Doctrine of Frustration in Contracts - Case Study Example

Doctrine of Frustration in Contracts ‘The doctrine of frustration does not always challenge the validity of the fundamental principle of Pacta Sunt Servanda’ Introduction The doctrine of frustration of purpose is an important feature of English law. It permits avoidance of contractual obligations. However, this is permitted only when the circumstances change to the extent that the performance required under the contract is drastically different from what had been originally agreed upon, by the parties to the contract.1 A concluded contract binds the parties. This binding effect is expected to persist, even if the circumstances undergo change. Although the possibilities in life are uncountable, it is feasible to isolate certain categories of factual configurations that take place frequently, and which entail definite issues. 2 There are several instances, wherein the contract cannot be performed by a party, due to circumstances beyond its control. These circumstances are termed force majeure, and include explosion, war, riots, trade embargoes, fire, flood, government action, accidents, and adverse weather conditions.3 On occasion, after the conclusion of a contract, the circumstances may change to the extent that the parties, acting as reasonable individuals, would not have entered into the contract or would have altered the contract, if they had known about the changed circumstances. This is the doctrine of rebus sic stantibus, which underlies the English principle of frustration of purpose, American commercial impracticability, German Wegfall der Geschäftsgrundlage, Swiss impossibility, and French imprévision.4 Frustration serves to discharge the parties to a contract from future performance. However, English law permits equitable compensation after such discharge from a contract. This was introduced by the Law Reform (Frustrated Contracts) Act 1943. The sanctity of contract or Pacta Sunt Servanda is a fundamental principle of contract law. By protecting the interests of the promisee, while binding a promisor to his promise, this norm reflects economic requirements and natural justice. In this context, it is imperative to realise that in the absence of reliable promises, economic activity becomes impossible. Herein lies the significance of this principle. Moreover, this principle explains the importance of specific performance, which has been adopted by the United Nations Convention on Contracts for the International Sale of Goods (CISG), as a primary remedy 5 The Pacta Sunt Servanda, per se, is a paramount principle of legal systems. Change of circumstances, in this context, refers to a class of concepts that address changes in the business, economic, and legal realities on which the contract is based. Specific performance has been deemed to be of crucial importance by the CISG. When there is an absence of unusual impediments, the parties should act according to what they had promised. 6 Argument 1 The doctrine of frustration challenges the principle of Pacta Sunt Servanda in cases of the impossibility of performance. The doctrine of frustration comes into play in cases that usually involve impossibility of performing the contractual obligations. However, it has also been extended to cases that entail illegality and frustration of purpose. This is best expressed by the term non haec in foedera veni or not what was promised to be done. This elaboration regarding the doctrine of frustration was provided in the ruling of the House of Lords in Davis Contractors Ltd v Fareham UDC.7 From the theoretical perspective frustration can encompass every manner of unexpected circumstances. All the same, the courts frequently express a disinclination to invoke this doctrine. In general, this doctrine become effective, when radical changes take place to the contractual obligation.8 This was the gist of the ruling in Davis Contractors Ltd v Fareham UDC. In this case, it was held that the contract was not frustrated, as its performance was still possible. Similarly, in Tsakiroglou & Co Ltd v Noblee Thorl, the defendant was required under contract to convey groundnuts from the Sudan to Hamburg, Germany, via the Suez Canal. Subsequently, the Suez Canal was closed and the defendant pleaded frustration of the contract, as the cost of shipment would be increased substantially. The court held that the defendant could adopt a circuitous route through the Cape of Good Hope, South Africa, in order to effect the shipment. Consequently, the contract could be completed.9 The mere fact that the contract had become much more difficult to execute did not render it frustrated. Argument 2 Doctrine of frustration challenges the principle of Pacta Sunt Servanda in cases of the occurrence of radically different events. In addition, a frustrating event is one that should make a contractual duty radically different from what had been agreed upon. If the obligation becomes much more difficult to perform, it is not sufficient to frustrate the contract. The requirement for the change to be radically different was clearly specified by Lord Radcliffe, while defining the doctrine of frustration.10 On comparing the decisions in Condor v The Barron Knights and Herne Bay Steamboat Co v Hutton, it becomes obvious that it is on occasion, it is quite difficult to decide if the contract had been frustrated. In Condor v The Barron Knights case, the mental condition of the claimant made him unfit for conducting musical performances, and so, the contract was frustrated. Moreover, in Herne Bay Steamboat Co v Hutton, the contract related to viewing the coronation of Edward VII and the naval review at Spithead. For this purpose the passengers were to be transported from Herne Bay. The coronation was cancelled and the defendant refused to pay the hiring fee. The court held that the defendant had to pay the hiring fee. This was on account of the fact that the defendant could have cruised around the fleet.11 Thus, the contract was not frustrated. In the above case, the contract was not frustrated since, performance was still possible even after the cancellation of the Naval Review. As such, the frustration arising from an alteration to the contractual obligations, which make it radically different from what had been agreed upon at the time of forming the contract. In order to resolve this difficulty, it is necessary to take into consideration two crucial factors. The first of these relates to determining if the obligations of the parties become radically different, consequent to the frustrating event. The other consideration is that the doctrine should render justice to the parties. Thus, a contract that would result in injustice on being enforced in a changed situation should be rescinded.12 Due to frustration the contract is annulled and neither of the parties can claim damages for breach of contract. Argument 3 Doctrine of frustration challenges the principle of Pacta Sunt Servanda in cases of the occurrence of supervening events. Frustration of contract is the general doctrine of discharge, on account of supervening events. This is independent of the nature of the event that results in the discharge. With the passage of time, the English authorities have identified and come to terms with an array of events that possess the latency to generate frustration. Some of these events are enumerated in the sequel. 13 The unavailability or destruction of the subject matter of a contract results in frustration of the contract. Moreover, frustration is also the consequence, when there is death, illness or incapacity of the person. Incapacity of the person is with regard to personal contracts. Furthermore, dissolution or supervening incapacity of a corporation results in frustration. Similarly, the cancellation of an expected event produces frustration. In addition, change in the national or foreign law or supervening illegality causes frustration. 14 Moreover, war or delay that is long enough to frustrate the commercial endeavour of the parties, or changed circumstances that radically change the original terms serve to frustrate the contract. In addition, financial loss, hardship, or inconvenience can frustrate the contract. Furthermore, if there is substantial difference in the expenditure incurred, between the actual and expected performance, it could constitute grounds for frustration of the contract. Finally, frustration of a contract could transpire, due to inflation, de – valorisation, or the discarding of a system of exchange rate. 15 If the fundamental obligations of the contract change, and if such change is at marked variance with what had been the purpose of the contract, then the contract may be discharged. Thus, in Metropolitan Water Board v Dick, Kerr & Co Ltd, the Minister of Munitions took recourse to his wartime powers and directed the defendant to cease the construction and to sell the plant that they had contracted with the claimant to build a reservoir for storing water. The Minister held that the uncertain duration of the interruption of World War I had nullified the contract.16 The House of Lords rejected this act of the Minister and held that the contract had not been frustrated. Refutation On occasion, frustration challenges the validity of the doctrine of Pacta Sunt Servanda. This is illustrated by the following discussion. A contract that depends upon the occurrence of a specific event for its completion will be frustrated, if that event does not take place. This was illustrated in Krell v Henry. In this case, the defendant had hired a room for the express purpose of viewing the coronation of Edward VII. This event was postponed, on account of the ill health of Edward VII. The upshot was that the defendant refused to pay the rent as the purpose of hiring the room did not materialise.17 The court opined that the cancellation of the coronation ceremony had effectively served to frustrate the contract. The frustration of a contract, from the perspective of the common law, takes place automatically and totally. Thus, the contractual obligations are extinguished completely, with the frustration of the contract. As a result, the court is not empowered to permit the continuance of the contract and to alter the contractual terms to suit the changed circumstances. 18 Consequently, the courts are not required to formulate contractual terms for the parties, as this would be undesirable. In contracts, statements relating to total discharge of contractual obligations are usually qualified. This emphasises that frustration is restricted in its impact and merely serves as grounds for the discharge of future obligations. With regard to the recovery of payments made, the legal consequences of frustration fall under the ambit of the Law Reform (Frustrated Contracts) Act 1943. 19 Moreover, in some contracts, one of the parties to the contract will be obliged to render personal services. In such cases, death or personal incapacity discharges the contract. For instance, in Condor v The Barron Knights the claimant was hired as a drummer of the band. His doctor had certified that he was not to play on more than four nights, in a week. According to his contract, he was required to play on every day of the week, if necessary. As a result of this medical certificate, the band terminated his contract.20 The court ruled that the contract had been frustrated, due to the illness of the drummer. Conclusion As such, frustration transpires, when the law acknowledges that there has been a change in the circumstances. Such change should render the performance something that is fundamentally different from what had been undertaken in the contract. Moreover, such change should be independent of default of either party. In addition, the crucial feature of the law of contract is the principle of Pacta Sunt Servanda. Consequently, the parties to a contract cannot deviate from the contractual terms. As such doctrine of frustration enables the parties to deal with situations, which makes the agreement illegal, extremely difficulty to perform, or commercially invalid, due to events that transpire after the conclusion of the contract. However, as per the above discussion, the courts tend to promote the performance of the contract rather than frustrating the agreement. It can be surmised from the above discussion that the doctrine of frustration does not challenge the validity of the principle of Pacta Sunt Servanda, all the time. However, on some occasions, the doctrine of frustration prevails upon the principle of Pacta Sunt Servanda. This establishes that the doctrine of frustration, sometimes, challenges the validity of the principle of Pacta Sunt Servanda. Bibliography — — ‘The doctrine of frustration in English Law’ (Association of Corporate Counsel, 10 November 2009) accessed 6 March 2013. Condor v The Barron Knights [1966] 1 WLR 87. Davis Contractors Ltd v Fareham UDC [1956] UKHL 3. Hondious E, and Grigoleit HC, ‘Unexpected Circumstances in European Contract Law’ (Cambridge Catalogue, March 2011) accessed 6 March 2013. Houtte H, ‘Changed Circumstances and Pacta Sunt Servanda’ (Trans – Lex) accessed 6 March 2013. Herne Bay Steamboat Co v Hutton [1903] 2 KB 683. Krell v Henry [1903] 2 KB 740. Law Reform (Frustrated Contracts) Act 1943. Liu C, ‘Changed Contract Circumstances’ (Pace Law School Institute of International Commercial Law, 26 April 2005) accessed 6 March 2013. Metropolitan Water Board v Dick, Kerr & Co Ltd [1918] AC 119. Thompson P, ‘A practical guide to force majeure and frustration of contract’ (1997) 18(1) Credit Control 9. Tsakiroglou & Co Ltd v Noblee Thorl [1962] AC 93. United Nations Convention on Contracts for the International Sale of Goods 1980. Walther J, Frustration and supervening impossibility / The doctrines of consideration and promissary estoppel (GRIN Verlag 2005). Read More