Last week the new Registrar of the LCIA came to talk to us. We knew that the volume of disputes we were handling had increased this year, but we were surprised when he told us that, this year so far, the LCIA has received twice the amount of references that it had for the same period last year. He said that this trend seemed to be most noticeable in the energy and other commodity sectors.
There is no doubt that the current buoyancy/volatility in these areas has led and is likely to lead to parties trying ever more inventive methods of enhancing their existing positions. Some have sought refuge in some of the less-used legal doctrines and have tried to see whether, or if they can bend a prevailing scenario into a certain doctrine to their benefit.
A recent case demonstrates this point. It concerned the legal doctrine of frustration and an attempt by a party to use it to be extricated from an unfavourable contractual position. Most will have an idea of what the frustration is, and many will know that it is generally only available in exceptional circumstances.
Under English law it is generally accepted that frustration occurs when, without the default of either party a contractual obligation has become incapable of being performed because the circumstances in which the performance is called for would render it radically different from that which was undertaken by the contract1. To put it another way, the doctrine of frustration applies when unpredictable events take place after the date the contract was formed that make performance of it legally or physically impossible or highly impracticable. However, not every event which prevents the performance of a contract will constitute frustration. The new event must be fundamentally different from one originally contemplated by the parties. If the contract is wide enough to apply to the new situation, then it cannot be an event giving rise to frustration.
The doctrine of frustration can easily be confused with the similar doctrine of impossibility. The main difference between the two is that the latter relates to the particular duties (terms) specified in the contract while frustration concerns the purpose and reasons why a party entered into the agreement.
The Emergence of Frustration
Frustration evolved at the beginning of the 20th Century. This was due to the combination of serious political disturbances (i.e. World Wars), great economic crises (inflation, strikes, and devaluations) and also the significant increase in the number of international trade transactions.
There is no uniform international approach to the use of the doctrine and that is why each case has to be considered carefully in light of the national laws under which the contract was made. The approach of national laws varies from the English test of fundamental difference in performance, through to commercial impracticability in the US, good faith in Germany and force majeure in France. Furthermore, each situation has to be examined on its own facts having in mind matters such as the kind of commodity, the type of the contract (e.g. FOB or CIF) and the bargaining position of the parties.
CIT v Transclear
The recent Court of Appeal decision in CIT v Transclear confirmed that the application of the doctrine does not provide an easy way out of contractual obligations. The case concerned the FOB sale of cement. Both parties knew that the goods would not be shipped by the Sellers themselves, but by a supplier in Padang with whom the Sellers had entered into a non-binding arrangement for the supply of the cement. The Buyers were buying the cargo to distribute in Mexico, in breach of a cartel operated by a local company, Cemex.
Cemex exerted pressure on the suppliers in Padang to withdraw their offer of the cargo. When the Sellers entered into a similar arrangement with suppliers in Taiwan, Cemex exerted the same pressure, with the result that those suppliers also withdrew their offer.
The Seller contended that because of the unforseeable actions of Cemex it was impossible to provide the goods to the Buyer in this geographical region and that, therefore, the contract was frustrated.
The Court couched the issue for it to determine as follows: ‘it is important… to recognise that the root cause of the seller’s inability to deliver the goods they had contracted to sell was the abuse by Cemex of its commercial position combined with the willingness of suppliers to acquiesce in its demands. The primary question in this case is whether such conduct was sufficient to frustrate the contract.’
It went on to decide that the contract was not frustrated. The decision emphasised that the Sellers’ inability to deliver is not sufficient to frustrate a contract of this kind. At the same time the pressure of Cemex could not be treated as a supervening event which made the performance of obligations impossible or fundamentally different in nature, mainly because the character of the performance remained the same. They also determined that the cargo was not physically unavailable for shipment or that shipment would have been unlawful: It was the Padang supplier’s own choice not to make the cement available, which they were free to exercise as they had no legal obligation to the Seller.
This case reconfirmed that, in the absence of some exceptional and supervening event, a contract will not be frustrated by the failure on the part of the ultimate supplier to make the goods available for delivery. What is needed is:
- a supervening event,
- not contemplated by the contract,
- which renders performance impossible or fundamentally different from what was originally envisaged.
In this case there was no finding that the cargo was physically unavailable for shipment, or that shipment from either Padang or Taiwan was unlawful. The supplier chose not to make the cement available for shipment and the Sellers bore that risk.
The fact that the case went to the Court of Appeal reflects that the Sellers had what you might call a near miss. It was not the sort of hopeless non-starter that got thrown out at the first stage. However, it also appears that the Court reached the correct decision and that a decision the other way might have opened the frustration floodgates.