Set New Standards for Contractual and Pre Contractual Relations

A contract is essentially private, it is a creation of rights and obligations initiated entirely by free consenting parties to perform certain contractual duties. [1] A breach of a contract is strict, it must be established that there is an actual breach by failure to perform. The promisee must establish that the promisor has failed to perform a contractual obligation, which gives rise to contractual liability [2] . However, contracts can be ambiguous with the need for gaps to be filled in.

There is a consensus among society that courts posses the ultimate solution in finding the correct legal answer. [3] If a contract contains gaps or is ambiguous (Raffles v Wichelhaus 1864) [4] , a court must decide objectively upon solving questions of liability arising in the context of contractual liability, which they will utilise a range of different sources of cases, doctrines, terms, approaches, and adopting in effect solutions to questions of contractual liability. [5] But it can be considered that courts are paternalistic, because they will override the parties expressed preferences out of a concern about the party’s welfare. Courts, do not conceive themselves as imposing an agreement that parties would reject. [6]

It was viewed that the obligation to perform a contractual duty was absolute. If it became physically impossible for a party to perform his/her bargain, they had to pay damages for the breach, even if supervening events took away the whole purpose of the contract without fault of either party. [7] This is known as “absolute contracts” rule, which was clearly expressed in Paradine v Jane (1647) [8] , which a lessee was evicted during the Civil War, and it was held that Jane still had to pay the rent, even though the fact that he could not enjoy the property because of the events beyond his control was no concern to the lessor, and thus was no excuse. [9]

The case of Taylor v Caldwell (1863) [10] was in relation to a music hall hired for a series of concerts was burnt down before the date for the first performance. This was held to frustrate the contract, because there was no longer any hall to hire. The hirer, therefore, no longer had to pay. [11] Such a case brought upon a radical liberal change which was imposed and developed by the courts, it facilitated the development of the doctrine of frustration which brought upon an exception to this absolute rule. Blackburn J outlined the reasons for his decision in Taylor v Caldwell (1863) [12] as:

Where, from the nature of the contract, it appears that the parties must from the beginning have known that it could not be fulfilled unless… some particular specified thing continued to exist, so that, when entering into the contract, they must have contemplated such continuing existence as the foundation of what was to be done; there… the parties shall be excused in case, before breach, performance becomes impossible from perishing of the thing without the fault of the contractor. [13]

The doctrine of frustration must be approached with caution and operates within strict limits which do not provide an easy means of escape. [14] Lord Sumner defined two essential factors in (Hirji Mulji v Cheong Yue Steamship Co (1926) that are necessarily to be present in any frustrating event:

The first essential factor is that there must be some outside event or extraneous change of situation, not foreseen or provided for by the parties at the time of contracting, which either makes it impossible for the contract to be performed at all, or at least renders its performance something radically different from what the parties contemplated when they entered into it. The second essential factor is that the outside event or extraneous change of situation concerned, and the consequences of either in relation to the performance of the contract, must have occurred without either the fault or the default of either party to the contract. [15]

The modern concept of frustration was stated in the following terms by Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council (1956) stated that:

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. [16]

The concept operates where the supervening event which brings about the “radical” change is usually to as a “frustrating” event, which establishes that the performance of the contract has become substantially different from that to which the parties agreed to. [17]

A contract may also be frustrated where both parties made it on the basis of a future event which does not take place Chandler v Webster (1904) [18] . The concern of frustration is also in connection with illegality, a change in the law to a contract will discharge the performance of an agreed contract Avery v Bowden (1855). [19] Another event which constitutes a frustrated event is a change that may occur, which makes a total nonsense of what was originally agreed upon, so that what the parties would have to perform bears no relation to what was originally intended. [20] This change must be radical; an event which merely makes it more difficult or expensive for a party to perform the contract will be no excuse. It is rare that a contract will be frustrated on this ground Metropolitan Water Board v Dick, Kerr & Co. (1918). [21]

The discharge of a contract may occur without either party being in breach of contract is entitled under the doctrine of frustration. [22] Frustration automatically brings the contract to an end and renders it void. [23] It also discharges the parties from their further contractual obligations Hirji Mulji v Cheong Yue Steamship Co (1926). [24]

Viscount Simon L.C stated in Joseph Constantine Steamship Line, Limited v. Imperial Smelting Corporation, Limited (1942) that:

It is well to emphasise that when “frustration” in the legal sense occurs, it does not merely provide one party with a defence in an action brought by the other. It kills the contract itself and discharges both parties automatically. [25]

The emergence of the doctrine of frustration provided the legal recognition that parties are excused without breach of contract from performance which justice demands. [26] The courts have intervened to provide a fair and just solution to the unexpected events in the context of contractual liabilities, which has overtaken the parties since their contract was formed. [27]

Initially, the implied term theory was adopted as the basis of the doctrine of frustration, so that whenever the doctrine operated it was because the court could imply a term into the contract providing for the discharge of the parties. [28]

The rights and obligations of parties to a contract are determined by the terms of that contract, these terms may be express or implied. [29] Express terms are those terms that the parties have articulated prior to, or at the time of, concluding their contract. Implied terms are those terms which the law implies into a contract but does not form part of the offer and could possibly not have been discussed by the parties to the contract. [30]

Parties cannot possibly contemplate every term that may arise and alter the performance of a contract. The traditional justification for the implication of terms is that the court is giving effect to the presumed intention of the parties on its view of the reasonable expectations of the parties to the transaction. [31] Necessity test was stated by Scrutton LJ in Reigate v Union Manufacturing Co (Ramsbottom) Ltd (1918):

a term can only be implied if it is necessary in the business sense to give efficacy to the contract; that is, if it is such a term that it can confidently be said that if at the time the contract was being negotiated some one had said to the parties, “What will happen in such a case’, they would both have replied, “Of course, so and so will happen; we did not trouble to say that; it is too clear”. [32]

Implied terms can be divided into three categories:

1. Terms implied by fact are implied on the basis of what both parties must have intended. [33] As MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd (1939) stated:

any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that if while the parties were making their bargain, an officious bystander were to suggest some express provision for it in the agreement, they would testify suppress him with a common ‘Oh, of course!’. [34]

For example, in a contract involving the hire of a ship, it would be implied that the vessel on hire was seaworthy. [35]

2. Terms implied by law are imposed upon the parties either by statute or by the court acting out of necessity, such obligations are imposed by of the law which enables to achieve substantial justice between parties. [36] For example, in a tenancy of a furnished house, the courts will imply a term that the premises will be reasonably fit for human habitation when the tenancy begins. [37]

Lord Denning stated in Shell (UK) Ltd v Lostock Garage Ltd (1977) [38] that terms implied in law are to be found in:

…those relationships which are of common occurrence… seller and buyer, owner and hirer, master and servant, landlord and tenant, carrier by land or sea, contractor for building works, and so on. In all those relationships the courts have imposed obligations to one party or the other, saying they are implied terms… the house in Liverpool City Council v Irwin (1977) [39] … examined the existing law of landlord and tenant… to see if it contained the solution to the problem; and, having found that it did not they, they imposed an obligation on the landlord to use reasonable care.

Terms implied by statute such as the Trade practices Act 1974 (Cth) [40] , Fair Trading Act 1999 (Vic) [41] and/or Goods Act 1958 (Vic) [42] are clear examples of legally imposed contractual obligations that are consolidated within the Acts which impose remedies for breaches, that are based upon consumer protection from corporations. For example s 18 of the Goods Act 1958 (Vic) [43] implies a term that goods sold by description must correspond with that description.

The courts also remedy situations such as quasi-contracts in which one party would be unjustly enriched were he or she not required compensating the other. For example, an unconscious patient treated by a doctor at the scene of an accident has not agreed (either expressly or by implication) to pay the doctor for emergency services, but the patient would be unjustly enriched by the doctor’s services if the patient was not required to compensate the doctor. [44]

3. Terms may also be implied by virtue of custom or usage. A contract may be deemed to incorporate a term which can be shown to be the ‘certain and general’ custom of a particular industry Con-stan Industries of Australia Pty Ltd v. Norwich Winterthur Insurance (Australia) Ltd (1986). [45]

It can be concluded that individual choices does not define a contract, the courts must interpret cases in the effort to make the contract meaningful, because contracts have the potential to be ambiguous the courts will fill some of these gaps by implying terms into contracts. It is notable about the implication of the courts that can be seen as regulating contracts in the context of distributive justice and impose contractual liability upon parties, who enter a contract, in order that one party does not take advantage of the other, and thus allows parties to terminate a contract without any breach by utilising rules or doctrines such as the doctrine of frustration. Courts have made a potent effort to ensure that the law of contract is objective and fair which is imposed in the interest of satisfactory social justice. The courts intervention in the interpretation and the filling in of gaps, imposing implied terms to give a contract enforceability and liabilities and the development of the doctrine of frustration have provided a just solution to the unexpected events that may arise or have arisen in contractual liabilities, because they can be viewed as satisfactory explanation of many cases to come. For example if the doctrine of frustration was not yet developed by the courts the law till this day would be reluctant to excuse a party of their performance in a contract where supervening events rendered that performance difficult or impossible.

Bibliography

Articles/Books/Reports

David W. Oughton and Martin Davis, Sourcebook on Contract Law (2nd ed 2002).

Linda Mulcahy and John Tillotson, Contract Law in Perspective (4th ed, 2008).

Richard Stone, The Modern Law of Contract (6th ed 2005).

S. B. Marsh and J. Soulsby, Business Law (8th ed, 2002).

Case Law

Avery v Bowden (1855).

Chandler v Webster (1904).

Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337.

Con-stan Industries of Australia Pty Ltd v. Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226

Davis Contractors Ltd v Fareham Urban District Council (1956) AC 696 at 729.

Hirji Mulji v Cheong Yue Steamship Co (1926) AC 497.

Hong Kong Fir Shipping Co v Kawasaki Kisen Kaisha (1962) 2 QB 26, at 66-71 Court of Appeal.

Joseph Constantine Steamship Line, Limited v. Imperial Smelting Corporation, Limited (1942) A.C. 154.

Liverpool City Council v Irwin (1977).

Metropolitan Water Board v Dick, Kerr & Co. (1918).

Paradine v Jane (1647).

Shell (UK) Ltd v Lostock Garage Ltd (1977).

Shirlaw v Southern Foundries (1926) Ltd (1939).

Raffles v. Wichelhaus (1864), 159 Eng Rep. 375 (Ct. Exchequer).

Reigate v Union Manufacturing Co (Ramsbottom) Ltd (1918) 1 KB 592.

Taylor v Caldwell (1863).