Frustration:
Frustration of a contract occurs when supervening events render the performance of the contract impossible or creates grave hardships for one party in the discharge of the contract. Therefore if due to no fault of either party the performance of the contract becomes impossible or largely different from what was initially agreed upon, the contract could be said to be frustrated. Frustration as an argument is not easily accepted by the courts for the discharge of obligation and duty under a contract. There are various strict tests that need to be fulfilled and satisfied for the contract to be rendered frustrated and shall be elaborated upon further in the paper. However, if the frustration is argued successfully and accepted by courts then the contract is rendered discharged. The power to decide so is always with the courts, and if the prayer of frustration is accepted it would free the parties of any and all obligations under such contract. This is, of course, a doctrine of last resort and may not always lead to equity or fairness as there is no power with courts to modify the agreement and can only hold either the entire or part of the contract is frustrated and hence need not be performed.
The doctrine of frustration was first established in the English case of Taylor V Caldwell. However, considering the scope of frustration to be too broad and undefined as laid down in the above case, Justice Bingham reduced and narrowed the scope of doctrine of frustration in Lauritzen A.S v Wijsmuller B.V , in which the test and essentials that determined the frustration of contract were laid down as follows :
A)Frustration in essence discharges the parties from any further obligations and kills the contract. B) Frustration automatically and forthwith terminates the contract.
C) Frustration can only occur in case of an event, which was not an act of either party, but a supervening event which was outside the control of either party.
D)Frustration takes place only in the event where the parties are seeking to rely on it are not to be blamed or are not at fault.
Therefore, the principles laid down by Justice Bingham in the above case has held good for decades and laid the concrete foundation of the test to what we refer to a the doctrine of frustration. To reiterate, a frustration of a contract occurs when a supervening events render the performance of the contract impossible or creates grave hardships for one party in the discharge of the contract due to no fault of either party.
Having established what is frustration of a contract, in definition, one turns their attention to how is frustration of a contract successfully identified and argued. The courts have, rightly, been very reluctant to accept the argument of frustration and have, over a period of time, added measures and test to establish what may or may not be considered as a frustration of a contract.
Test of Tacit assumption:
There are a few assumptions on which contractual obligations are agreed upon. These assumptions lead one to believe a future event will inevitably take place for the contract matter to satisfy. Hence if a contract is entirely based upon this future assumption and that assumption without any fault of either party turns out to be incorrect or ceases to exist then the courts could hold that the contract may have been frustrated. The case that brought doctrine of frustration and the shared assumption test to light was Krell v. Henry. The facts of the case are- Edward VII was to be crowned in the Westminster Abby in 1902. Krell, who had an apartment overlooking the coronation, had offered the window for anyone who would want to rent the same. Henry agreed to the offer and paid 25 pounds as an advance and was yet to pay 50 pounds. Just days before when the coronation was set to take place, Edward VII had fallen sick and the coronation had to be postponed. Henry refused to pay the remainder of 50 pounds and was, hence, subsequently sued by Krell. Lord Justice Vaughan Williams held that neither parties could reasonably had foreseen that the coronation may not take place on the specified date. This tacit assumption that the coronation would take place was shared and they could not have reasonably foreseen that such an event maybe postponed. The court held that the room was hired for a particular purpose and the coronation processions were the foundation of that contract, therefore as the processions were canceled the main object of the contract had ceased to exist hence the contract was held to be frustrated.
Exception of Tacit assumption:
Therefore, from Krell v Harry it is clearly established that shared tacit assumptions, even though are not explicitly put in to the agreement, are very much an integral part of the contract and provides for the motive, object and reason for the existence of the contract. But, however, the shared tacit assumption are not absolute and there are exceptions to the rule. The four exceptions to the rule are :
parties are aware that there are various foreseeable assumptions or their assumptions are problematic;
Where there is a risk factors associated with the assumptions;
Where the assumption is not shared;
The assumption or the event is not material to the object of the contract.
Therefore if any of the above exceptions fall into the the test of shared tacit assumption then the contract cannot be said to have been frustrated.
Tacit assumption is available to the parties as a judicial relief only if the supervening event could not have been reasonably foreseen or had been so improbable that neither party could have considered its possibility. The courts will, however, not give any judicial relief if the event was only highly unlikely to occur but the probability was not negligible. In the latter sense the parties realise there is a probability for risk but the odds of that risk materialising are not very high, so the parties tend to overlook the same during the contract negotiations. The courts in such instance have held that the parties had the ability to plan and mitigate for such events at the time of entering into the contract, but choose to overlook or not plan for such an eventuality, therefore the parties in such cases cannot successfully plead frustration.
Another important aspect of tacit assumption is wrong assumptions, where parties genuinely believe that their assumption of the future is correct rather than it actually being problematic and that the occurrence, of the event that gives the object of their contract legitimacy, will take place. The probability of these occurrence may or may not be fair but still the same are based on future assumption of events. But if these are assumptions, which after all are probabilities, do not take place then the contract can not be sought to be frustrated. There was a wrong assumption by the parties, but that does not mean that that the event that took place was outside the foreseeability of the parties, hence the same needs to be performed regardless of hardship.
Force Majeure, Hardship and Intervener Clause:
(From the english perspective, jargons may interchange in practise with regions and jurisdictions)
Force Majeure, hardship clause or intervener clause are generally as a matter of practice put into commercial agreements so that parties can deal with high risk supervening events, where the occurrence of these events could lead to the frustration of object of the contract and bring an end to the entire contract. The Force Majeure in effect puts the the contract to a stand still if an event outside the control of either parties renders the performance of the contract impossible. But it does not frustrate the contract, it merely asks the parties to wait until the event has passed so that the parties can resume the contract and fulfil their obligations. The object of the clause is that if the parties have expressly provided for events that could cause severe hardships then the parties do not have power to turn that hardship into frustration, going back to the first expedition of the rule of tacit assumption, and thus bring an end to the contract and its obligations. The force majeure clause in turn allows the parties to save the contract and also have the obligations fulfilled after the supervening event has passed.
The party relying upon the force majeure clause has to prove the facts or establish the supervening event that he claims are causing hinderance to the performance of his contractual obligations. He needs to prove that the supervening events that cause the hardship or failure of performance was not in his or her control and there was no way to reasonably have foreseen the event taking place. The party needs to also establish that he could not have taken steps to mitigate or avoid for such events and that the events were entirely unpredictable.
There are various reasons why the parties would consider inserting a Force Majeure clause. By inserting the clause into the agreement the parties can suspend the contract for a limited amount of time but do not have to worry about frustration of the contract that would in essence bring a judicial end to the contract. The clause allow parties to decide on the remedy after the event causing the invocation of the clause has taken place. If there is no force majeure clause in the contract then the only option would be of frustration and that would mean in essence that no more contractual obligations remain. Force Majeure clause are normally drafted in two bits, one part of the clause contains a list of foreseeable events that could take place rendering a valid invocation of the clause, the other part is more general in nature with certain terms and conditions for any other events that need to be covered but may not have been explicitly put in the contract.
The hardship clause, however, changes the relationship and obligations of the parties when successfully invoked. The hardship clause lays down the terms and definition of what constitutes to hardship and if the either party is successful in establishing hardship then there is a procedure laid down as to what needs to done by both the parties if the such an event takes place. Generally this allows both the parties to renegotiate the contract and change the obligations, and terms and conditions of the contract in such a way that both the parties in good faith reach a fair agreement keeping in mind the changed circumstances. The intervener clause is similar to the hardship clause except if the parties can not reach an agreement in case of hardship then the parties can approach a third party, like an arbitrator, who will have the ability to determine the resolution of conflict between the parties.
Therefore if the parties expressly put in a clause that regulates unforeseen events then the scope of the doctrine of frustration become impotent. But however, the scope of public policy in the determination of frustration can not be ousted by even express clause. For ex. if an agreement is said to be frustrated on the account that the underlying object of the contract is illegal, then no express clause can oust frustration in such a scenario.
To conclude, the Force Majeure, Hardship and Intervener clause protect the parties from an unforeseeable event that could frustrate the object of the agreement and result in judicial termination of a part or the entire contract. It also allows parties to overcome the event causing hardship, through renegotiations or effecting a stand still upon the discharge of the agreement, while protecting the agreement and the obligation under the agreement from judicial intervention and termination.
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