Author Name:   Arpita Majumdar

This Article argues that the applicability of the fundamental principle of Pacta Sunt Servanda in Contract Law is limited by the 'Doctrine of Frustration'.

The Doctrine of Frustration Challenges the Validity of the Fundamental Principle of Pacta Sunt Servanda

The principles of law of contracts find their very origin from the theories of “offer and acceptance”. Thus the very scope of agreement that is to be is determined by the offer, its acceptance and the promise to fulfill the obligations of such an offer. In English law it is a well settled principle that “to create a contract there must be a common intention of the parties to enter into legal obligations” [1]. Thus if we analyze both parties to contract should have the intention to fulfill the legal obligations to be imposed, thereby giving effect to the principle of Pacta sunt servanda which “means agreements must be kept.” But it poses a serious contradiction when we compare this point of law with the principle of frustration of contract which implies that the intention of the parties when they entered into the contract cannot be materialized. This essay intends to compare and contrast the two principles of the law of contract and how they contradict.

Concept of Pacta sunt servanda and Doctrine of Frustration.

The leading authority, the case of Balfour v. Balfour established that not all agreements can be concluded as a contract [2]. Thus to conclude that any agreement shall have the force of law, the parties to the agreement shall agree to perform certain legal obligations. This same reasoning is embedded in the principle of Pacta sunt servanda which means the parties have the legal obligation to fulfill the promise made and to this extent the agreement shall be binding on them.

Development of pacta sunt servanda

The sacred principle of the classical law of obligations was the idea of pacta sunt servanda (sanctity of contracts), which means that contracts are binding on any conditions. It was developed in the East by the Chaldeans, the Egyptians and the Chinese in a noteworthy way. According to the classical theory of contracts, each reasonable person has the freedom to enter into a contract upon terms determined by that person and to be certain that a contract concluded voluntarily will be subject to judicial enforcement and binding on the parties. Thus, unilateral denunciation of a contract was, therefore, in general, excluded.[3]It was a general rule of the law of contract before 1863 that a person was bound to perform the obligation undertaken by him without claiming excuse of subsequently impossibility of performance of the obligation. [4]

Development of Doctrine of Frustration:

Under the doctrine of Frustration, a contract may be discharged if after its formation events occur making its performance impossible [5]. This doctrine comes into play in two types of situation, firstly, where physical performance becomes impossible, and, secondly, where the centre object of the contract fails. In the well known judgment of Krell v. Henry [6], it was held that the object of the contract was frustrated by non happening of a specific event.

Explaining the concept of “frustration of contract” Lord Wright stated “the word frustration is here used in a technical legal sense. It is a sort of shorthand: it means that a contract has ceased to bind the parties because the common basis on which by mutual understanding it was based has failed. It would be more accurate to say, not that the contract has been frustrated but that there has been a failure of what in the contemplation of both parties would be essential condition or purpose of the performance. [7] The above mentioned definition can said to be the most convincing definition so as to understand the concept of frustration.

Frustration of a contract is either affected by destruction of subject matter or non existence of it, death or incapacity of a party to perform the obligation, non-occurrence of events in cases of contingent contracts, and finally if the performance is rendered illegal by any legislation. The legal effect is that the contract is discharged automatically and totally.

CHALLENGING THE VALIDITY
As already discussed both the principles have stood the test of time in the law of contracts but if the concepts of these two doctrines are compared, it can be comprehended that the fundamentals of the two contradict. On one hand, the principle of pacta sunt servanda emphasizes on parties to be bound by the contract and on the other the doctrine of frustration provides for circumstances under which the parties shall not be bound by the contract. To understand the contradiction clearly it is important to discuss the limitations to pacta sunt servanda and the theories that have been developed to justify frustration.

Limitations of pacta sunt servanda:

The principle of pacta sunt servanda has always had its limits. Even if it is logically understood if the basis or the subject matter is destroyed, the legal effect renders nullified. Even the Roman law provides that, no contract was absolutely binding or binding under all circumstances. Unilateral dissolution of the contract was permissible if a party failed to perform its contractual obligations (e.g. in the case of leases, mandates or contracts of sale). Such an exception has to considered to bring the principle to its logistic effect.

Historically, the principle of pacta sunt servanda has been prejudiced by the principle known as the doctrine of clausula rebus sic stantibus. According to that doctrine, a contract is binding only in so far as the circumstances remain the same as at the time of the conclusion of the contract.

In modern theory, the fundamental views have change. For some authors, the modern contract law cannot be based on the positions of classical contract law any more, since those positions have inevitably become inappropriate in the light of the developments as also provided for in the theory of Radical change which substantially puts forth the same argument. The others argue that since the scope of contract law does not limit itself to sale of goods etc its principles have to be modified according to the length and breadth of its dimensions. In other words taking into consideration the economic, social and fundamental problems, the rigidity of the principle of pacta sunt servanda cannot be maintained. Regardless of different approaches to the binding nature of contracts, the study of legal grounds for exemption from contractual duties has become very important in modern times.

Theories of Doctrine of Frustration

Before the enactment of the Law Reform (Frustrated Contracts) Act, 1943, the principles of this doctrine were guided by the judgment laid down in the case of Krell v. Henry. Various theories were laid down to justify this principle that a contract would come to end by impossibility of event.

First theory being the Theory of Implied Term explained by Lord Loreburn in F.A. Tamplin Steamship Co. Ltd. v. Anglo- Mexican Petroleum Products Co. Ltd. in these words “the court can and ought to examine the contract and the circumstances in which it is made not of course to vary, but to explain it, in order to see whether or not from the nature of it the parties must have made their bargain on the footing that a particular thing or state of things would continue to exist. And if they have done so, then a term to that effect will be implied, though it be not expressed in the contract” This means that the parties have implicitly agreed on certain conditions and if such conditions cease to exist the contract can be frustrated. But this has been criticized at several instances.

Second, Theory of Just and Reasonable Solution, was an attempt to explain this doctrine through a different perspective by Denning LJ [10]. He explained that court has inherent jurisdiction and power to do what is just and reasonable in a given situation. He justified it by saying “the day is done when we can excuse an unforeseen injustice by saying to the sufferer -it is your own folly”.

Third, Thoery of Disappearence of The Foundation of Contract answers the question in a very logistic manner with the support of general principles of contract. The basis of this theory is that the contract cannot have the force of law if the subject matter on which the parties consented to contract itself has disappeared or destructed.

Lastly, Theory of Radical Change in Obligation recognizes that law should provide for a situation when the contract can be incapable of performance without the fault of either of parties.

The juristic basis of the doctrine has evolved over number of years. The English courts have over time rejected the notions of “just solution”, “foundation of the contract,” “failure of consideration” and “implied term”, and instead adopted the test of a radical change in the obligation, which is currently regarded by leading commentators as the preferred approach.[12] The Law Reform (Frustrated Contracts) Act, 1943 enacted by the British Parliament now provides that all sums paid or payable to any party in pursuance of the contract before the time when parties were so discharged shall, in case of sums paid so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sum so payable, cease to be payable.

CONCLUSION
Though prima facie it may seem that the fundamentals of the principle of pacta sunt servanda challenged by the doctrine of frustration, a detailed analysis of it brings out the shortcomings of binding parties into legal obligation. Further, doctrine of frustration inter alia acts as an exception to pacta sunt servanda.

BIBLIOGRAPHY
[1] Rose and Fran Co. v. J.R. Crompton & Bros., (1923) 2 KB 261
[2] Balfour v. Balfour [1919] 2 KB 571
[3] R. Zimmermann, The Law of Obligations : Roman Foundations of the Civilian Tradition. Deventer, Boston: Kluwer Law and Taxation Publishers, 1992, pp. 576-77
[4] S.S. Ujjannavar, Cases and Materials on Contract, 1983, pp. 413
[5] Treitel, The Law of Contracts, 12th edn, (ed Edwin peel), Sweet & Maxwell Ltd., London, 2007, pp. 924
[6] Krell v. Henry [1903] 2 KB 740
[7] Twentsche Overseas Trading Co. Ltd. v. Uganda Sugar Factory Ltd. AIR 1945 PC 144
[6] Paradine v Jane (1647) Aleyn 26
[7] Cheshire, Fifoot & Furmston’s Law of Contract, 15th edn, (ed M.P. Furmston), Oxford University Press, New Delhi, 2007, p. 721
[10] British Movietonews Ltd v. London and District Cinemas Ltd. (1951) 1 KB 190
[12] Chitty on Contracts, 29th edn, (ed Hugh Beale) 2004, Sweet & Maxwell Ltd., London, at pp. 23-001

The author can be reached at: arpita365@legalserviceindia.com

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