Nature of Obligations

Contract Obligations Presumed Absolute

The general principle is that a person is unconditionally obliged to perform his contractual obligations. It is not simply a question of using best endeavours to do so. It is presumed that contracts provide for unconditional obligations.

There is nothing inconsistent with the existence of a contract that a party undertakes something that is very difficult or even impossible. A person may agree to accept an absolute and unconditional obligation which he cannot perform. The general principle is that the law holds a person to his bargain.

The purpose of contract law is to allocate risks.  The contract may allocate the risk of particular events and circumstances to one party or the other. The fact that one party finds it very burdensome and expensive to perform or indeed impossible to do so, does not mean that the contract has been frustrated.


Nature of Frustration I

Frustration is a basis upon which contractual obligations may be released. It applies where, for wholly unforeseen circumstances, it is impossible to perform a contract or perform it in any meaningful way. Ordinary commercial risks do not allow the discharge of a contract by frustration.

The doctrine of frustration developed in the context of cases, where some wholly supervening event arose, commonly destroying the subject matter of the contract concerned. For example, a contract for the letting a music hall for a performance, which was destroyed by fire shortly before the performance, was discharged on grounds, which effectively amounted to frustration.

The frustrating event must be such as to radically change the basis of performance of the contract. It may happen that a factor, such as a delay, does not initially constitute frustration. It may become prolonged or apparently prolonged or interminable, there may be a point at which it amounts to frustration.


Nature of Frustration II

The subject matter of frustration must be something fundamental and central to the contract. It may not relate to a relatively inessential or non-central matter. It most commonly applies where the subject matter of the contract has been destroyed. This has included such circumstances as the existence of a particular ship or building, which has been unexpectedly destroyed.

The frustrating event must arise from some fundamental state of affairs or thing that is assumed by the parties to the contract to be basic to it and to continue to exist. The essence of frustration is that there has been an overwhelming supervening event which was unforeseen by both parties.  War, blockade and like circumstances may constitute frustrating events.

Where there is a contract for the sale of specific goods, which without the knowledge of the seller have perished at the time that the contract is made. the contract is void by under the Sale of Goods Act. Where, the goods are destroyed after the contract, without any fault of either party, before the risk passes to the buyer, the agreement is thereby avoided.


Does not Readily Apply I

The courts take the view that frustration is not lightly to apply. Generally, the parties must accept the allocation of risks expressly or impliedly provided by the contract.  Frustration will not generally be available, simply because the contract becomes more burdensome due to increased costs.

The courts do not lightly apply the principles of frustration.  Arguments for frustration are to be scrutinised carefully and to be allowed only sparingly. Frustration must relate to a key contractual matter.  If it relates to some peripheral matter which is not essential, then a substitute arrangement on this matter may be implied.

It must relate to a wholly unexpected matter or event, which neither party could anticipate.  If the parties anticipated or should have anticipated the matter, frustration would not be available.


Does not Readily Apply II

A contract for a commercial venture will not generally be rendered void by extraneous circumstances. Frustration will not apply merely because the performance of a contract has become very onerous on one party. Commonly the unexpected increase in the cost of performance may arise from a strike or extraordinary weather affecting performance.  A dramatic increase or fall in the price of the assets concerned, is no way sufficient, to allow the principle of frustration to apply.

The Suez crisis in 1956 and the Six-Day War in 1967, each closed the Suez Canal and put greatly increased burdens on shippers. The relevant contracts of carriage were held not to be frustrated in several cases. An alternative route existed and the fact that it made the carriage substantially more expensive for the carrier was not sufficient to cause frustration.


Most Mistakes not Frustration

It is not frustration because some expected benefit which one party to the contract anticipated is not available.  Where in substance the thing contracted for is provided, the fact that it does not have particular attributes due to a change of circumstances is not a frustrating event.

Where a contractor contracts with subcontractors in anticipation of a principal contract, the non-materialisation of the principal contract is likely to be categorised as his risk, in the absence of a stipulation to the contrary.


Ordinary Commercial Risks

Where the risk is one which every party in the particular field is to be regarded as knowing and taking, frustration will not negate a contract, where one party would normally carry this risk in the business concerned or in the ordinary course of events. That party must contract to the contrary if he does not wish to carry this risk.

Frustration does not allow persons to avoid their contractual obligations simply because they have become more burdensome, costly or unprofitable.  It applies only where there are fundamental unforeseen circumstances, which are beyond either party’s control.

Where the contract does not provide for ordinary commercial risks, the happening of those risks does not, of itself constitute frustration. One party will usually carry the burden of loss.


Contact Makes Provisions

The common law principle of frustration is applicable, only where no provision is made by the express or implied terms of the contract.

The parties to a contract may provide for contingencies, by an express term, for example, excusing performance if the contingency occurs. Parties sometimes include so-called force majeure clause dealing with wholly exceptional and unlikely circumstances (e.g. a so-called act of good, such as a natural disaster).

Parties sometimes provide clauses dealing with “force majeure”, “vis major” or other unforeseen circumstances outside their control. They typically make provision for the discharge of the contract in these cases. The doctrine of frustration may nonetheless operate even where such clauses are present.

Where the relevant event is in fact provided for by the contract, frustration will not generally be available.


Contract Provision may not Preclude Frustration

If the risk is regulated by the contract, as for example is the case with the standard contract for the purchase and sale of real property, frustration cannot apply.Contracts frequently provide express so-called “force majeure” clauses.  Exclusions of liability to perform are sometimes made in respect of acts of war and “acts of God”.

The presence of a force majeure clause does not necessarily exclude the doctrine of frustration.  The courts may apply the principle of frustration, even where a specific force majeure clause is provided. The court may find that the event or circumstances that have occurred are so extraordinary, that it is wholly outside the scope of the clause that appears to cover the position.

It is a matter of interpretation as to whether the clause applies in the particular circumstances.  The court may choose to interpret a clause so that it does not apply to the particular supervening event that has happened.


Unforeseen Event

If the party who claims frustration was aware of a particular risk or contingency, then it is more difficult for that party to plead frustration. The court is likely to hold he took the risk concerned.

It is sometimes said that the event should be unforeseen, unexpected or uncontemplated. Some courts have expressed the view that the frustrating event must be unforeseen or unexpected.  These expressions are not necessarily definitive.

Most courts accept that he fact that the event is foreseeable, does not preclude it being sufficient to constitute frustration. Many contingencies under a contract are potentially foreseeable although unlikely.  It appears that the fact that an event is foreseeable and even reasonably foreseeable, is not sufficient to exclude the possibility of frustration.

The key issue is that matter or risk is so unexpected, that the parties have failed to consider it. In a sense, frustration arises, where the matter, event or risk is such that neither party expressly or impliedly undertook the risk concerned.

The event must be such that it was not a serious possibility. If the event was a serious possibility, then frustration is unlikely to be available.


Delay

Circumstances outside the parties’ control which cause delay, do not necessarily frustrate the contracts.  The delay must be so long that it undermines and removes the underlying basis of the contract, for frustration to apply.

Where there is a long interminable delay, at a certain point, parties may be entitled on the basis of the reasonable probabilities as to the prospective length for which it may continue, terminate the contract if a reasonable assessment is such as to remove the commercial basis of the contract.

In some cases, the delay is such as to alter the contract radically. Where a ship was hired, but run aground requiring extensive repairs, the commercial sense of the agreement was lost by reason of the prospective delay and the contract was avoided. The parties are not obliged to wait until delay is over.


Point at which Delay Frustrates Contract

If it appears from the circumstance that the delay is likely to be indefinite, or of such a magnitude as to constitute frustration, then the parties may act on the basis of the reasonable commercial probabilities.

The fact that it might later be proved that performance did not, in fact, become impossible or interminably delayed, does not obviate the application of the doctrine of frustration. If at the relevant time it appeared probable that the circumstances were such as to frustrate the performance of the contract, then the doctrine applies.


Discharge

Where frustration occurs, future performance is discharged. The parties’ future obligations are discharged.   The contract is ended automatically. It is not vitiated retrospectively as and from the start.  Frustration does not discharge rights that have come into existence before the frustrating event.  They continue to apply.

The principle of immediate termination in respect of future obligations raises anomalies and has been reformed in the United Kingdom.  The anomalies are particularly pointed where the obligation to pay may have arisen in advance of performance, as is frequently the case.

This is unlike the case with mistake where the contract may be void as and from the outset. The traditional approach is that the loss lies where it falls.


Restitution on Frustration

The basic principle is that frustration discharges the parties from all future performance. This may require restitution, in order to reverse what would otherwise constitute unjust enrichment. Where there is a total failure of consideration, restitution will be allowed.  Restitution general requires that there has been a total failure of consideration.

In many circumstances, frustration will cause a total failure of consideration, in which event restitution is available.   The courts have held that where no tangible benefit derives from the contract, there is a total failure of consideration for this purpose.

However, any significant element of benefit may preclude restitution at common law.Frustration does not necessarily lead to a total failure of consideration allowing for restitution of monies paid.  In England and in Northern Ireland, the Law Reform (Frustrated Contracts) Acts has modified the common law position and allows for the adjustment of the rights of parties to a frustrated contract.

The is more modern common law support for allowing a more expansive doctrine of restitution of monies paid under a frustrated contract. Prepaid money is usually recoverable even though there has been no total failure of consideration. A party may obtain compensation for breaches which occur prior to the frustrating event in some cases.


References and Sources

Irish Textbooks and Casebooks

Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch 18

Friel, R. The Law of Contract 2nd Ed, (2000)

McDermott, P.  Contract Law (2001) 2nd Ed (2017) Ch 20

Enright, M. Principles of Irish Contract Law (2007)

Clark and Clarke Contract Cases and Materials 4th Ed (2008)

English Textbooks and Casebooks

Poole, J. Casebook on contract law. (2014) 12th edition

Stone and Devenney, The Modern Law of Contract 10th Ed (2015)

McKendrick, Contract Law 10th Ed (2013)

Chen-Wishart, Contract Law 5th Ed (2015)

Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)

Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.

Chen-Wishart, M. (2015) Contract law. 5th Ed.

Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.

Duxbury, Robert (2011) Contract law. 2nd Ed.

Halson, Roger (2012) Contract law. 2nd Ed.

Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)

O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)

Peel, and Treitel, The law of contract. 13th Ed. (2011).

Poole, J.Casebook on contract law. 12th Ed. (2014).

Poole, J.  Textbook on contract law. 12th Ed. (2014)

Richards, P Law of contract. 10th Ed. (2011)

Stone, R.  The Modern law of Contract. 10th Ed. (2013)

Treitel, G. H.  An outline of the law of contract. 6th Ed (2014).

Turner, C Unlocking contract law. 4th Ed. (2014).

Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).

UK Casebooks

Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)

McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)

Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)

Burrows, A. S.  A Casebook on Contract. 4th Ed.

Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)

Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)

UK Practitioners Texts

Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)

The above are not necessarily the latest edition.