On The Doctrine Of Frustration Of Contract In Anglo-American Law

According to the commonly accepted dicta "pacta sunt servanda", obligor should be responsible for his non-performance even though he has no fault or even it is due to the supervening contingency. However, there is also exception when the risk exceeds the range of reasonable control. Especially in the modern society which is surrounded with various risks, every country can not avoid answering the question of whether the supervening contingency can affect the performance of contract. The civil law symtem and common law system has each developed a different system of solutions, such as the Wegfall der Geschaftsgrundlage theory in civil law and the doctrine of frustration of contract in Anglo-American Law. China’s current contract law provides for the doctrine of force majeure, and has established the application of the doctrine of change of circumstances through judicial interpretation though the relative standards are still indefinite. It isn’t appropriate to identify the doctrine of change of circumstances in civil law with the doctrine of frustration of contract in Anglo-American Law. China’s scholars have paid more attention to the doctrine of change of circumstances but paid little attention to the doctrine of frustration of contract.The first issue is the concept of frustration of contract and its establishment. As early as in Roman law there has been a principle that obligor is not responsible for the incident. Incident is divided into two kinds:accident incident and force majeure, the former emphasises the unforeseenability and the latter emphasizes the irresistibility. They can produce the same legal effect so they can be employed universally. Yet the real clausula rebus sic stantibus principle is proposed by Church law scholars, the principle was popular in the16th and the17th century then was limited from the18th century to the19th century and returned to its stage of history from the20th century. The leading case in British that has established the doctrine of frustration of contract is the Taylor case in1863, which has moved away from the doctrine of absolute contracts to the modern doctrine of discharge by supervening events. From then on, through continuous development in case law, the frustration doctrine has been a very important dotrine in Anglo-American Law. The expression "frustration" can be used in a variety of senses. It is first used in the maritime contract disputes caused by the frustration of adventure, now the scope of its application has been expanded. In the broad sense it refers to the general doctrine of discharge by supervening events, irrespective of the type of event which brings about discharge. In the narrow sense, frustration refers to three particular kinds of cause of discharge:frustration of adventure, frustration of purpose and frustrating breach. In British, the expression of frustration of contract includes three types:impossibility of performance, impracticality of performance and frustration of purpose. In American law, frustration of contract generally refers to the frustration of purpose. This paper uses the expression of frustration of contract in broad sense unless there are specific instructions.Frustration of contract is essencially a law issue but not a fact issue, it is determined by juge but not by jury. Its significance lies in whether an arbitrator’s conclusion on the frustration of contract will be under the control of court, for the arbitration conclusions of the fact is generally final. The difference between law issue and fact issue is sometimens difficult to draw.The second issue is the theoretical basis of frustration which has long been a source of debate. The establishment of the doctrine of frustration of contract in Anglo-American Law reflects the chang from pacta sunt servanda to clausula rebus sic stantibus. The determination of the theoretical basis of frustration is helpful to understand why and when a contract is frustrated. The theory of implied terms emerged in the19th century is contributive to the the establishment of the doctrine of frustion of contract, but it has been criticized for can not reflect the contractors’ real intention, until the20th century there have been few scholors approving this theory. The just solution theory treats the frustration of contract as the result of the court’s right of discretion. Its defect is difficult to limit the court’s interference on contractors’ promises. The theory of radical chang on obligation attributes the frustration of contract to the radical change of contractors’obligations which reflect the requirement of the value of fair and reasonable. It has been applied in many cases by the British House of Lords. The theory of risk allocation considers the problem of frustration as a problem of risk allocation. If a contract is frustrated, the risk is assumed by the promisee, if a contract isn’t frustrated, the risk is assumed by the promisor. The risk should be assumed by the superior risk bearer if there’s no express convenant. A contractor may be in the positon of superior risk bearer for two reasons:the better position to prevent the occurrence of risk and the identity of the best insurer. The risk allocation theory’s defect is that the identity of the most knowledgeable party is not the unique consideration, and the criterion of best insurer is of no effect in dealing with the upsetting of the economic equilibrium caused by supervening contingency. So who is the superior risk bearer is uncertain, the result is unpredictable. On conclusion, each theory can not fully explain the reason for the frustration of contract, but the superior risk bearer theory provides a more practical method.The third issue is the requirement of the frustration of contract. As a Limited safety hatch for the contractor to be discharged, the requirement of the doctrine of frustration’s application is very strict. The performance of contract has become impossibility, impracticability or the purpose of the contract has been frustrated for the unforeseenable supervening contingency happened after the formation of contract and contractors havn’t speculated it through express or implied menthods. The contract should also be executory. The effect of supervening contingency on performance must be fundamental, onerosity and radical. The test of foreseenability adopts the objective criterion-reasonable person test. Empirical approach is a more feasible method in practice.The fourth issue is the type of the frustration of contract. Frustration of contract generally includes three types:impossibility of performance, impracticability of performance and frustration of purpose, but their status in English law and in American law is different. In British, impossibility of performance and frustration of purpose are the two popular types of frustration. Impracticability of performance isn’t an independent type of frustration, but can be applied through some special way such as equity theory to reach the same result as the frustration of contract. Impossibility of performance is the first appeared type of frustration which requires the performance should be irreplaceable. This charactaristic leads to the narrow scope of its application and eventually leads to the separation of impracticability from impossibility. American law goes further in regarding the impracticability as an independent doctrine which includes impossibility and in parallel with frustration of purpose. In the case of frustration of purpose, contractors’ performances are still possible but only the value of the performance has been destroyed. The doctrine of frustration of purpose has a wider scope in American law than in English law, this reflects that English court has paid more attention to the certainty and scancity of contract than American court.The fifth issue is the consequence of frustration of contract. The legal sources regulating the effect of frustration can be found both in case law and statutory law. In England it is the Law Reform (Frustrated Contracts) Act1943which is the principal source of the law relating to the remedial consequences of the frustration of contract, but the scope of its regulating is limited and can be excluded by contractors’ covenant. So the role of the case law can not be ignored. There is no special legislation relating to the effect of frustration in American law, but UCC includes some regulation on the effect of frustration of sale contract. The first and the second Restatement on contract law have important reference meanings as soft law to deal with the effect of frustration. Frustration of contract can affect the contractors’rights and obligations accrued before frustration and after frustration. In general, the obligation accrued after frustration of contract will be terminated automatically and totally from the time of the frustration. But the automatical termination of contract will make one party gain some windfall and eventually violate the requirement of fairness and justice, and the total termination of contract deprives the possibility of adapting the contract according to the supervening contingency. Furthermore, it is unfair to treat the obligation accrued before and after frustration in different ways. Both British and America law have taken some mitigation methods to get over these defects. English law refuses the general rule that frustration can be the reason for the contract’s adapting or reforming, but contractors’ covenant and the rule of estopple can limit the effect of automatic termination to a certain degree. American law goes further in this respect, it is possible for court to adapt or reform the frustrated contract and it is also possible for the contractor to choose partial discharge.The finiancial adjustment between the contractors includes four problems:the recovery of money paid before discharge, the payment of money payable before discharge, the recovery of valuable benefit and the compensation of expenses. In common law, the general rule on the paid money is "loss lies where it falls" according to which the money paid before frustration can not be recovered and the money payable before frustration should also be paid and the following result is that all the losses are burdened by one party, payor will gain nothing for his payment. So the later case law established the rule that the paid money should be recovered in case of the total failure of consideration, but the requirement of total failure of consideration makes the application scope of the claims of restitution very limited. The Law Reform (Frustrated Contracts) Act1943in British has abandoned the former requirement and has established the rule that the paid money should be recovered and the payable money need not to be paid. If the submitted performance is the obligation other than paying money, the valuable benefit produced by performance should be recovered just as the recovery of paid money. Valuable benefit is a final product which requires the occurance of practical benefit, the cost inccurred to the payee should also be deducted. Court has discretionary power in determinating the amount of valuable benefit. The claim of recovery of cost is not an independent right of claim. Since English law pays more attention to the principle of pacta sunt servanda, the requirement of frustration is stricter than in American law, for example the endeavor in the mitigation on the total discharge is more obvious in American law and the independent claims in respect of expenses have a wider scope in American law. It is also more likely to make success in adapting the contract in American law. Despite of these different details, British and America has developed from the same strain.The sixth issue is the scope and the limitation on the application of the doctrine of frustration of contract. The doctrine of frustration has experienced a history from strict application to gradual expansion, now it has become a very important doctrine in contract law. International legislations such as UCC and PICC also include some related regulations. But after all, it is only a limited hatch for discharge. On one hand, the requirement of the doctrine’s application is very strict; on the other hand, some specific types of contract are difficult to apply the doctrine of frustration, such as land and real estate leasing and sale contract, employment contract, the package tour contract, long-term contract, financial contract, etc. Only in a few cases can the contractor succeed in claiming the frustration of contract. A better method is to stimulate the initiative of the contractors’ in the process of drafting a contract, to make covenant on the occurance and legal effects of the supervening contingency through force majeure clause, hardship clause, floating price terms, intervener clause and so on. But a complete contract including all risks is only an ideal pursue, the doctrine of frustration of contract is still a very important doctrine. Although frustration is a difficult defence to be invoked, it should not be thought that it has become a sterile doctrine.The doctrine of frustration of contract in Anglo-American law comprises the doctrine of force majeure and the doctrine of the change of circumstances in China’s contract law. Impossibility is equivalent to the doctrine of force majeure; Impractibility and frustration of purpose are equivalent to the doctrine of the change of circumstances. The common law’s rich experience in the typification of supervening contingency and its legal consequences provides us with important reference meanings.