was made to lift the injunction in the other case. The hearing was adjourned until 19 January. At the hearing the injunction was re-imposed by consent of the parties on the basis that the plaintiff had decided that the operation on Mona was too troublesome.

CLAIM:

At first instance, the plaintiff sued the defendant for damages for breach of contract to supply a helicopter and the reimbursement of money paid in advance. In response, the defendant claimed damages for fraudulent misrepresentation; alternatively it claimed damages for breach of contract. As a third alternative it pleaded frustration on 15 July 1996, when it was alleged to have become apparent to all parties that the contract could not be performed.

The defendant appealed. The only ground of appeal dealt with by the court of Appeal was whether the Law Reform (Frustrated Contracts) Act (UK) applied.

OUTCOME:

At first instance it was held that the agreement was frustrated by the imposition of the injunction in the land dispute case. The defendant was ordered to return US$37,000 plus SBD211,520 plus interest to the plaintiff, pursuant to he Law Reform (Frustrated Contracts) Act 1943 (UK). The counter-claim for fraudulent misrepresentation was dismissed.

The appeal was allowed on the basis that frustration did not apply, and that the plaintiff repudiated the agreement when it abandoned operation son Mono Island. The matter was remitted to the High Court for the assessment of damages.

LEGAL PRINCIPLES:

Ratio Decidendi

  • If a party to a contract has special knowledge which should have led him to foresee a frustrating event, and has concealed that knowledge from the other party the doctrine of frustration cannot apply.
  • In order to establish that a party is prevented from relying on the doctrine of frustration on the basis that s/he should have foreseen the event in question it is not necessary to prove fraudulent conduct.
  • The Law Reform (Frustrated Contracts) Act 1943 can only apply if frustration is established under the common law.
  • Repudiation of a contract may occur when a party’s conduct reveals an intention not to be bound by conduct.

Obiter Dicta

The holder of a milling licence is still required to comply with s 5 of the Forest Resources and Timber Utilisation Act Cap 40 (Forest & Another v Mahlon Ali & Attorney General, unreported, cc1/94, cited with approval as being consistent with Allardyce Lumber Company Limited & Dovele Company Ltd v Nelson Anjo, CAC 8/1996, 25 April 1996; Mega Corporation Ltd v Nelson Kile, CAC1/1997, 21 April 1997; and Gandly Simbe v East Choiseul Area Council & Others, CAC 8/1997, 9 February 1999).

COMMENTARY:

 The Principle in Walton Harvey Limited v Homfrays Ltd [1931] 1 Ch 274

The doctrine of frustration operates to discharge the parties from further liability where an outside event or extraneous change of situation occurs. The appropriate test to determine whether frustration has occurred was laid down in Davis Contractors Ltd. v Fareham UDC [1956] AC 696. In that case Lord Radclyffe said:

Frustration occurs whenever the law recognises 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.

In this case, the Court of Appeal appears to have accepted that, if a party could have foreseen the extraneous event at the time the contract was made, that party cannot rely on the doctrine of frustration. This was the case in Walton Harvey Ltd. v Walker and Homfrays Ltd. [1913] 1 Ch 274. In that case, the defendant, knowing that there was some likelihood that its hotel would be compulsorily acquired and demolished, permitted the plaintiff to erect an advertising hoarding on its roof. Part way through the seven-year contract, the building was resumed and the sign removed. The plaintiff sued for damages. The defendant argued that the resumption had frustrated the contract, and that they were, therefore, excused from further liability. It was held that the contract had not been frustrated. The defendant had been aware of the risk, but had entered into the contract despite it. No provision had been made in the contract to deal with the event of resumption. Consequently, the defendant was not excused from liability when it eventuated.

A regional example of this principle is provided by Picardie Holdings (NH) Limited v Waegemenn (1980-88) 1 VLR 5. In that case, the plaintiff was seeking to enforce an agreement for the sale of land to the defendant. The defendant alleged that the plaintiff no longer owned the land due to statutory changes made to land holding laws, and that therefore the contract was frustrated. It was held that the contract was not frustrated, as the contract clearly indicated that the defendant was aware of the changes to the law, which in any event did not prevent the sale of the land, but merely meant that the defendant might have to negotiate with customary landowners thereafter.

The Court of Appeal appears to have accepted in this case that the plaintiff had special knowledge. Had both parties had knowledge allowing them to foresee the likelihood of the frustrating event the position would have been more complex, as there is conflicting authority as to whether events foreseen by both parties can be relied upon to establish frustration. In essence, it appears to be a question of construction as to whether the contract was intended to be binding in any event, or whether the absence of express provision shows an intention to rely on the doctrine of frustration. In W J Tatem Ltd v Gamboa [1939] 1 KB 132 the plaintiffs chartered a ship to the defendants to be used to evacuate refugees from Northern Spain during the Spanish civil war. The ship was seized by the Nationalists. The fact that seizure of the ship was within the contemplation of the parties did not preclude the operation of frustration since the contract made no express provision for the contingency.

Application of the common law in Solomon Islands

In this case, the common law principle in Walton Harvey Limited v Homfrays Ltd [1931] 1 Ch 274 was held, obiter, to apply in Solomon Islands. Paragraph 2 of Schedule 3 of the Constitution of Solomon Islands 1978 makes it clear that the common law is part of the law of Solomon Islands:

(1) Subject to this paragraph, the principles and rules of the common law and equity shall have effect as part of the law of the Solomon Islands....

The Court of Appeal has held that, read in the context of sub-section (2), this means the common law of England (Cheung v Tanda [1984] SILR 108 at 121). Sub-section (2) states:

(2) The principles and rules of the common law and equity shall so have effect notwithstanding any revision of them by any Act of the Parliament of the United Kingdom which does not have effect as part of the law of the Solomon Islands.

As the Court of Appeal pointed out, these words would not make sense if the common law of other countries was being referred to.

It should be noted that paragraph 4(1) of Schedule 3 of the Constitution provides that, ‘No court of Solomon Islands shall be bound by an decision of a foreign court given on or after 7th July 1978’. This has been interpreted as meaning that declaratory decisions made after 7th July 1978 (the date of independence) are part of the common law prior to independence and are therefore binding, whereas decisions developing the common law after 7th July 1978 are not binding (Cheung v Tanda [1984] SILR 108 at 123).

Application of United Kingdom Acts in Solomon Islands

The Law Reform (Frustrated Contracts) Act 1943 (UK) is applicable in Solomon Islands by virtue of the Constitution. Section 76 of the Constitution continues the United Kingdom Acts of Parliament in force. The transitional nature of this provision is made clear by schedule 3 of the Constitution, which imposes a ‘cut-off’ date on such Acts. Paragraph 1 of schedule 3 provides:

Subject to this Constitution and to any Act of Parliament, the Acts of Parliament of the United Kingdom of general application and in force on 1st January 1961 shall have effect as part of the law of Solomon Islands, with such changes to names, titles, offices, persons and institutions, and as to such other formal and non-substantive matters, as may be necessary to facilitate their application to the circumstances of Solomon Islands from time to time.

Repudiation by Conduct, and Election

In this case, the issue of frustration was in fact rendered academic by the Court of Appeal’s finding that the contract was repudiated four days before the re-imposition of the blanket injunction relied on by the plaintiff as a frustrating event. The Court held that repudiation took place when the plaintiff abandoned operations on Mono Island. This conduct was a clear demonstration of an intention not to be bound by the contract. In addition to express repudiation, this type of conduct has long been recognised by the courts as sufficient to amount to repudiation. Where the reasonable inference from a party’s conduct is that s/he no longer intends to perform his side of the contract, this will suffice, provided the refusal relates to the contract as a whole, or to an essential part of it (see e.g. Frost v Knight (1872) LR 7 Exch 111).

Unlike other methods of discharge, breach does not automatically bring a contract to an end. Assuming that the breach is sufficiently serious to entitle the other party to treat the contract as discharged, the consequences of the breach depend on the innocent party's election. If the innocent party elects to treat the contract as discharged he must make his decision known to the party in default. Once s/he has done this, the decision is final and cannot be retracted (Scarf v Jardine (1882) 7 App Cas 345 at 361). In this case, there was no evidence of the defendant having made or communicated an election. This leads to the interesting question of whether the contract could be said to have been still on foot when the frustrating event occurred four days later. If it was, the supervening event could be argued as having relieved the plaintiff from liability for the repudiation. This was the case in Avery v Bowden (1855) 5 E&B 714 where the defendant chartered the plaintiff’s ship and agreed to load her within forty-five days. The defendant made it clear before the expiry of the period that no cargo would be available. The plaintiff remained in port, hoping for cargo. Before expiry of the forty-five days, war broke out and the contract was frustrated as it was illegal to load cargo at an enemy port. It was held that the shipowners could not recover damages for an anticipatory repudiatory breach in failing to provide a cargo, since the plaintiff had affirmed the contract. If the plaintiff had sailed away on being told that no cargo would be available, he would have had a right to claim damages for the loss caused by the breach. As the contract was frustrated between the date of repudiation and the date fixed for performance he lost the right to claim damages for the initial breach. It would appear that this argument was not put to the Court of Appeal in the current case.

Waiver

Where a party agrees not to insist on performance of a certain term in a contract by the other party, this forbearance is known as waiver. The person waiving must have full knowledge of all the facts. In this case the waiver of the time limit for making the initial payment under clause 12 (b) of the contract, did not consist of express words. Rather it was implied from the plaintiff’s conduct when it accepted the US$37,000 and continued with the contract, after the time limit for payment under the contract had expired. (For another regional example of this see, e.g., Edgar v Lawlor Bros (1967) FLR 14).

Misrepresentation

In this case, the defendant claimed damages for fraudulent misrepresentation. The trial judge dismissed this claim, presumably on the basis that the plaintiff had not acted fraudulently. In any event, the common law rule is that silence does not amount to misrepresentation (Keates v Lord Cadogan (1851) 10 CB 591) and there is no evidence that the plaintiff made any statement of fact concerning the timber licence. The question of misrepresentation does not appear to have been pursued on appeal, or if it was, was not regarded as relevant by the Court of Appeal, given that it had decided in the defendant’s favour on the basis of repudiation by the plaintiff.

Recovery of Money Paid in Advance

In this case, the Court of Appeal, having found in favour of the defendant, remitted the case to the High Court for the assessment of damages. The Court made no mention of the monies paid in advance by the plaintiff to the defendant, the majority of which the court at first instance had ordered to be returned. Assuming these monies to have still been with the defendant, the question arises whether the plaintiff is entitled to a refund. In the absence of an order to that effect, the answer is, prima facie, no. However, in assessing any damages payable to the defendant, the court would be likely to allow any money belonging to the plaintiff and held by the defendant to be set-off.

In principle, money accrued due and paid before the repudiation is not recoverable. However, assuming that the payments are not classified as a deposit or as security for due performance, the plaintiff could recover the sums paid in restitution, if it could show a total failure of consideration (Dies v British and International Mining and Finance Corporation Limited [1939] 1 KB 724). However, in the present case, the defendant commenced performance when it brought the helicopter from Singapore to Port Moresby, thus rendering recovery through this avenue unlikely.

The Forest Resources and Timber Utilisation Act Cap 40

The plaintiff in this case was felling and extracting logs without a licence, as required by the Forest Resources and Timber Utilisation Act Cap 40. This Act has given rise to a large amount of litigation, mainly because, in providing procedure for the identification of persons entitled to grant timber rights, it does not clarify the relationship between those person and the customary landowners (see further Corrin J, ‘Abrogation of the rights of Customary Landowners by the Forest Resource and Timber Utilisation Act’, (1992) 8 QUT Law Journal 131).

The plaintiff gave evidence that it was relying on the timber milling licence issued to its principal, Mubu Saw-Milling, which contained a footnote purporting to authorise export of an annual quota of round logs. However, a milling licence can only legitimise a milling operation, not a logging operation. This point was made clear in Forest & Another v Mahlon Ali & Attorney General, unreported, cc1/94, Allardyce Lumber Company Limited & Dovele Company Ltd v Nelson Anjo, CAC 8/1996, 25 April 1996; Mega Corporation Ltd v Nelson Kile, CAC1/1997, 21 April 1997; and Gandly Simbe v East Choiseul Area Council & Others, CAC 8/1997, 9 February 1999. Unfortunately, either in ignorance or in defiance of the first of those decisions, the timber milling licence was renewed on 9 February 1995, without the footnote being deleted.

JENNIFER CORRIN CARE
SENIOR LECTURER,
UNIVERSITY OF THE SOUTH PACIFIC


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