Categories
Contract

Rein And Contract Law

“The parties to an executory contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate – a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to the execution, or the like. Yet this does not in itself affect the bargain which they have made…” (per Lord Simon in British Movietonews Ltd. v.
London and District Cinemas [1952] A. C. 166 at 185). Discuss this dictum and explain the respects in which it needs to be qualified. This quote refers to the doctrine of frustration.In order to adhere to the essay question, it is important to establish what frustration is. The essence of frustration was identified in Davis Contractors Ltd v Fareham Urban District Council[1] by Lord Radcliffe.
He asserts that “Frustration occurs whenever the law recognises that without the default of either party, a contractual obligation has become incapable of being performed because of the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract”.The doctrine excuses parties from further contractual performance when unforeseen events, subsequent to contract formation, make performance illegal, impossible, or radically different from the obligations the parties undertook at formation[2]. The doctrine was established in the nineteenth century. Prior to this, supervening events provided no excuse for non-performance therefore contractual duties were regarded as absolute. The leading case for this is Paradine v Jane[3]. The claimant sued the defendant for rent. The claimant sued the defendant for a failure to pay rent for three years on leased lands.

Jane asserted as a defense that the lands had been seized and occupied by Prince Rupert of Germany, and that Jane had been put out of possession and frustrated in the performance of his duties under the lease and was not bound to perform under the contract. The court held that when a party creates “a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract. ” In British Movietonews Ltd. v London and District Cinemas[4]. The contract was made with regards to film distribution.It included a stipulation in the contract which allowed the defendant to end the arrangement given that there was a four week notice. The parties entered into a supplementary agreement which affirms that the original contract would remain until the order was cancelled.
This was due to the fact that the Cinematograph Film Order proscribed them from distributing or obtaining any films without license except it was for “securing public safety, the defence of the realm, maintenance of public order or efficient prosecution”. However this order went on for longer than expected.The claimant contended that this meant that payment would persist but the defendants opposed. On first instance Lord Slade agreed with the claimants. The appeal was allowed as it was held that the delay could not have been envisaged and the situation had altered significantly from the intentions the parties had created the contract on, hence it couldn’t continue. Lord Simon, on appeal in the House of Lords stressed that the meaning of “an unexpected turn of events” had been misconstrued and applied too generally thus includes non-frustrating events.He avows that a “frustrating event must be regarded as introducing a new situation to which no limit can be put”.
The appeal was allowed. Looking at the dictum by Lord Simon, it is possible to infer that he is not in favour of the doctrine of frustration but leans towards the approach of absolute liability as he states “The parties to an executory contract are often faced, ……
with a turn of events which they did not at all anticipate…….
Yet this does not in itself affect the bargain which they have made…” He takes the point of view that the doctrine has not been employed appropriately by the courts as if it was, there would be fewer terminations of contracts and effective use of other methods like adaptation and force majeure clauses[5]. In the last phrase of this dictum , Lord Simon concluded that although exceptional circumstances may exist, courts must take cautious steps when walking through the door of interpretation and they must never turn their backs on the terms contained in contracts.To Invalidate a contract may carry a greater legal consequence than initially foreseen by the courts. A question to raise is; what if a party to the contract anticipated a future turn of event but assessed the risk involved and notwithstanding, entered into the contract. Should the court step in to cut the tight rope from such a person’s neck when he or she is facing the guillotine? The role of the courts is to seek justice and not to bail us out when things are not going our way.For now, there are certain events that can amount to frustration and the courts can fall back to these precedents to make an informed decision. These events include physical impossibility, non-occurrence of a particular event, supervening illegality, death or incapacity for personal service, requisitioning of ships and interferences with chaterparties, sale and carriage of goods, building contracts, change in the law and performance of only one party affected.
Only few of these will be discussed further.Physical impossibility is concerned with where the performance of the contract is made impossible by the destruction of a specific thing that is essential to that performance. Such is the case of Taylor v Caldwell[6] where the claimant hired the Surrey Gardens and Music Hall from the defendant to put on four concerts. The hall was destroyed by an accidental fire before the concerts started and the claimant sought damages to cover the expenses incurred in preparing for the concert. Both parties were excused because the contract was impossible to perform.Frustration was the grounds in which the contract was discharged as it included an implied condition. The theory of implied term was elaborated on by Blackburn J.
He suggests that a contract is discharged because the parties have agreed that the contract cannot be preformed if the frustrating event occurs. This begs the question, how fair is this tool? It is definitely a useful tool to the defendants as they will always have a way of being excused from a contract. Non-occurrence of a particular event rose out of the deferment of the coronation of King Edward VII due to his sudden illness.Performance of the contact depended on the existence of the event. This was also evident in the case of Krell v Henry[7]. The court held that the defendant was excused from paying the rent as both parties must have regarded the holding of the procession on the date planned essential to the contract. The rent agreed was inflated because of the procession.
This was one of the factors the court used to support the fact that the contract was entered into solely to view the procession. It is clearly evident that the flats could have been used on those days.The contract was frustrated as the performance of the contract on those days would not attain the purpose of the agreement which was to view the procession. It also possible to infer that the purpose was frustrated because the rent agreed was inflated because of the procession. If this was not the case, the defendant would have hired a cheaper room without the view. On the other hand, there are some categories which will not amount to frustration. This comprises of self induced frustration, where a force majeure clause is enabled, forseeability, onus of proof, commercial inconvenience and leases.
If one of the parties caused the frustrating event, this is known as self induced frustration and is no frustration in law. In J Lauritzen AS v Wijsmuller BV, The Supper Servant Two;[8] according to Hobhouse LJ, courts use the term self-induced frustration when “one party has been held by the courts not to be entitled to treat himself as discharged from contractual obligations”. At the Court of appeal, it was stated that the concept of frustration did not operate to remove the defendant’s liability under the contract with the claimant.Bingham LJ felt that it was “inconsistent with the doctrine of frustration as previously understood on high authority that its application should depend on any decision, however reasonable and commercial, of the party seeking to rely on it”. A controversial category is the commercial inconvenience. Lord Radcliffe in the case of Davis Contractors v. Fareham UDC[9]stresses that inconvenience or material loss itself does not cause the principle of frustration to be proven.
In addition, there must be an alteration in the duty or obligation.This is apparent in Tsakiroglou & Co Ltd v. Noble Thorl G. M. B. H[10]. This contract surrounded the sale of groundnuts which was rigid in terms of the date of delivery.
It was held the contract had not been frustrated by the closure of Suez Canal. If the delivery date was made an important aspect of the contract, the results might have been different. The House of Lords felt it was still possible to transport the goods though it would have been more expensive. A pertinent decision was whether this would make a significant difference to the original contract. An increase of expense is not a ground of frustration” as held by Lord Simonds. This goes hand in hand with Lord Simon view in the British Movietonews case putting frustration into its proper use which is to end contracts that are no longer possible to carry out. Another case which can be used to reflect Lord Simon view is the case of Staffordshire Area Health Authority v South Staffordshire Waterworks Co[11].
The defendant agreed ‘at all times hereafter’ to supply water to a hospital at a fixed price. Some years later, the cost of supplying the water was twenty times the contract price.Lord Denning articulated the opinion that by reasoning of continuing inflation, a different situation had materialised in which the contract has ceased to bind. However the other members of the Court of Appeal did not accept his view. They went along with the orthodox view that any decrease in the purchasing power of sterling or the deflation of a foreign currency in which a debt is expressed is a stake which must be borne by the creditor. Provision must be made in the contract if he does not wish to bear the risk. It is not unusual in leases for the terms of the contract to provide for modification of the price to take account of inflation.
One way of avoiding substantial numbers of frustration cases is using force majeure clauses when drafting the contract. A force majeure clause is a limitation statement made in a contract which prevents parties having to strictly comply with the terms in the contract in unjust situations and prevents the provider from being liable to a customer for failure to perform their obligations. This is beneficial to the courts because they don’t want to allow the doctrine to act as an escape route for a party for whom the contract has simply become a bad bargain.This would also help to enforce Lord Simon’s view and limit the use of frustration as consumers are less likely to bring an action when such clauses are in place and it will also encourage them to read and comprehend the contract fully before agreeing. An illustrative case is Channel Island Ferries v. Sealink UK Ltd[12], in which there was a force majeure clause which allowed the party failing to perform the contract to avoid liability because they had already anticipated the event therefore it cannot be classed as a frustrating event.There are a variety of disadvantages of the doctrine that support Lord Simon’s proposal to narrow down the scope.
To look at it plainly, parties might just prefer to bite the bullet and continue despite a burden being placed on one of them. Another is that frustration only recognises one legal consequence: termination. However, if we were to apply such adaptation techniques as in Germany, it would be difficult and time-consuming to reproduce a contract that will fully encompass every eventuality that may arise[13], even if it made full use of express provisions like force majeure clauses.Such clauses can be criticised themselves in their use, for example, in an American journal[14],they have been said to subject parties to a painful choice, where they can either reconcile and preserve their relationship, or part in it response to a fractured relationship. They are often drafted with the suppliers’ interests in mind referring to an issue of “impossibility” when truly it is a mere case of commercial inconvenience.On the other hand, even though suppliers may impose dishonest force majeure clauses, most customers under long term contracts are not willing to bring an action because it is too expensive and time-consuming as well as disruptive, destroying any possibility of ongoing relationships. To conclude, Lord Simon was accurate in recognising the flaws with the concept of frustration which was it being used as a quick and easy way to manage unsuccessful contracts, however it has become more challenging than expected.
In trying to keep a tight rein on the use of frustration, Lord Simon is attempting to take a firm approach of carrying out contractual obligations as it is evident the future cannot be predicted. The parties are required to envisage numerous possibilities when the contract is being drafted and be able to protect against them. On the other hand, narrowing the use of the doctrine may result in sincere cases being ignored.Leon E. Trakamn “Declaring Force Majeure: Veracity or Sham? ”, available at: http:/works.bepress. com/leon_trakman/4

Categories
Contract

English Contract Problems In Indian Code and Case Law

Introduction
The Indian Contract Act traces its roots back to the English Contract Law. But the Indian Contract Act shows some deviation from the English Contract Law. This deviation is propounded in the treatment of the acceptor i.e. the offeree wherein the Indian law on offer and acceptance seems to favor the acceptor more than the English Contract Law.
The Mailbox rule, as the name suggests governs the communications taking place through post in English common law. According to this, a contract is formed as soon as the acceptor sends his letter containing the acceptance to the post office. This is a deviation from the usual rule involving other modes of communication like telephones, telex, etc. wherein the contract is formed only when the offeror is intimated of the acceptance of his offer by the offeree.

The Indian Contract Act, 1872 differs with regard to communications by post. Section 4 of the India Contract Act deals with the communication when complete and reads as follows:
“…The communication of an acceptance is complete. –
as against the proposer, when it is put in a course of transmission to him, so as to be out of the power of the acceptor;
as against the acceptor, when it comes to the, knowledge, of the proposer…”
This means that the offeror is bound when the offeree posts the letter of acceptance so as to be out of the reach of the offeree and the offeree is bound when the offeror receives the letter. This is discriminatory against the offeror as the offeror will be liable even if the letter of acceptance fails to reach him. But the offeror will not be liable if the mistake is committed by the offeree.
Dunlop v. Higgins, an English case demonstrates the reasons behind the conception of the mailbox rule which happens to be disadvantageous to the offeror. In this case, Higgins enquired about the price of iron and after subsequent communication, on the 28th of January Dunlop offered to sell iron to them at a specific price. Higgins received the letter on the 30th of January and sent their letter of acceptance on the same day but erroneously mentioned the date of posting as 31st January. Dunlop received the letter on the 1st of February and replied stating that they could not sell them the iron because the offer was not accepted in time. Higgins realized their mistake and wrote to Dunlop regarding the same. Upon the refusal of Dunlop to sell them the iron, Higgins sued them for breach of contract. The court decided in favor of Higgins and held that the contract was formed the moment Higgins posted the letter of acceptance. The court reiterated the reasoning used in Adams v. Lindsell which was that it is practically impossible to have a contract by post if the parties were not bound when the letter of acceptance is posted because if the offeror was not bound until he received the letter of acceptance, then it is only fair that the offeree is not bound until he has knowledge of the fact that his acceptance had reached the offeror. This would lead to infinite number of communications resulting in the contract not being formed at all.
The other reason is that the post office is considered to be the agent for both the offeror and the offeree dealing with the dispatching of the offer and receiving of the acceptance. Giving it to the agent is as good as giving it to the principal and that’s the reason why the contract is formed when it is posted. Another reason is that it is difficult to prove receipt of the acceptance as compared to proof of the posting. The mailbox rule prevents the offeror from falsely denying the receipt of the acceptance.
The reasons mentioned above validate the mailbox rule and even though it is against the offeror, it doesn’t seem to favor the offeree. There is another reason which specifically favors the offeree. If the offeror mentions a certain date before which the offeree should send his acceptance, then because of the mailbox rule the offeree has more time to think about the offer and decide whether he wants to accept it. In the absence of this rule, the offeree would have to hurry and post his acceptance such that it reaches the offeror before the last date. The time of receipt is not considered in the mailbox rule; it is enough if the acceptance is posted before the last date.The mailbox rule shows that even though the Indian law blatantly favors the offeree, the common law also favors the offeree in a subtle way.
The offeree getting more time to think about the modalities may seem to be beneficial to him and detrimental to the offeror but there is another way of looking at the same. The rule may lead to immense loss for both the offeror and the offeree. For example, if the offeror offers to sell perishable food items like coconuts, he would want the offeree to hurry and send his acceptance so that he can ship the coconuts to the offeree. But if the offeree delays and posts his acceptance on the last date, then there is a possibility that the coconuts would have already spoilt. The offeror would then be held liable. There is another possibility that the items may get spoilt within no time of delivery. The offeree might have wanted the coconuts for a ceremony. This would lead to hardship and loss for the offeree as well.
Section 5 of the Indian Contract Act deals with the revocation of proposals and acceptances and reads as follows:
“…A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards.
An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards…”
This favors the offeree. The offeree has the ability to revoke his acceptance as long as the revocation reaches the offeror before the acceptance.The offeror cannot revoke his offer once there is an acceptance. On the other hand, the common law does not favor the offeree since both the offeror and the offeree are contractually obligated once the letter of acceptance has been posted by the offeree. The offeree also cannot revoke his acceptance. This aims at preventing the offeree from having an edge over the offeror. The offeree if allowed to revoke his acceptance would keep the offeror waiting for his acceptance but he could also choose to revoke it through other means like telephones, telex etc. which is unfair to the offeror. Though the common law seems to be unbiased, it has been held that the revocation of an offer before acceptance is valid only when it reaches the offeree while the acceptance is valid once posted. This clearly favors the offeree because there will be a contract even if the offeror decides to revoke his offer.
There is another instance apart from the mailbox rule where the offeree is favored. Section 6 of the Indian Contract Act deals with the modes of revocation of offer. The Indian law enunciates that in case the offeror wants to revoke his offer before the acceptance, he should either personally give a notice of revocation or should do so through his agent. This is as opposed to the common law which doesn’t require the offeror to personally or through his agent inform the offeree about the revocation before the acceptance. The revocation is complete when the offeree gets knowledge of the revocation through any source.The Indian law seems to be favoring the offeree as it mandates that the notice of revocation should come from the person who makes the offer. The legitimacy of the source cannot be verified in the common law. Other people may not have the right information about the revocation of the offer. Both the offeror and the offeree will lose out and the contracts will not be formed due to reliance upon the words of a layman.
Under common law, a promise to keep an offer open is not binding on the offeror unless accompanied by consideration by the offeree. By paying the offeror the offeree creates an option contract due to which the offeror is bound and has to keep the offer open for that time frame. He is liable for any breach on his part.This is applied in Routledge v. Grant. But in Indian law, a promise to keep an offer open is enforceable even without consideration. The Indian law is favorable to the offeree because in this case, the offeree need not make any additional payment in order to keep the offer open.
Contracts once formed cannot be cancelled without being sued for breach of contract. But common law under the Consumer Protection (Distance Selling) Regulations 2000 allows for the cancellation of a contract by the consumers within a particular time limit called the cancellation period without any liability arising from the same. This is called the cooling off period and usually lasts for around 7 days. The Indian law also has the cooling off period. The offeree in cases involving insurance policies is immensely benefitted because he has the choice to reconsider the contract. This is especially useful in situations involving a large amount of money. The offeror is at a disadvantage because he loses out on the contract. The doctrine of caveat emptor which has evolved from the common law translates to let the buyer beware. It is as opposed to the above rule which permits contracts to be cancelled within a particular time period. Caveat emptor is used more often in India and preferred to the cancellation of contracts. Common law though doesn’t encourage the usage of caveat emptor. So, the offeree benefits more in the common law system than the Indian law.
Conclusion
I agree that Indian law on offer and acceptance favors the acceptor. I also feel that English common law favors the acceptor but to a minimal extent. The reasons behind India’s inclination towards the offeree can probably be because the offeror controls almost all aspects of the contract. The offeror mentions the last date of acceptance, the mode of communication and the offeree is bound by this. The offeree is at the mercy of the offeror and in order to prevent the offeree from reaching a pitiable position, some aspects of the formation of a contract are favorable to the offeree.