“Since the effect of frustration is to kill the contract and discharge the parties from further liability under it, the doctrine is not to be lightly invoked, must be kept within very narrow limits and ought not to be extended,” Bingham LJ, Lauritzen. The obiter by the Lord Justice informs the subject of this paper’s discussion. The paper seeks to examine the spirit and the letter of the law in the application of the doctrine of frustration of contract. The paper assumes a legal character that would include consideration of common law approach, statutes and case laws. In addition, the paper would critically examine the context under which the Lord Justice arrived at his decision in the Lauritzen. It is instructive to note that the doctrine of frustration of contract is an exception and so applies only in exceptional cases. Indeed, that is the spirit enunciated in the dicta as per Lord Bingham in Lauritzen.
It is imperative in analysis of the case to examine the context of the case with an objective approach into the conclusion of the Lord Justice in Lauritzen. In this case, the defendants had reneged on their contractual obligation with the defendants. The facts of the case are that the defendants entered a contract with the claimants in which the former were to transport an oil rig the possession of the latter. In this contract, the defendants were supposed to transport the oil rig from Japan to Rotterdam using either of the two ships belonging to the defendants. The defendants had elected to use the second ship named Super Servant Two. In the process of availing the Super Servant Two for the purpose of facilitating the transportation, the ship sunk in the Democratic Republic of Congo while in the transportation of another separate and independent oil rig. Since the first ship was equally busy and engaged in the other businesses, the defendants failed to transport the oil rig from Japan to Rotterdam. They contended that their failure was consequent of the sunk ship and that as such it fell under the doctrine of frustrated contracts. In their contention, the bench ought to have ruled in their favour and declared the contract frustrated and so discharge them from any obligation of a future or current nature. Indeed, as per the doctrine of frustration of contracts, this plea ought to be and was examined with scrutiny. The approach pursued by the Lord Justice in this case was in consonance with the exceptional approach to frustration of contracts. As contained in the dicta of Lord Bingham, frustration of contracts arises only in exceptional cases and since the consequence is to discharge the parties from their obligations the application should be limited to a particular boundary and confine of the law. Indeed, that was the spirit that enabled the Lord Justice to give a hearing to the claimant’s argument. The claimant submitted that the contract did not fall under the province of the frustrated contracts. The claimant alleged in his submission that indeed the contract was frustrated but that the frustration had been induced. In the character of the law, an induced frustration did no enjoy the benefits of frustration and hence the defendants would not be discharged from meeting their obligations both in the future and current times. In appreciation of the holding of the Lord Justice, it is imperative to examine the conditions in the character and nature of precedence that have often informed the application of frustration of contract and in the same spirit to examine the context of the Lauritzen.
The doctrine of frustration of contract was applied in the Paradine v. Jane. In this case, the courts ruled that parties to a contract incur the obligations to discharge their duties in every manner possible. In that context, the court often seeks to examine the nature of frustration and compared the supposed frustration with the situation. The court must be convinced of a number of factors. One, the events leading to the frustration must not be the fault directly or indirectly of either party. The events ought to be the fault of a third party. It is noteworthy that the court often approaches the analysis with legal scepticism. It is the position of the court as laid out in Paradine v. Jane that the parties must have attempted to discharge their duties in all manner possible. In context to Lauritzen, the court held that the fact that the Second Ship sunk did not prevent the defendants from seeking alternative means of delivery of the service. Indeed, it needs to be examined that the nature of the contract in Lauritzen was not imposed to the use of one particular ship. In fact, the courts often use liberal approaches and examine the spirit of the contract. From the wording of the contract in Lauritzen, the court deduced the fact that the ship was irrelevant. The main objective of the contract was the transportation of the oil rig. In addition, it was the election of the defendants that the transportation be effected with the use of the Second Ship. In that context, it needs to be distinguished upon frustration. This is because the court looks at the subject of the contract to render a contract frustrated. It is the law that frustration is proved if the subject of the contract is affected or conditions occur that prevent the subject of the contract to be effected. In the case of Lauritzen, it is the Second Ship that got sunk. The court took the view that the defendants did not prove the frustration in toto. This is because the defendant had the opportunity to incur additional costs and effectively see that the subject of the contract was performed. The defendants were hence denied the opportunity of waiver of obligations undischarged.
In addition, as evident in Taylor v Caldwell, the doctrine of frustration of contract would be applicable only for cases that involve a complete destruction or loss of the subject matter and or a component at the root of the discharge of the contract. The facts in Taylor were that the defendants had lent out a hall for the performance of a music festival. In the few days preceding the function, the hall was burnt down. This occasioned the unavailability of the hall for the function. The court held that since the hall, the subject matter of contracting had been destroyed, the contract had been frustrated and the nature of frustration was not the fault of either party. As such the parties were each discharged from their obligations. It is interesting to examine the relative injustice and inconvenience that the ruling in Taylor occasioned to the claimant. This is because of the matter of prior payments. It is the holding of the court that under frustrated contracts, the previous engagements are not reversed but their future obligations are discharged from the parties. In that vein, the party that had paid prior fees is not entitled to receive anything back. It is the observation of the court that no refunds need be paid since it is equally expected that the other party is inconvenienced. For instance, the party would have begun some activities that would facilitate the discharged of its obligations. However, the relative injustice and inconvenience on the other party has been cured by the holding in Fibroska Spolka v. Fairburn Limited. In this case, the court held that in the event of total failure of consideration, the prior payments ought to be refunded. However, the spirit in Fibroska has not been appreciated in full yet. It is was applied in Henry v. Krell in which the court held that the frustration of contract devolved the right to the claimant to recover his prior payment on grounds of total failure of consideration.
In conclusion, it ought to be appreciated that the courts have remained loyal to the approach laid down in the dicta of Lord Justice Bingham. Indeed, the doctrine of frustration of contracts has been applied to a limited number of situations. It is the approach of the courts that the doctrine needs to be applied as a last resort.
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