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“The practical significance of the doctrine of frustration is limited”. Discuss the essence of the doctrine of frustration and explain whether you agree with the previous statement
In order for there to be a successful defence of frustration of a contract there needs to be a valid contract, with applicable exclusion clauses. Therefore the first part of this discussion will consider what is a valid contract and the importance and limitations of exclusion clauses. This discussion will then consider specifically the doctrine of frustration illustrate when and when not it applies to a valid contract, especially in relation to the use of the force majuere exclusion clause. It will then consider examples of the doctrine of frustration and apply it to marine contracts as this is an area that outside forces can affect completing the transfer of goods etc. Also the idea of force majeure will be considered in reference to the Rainbow Warrior case and illustrate the limitations of this exclusionary clause in international law but the same doctrine is applied at all levels. Finally this discussion will conclude by answering the title question, i.e. is the doctrine of frustration is limited as a contractual defence.
Elements of a Valid Contract:
In order to determine if there is a valid contract there has to be three elements which are; agreement; consideration; and intention. The first element that will be dealt with is the notion of agreement between the two parties. This element contains the ingredients of offer and acceptance. A valid offer must be clearly communicated by writing, mouth or act in order to allow the other person or group of persons to decline or accept. In relation to sales of goods there is no requirement for the agreement and offer to be in writing, as with the sale of property; however the offer has to be certain in its terminology and must be clearly distinguishable from an invitation to treat. In respect to certainty of terms both parties must make their intentions clear, as the courts will not enforce a vague agreement or an incomplete agreement ; in addition it has to be more than a wish to enter negotiations, which the individual does not want to be bound .
The second element of a valid contract is consideration, which is defined as an indication that the promisor intended to be bound, and has the capacity to be bound. Consideration must be of some value , where there is a right, interest, profit or benefit to one party and a detriment to the other. There must be sufficient detriment to one party to be valid consideration . Consideration must come from the promisee, i.e. the person who has provided consideration can only enforce the promise; however the consideration does not need to be adequate, i.e. the consideration of the individual but does not need to be equal to the consideration of the other party. The law leaves it to the two parties to determine the amount of consideration, it may be very little ; however there is no consideration if the terms are vague ; and there is no consideration if it is not sufficient . Insufficient consideration includes performing a duty imposed by law or a duty owed to a contract of another’s. Therefore consideration is an important part of a valid contract, however in relation to sales of goods it is usually executed consideration – a price paid for a promise, i.e. a price paid for the goods received.
Intention is the final element of a valid contract, which is the intention to be legally bound by the contract. In relation to the sales of goods it is not a complex scenario because once the money is received and the individual had the intention to sell the item, then the goods must be delivered to the buyer. The only way that intention can be omitted if it is proved that the party did not seek to be included to enter legal relations; however the passing of money and retaining it equates to a legal contract, the only way not to enter a contract is to reject the offer of the buyer and return the price of the goods.
If all these elements are in the contract along with good faith then the contract is complete and must be honoured or a breach of contract law may be present. Good faith is present within all types of contracts whereby it refers to the honest intent to act without taking an unfair advantage over the other person within the contract. Therefore the only method to discharge a contract is through actions in breach, frustration etc. Frustration is also a defence in an action of a breached contract; however if any of these elements are missing then there is no action in frustration because the contract is invalid and the individuals cannot be held to it.
Doctrine of Frustration:
Frustration is an act outside the contract that makes it completion impossible, a good example of this is in marine contracts where a delivery is specified for a certain date and time but the crossing is so bad that the delivery cannot be made on time. This would be an example of frustration of that part of the contract and no breach would be held as long as the goods were delivered at the nearest possible time. Frustration of a contract and what it constitutes is usually seen via exclusion clauses, such as advising that liability will not be held for incomplete contracts or damage due to acts of God, nature etc. Other examples of what may frustrate a particular contract may also be present also, i.e. unforeseen acts, third parties etc. To be a valid exclusion clause and under contract law there are only three ways that they can be incorporated which are; by signature even if they are not read ; by notice where there has to be sufficient notice ; and by custom where there has been previous dealings between the parties even if the clause is added in later .In this case there is a signature and in addition if the two parties have had previous dealings, then the signing party would most likely be bound by these conditions of exclusion. Therefore notice of terms must be before the contract performance begins, if these conditions were sent later then there would be no notice of this condition . Therefore in a case where there are no previous dealings with person the question is to ask is whether the average person would have notice? If yes then the average person is bound by the exclusion clause. However if the dealings were two business persons the average person test would not suffice and the person would be held if the exclusionary clause was a trade standard, i.e. the exclusion clause be construed as standard conditions in the business ? The most condemning example of notice is a signature accepting the terms and conditions, even if one does not read then it would be very hard to prove that no notice was given due to signing of the contract and terms and conditions . However it may be shown that the damage is due to negligence and possibly and action in tort, where there can be no signing away of liability to the contract and its performance. Therefore in relation to damages incurred under the contract, even if the exclusion clauses were supported it has to be determined if there is remoteness of damage, whereby monetary compensation can be claimed for a failure to perform a primary obligation as this is a breach and/or the loss for any breach of a secondary obligation . Therefore what is classed as frustration may be contained within an exclusionary clause but if the court determines such a clause is unfair, under the UCTA 1977 then the condition would not be allowed and the contract performed, damages paid out or both. In short this makes frustration limited to the interpretation of the courts, industry standards and the notion of force majeure. The best definition of force majeure and circumstances that create a state of frustration is under international law, where exclusionary clauses rarely exist but circumstances arise where international contractual obligations owed by one state to another can be frustrated. This is also a very interesting angle to consider because it is highly developed and can in most part be applied to normal contracts.
International Contracts, Rainbow Warrior – Force Majeure Limitations:
If a country breaches an immunity, obligation or law, i.e. international contractual obligation, then it is no longer applying the central principles that are key to international law, which allows the state to be subjected to UN arbitration, because these obligations have been imposed on the state for breaching another state’s sovereignty then these obligations must be upheld. If these obligations are not upheld by the state then the UN can become involved to force the obligations are honoured and further penalties and compensation may be ordered; however under certain circumstances the state may temporarily be discharged from these obligations, which include consent ; countermeasures ; force majeure ; distress ; state of necessity ; self-defence ; and reservation . Two of these circumstances are important to this discussion and the case study force majeure; distress; and state of necessity. These circumstances are outlined in Chapter III of International Law Commission Report 1999 titled State Responsibility under Articles 31.
Force majeure is defined as:
The wrongfulness of an act of a State not in conformity with an international obligation of that State is precluded if the act was due to an irresistible force or to an unforeseen external event beyond its control which made it materially impossible for the State to act in conformity with that obligation or to know that its conduct was not in conformity with that obligation.
Therefore if an emergency were to arise and the obligation could not be adhered with for the period of time that this emergency lasts then the state has not failed to meet its obligation, as long as it is adhered to after the event. Also Article 31 states that if the state is in someway involved in the emergency the obligation must not be precluded, i.e. the state is still responsible to adhere to the obligation.
In this case France was guilty of sinking the Rainbow Warrior in a New Zealand harbour breaking the international law concerning the sovereignty of states. The sinking of the ship was attributed to the French military forces, where two individuals (Major Mafart and Captain Prieur) were apprehended by the New Zealand authorities and imprisoned; however UN arbitration determined that the two individuals should be moved in a remote French military base for three years without the ability to leave. France agreed to this fact and New Zealand released the individuals to the French authorities and these individuals were transported to the military base; however before the three years were up the individuals were enabled to return to France, which was not agreed to by New Zealand therefore breaching the arbitration. France claimed that in the case of force majeure in the case of the Major and distress in the case of the Captain. The circumstances surrounding the Major were that he was taken ill and transported to France on the guise of an emergency and allowed to remain there. However it transpired that the Major did need some medical assistance and could be given appropriate treatment in Hao, it was agreed by the UN that the evacuation was not a case of force majeure and the actions were not precluded. If one now considers this in respect to normal contracts one can identify that frustration can occur when an unforeseeable act occurs or it is a circumstance of reservation, i.e. exclusion clause, the contract can be set aside as frustrated. Unlike international law and obligations between states which are ongoing the normal contract will be discharged because it can no longer be performed because it is a one off act and not an ongoing obligation; however as the Rainbow Warrior Case illustrates in must be a truly unforeseeable act which leaves no other choice but to discharge the contract; however as this contractual obligation was on going this
Doctrine of Frustration Applied:
The above discussion of force majeure discussed its uses in respect to international contracts and obligations between states and briefly touched upon how this would affect the average contract. Like the cases of international law discharging the obligations is not taken lightly and only used in extreme circumstances. As in the case of Davis v Fareham illustrated frustration is the last option to be taken.
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. Non haec in foedera veni. It was not this that I promised to do.
It is common practice that just because a contract has become too expensive that it is not frustrated, unless the other party start making unreasonable late and highly expensive variations; whereby a lump sum contract is frustrated so that the contractor can recalculate his lump sum. Also as noted earlier any clause that defines force majeure must comply with the UCTA 1977. The key question is whether the act is completely outside the contractor’s control that it is no longer performable. However the court is prepared to give the terms of the contract their widest meaning i.e. the parties’ intentions, because what is the point of creating a valid contract and then deciding it is no longer desirables and using a clause that brings about frustration creating an unfair situation for the other party. The Court of Appeal in The Marine Star argued the correct approach was through the actual words used because these exclusionary clauses are restrictive in nature; however the correct is approach still points to one outcome the limited use of force majeure. Frustration can be the physical destruction of the subject matter of the contract, i.e. a fire burns down a concert hall . It can also be due to extraneous circumstances, such as the Guns ‘n’ Roses Case where the health and safety department declared the stadium unsuitable so the contract was frustrated as the band could not perform. Impracticability is another example of frustration, i.e. the circumstances have changed radically so the contract cannot be performed. The best example of how extreme the circumstances have to be to equate to frustration of contract can be seen in the leading authority of Jackson v Union Marine Insurance Co Ltd :
A ship was chartered in the November to proceed with all possible despatch, all dangers and accidents of navigation excepted, from Liverpool to Newport to load a cargo for carriage to San Francisco. The ship ran aground on 3 January in Carnavon Bay. She was later refloated by 18 February and taken to Liverpool. The charterers repudiated the contract on 15 February. The question was whether the charterers were liable for not loading the ship, or whether the time likely to be required for repair (the ship was still under repair in August) was so long as to excuse the charterers. On this finding by the jury, the court held that the adventure contemplated by the parties was frustrated and the contract discharged. The contract term, read literally, did cover what had happened, and it would have stopped the charterers from recovering damages in the event of delay, but it was not intended to cover an accident causing injury of so extensive a nature.
Therefore like international state contractual obligations the frustration of normal contracts is highly restricted, therefore a defence or action in frustration of contracted is limited because the key point is a valid contract has been made and the good faith it has been structured upon should be respected; unless a situation so extreme occurs that it is unfair and impossible for the contract to be performed.
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