Frustration Rules of the Vienna Convention Comparison

It generally assumed that a challenging issue in different contracts particularly in international sales contracts that often emanates when an unforeseen event impedes performing a contract. Conventionally, this issue may be occurred ‘when unforeseen occurrences, subsequent to the date of the contract, render performance either legally or physically impossible, or excessively difficult, impracticable or expensive, or destroy the known utility which the stipulated performance had to either party’ [1].

It should be noted that many theories on this issue have been established in different states under the clause of frustration, force majeure, impossibility, Act of God and failure of presumed conditions. However, none of them has yet been generally accepted [2].

Nonetheless, due to the certain circumstances, the default on contractual obligation can be released under the laws of such countries [3] as Great Britain where the doctrine of frustration is established. In addition, since the United Nations Convention on Contracts for the International Sale of Goods 1980 (CISG) [4] is concerned; it has a common rule with respect to the frustration rules.

This essay aims to compare the doctrine of frustration rules under the English law and the exemption clause under the CISG. Both frustration and exemption rules provide for the exception towards fundamental rules of the contract. It can be clearly seen that frustration rules under the English law deals with the supervening events where a party can be remitted from any forthcoming obligation to perform the contract. Comparatively, the exemption rules under CISG have a similar provision as clear as frustration rules under the English law respectively.

Accordingly, this assignment will be presented and examined regarding the doctrine of the frustration rules under the English law. Further, it will scrutinize thoroughly the exemption rules under CISG. Finally, comparative analysis will be made between the mentioned rules in the conclusion. However, it should be kept in mind that owing to the tangled theory of both rules, this paper will consider some significant issues within making comparison.

PART I. FRUSTRATION RULES UNDER THE ENGLISH LAW

NATURE OF THE DOCTRINE OF FRUSTRATION

The doctrine of frustration began to develop in the nineteenth century. Prior to this, majority of contractual obligations were considered as absolute. Supervening events were not considered as justifications for non-performance [5] .

In the United Kingdom, the origin of the doctrine of frustration can be found in the seventeenth century decision namely in case Paradine v. Jane [6] which magnifies the rule of absolute liability for performance. In that early milestone of the contract law, the court rejected any amendment of the obligations which had been established in the contract owing to supervening events that were beyond control of the parties [7] . Further, the court held that ‘when the party by his own contract 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’ [8] . Subsequently, this stringent interpretation had been changed in the decision of Taylor v. Caldwell in 1863 [9] . Particularly in this case, the court declined to apply the absolute theory of contract and instead of this, firmly set an “implied condition” theory which can be excused towards parties if the “implied condition” has been changed at the period of time making the contract. The substantial approach of the court to confine the frustration rules to physical impossibility of performance the contact was significantly changed to spread towards legal impossibility [10] .

Further, the doctrine of frustration has been clearly explained in a great amount of cases holding by the courts.

It is remarkable that the doctrine of frustration may be applied in such cases where the circumstances have considerably been changed after the completion of contract like a supervening event which impacts essentially on the performance of contract that both parties are remitted from any forthcoming obligation to perform. To note, not only the contract become eluded, but also the parties are exempted from any liability arising in damages for non-performance [11] .

As Treitel rightly points out that the object of the frustration rules is allocating the hazards of supervening events adequately [12] . Nevertheless, there is an issue why the parties could not themselves prepare for the possibilities in the contract. Even though the frustration doctrine of absolute contracts has been adjusted by the later progresses in law, it still remains the core rule in which it has the certain exclusions. It necessary to note, when the parties have plainly allotted the hazards in the contract, the contract is provided to be kept and frustration can be settled [13] .

Additionally, in England, it is mentioned two laws regarding the frustration of contract. One is the English Sale of Goods Act 1979 [14] (Act) which embraced only a minor part of the applicable law of frustration. Second is the Law Reform (Frustrated Contracts) Act of 1943 [15] . The Act can be treated only in cases encompassing the frustration of contract to sell generic merchandise. It is followed that this Act mainly provides that in selling the specific merchandise an agreement is evaded if the merchandise perish without any culpability of the parties before the hazard has passed to the buyer. In contrast, the Law Reform Act widened its scope to all cases of frustration excepting those embraced by the Act. The Law Reform Act stipulated that parties could reimburse any payments before the time of frustration and also the judge could split between the parties dependence costs incurred in scrutiny of the performance of contract. However, this Act concerned only the forms of legal relief after the frustration has been recognized, leaving the fundamental rules of frustration untouched [16] .

THE OPERATION OF FRUSTRATION RULES

Events leading to the frustration can be divided into categories, for instance, the impossibility and common venture frustration [17] . Likewise, some authors tend to see illegality as an independent group detached from other bases [18] . According to Treitel, impossibility is separated from the frustration of purpose and illegality, describing six causes of impossibility: 1) demolition of a particular object, 2) incapacity or death, 3) performance method, 4) failure of a specific source, 5) unavailability and 6) statute. It necessary to highlight that the formulation a comprehensive list of frustrating events is impossible [19] . Nevertheless, due to the broad interpretation and division into categories, it will be useful to mention only the basic clauses.

2.1. Frustration by impossibility. The impossibility of performance is the most evident basis of frustration and it may be arisen in certain reasons. If the performance of a contract becomes extensively impossible without any fault of parties, the contract is deemed to be frustrated [20] . As stated above, in case Taylor v. Caldwell [21] , the performance of a contract was treated impossible by the demolition of the subject matter. This case is a good example of partial impossibility because the contract concerned the use of the gardens and hall, but generally it was only the hall that was destroyed by the fire. However, the use of hall was judged to be an essential element of the contract (the hall was required for the giving of concert performances) and its demolition was adequate to being frustrated. It is not required to show complete demolition of the subject matter until the nature of the object has been substantially changed [22] . Likewise, in a sale of particular goods, if the goods are perished, the contract may presumably become frustrated [23] . The best example for this, in case Asfar & Co. v. Blundell, a big amount of the cargo container of dates which had been damaged by the submergence and consequently the court held to be for the business purposes [24] .

2.2. Supervening illegality. A contract is deemed to be discharged after its performance has become illegitimate which would seem like the public may unlikely give shield to ventures. As an alternative, the party who turns down to perform the illegitimate acts ought to be protected. However, the allocating of risks to some extent can be problematic. Both parties have bound by contract when it was still legitimate [25] .

With respect to the frustration, it can be implied that illegality has sometimes been shown as a separate basis of discharge, but not as a subdivision of impossibility. It is necessary to mention Treitel`s statement that the objective of the frustration doctrine in instances of the frustration of purpose or supervening impossibility is to allocate the damages affected by the supervening event in a reasonable manner, while in a instance of supervening illegality, the court must take into account, not only parties’ interests, but also public interests which leads likely to the special rules of frustration respectively [26] .

2.3. Limitations. There are some limitations towards the applicability of the frustration rules. Hence, frustration can be excluded in circumstances where it has explicit provisions for the befallen event in the contract and the event was predicted or foreseeable or the event occurred owing to the one of the parties` fault [27] .

Actually, there are some exceptional cases such as where the contract has been required dealing with the enemy at war times, adequate provisions for only postponing the activities under the circumstance of war were established aside from the ground of the public policy concerns [28] . Furthermore, in the leading Fibrosa case, a contract for a sale of machinery to be dispatched to Gdynia had been frustrated when the enemy had occupied a port during the Second World War. Even though it was conceivable to get the goods to the destination, the court held that the contract was discharged due to the fact that it would form an act of dealing with the enemy [29] .

Admittedly, the frustration should be a matter of degree. It can be meant that frustration may arise at a foreseeable period in a sequent of events, which are in a consecutive transaction, and further it clearly becomes a matter of degree whether an unexpected event does or do not amount to the frustration clause. If the hazard of a potentially frustrating event has been predicted by the parties or it was foreseeable, consequently the doctrine of frustration is ruled out [30] .

In addition, a party cannot appeal to the self-induced frustration, because the frustration caused by his personal actions or actions of those he is responsible for. This frustration clause is an exception in regard to the termination of the contract. Whereas the first requirement of the doctrine is that the unsatisfying event has to be an event beyond the control of the parties. Therefore, the doctrine of the frustration rules apparently does not protect a party whose personal breach of contract essentially is the frustration event. To some extent, depending on the occasion, negligence may also be adequate to exclude frustration, for instance, in Taylor v. Caldwell, if the fire had been initiated by the hall owner’s negligence, this would presumably have been enough to exclude the likelihood of frustration [31] .

FORCE MAJEURE CLAUSE

It should be distinguished that the terms “force majeure” and “frustration” are not similar and follows from the different legal concepts. However, both terms also have some things in common. Both concepts deal with the consequence of supervening events on contracts. Both common law and civil law have the rules regarding the influence preceding events on the formation of contracts [32] .

It is essential that force majeure rule can be easily found in the national laws as well as in ordinary terms and different contracts. As Mestad states that a force majeure clause should have at least four elements: 1) a definition of appropriate events or causes, 2) a requirement that performance is staved off, 3) a requirement of a causal relation between the events and the fact that performance is forestalled and 4) the consequences of the three conditions being satisfied. In addition to these important components the rule may also embrace requisites such as foreseeability, being avoided or overcome the event and proceedings the party claiming force majeure should be followed [33] . For example, in Wild Handel NV v. Tucker and Cross [34] , the sellers summoned the force majeure clause of the sale contract of Chinese frozen rabbits. The sellers argued that the imports of Chinese frozen rabbits were much smaller in quantity than the quantity required under their contract. The court held that there was no finding from the judge that they were incompetent to purchase the Chinese frozen rabbit from other supplier than another one with whom they deal with. Afterwards, Justice Donaldson stated that unless they could do that they are incompetent to show the fact that they were staved off from satisfying the contract by a reason of beyond their control [35] .

Finally, force majeure rules may have three advantages which have to be highlighted. First of all, the ambiguity of whether a contract frustrates or not can be diminished by the parties approving the list of events. Secondly, it overwhelmingly gives the parties a chance to be agreed a broader category of events that should establish the force majeure clause. Thirdly, the parties can make a provision for the consequence of the case of force majeure, for instance, the frustration rule finishes the performing of contract automatically notwithstanding of the wishes of each party, whereas force majeure rules frequently provide for a period postponement of the contract for supervening event [36] .

EFFECTS OF FRUSTRATION RULES

It is particularly noticeable that in common law the effect of frustration can be defined as the contract is automatically terminated at the time of frustrating event. Both parties are unbound from their contractual duties from that moment. Primarily, this caused unfair fallout as the parties were still kept being liable for any performance before that date. Moreover, there was no option of reimbursing advance payments and henceforth. Further, statutory measures to adjust this issue and other biases were taken significantly [37] . The influence of frustration was plainly stated in case Joseph Constantine Steamship Line Ltd v Imperial Smelting Corp Ltd by Lord Simon: ‘When frustration in the legal sense occurs, it does not merely provide on party with a defence in an action brought by the other. It kills the contract itself and discharges both parties automatically’ [38] .

A party who had paid money according to the frustrated contract could reimburse it if he could prove by showing a total failure of contemplation. This rule was provided by the Law Reform (Frustrated Contracts) Act 1943. The Act interprets that amounts paid by one party to another under the contract are recoverable and amounts being paid by a party under the contract terminate to be payable. However, the payee or intentional payee may be permitted by the court to hold or reimburse costs incurred by him before exempting or for the purpose of contractual performance; and a party who has got a valuable profit by causes of any act completed by the other party prior to the time of release, may be disciplined to pay that party such amount, but not transcending the value of the profit [39] .

PART II. EXEMPTIONS UNDER THE UNITED NATIONS CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS

SCOPE OF THE ARTICLE 79 CISG

It is remarkable that Convention on Contracts for the International Sale of Goods covers the rules of exemption beyond postponement and non-delivery to all facets of either party’s contractual performance [40] . However, this broad definition of exemption should not involve a non-conforming tender, delivered imports but being defective [41] .

Subsequently, Article 79 provides:

‘Article 79

(1) A party is not liable for a failure to perform any of his obligations if he proves that the failure was due to an impediment beyond his control and that he could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences.

(2) If the party’s failure is due to the failure by a third person whom he has engaged to perform the whole or a part of the contract, that party is exempt from liability only if: (a) he is exempt under the preceding paragraph; and (b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were applied to him.

(3) The exemption provided by this Article has effect for the period during which the impediment exists.

(4) The party who fails to perform must give notice to the other party of the impediment and its effect on his ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, he is liable for damages resulting from such non-receipt.

(5) Nothing in this Article prevents either party from exercising any right other than to claim damages under this Convention’ [42] .

Hereby, Article 79 can be provided as either party can be discharged from the performance of his duties because of an extraneous event which is arbitrated adequately essential to warrant the justification [43] . In simply words, this Article mainly covers a wide-ranging reason of exemption for non-performance of any duties, and applies to any commitments generally caused by a sale contract of goods [44] .

CONDITIONS FOR EXEMPTING AN IMPEDIMENT

According to Article 79 CISG, in order to being relieved, a party must found that the performance was impeded by: 1) an impediment; 2) beyond the party’s control; (3) that could not reasonably have been taken into consideration, either overcome or avoided. It is necessary to note that in order to justify the exemption clause under Article 79, a party also have to notify the other party of “the impediment and its effect on his ability to perform” within a reasonable time [45] .

It can be found that a party should be released by the mentioned below conditions respectively:

1) Impediment. It must be an impediment due to performing the contract. As Honnold clearly defines an impediment as ‘implies a barrier to performance, such as delivery of the goods or transmission of the price rather than an aspect personal to the seller’s performance’. Moreover, the contractual performance must be prevented by the obstruction [46] . According to Stoll, the definition can be easily referred to the events outside the party`s infringement which to some extent may be “natural, social, or political events or physical or legal difficulties”. However, merely individual circumstances like personal insufficiency could not surely be taken into account as an impediment under Article 79 [47] . In contrast, only objective circumstances that performance is prevented can be considered as impediments pursuant to Article 79 CISG. Therefore, impediments with the scope of Article 79 should embrace: Acts of God such as earthquakes, inundations, fire, storm and lightning; events concerning political and social circumstances such as revolution, riot and war; and other categories of obstructions such as damage of the carrying vessel, larceny, robbery or disruption during the carriage. As outlined above these events may abolish the seller’s grounds, the cause of either total or partial loss of the goods, or being prevented the buyer from paying the value [48] .

2) Beyond the party’s control. The impediment has to be outside the party`s control. Under Art.79 (1) CISG it states that an exemption is allowable only when the obstruction to the performance is beyond the party`s control.

Referring to Stoll`s statement, it should be noted that this requirement is grounded on the assumption which is a typical range of control: a range within which it is tangibly likely for, and may be expected of, the promisor is in control [49] . Moreover, Schlechtriem points out that the obligor is always liable for obstructions that he could have prevented but, notwithstanding his control over planning, organisation and performance, is being failed to do so. It is remarkable that negligence is not required [50] . For instance, in a case treated by the High Arbitration Court of Russia, the buyer had paid the value, but the cash was stolen from the foreign bank beforehand the seller had got it. Ultimately, the Court held that the buyer`s failure was not owing to an obstruction beyond his control [51] .

3) An unforeseeable impediment. The impediment must be reasonably unpredictable [52] . The obstruction has to be that could not have been taken into consideration at the time period where the contract was initially made. It can be stated that the obligor is even liable for obstructions beyond his control, as long as it was either reasonably predictable or known to him at the completion of the contract. In the vast majority of cases, the judges have rejected the existence of force majeure clause because the component of unpredictability was missing [53] . If there is a real risk of an obstruction to performing and the contract is, however, completely passed into, the hazard of the obstruction was presumed and relief cannot be positively sued [54] . It should stressed that in contract the terms that neither expressly or impliedly mentioned show that the obstruction was factually predicted, it must be resolved whether the defaulting party could judiciously have been expected to take it into consideration at the time period of the completion of contract [55] . For instance, in a Russian arbitral award 1995, the buyer requested release from liability on the ground that he did not have the foreign currency which was essential for the payment. Eventually, the tribunal held that the absence of foreign currency did not characterize under the rule of force majeure in the contract and subsequently stated that the buyer had not taken any measures to guarantee that the payment could in fact be made [56] .

4) Unavoidable impediment. The obstruction has to be unavoidable, thus it means that the nonperforming party must have been judiciously unable to be avoided or overcome the obstruction. To avoid can be defined as taking all the necessary measures to stave off the occurrence of the obstruction. Likewise, to overcome may be interpreted as taking all the necessary measures to prevent the consequences of the obstruction. It is strictly related to the condition of the external matter of the hindering event. Nevertheless, it is complicated to differentiate between what is possible and impossible to overcome the obstruction. [57] .

5) Causality. This condition concerns the causal part. The default on the contract has to be owing to the impediment [58] . For instance, the seller has rejected to fulfil the contract, after the rejection, a fire burns his storehouse and all goods are damaged by the fire. In this case, the seller cannot rely on the burning storehouse to be excused from his obligation for damage because default in such an occurrence is on account of his prior rejection to perform, but not the fire. To some extent it can be problematic to determine the exact cause of the failure when the several reasons are summoned, the decision will depend on the judge`s subjective appraisal [59] .

6) Duty to notify. Pursuant to Article 79(4), it states that the party who fails to achieve to give notice of the obstruction and its consequence on his ability to fulfil to the other party, hence as to authorize the other party to take all measures to overcome the results of the failure, notwithstanding of whether the obstruction is permanent or provisional nature [60] .

It should be emphasized that the notice exists only when the event of the obstruction is definite, but not when it may still be evaded. Similarly, the notice has to reach the party provided within a reasonable time. If the notice has not been given or obtained within a reasonable time, the nonperforming party is responsible for damages causing from the failure to give notice [61] .

EFFECT ON THE EXEMPTIONS

Article 79(5) sets forth as “nothing in this article prevents either party form exercising any right other than to claim damages under this Convention” [62] . Accordingly, it confines the