Frustration

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One of the most significant principles of the Law of Contract is that of the capacity of the parties to enter into the contractual agreement freely. Therefore, freedom of contract lies at the core of the contractual agreements. Once a valid contract has been entered into, each party is expected to undertake their obligations without fail. However, the doctrine of frustration sometimes intervenes in a manner that undermines the principle that parties ought to keep their agreements. This paper discusses the assertion that the doctrine of frustration challenges the validity of the fundamental principle of pacta sunt servanda, meaning “agreements must be kept”. A contract is an agreement between two or more parties which create particular obligations that are enforceable or otherwise recognizable at law. Essentially, a contract is a legally enforceable agreement. This doctrine is known as pacta sunt servanda which embodies the rule that agreements and stipulations, especially those which are contained in treaties, have to be observed strictly. The rule at common law was that whenever parties had validly contracted, the law could not recognize anything as permitting either of the parties to go back on their word. Article 8(1) of the Contract Law states that a lawfully accepted contract is binding on the parties who shall each fulfill its own obligations in accordance with the terms of the contract, and the contract cannot be unilaterally altered or end. The parties were expected to provide for the likelihood of the occurrence of all eventualities so that if they failed to do so, then the loss had to be borne by the liable party who then had to bear the consequences as was held in Paradine v Jane. Therefore, the common law construed the obligations of parties to a contract strictly. As a result, the failure of a party to the contract to meet their obligations automatically made that party liable for breach of the contract to the innocent party. It was immaterial that the breach arose from the occurrence of a supervening circumstance which was unforeseeable and completely out of the control of the party in breach. In other words, an agreement had to be honored in its strict terms by the parties, hence the appropriateness of the Latin phrase pacta sunt servanda. The effect of frustration to a contract is to discharge the parties from any further obligations under the contract. The bottom line was therefore that the loss lay where it fell. This reality created a lot of hardship to a party because the innocent party could not even recover any money they had already paid could not be recovered unless it was demonstrable that there was a total failure of consideration. It is crystal clear therefore that the effect of frustration is to provide qualification for the doctrine of pacta sunt servanda. Taylor and Caldwell is commonly accepted to be the fundamental case which heralded the introduction of a general principle of frustration, which operates on the premise that the performance of the contract becomes impossible because of the occurrence of some unforeseeable and uncontrollable circumstance and where it would be significantly unjust if a promisor becomes responsible for the breach of the contract. As the principle of frustration developed in years, it gave a rise to so-called force majeure clauses which are incorporated to make clear where losses will fall on the occurrence of events. A contract is not to be considered frustrated merely because one party considers that performance of the contract has become onerous. It is necessary for the party seeking to invoke the doctrine of frustration to convince the court that the contract as originally conceived now bears little or no resemblance to the new state of things. In Tsakirogolou and Co Ltd v Noblee and Thorl GMBH, it was held that for frustration to be proved, the party seeking to rely on the doctrine must clearly show that there was no alternative or other feasible way to...
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