The Doctrine of Frustration: Development and Limitations under English Contract Law.
INTRODUCTION
Pacta sunt servanda is a fundamental and universally accepted concept of contract law. As a matter of principle, each party must adhere to the letter of the agreement. Lord Hope recently expressed the opinion that “the maxim pacta sunt servanda [...] lies at the root of the whole contract law”.1 Since effective economic activity is not possible without reliable promises, the importance of the precept is indeed paramount.2
Nonetheless, the principle of sanctity of contract is not considered to be absolute. Practice has demonstrated that strict application of the doctrine might lead to an immensely impractical and wholly outrageous result. Situation existing at the conclusion of an agreement might have subsequently changed so significantly that any reasonable party would not have entered into the contract or would have stipulated for a different one, had it known the future occurrence.3 In response to the need for a feasible solution, the English system has developed the doctrine of frustration, which is an embodiment of the Roman clausula rebus sic stantibus.
It will be argued herein that the doctrine of frustration is, at most, a well-confined exception to the principle of pacta sunt servanda, applied only in a very limited manner. Sanctity of an agreement is still the cornerstone of the modern contract law. First, the theories as to the conceptual basis of the doctrine of frustration will be presented in order to demonstrate the varying degree of interference of that notion with the principle of pacta sunt servanda depending on the justification preferred. Secondly, limits of the doctrine of discharge will be analysed with the aim of showing care with which the courts apply it to the cases before them.
CONCEPTUAL BASIS OF THE DOCTRINE OF FRUSTRATION
It is submitted that should the “implied term” theory be regarded as the foundation of the doctrine of frustration, there would be no conflict between that concept and the principle of pacta sunt servanda. Classic formulation of the idea of sanctity of contract can be found in Paradine v Jane, where it was held that once a contracting party assumed a duty it was bound to fulfil it.4 In Taylor v Caldwell, however, the court employed the term of an implied condition in order to introduce the doctrine of frustration into English law. It was decided therein that an agreement was to be construed “as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible [...] without default of the contractor”.5 Lord Loreburn in Tamplin stated that the court would not regard an obligation as absolute if the parties did not intend it to be such.6 Provided they “made their bargain on the footing that a particular state of things should continue to exist, a term to that effect will be implied”.7 Therefore, a court adjudging frustration of a contract does nothing more than giving effect to an unexpressed, albeit presumed or, perhaps, imputed, intention of the parties. Whether it is possible or not is a matter beyond the scope of this paper.8 Applying strictly the “implied term” theory, there can thus be no violation of the principle of pacta sunt servanda, as contravention is circumvented by resort to yet another fundamental concept of contract law, namely the autonomy of the parties’ will.
Nonetheless, the “implied term” theory as to the basis of the doctrine of frustration appears to have been rejected by some in preference to a different conceptual foundation. Lord Radcliffe opined in Davis Contractors that “it would be simpler to say that frustration occurs whenever the law recognises that 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 contracted to do”.9 According to Professor Treitel, this statement is to be taken as supporting the so called “construction theory”.10 In fact, both Blacburn J. and Lord Loreburn in Taylor v Caldwell11 and Tamplin12, respectively, indicated that the ultimate success of a plea of frustration is dependent upon the interpretation of a contract as a whole. This view was endorsed in a long line of authority.13 Consequently, whether an agreement has been frustrated is to be determined by examination of the spirit of the accord with regard to the common actual intention of the parties. Such an approach to the issue of frustration is at ease with the principle of pacta sunt servanda, since a contract is discharged because this is what the contractors intended in the situation which eventuated.
However, the “construction” theory too seems to have been dismissed by few in favour of an extremely vague notion of “just solution”. Some view the doctrine of frustration as “a device by which the rules as to absolute contracts are reconciled with the special exceptions which justice demands”.14 Lord Wright famously remarked that the judiciary has indeed invented it in order to supplement any defect of the actual contract.15 His Lordship subsequently added that the court should be guided by what is fair and reasonable when assessing whether an agreement has been frustrated.16 With respect, such an arbitrary application of the doctrine of frustration has the potential to interfere considerably with the principle of sanctity of contract, excusing each party from performance in circumstances which do not warrant discharge of their respective obligations.
Bearing in mind that none of the theories presented above attracted a universal approval, it is difficult to determine whether the doctrine of frustration de facto challenges the validity of the principle of pacta sunt servanda. It is submitted that this depends upon which one of them is preferred, with the first two being relatively noninvasive, if at all, and the third having a potential to be remarkably intruding. Forthcoming analysis should, therefore, focus upon the limits of the doctrine of frustration in order to ascertain the extent to which it is likely to interfere with the sanctity of a contract.
LIMITS OF THE DOCTRINE OF FRUSTRATION
It is submitted that Blackburn J. in Taylor v Caldwell rather unfortunately formulated the doctrine of frustration in a way immensely permissive of expansion.17 Further development could sweep the principle of pacta sunt servanda away from the horizon of contract law. English law has, however, since accepted the occurrence of frustration in cases where a thing required for the performance of contractual obligations was permanently, or even temporarily, requisitioned or unavailable18, or where the impossibility affected only the mode of performance.19 Interestingly, a door was opened for the doctrine of frustration where the supervening event had not rendered performance by either party impossible at all, merely defeating the purpose of the contract. In Krell v Henry, which is said to be the leading case in the string of jurisprudence related to the coronation of King Edward VII, an agreement was frustrated even though performance was not physically or legally impossible and there was no express reference in the contract to the coronation of the king.20 Accordingly, the doctrine of frustration was thereby extended to cover “the cessation or non-existence of an express condition or state of things going to the root of the contract and essential to its performance”.21 Such a development of the doctrine of discharge can rightly be criticised for challenging the sanctity of a contract in the fullest sense. It might lead to misapplication of the concept, allowing a party to escape fulfillment of a duty purely because an event subsequent to the conclusion of the contract turned the agreement into a poor bargain.
Nevertheless, the courts were careful to restrict the ambit of the exception to the “very narrow limits”.22 In The Nema Bernard Rix, as he then was, appearing as counsel for the charterer, having stated that “frustration runs counter to the maxim pacta sunt servanda”, attempted to convince the Court of Appeal that it should be “examined carefully and closely [...] to see that it works fairly and mutually”.23 Upon appeal to the House of Lords, Lord Roskill seemed to have appreciated this contention, asserting that the doctrine was “not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains”.24 It is now generally accepted that “an increase of expense is not a ground of frustration”.25 For instance, performance of the contract of sale by shipping the goods via the Cape of Good Hope was “not commercially or fundamentally different from” shipping them via the Suez Canal, though the cost of such deviation might be substantial.26 Neither can “disappointed expectations lead to frustrated contracts”.27 Lord Hailsham L.C. in National Carriers Ltd v Panalpina Ltd described as “untenable” the “proposition that the doctrine was not to be extended”.28 Still, his Lordship opposed the idea of allowing an event which temporarily prevented a tenant of a warehouse from putting it to the intended use to frustrate the contract. It is also worth noting that only two of the so called “Suez Canal” cases, which arose out of the crisis of 1956, were concluded by a finding of frustration, both being subsequently overruled.29 Cumulatively, these cases may be taken to stand for the proposition that where a performance was not made impossible, but merely had become more onerous for the party alleging frustration, the court would not allow operation of the doctrine, holding the party to the contractual bargain it had made instead. Moreover, where it is clear from the contract that one party was intended to assume the risk of the alleged frustrating event, the court can imply such a term.30 As shown above, the scope for invoking the doctrine of frustration is very narrow due to the importance attached by the courts to the principle of sanctity of contract.
Furthermore, an express provision in the contract dealing with a certain event might prevent the application of the doctrine of frustration.31 Since the concept is concerned with an occurrence of an unforeseen circumstance, it cannot be applied if the one in question is enshrined into the agreement. As a result, a force majeure clause would preclude the application of the doctrine of frustration provided that the alleged frustrating event was one enlisted under the provision.32 Equally, a price-escalation clause in a contract is likely to discourage the court from concluding that a sudden and rapid increase in price has frustrated the agreement.33 Nonetheless, unequivocal and clear wording must be used in order for such a provision to be effective in excluding the possibility of frustration.34 By upholding an express clause, the court is affording the principle of pacta sunt servanda paramount importance through limiting the ambit of the doctrine of discharge.
In addition, if the court is prima facie satisfied that the parties foresaw the allegedly frustrating event despite there being no express provision related to that occurrence, it might not apply the doctrine of frustration.35 Even if the event was foreseeable, albeit not actually foreseen by the parties, it is might still be held not to have frustrated the contract.36
CONCLUSION
It was demonstrated in the course of this paper that the doctrine of frustration is, in general, at odds with the principle of pacta sunt servanda. Degree of invasion upon the fundamental concept of contract law is dependent on the conceptual basis adopted as justification for the former idea. Nonetheless, as presented above, the courts have been careful in limiting the outreach of the doctrine of frustration so as to avoid the clash with the cornerstone precept of sanctity of a contract. Therefore, it is submitted that the challenge posed by the doctrine of frustration to the validity of that principle is no more than necessary for achieving a just outcome in a particular case.
1 Lloyds TSB Foundation for Scotland v Lloyds Banking Group plc [2013] UKSC 3, [47].
2 See D Maskow, Hardship and Force Majeure (1992) Am. J. Comp. L. 657, 658.
3 See Schmitthoff CM, Schmitthoff's Export Trade (8 ed. OUP 1986) 146.
4 (1646) Aleyn 26, 27.
5 (1863) 3 B. & S. 826, 839 (Blackburn J.).
6 Tamplin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd [1916] 2 AC 397, 403-404
7 ibid.
8 See, in particular, Denny, Mott & Dickson v James Fraser [1944] AC 265, 275 (Lord Wright).
9 Davis Contractors v Fareham UDC [1956] AC 696, 729.
10 Treitel G, Frustration and Force Majeure (2nd edition, Sweet & Maxwell 2004) 643.
11 See n 5, 833-834.
12 See n 6, 404.
13 See, for instance, Shell UK Ltd v Lostock Garages Ltd [1976] 1 WLR 1187, 1196, Atisa SA v Aztec AG [1983] 2 Lloyd’s Rep. 579, 586; FC Shepherd & Co Ltd v Jerrom [1987] QB 301, 322; J Lauritzen A/Z v Wijsmuller BV (The Super Servant Two) [1989] 1 Lloyd’s Rep 145, 154; and Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd (The Great Peace) [2002] QB 697, [73].
14 See Hirji Mulji v Ceong Yue SS Co Ltd [1926] AC 497, 510 (Lord Sumner). See also Denny, Mott & Dickson v James Fraser [1944] AC 265.
15 Denny, Mott & Dickson v James Fraser [1944] AC 265, 275.
16 Joseph Constantine Steamship Line Ltd v. Imperial Smelting Corp. Ltd [1942] AC 154, 186.
17 See n 10, 46.
18 See, for instance, Re Shipton, Anderson & Co [1915] 3 KB 676, Bank Line Ltd v Arthur Capel [1919] AC 435, Jackson v Union Marine Insurance Co Ltd (1874) L.R. 10 C.P. 125
19 See, for instance, Nickoll & Knight v Ashton Edridge & Co [1901] 2 KB 126.
20 [1903] 2 KB 740, 748.
21 ibid., 748.
22 Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93, 115.
23 Pioneer Shipping v BTP Tioxide (The Nema) [1980] 1 QB 547, 556.
24 Pioneer Shipping v BTP Tioxide (The Nema) [1982] AC 724, 752.
25 See n 22.
26 ibid.
27 See n 9, 715.
28 [1981] AC 675, 689.
29 See Carapanayoti & Co Ltd v ET Green Ltd [1959] 1 QB 131 – overruled in Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1962] AC 93 – and Soc Tunisiene d’Armement v Sidermar SpA (The Massalia) [1961] 2 QB 278 – overruled in Ocean Tramp Tankers Corp v V/O Sovfracht (The Eugenia) [1964] 2 QB 226.
30 Larrinaga & Co Ltd v Societe Franco-Americaine des Phosphates de Medulla Paris (1923) 39 TLR 316.
31 See, for example, Joseph Constantine Steamship Line Ltd v. Imperial Smelting Corp. Ltd [1942] AC 154, Kuwait Supply Co v Oyster Marine Management (The Seafeer) [1994] 1 Lloyd’s Rep. 637, and Bangladesh Export Import Co Ltd v Sucden Kerry SA [1995] 2 Lloyd’s Rep. 1.
32 See, in particular, Schmitthoff’s Export Trade: The Law and Practice of International Trade (10th edition OUP 2000).
33 Wates Ltd v G.L.C. (1983) 25 Build LR 1.
34 See, for instance, Beale HG, Chitty on Contracts. Volume I: General Principles, (30th edition, Sweet & Maxwell 2008), [23-058].
35 See, for instance, Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal [1983] 1 AC 854.
36 See Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] EWCA Civ 547, [127].
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