Thoughts on frustration of contract in Scots law

One of the classes on offer during Innovative Learning Week was a class called "Blogging in private law."  The class discussed the recent case of Lloyds TSB Foundation For Scotland v Lloyds Banking Group plc ([2011] CSOH 105 and [2011] CSIH 87), a case which we understand is being appealed to the Supreme Court.  This case caused us to reflect on the principles of frustration in Scots contract law.  Although neither party in the case has, thus far, argued that the contract has been frustrated, arguments raised by the bank on  equitable adjustment led the class to look back at the development of frustration. Here is a blog on the case of Tay Salmon Fisheries Company Ltd v Speedie (1929 SC 593) drafted by one of the students in the class, Martin Smail:

 "In light of the recent Lloyds TSB Foundation for Scotland case being appealed to the Supreme Court, it seems an appropriate time to take a look back at an early example of frustration in contract – the case of The Tay Salmon Fisheries Company Ltd v Speedie (1929 SC 593).

The Tay Salmon Fisheries Company was the tenant of a lease to fish for salmon in Fife. During the period of the lease, the President of the Air Council (under statutory authority) created by-laws in the fishing area to allow that area to be used as a practice zone for the RAF. The result of the by-laws was that no ‘vehicle, animal, vessel, aircraft or thing’ was permitted to be in the practice zone at certain times, with a breach of this resulting in a fine. Subsequently, the Fisheries Company was unable to fish because of the time it took them to drop and lift their fishing nets, ultimately rendering their rights under the lease unusable. Despite the fact that the ‘zone’ was only in use for part of the time that the Fisheries Company used their fishing rights, it was their (cumbersome) fishing style that led them to raise an action again Mr Speedie arguing that they should be released from the lease.

It was held by the Lord President (Clyde) that the lessor (Mr Speedie) was in breach of the warrandice clause under the contract to provide possession of the fishery to the Fisheries Company. His Lordship stated that the result of the by-laws was to make the fishery ‘unworkable’ and ‘incapable of possession’. In respect of the fact that the bombing zone was not in constant use, it was stated that it was ‘impracticable’ for the Fisheries Company to have to lift their nets at short notice, to their cost and endangerment and therefore that they were ‘deprived of the possession of the fishery under the lease’.

The case was said to resemble the principle of rei interitus (i.e. where the subjects of a lease are completely destroyed) although this did not sit very well in the judgments. The result of this was that the principle had to be applied almost by analogy because the facts of the case did not fit with the general application of the rei interitus principle. The important pivot (again) on which this point was decided was that the Fisheries Company fished in a way that meant that they could not practicably use the lease. Therefore it was ultimately deemed to be useless to them and that the only result of this was that warrandice provided by the lessor was breached, the result of which could only be ‘liberation of the tenant from the bonds of the lease’.

An interesting approach was taken by Lord Sands whose discomfort with the breach of the warrandice (and the application of the rei interitus principle) as a result of the actions of a 3rd party is almost palpable. He states that it is not the lessor’s duty ‘to protect against outside interferences’ and his approach therefore is purely from a commercially practical point of view. He states that the case raises not a question of loss of profits but instead ‘of possible loss’ which is the reason why the Fisheries Company decided not to continue to fish when the by-laws were enacted. He places the burden of proof on the Fisheries Company to show that the use of the fishery was impracticable and that the ‘character of the fishery’ was ‘entirely altered’. He seems satisfied by the evidence given by pursuers that dropping and lifting their nets at such short notice and so many times a week was ‘commercially quite impracticable’. This was not only due to the cost and man-power that would be expended but also because, had the nets not been taken in on time, then there is a chance that the Fisheries Company would have contravened the by-laws and incurred a penalty as a result. His sidestep in having to answer the breach of warrandice or rei interitus question led him to say that that ‘free exercise of the right of salmon fishing’ has been ‘rendered incapable of profitable use’ – a much  more general commercial law approach than one purely borne out of contract law found in the other judgments.

I agree with Lord Sands approach more than I do with the other judgments in the case as I do not feel comfortable with the fact that a breach of warrandice can occur as a result of a supervening action of a third party. Lord Sands’ commercially practicable approach makes more sense and avoids the tricky question of whether a party can be liable for breach of contract when the real cause of the breach is a factor external to the contract itself. 

I feel that the decision that was arrived at (although by different means) by the judges was the correct one. It should serve as a warning to parties undertaking such leases to expect the unexpected (i.e.consider taking out business interruption insurance, trade insurance or even legal expenses insurance) and when they hear aeroplanes overhead to take cover and check their contract again…."