JOHNSON v. ATKINS

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Docket Number

Docket No. 12065.

Attorney(S)

Brobeck, Phleger Harrison for Appellants. William A. Boekel and John D. Gallaher for Respondents.

Judges

NOURSE, P.J.

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Smart Summary

Factual and Procedural Background

The dispute arose from a c.i.f. contract for the sale of 500 tons of copra for shipment from San Francisco or Oakland to Puerto Colombia, or Barranquilla, Colombia. Two hundred tons were shipped and paid for. The buyer learned that no further copra could be shipped to Colombia because entry permission (a permit) was cancelled or denied by Colombian authorities. The buyer paid incidental handling expenses for the remaining 300 tons and asked the seller to make other disposition for the buyer's account; the seller refused and submitted the controversy to arbitrators under the San Francisco Foreign Commerce Association rules, which were made part of the contract. The arbitrators awarded in favor of the seller, ruling that it was the buyer's duty to secure the permit. The buyer protested submission to arbitration and then contested the award in proceedings before the Superior Court of the City and County of San Francisco. The trial court confirmed the arbitrators' award; appellants appealed. The Court of Appeal reversed the trial court's judgment.

Legal Issues Presented

Whether the rules of the San Francisco Foreign Commerce Association applied to a c.i.f. contract (a contract involving prepayment of costs, insurance, and freight) or were limited to contracts described as "Ex Dock, Ex Warehouse, f.o.b. Carrier, Port of Entry."
Whether the arbitration clause survived where the object of the contract was frustrated (i.e., whether the contract was terminated by frustration and thus arbitration was unavailable).
Whether the award was void for failure to comply with the rule requiring arbitrators to fully set forth the facts of the case.

Arguments of the Parties

Appellants' Arguments

The association's rules did not govern c.i.f. contracts and thus arbitration under those rules was not applicable to this contract.
The contract's purpose was frustrated when shipment to Colombia became impossible (because of the required permit), so the arbitration clause fell with the contract and arbitration was improper.
The arbitrators' award was defective because it did not comply with the rule requiring arbitrators to fully set forth the facts of the case.
As a special defense in the superior court, appellants pleaded that from the inception all parties knew a Colombian permit was required, that securing the permit was essential to the transaction (which was effectively a purchase for resale to a Colombian buyer), and that the impossibility of obtaining the permit frustrated the commercial adventure; appellants tendered evidence to prove this defense which the trial court excluded.

The opinion does not contain a detailed account of respondents' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Straus v. Kazemekas, 100 Conn. 581 [124 A. 234, 238]	Statement of the doctrine of frustration: where a condition necessary to performance ceases to exist without fault, parties are excused from performance by an implied condition.	Cited as a clear articulation of the frustration doctrine to support the proposition that performance may be excused when a foundational condition ceases to exist.
12 A.L.R. 1275	Referenced in the discussion of the Straus doctrine (as an annotation authority).	Noted as part of the authority explaining the doctrine of frustration quoted from Straus.
Hirji Mulji et al. v. Cheong Yue etc. Co., English Law Reports, Appeal cases (1926) p. 497	Held that frustration ending the commercial venture terminates the contract and thereby terminates arbitrators' jurisdiction unless arbitration clause explicitly excepts itself.	Used as a principal authority for the proposition that frustration brings the contract (including arbitration clause) to an end and that arbitrators then lack jurisdiction to decide disputes that arise after frustration.
Bank Line v. Arthur Capel Co., (1919 A.C. 435)	Established rule that contracts can be terminated by wartime requisition or similar events making performance impossible.	Cited as an example supporting the principle that certain events terminate the contract and its obligations.
Restatement of the Law of Contracts, section 288	Where the assumed possibility of a desired object forms the basis of the contract, frustration discharges the promisor who is without fault.	Quoted and relied upon to show the Restatement supports discharge of duty when the contract's basic object is frustrated.
Hackfeld Co. v. Castle, 186 Cal. 53 [198 P. 1041]	California application: provisions prescribing manner of shipment were essential; cessation of the route or embargo made performance impossible and excused parties.	Cited as a California case applying the frustration doctrine where shipping route and embargo prevented performance.
LaCumbre G. C. Club v. Santa Barbara Hotel Co., 205 Cal. 422 [271 P. 476]	California application of frustration where destruction of the subject (hotel burned) excused performance; cites 13 C.J. 642.	Used to show the rule has been followed in California and to support the implied-condition formulation of frustration.
13 C.J. 642 (and 17 C.J.S., § 464, p. 956)	Textual authority stating that contracts based on continued existence of a person, thing, or condition imply an excusing condition if that thing perishes or ceases.	Quoted in the LaCumbre case and relied on in the opinion to illustrate recognized text authority supporting frustration.
Hanes v. Coffee, 212 Cal. 777 [300 P. 963]	California case addressing whether frustration leaves nothing to arbitrate under a contract.	Listed with other California cases as following the same principle that frustration can eliminate the arbitration forum for disputes arising after frustration.
Stetson v. Orland Oil Syndicate, 42 Cal.App. (2d) 139 [108 P.2d 463]	California appellate authority applying the frustration doctrine in appropriate circumstances.	Cited as a case following the rule that frustration can discharge contractual obligations and affect arbitration provisions.
Friedlander v. Stanley Productions, 24 Cal.App. (2d) 677 [76 P.2d 145]	California appellate authority applying the frustration doctrine.	Included among cases cited for the proposition that frustration may end the contract and suspension of arbitration follows.
Dahl v. Nelson, Donkin Co. (per Lord Watson, cited in Hirji Mulji)	Quoted in Hirji Mulji regarding the theoretical explanation of frustration as an implied term supplying what parties would have agreed to as fair and reasonable.	Used in the opinion (via Hirji Mulji) to explain the theoretical basis of the frustration doctrine.

Court's Reasoning and Analysis

The court began by noting the appeal was from a judgment confirming an arbitration award after the trial court denied appellants' opposition to arbitration. Although appellants raised three grounds for reversal, the court determined it need not decide the first and third points (scope of association rules and form of the award) if the contract had been terminated by frustration—because if frustration occurred arbitration would not be proper under any interpretation of the rules.

The court assumed, without deciding, that the contract was subject to the association rules so it could rest its judgment on the firmer ground that the trial court should have determined whether the contract was terminated by frustration of the commercial venture. The opinion explains the doctrine of frustration by quoting and citing authorities (including Straus v. Kazemekas, Hirji Mulji, Restatement § 288, and California cases) and describes the doctrine's application to contracts made impossible by events such as embargoes or requisitions during wartime.

Applying these principles, the court emphasized that where the assumed possibility of a desired object forms the basis of the contract, an implied condition excuses performance if that object is frustrated without a party's fault. The court observed that the arbitration clause is part of the contract and ordinarily terminates with the contract unless phrased to exclude the results of frustration; the association's Rule 513 contained no such exception.

The opinion noted the arbitrators found the seller had fulfilled his part and that the buyer was estopped because the buyer had the duty to procure the Colombian permit. Appellants had pleaded a special defense that the permit was essential from the inception and that the transaction was effectively a purchase for resale requiring the permit; they offered evidence to prove that the commercial adventure was understood to require the permit and that its absence frustrated the contract. The trial court sustained objections and struck that evidence. The Court of Appeal held that exclusion was error because the proffered evidence went to the core issue—if true, the contract was terminated by frustration and arbitration was not permissible.

Holding and Implications

Holding: REVERSED. The Court of Appeal reversed the trial court's judgment confirming the arbitrators' award.

Implications: The direct effect is reversal of the judgment that confirmed the arbitration award and a finding that the trial court erred in excluding appellants' proffered evidence on the critical issue of frustration. The opinion rests on established authorities that frustration of the contract's commercial purpose can terminate the contract and, absent an express exception, also suspend or end arbitration provisions; the court did not announce a new rule of law beyond applying existing doctrine to the facts and procedural errors described.

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J.B. SPRAGUE JOHNSON et al., Appellants, v. DAVID ATKINS et al., Respondents.

NOURSE, P.J.

This is an appeal from a judgment, or order, confirming an award of arbitrators made after the trial court had denied appellants' opposition to the petition for arbitration.

The controversy arises out of a c.i.f. contract for the sale of 500 tons of copra to the appellants for shipment to Puerto Colombia, or Barranquilla, Colombia, from San Francisco or Oakland. Two hundred tons were shipped and paid for when the buyer learned that no more copra could be shipped to that country, because permission for entry was either cancelled or denied by the Colombia authorities. The buyer paid to the seller incidental expenses incurred in handling the remaining 300 tons, and requested the seller to make other disposition of the remainder for their account. The seller refused and sent the controversy to arbitrators appointed under the rules of the San Francisco Foreign Commerce Association, which rules were made a part of the contract. The arbitrators ruled that it was the duty of the buyer to secure the permit and made their award in favor of the seller. The buyer first protested the submission to arbitration and then contested the award in suitable proceedings before the superior court.

On this appeal the appellants present three grounds for a reversal of the judgment, or order. (1) That the rules of the association do not cover a c.i.f. contract — that is a contract calling for prepayments of costs, insurance, and freight — but that they are limited to contracts covering sales made "Ex Dock, Ex Warehouse, f.o.b. Carrier, Port of Entry." (2) That, assuming the contract to be subject to arbitration, the arbitration clause fell when the object of the contract was frustrated. (3) That the award is void because it failed to comply with the rule requiring the arbitrators to fully set forth the facts of the case.

Because of the views herein expressed it is unnecessary to consider either the first or the third point raised. If, through frustration, the contract was at an end arbitration was not proper under any interpretation of the rules, and it would then become immaterial whether the award was in proper form.

We may assume without deciding that the contract was one that called for arbitration under the rules of the association, because we prefer to rest the judgment upon the firmer foundation that the trial court should have tried the issue whether the contract was terminated by frustration of the commercial venture contemplated by the parties in the execution of the contract, and hence the arbitrators had no jurisdiction to make the award. The doctrine of frustration is well stated in Straus v. Kazemekas, 100 Conn. 581 [ 124 A. 234, 238], where the court says: "Where from the nature of the contract and the surrounding circumstances the parties from the beginning must have known that it could not be fulfilled unless when the time for fulfillment arrived, some particular thing or condition of things continued to exist so that they must be deemed, when entering into the contract, to have contemplated such continuing existence as the foundation of what was to be done; in the absence of any express or implied warranty that such thing or condition of things shall exist the contract is to be construed as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible or the purpose of the contract frustrated from such thing or condition ceasing to exist without default of either of the parties. 12 A.L.R. 1275."

The doctrine has been given wider scope and application in the cases following the world war of 1914 where contracts for the sale of specific materials, and for the shipment on named vessels, or to specific ports, were made impossible of performance by war restrictions, embargoes, or seizure of the vessel. Numerous cases on the subject are to be found in the English reports; the earlier cases refusing to apply the doctrine, and the later uniformly accepting it as a settled rule of law, which not only declares a termination of the obligation, but a suspension of the arbitration clauses of the contract. The latest case called to our attention is Hirji Mulji et al. v. Cheong Yue etc. Co., English Law Reports, Appeal cases (1926) p. 497. That case involved a dispute between the contracting parties whether the frustration of the object of a charter party by reason of the requisition of the chartered vessel in war time put an end to the jurisdiction of the arbitrator. The holding was that, since the contract came to an end by the frustration of the commercial venture, the jurisdiction of the arbitrator terminated with the contract and he therefore had no power to award damages for failure of performance. The case arose in the British court in Hongkong which approved an award of the arbitrator allowing damages for the breach, and rejecting the defense of frustration. The award was affirmed by the Supreme Court of Hongkong, two justices dissenting. On appeal to the privy council this judgment was reversed, all justices concurring. Defining the doctrine upon which the court rested its opinion it was said (p. 510): "Frustration, on the other hand, is explained in theory as a condition or term of the contract, implied by the law ab initio, in order to supply what the parties would have inserted had the matter occurred to them, on the basis of what is fair and reasonable, having regard to the mutual interests concerned and of the main objects of the contract: see per Lord Watson in Dahl v. Nelson, Donkin Co. (1) It is irrespective of the individuals concerned, their temperaments and failings, their interest and circumstances. It is really a device, by which the rules as to absolute contracts are reconciled with a special exception which justice demands." Many of the earlier cases to the contrary, upon which the judgment no doubt was based, are considered and their rule rejected in this later opinion. It is further said (p. 505): "All these arguments, it will be seen, resolve themselves, on examination, into the fundamental inquiry, whether in law and fact frustration had been brought about before any dispute arose with regard to frustration or its cause or its consequences. The arbitration clause is but part of the contract and, unless it is couched in such terms as will except it out of the results, which follow from frustration, generally, it will come to an end too. This must be so, if the law is, that the legal effect of frustration is the immediate termination of the contract as to all matters and disputes which have not already arisen.

"Throughout the line of cases, now a long one, in which it has been held that certain events frustrate the commercial adventure contemplated by the parties when they made the contract, there runs an almost continuous series of expressions to the effect that such a frustration brings the contract to an end forthwith, without more and automatically. They are too numerous to be cited exhaustively, but there are few expressions to the contrary and none in recent cases."

It was then said that a great many charter parties had been dealt with during the last few years on contracts held to have been frustrated by reason of requisitions during the war period; that Bank Line v. Arthur Capel Co., (1919 A.C. 435, settled the rule that the contract was terminated by these events. It was further said that (p. 509), "whatever the consequences of the frustration may be upon the conduct of the parties, its legal effect does not depend on their intention or their opinions, or even knowledge, as to the event, which has brought this about, but on its occurrence in such circumstances as show it to be inconsistent with further prosecution of the adventure."

The same principle is followed in our own cases. In Restatement of the Law of Contracts, section 288, it is said: "Where the assumed possibility of a desired object or effect to be attained by either party to a contract forms the basis on which both parties enter into it, and this object or effect is or surely will be frustrated, a promisor who is without fault in causing the frustration, and who is harmed thereby, is discharged from the duty of performing his promise unless a contrary intention appears." California cases in support of the text are Hackfeld Co. v. Castle, 186 Cal. 53 [ 198 P. 1041], and LaCumbre G. C. Club v. Santa Barbara Hotel Co., 205 Cal. 422 [ 271 P. 476]. In the Hackfeld case the contract called for the shipment of honey "from Honolulu via Tehuantepec to Hamburg." The Tehuantepec route was discontinued before the time for shipment because of unsettled political conditions in Mexico, and the war of 1914 had caused an embargo on shipments to Hamburg. The buyer refused to accept delivery of the portion of the goods not shipped and the seller sued for the loss. In affirming a judgment for defendant the Supreme Court held that the provisions for the manner of shipment were essential to the performance of the contract and that the contract must therefore be deemed subject to the implied condition that the parties be excused in case, before breach, performance became impossible by reason of the prescribed route ceasing to exist. In the LaCumbre case the golf club had a contract with the hotel company giving privileges of membership to guests of the hotel in consideration of specified monthly payments. The hotel burned down and the company refused to make the payments to the golf club. In an action by the latter the Supreme Court followed the rule of the Hackfeld case and cited with approval the statement in 13 C.J. 642 (see 17 C.J.S., § 464, p. 956): "Where from the nature of the contract it is evident that the parties contracted on the basis of the continued existence of the person or thing, condition or state of things, to which it relates, the subsequent perishing of the person or thing, or cessation of existence of the condition, will excuse the performance, a condition to such effect being implied, in spite of the fact that the promise may have been unqualified."

[1] Following the same rule, but addressed particularly to appellants' contention that the frustration of the purpose of the contract left nothing to arbitrate under it, are Hanes v. Coffee, 212 Cal. 777 [ 300 P. 963]; Stetson v. Orland Oil Syndicate, 42 Cal.App. (2d) 139 [ 108 P.2d 463]; and Friedlander v. Stanley Productions, 24 Cal.App. (2d) 677 [ 76 P.2d 145]. The application of these cases and of the Hirji Mulji case ( supra) is apparent. The rules of the foreign commerce association, which were expressly made a part of the contract, provide: "Rule 513. ARBITRATION — Any dispute arising under contract shall immediately be submitted to arbitration before a committee of the Foreign Commerce Association of the San Francisco Chamber of Commerce under its Rules." In the Hirji Mulji case ( supra) the court said: "The arbitration clause is but part of the contract and, unless it is couched in such terms as will except it out of the results, which follow from frustration, generally, it will come to an end too. This must be so, if the law is, that the legal effect of frustration is the immediate termination of the contract as to all matters and disputes which have not already arisen." It will be seen that here the arbitration clause contained no such exceptions. Here the arbitrators based their award upon the finding that "After full consideration of all points, the arbitrators were unanimously of the opinion that Seller had filled his part of the contract and was estopped from making shipment by Buyer's inability to secure the necessary permit from the Colombia authorities. It was clearly the duty of Buyer to furnish such permit. . . ." As a special defense to the petition the appellants herein pleaded that from the inception of the transaction all parties knew that the copra could not be shipped into Colombia without a permit issued under the authority of that government, that the obligation to secure such a permit rested upon the buyer, but that the contract obligated the seller to deliver the necessary shipping documents for transportation of the copra to one of two designated ports in Colombia, and all parties understood that it would be impossible to procure such documents without the permit. Other facts were pleaded in support of the issue that the commercial adventure was from its inception understood to be a purchase here for resale to a Colombian buyer and that a permit, or license, for shipment to a Colombian port was essential to the purposes of the adventure; that this purpose was thus frustrated by conditions beyond the control of the buyer. Evidence was tendered, and an offer was made to prove this special defense, and the trial court sustained objections to the offer and ordered the evidence stricken. This was error. The evidence was directed to the very meat of the controversy. If the facts alleged are true the contract was terminated and no arbitration was permissible.

The judgment is reversed.

Sturtevant, J., and Spence, J., concurred.

A petition for a rehearing was denied August 14, 1942.