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Introduction

This work compares the doctrine of frustration under English law and the rule of exemption under the United Nations Convention on Contracts for the International Sales of Goods (CISG). Both frustration and exemption deal with the exception to the basic rules of the contract. Frustration under English law deals with the supervening events, in which a party can be released from any future duty to perform the contract. Exemption under CISG deals with the similar issue to frustration under English law.

This work is structured as follows. First, the doctrine of frustration under English law is presented. Second, the rule of exemption is examined. Finally, there is a comparison of the above sets of rules in the conclusion. Due to the complicated theory of the rules, this work only focus on some important questions when make comparison.

Part I. Frustration under English law

A contract is considered to be frustrated due to a supervening event, this supervening is so fundamentally affects the performance of the contract that both parties are released from any future duty to perform. In English law the principles evolved by the courts to regulate have come to be known as those dealing with “frustration” of the contract.

The traditional case law denied the application of the frustration of a contract, in case Paradine v. Jane, the Court held “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.” It was not until in case Taylor v. Caldwell that the frustration rule was accepted by the Court, in this case, it was held that the contract could be discharged because, “the parties must from the beginning have known that it could not be fulfilled unless… some particular specified thing continue to exist”, and in these circumstances it was “ not to be construed as a positive contract, but as subject to an implied condition that the parties should be excused in case, before breach, performance becomes impossible form the perishing of the thing without the fault of the contractor” Later on , the doctrine of frustration has been well explained in a large number of cases by the courts.

1.Legal meaning of frustration

In English law, the frustration has its own meaning as follows:

Firstly, frustration occurs only where, subsequent to the conclusion of the contract, a fundamentally different situation has unexpectedly emerged. Some situations that may make the performance of the contract more difficult cannot be included in this situation . As Lord Simon stated: “ the parties to an executory contract are often faced, in the course of carrying it out, with a turn of events which they did at all anticipate- a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacles to execution, or the like. Yet this does not in itself affect the bargain they have made. If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances, existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract cease to bind at that point.”

Secondly, the frustration should be a matter of degree; it means that frustration may occur at an uneasily predicable stage in a sequent of events, which are in a gradual transaction, and it then becomes a matter of degree whether an uncontemplated event does or not amount to frustration. For example, the government prohibition of exportation or importation, the strike and other industrial action may occur during the performance of the contract, in these cases, the contract might merely be suspended and might become frustrated only after the lapse of a reasonable time when it is clear that the event affect the foundation of the contract. It is not necessary to ascertain the exact date when the contract was frustrated, however, it is sufficient to sate that the contract was frustrated by no later than a certain date.

Thirdly, self-induced frustration is an exception to the termination of the contract. Since the first requirement of the doctrine of frustration is that the frustrating event must be an event beyond the control of the parties . Thus, the doctrine of frustration obviously does not protect a party whose own breach of contract actually is, or brings out, the frustration event. For example, a party who fails to take proper steps to apply for an export licence cannot rely on the failure to obtain the licence as a frustrating event.

2.Conditions on frustration

There are certain types of risk that are neither so unforeseeable or so destructive of the commercial purpose of the contract that it would be unjust to hold the parties to the bargain, in these cases, the law declares that the contract is frustrated. In international trade, the following are typical sets of circumstances.

(1). Destruction of the subject matter

Frustration occurs when the person or thing has been physically destroyed because the performance of the contract depends on the existence of a given people or thing. In these cases, “ a condition is implied that the impossibility of performance arising from the perishing of the person or thing should excuse the performance.” The perishing of goods without the fault of the parities may lead to the frustration of the contract is codified in Sales of Goods Act 1979, Section 7 of the Act states “ where there is a agreement to sell special goods and subsequently the goods, without any fault of the on the part of the seller or buyer, perish before the risk passes to the buyer, the agreement is avoided.”

(2). Illegality

A contract may be discharged by a supervening prohibition if the prohibition would have made the contract illegal, had it been if force when the contract was made

Trade with enemy
In the leading Fibrosa case, a contract for the sale of machinery to be shipped to Gdynia was frustrated when the enemy occupied that port during the Second World War. Although it was possible to get the goods to the destination, the Court stated that the contract was discharged because it would constitute an act of trading with the enemy.

Export and import prohibition
After the conclusion of contract, the contract may be frustrated duo the governmental prohibition of the performance; for example, the government may place an embargo on the export or importation of the goods. The prohibition can operate as a frustrating event if it covers the whole of the contract period. If this condition is not met, a party would be advised to wait until the time of performance has expired before treating the contract of as frustrated because the prohibition may be removed in time to allow performance. If the government prohibition extends beyond the stipulated time for performance, it is normally considered that the contract is frustrated because there is an implied condition in every contract that its performance should be legal at the date when the contract is to be performed.

Fundamental changes in circumstances
After the contract was made, it is further frustrated when a radical change of circumstances have occurred. In this situation, the foundation of the contract has gone and the contract would amount to a new and different contract from the original one. To determine the fundamental changes in circumstances that result in the frustration is difficult. Normally when parties entered into the contract, an event within the contemplation of the parities do not operates as a frustrating event even though they did not expect or consider it probable that it would happen. The English decisions show that courts consider the principle of contract as higher important than the requirements of commercial conveniences and that they will not lightly assume that a contract is frustrated when a contract is still capable of performance.

Export and import licences and quotas
The restrictive government regulations, such as licences and quotas, may be considerably difficult for the parties to obtain. If a contract cannot be performed because the licence is not granted or revoked or the quota is too small, it is often considered that the contract is frustrated.

In a contract containing no condition of “subject to licences” or “subject to quotas”. If a party has undertaken to obtain the licence or quota but he fails, he is in breach. However, if a party has merely undertaken to take all reasonable steps but fails, the contract is frustrated.

In a contract containing a condition of “ subject to licence” or “subject to quota”, the seller is free from his obligation only if he can show that he used due diligence and took all reasonable steps he was unable to obtain the licence or the quota.

3.Partial frustration

If a contract provides a party with the right of electing several modes of performance and one mode has become frustrated, the contract is not completely destroyed but has to be performed in one of the remaining modes. Thus, a contract for carriage of a rig by one particular vessel was not frustrated by its sinking because the contract could have been performed by using another vessel which had been specially named in the contract.

4.Force majeure

It can be seen that the frustrating events is very narrow in English case law and the courts are more unlikely to declare the frustration of the contract. Thus, the exporter may introduce a clause in the contract to define the mutual rights and duties if certain events beyond control occur, whether or not such events result in the frustration of the contract in the ambit of the law. Concerning the effect of the force majeure clauses, sometimes these clauses provide the extension of the time of performance, or the automatic suspension or cancellation of the contract in case of the occurrence of the contract, sometime they give each party or one party to chose whether to suspend or cancel the contract in the event. Force majeure clauses may have three advantages Firstly, the uncertainty of whether a contract frustrates or not can be reduced by the parties agreeing a list of events. Secondly, it gives the parties the opportunity to agree a wider class of events should constitute force majeure. Thirdly, the parties can make provision for the consequence of the occurrence of the force majeure, for example, the frustration rule terminates the contract automatically irrespective of the wishes of the party, while in force majeure clauses often provide for a period suspension of the contract for the supervening event.30

5. Effect of frustration

The effect of frustration has been clearly stated by Lord Simon L.C in case Joeseph: “ 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 discharge both parties automatically”. At common law, a party who had paid money under the frustrated contract could recover it if he could show a total failure of consideration this rule was adjusted by the Law Reform (Frustrated Contracts) Act 1943. The general rule by the Act is that sums paid by one party to another under the contract are recoverable, and sums payable by a party under the contract cease to be payable. But the payee or intended payee may be allowed by the court to retain or recover expenses incurred by him before discharge in or for the purpose of performance of the contract; and a party who has obtained a valuable benefit by reasons of any act done by the other party before the time of discharge may be ordered to pay that party such sum, not exceeding the value of the benefit, as the court considers just.

Part II. Exemption under CISG

1,Legal meaning of the exemption

Under the heading of “Exemptions”, Article 79 of the CISG deals with one of the most important questions in contract law, which is to what extent, the party is not liable for a failure to perform any obligation of the contract if the impediment arises beyond his control. It corresponds to domestic systems' concepts of force majeure, frustration, impossibility of performance, commercial impracticability. Article 79 provides:

(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.

2.Conditions

In order to be excused according to article 79, a party must establish that performance was obstructed by: (1) an impediment; (2) beyond the party's control; (3) that could not reasonably have been taken into account, avoided or overcome. In addition, to qualify for article 79 exemption, a party must also notify the other party of "the impediment and its effect on his ability to perform" within a reasonable time.

It can be found that the following conditions should be met for a party to be exempted:

(1). Impediment

It should be beard in mind that only objective circumstances that prevent performance can be considered to be impediments within the meaning of Article 79. Accordingly, impediments within the scope of CISG Article 79 should include: Acts of God (e.g. earthquake, lightning, flood, fire, storm, crop failure, etc.); events relating to social and/or political circumstances (e.g. war, revolution, riot, coup, strike, etc.); legal impediments (e.g. seizure of the goods, embargo, prohibition of the transfer of foreign funds, the prohibition or restriction of foreign imports and/or exports, etc.); and other types of impediments (e.g. loss of the carrying vessel, theft, robbery or sabotage during storage or carriage, general strike, general power supply cut). The occurrence of any of the aforesaid events may (i) destroy the seller's premises or factory, (ii) prevent the seller, the carrier, or the warehouse operator from delivering the goods to the buyer or his agent, (iii) cause damage to or total or partial loss of the goods, or (iiii) prevent the buyer from paying the price.

(2). Impediment beyond the party’s control
The impediment must arise in an area outside the party’s control. Accordingly, business failures, personal incapability, liquidation or bankruptcy, failure of production or accounting systems, failure of data processing equipment, failure to maintain the necessary personnel, illness, death or arrest of the party, incapability of the party's supplier to provide him with raw material, strike constituting internal confrontation at a factory (a general strike, however, shall constitute an impediment), or excessive increase in the price of the raw material should not discharge the party from his obligation to perform. State intervention preventing performance, such as the imposition of quotas, import and export bans, are in general outside a party’s control.
(3). Unforeseeable impediment
If the event, an event being an impediment within the meaning of Article 79, was foreseeable, the defaulting party should, in the absence of any contrary contractual provision(s), be considered as having assumed the risk of its realization. Foreseeability must be appreciated at the time of the conclusion of the contract; it is a question of whether the party ought to have reasonably foreseen a realistic possibility that an impediment to performance would occur. However, it is important to understand that, in the assessment of the foreseeability factor, other circumstances should also be considered, such as the duration of the contract (the longer the duration, the less likely the contracting parties will be able to foresee possible impediments), the fact that the price of the goods sold tends to fluctuate in the international market, or the fact that early signs of the impediment were already obvious at the time of the conclusion of the contract.
(4) Unavoidable impediment
The impediment must be unavoidable, it means the defaulting party must have been reasonably unable to have avoided or overcome the impediment or its consequences. To avoid means taking all the necessary steps to prevent the occurrence of the impediment. To overcome means to take the necessary steps to preclude the consequences of the impediment. It is closely associated with the condition of the external character of the impeding event. However, it is difficult to distinguish between what is possible and what is impossible to overcome the impediment, a case-by- case analysis is required. For example, an object is lost at sea and can be fished out in good condition although at great cost, the final solution will not the same if the said object is a highly valuable sculpture or only a machine tool.
(5) Causality
This condition relates to the causal element. The non-performance of contract must be due to the impediment. For example, the seller has refused to perform the contract, after the refusal, a fire burns his warehouse and all the goods are destroyed by the fire. In this situation, the seller cannot rely on the burning warehouse to be exempt from his liability for damage because non-performance in such a case is due to his prior refusal to perform, not the fire. Sometimes it may be difficult to determine the precise cause of the failure when several causes are invoked, the solution will depend on the subjective appraisal of the judge.
(6) Notice

According to Article 79(4), it requires the party who fails to perform to give notice of the impediment and its effect on his ability to perform to the other party, so as to enable the other party to take all the steps to overcome the consequences of the failure, regardless of whether the impediment is permanent or temporary.

It should be noted that the notice exists only when the occurrence of the impediment is certain, not when it may still be avoided. Also, the notice must reach the party addressed to within a reasonable time. If the notice has not been given or received within a reasonable time, the defaulting party is liable for damages resulting from the failure to give notice.

3.Temporary impediments
Under Article 79(3), the uncontrollable impediments, which temporarily prevent performance, relieve the party from damages for his temporary failure to perform. However, that does not alter the fact that the delay in performance is a breach of contract. The other party can declare that the contract avoided pursuant to Article 49(1) if the breach is ‘fundamental’ within the meaning of Article 25.
4.Effect of the exemption
Article 79(5) provides “nothing in this article prevents either party form exercising any right other than to claim damages under this convention.” Thus, except for the damages, all other remedies under CISG are available for the parties to claim. Accordingly, three aspects in relation to the effect should be considered.
Firstly, a unforeseeable impediment to performance only results in the relief of the party’s obligation to pay damages .If the party is prevented form performing only in part, then he is relieved of liability for damages only in respect of that part, the other party may continue to exercise his rights in respect of performance that is still available, or he may avoid the whole contract on the ground of partial non-performance.
Secondly, other remedies can be obtained. If one party is entitled to exemption under Article 79, the other party nevertheless retains all other remedies available to him under the Convention, except for his claim to damages, amongst theses remedies are avoidance of the contract (Article 45(1) (a), 49, 51, 61(1)a and 64) and a reduction in the contract price(Article 50).Claiming interest under Article 78 on the price or other sums due is also an remedy for the other party .
Thirdly, It should be noted that the other party’s right to claim performance is also basically unaffected under Article 79. Delayed delivery or delivery of non-conforming goods generally do not away with the other party’s right to performance, even if the party is exempted from paying damages on the ground of Article 79. In the case of impossibility, the recognition of a right to claim performance would clearly be not realistic, because the subject matter of performance no longer exists. However, Article 79(5) merely means that the party’s remedies, including the right to performance, are not excluded simply because the other party is relieved from his liability to pay damages.
Conclusion
In analysis of the frustration under English law and the exemption under CISG, several similarities and differences can be found as follows:
1.Similarities
There are several similarities between these two rules. Firstly those two rules both set some strict conditions on whether the party can be released from the performance of the contract. The frustration under English law provides that the supervening events should be make it impossible for the performance of the contract, these supervening events should be unforeseeable and beyond the control of the party which make the contract impossible to perform, the exemption under CISG also provides these conditions. Secondly, the proof of burden is on the non-performing party under both rules, thus, if the party want to be released from the performance of the contract, he should present that the event arose after the conclusion of the contract falls within the conditions of the frustration doctrine and exemption rule. Lastly, It can be found that the frustration event in English law and the impediment in CISG are limited and strict, so as to prevent the non-performing party from misuse of the doctrines.
2.Differences
As mentioned above, frustration under English law and exemption under CISG share some similarities. However, there are sharp differences between these two rules.
Firstly, if the English doctrine operates, the contract is discharged in its entirety, the Vienna convention regards component obligations of a contract as been available for exemption. Again, English impossibility of performance or frustration wholly discharges the contract, leaving only ajustment under the Law Reform (Frustrated Contracts) Act 1943, whereas exemption under Article 79 merely excludes the remedy of damages, the contract apparently continues to exist unless and until it is avoided, the only immediate effect is to excuse the non-performing party from liability for failure to perform. Furthermore, English law frustration releases both parties from performance of the contract whereas Article 79 only exempts the non- performing one, the other party has the right to claim for remedies. It does not automatically terminate the contract, and it is left to the other party to determine what remedies he wishes to pursue (other than in respect of damages) in the light of the supervening circumstances.
Secondly, the requirement of notice is a further difference between English law of frustration and impossibility and the regime established by Article 79 of CISG. In English law, frustration terminates contract automatically at the time of the frustrating event, “its legal effect does not depend on [the parties’] opinions, or even knowledge of the event”, under Article 79(4) of CISG, exemption requires the party who fails to perform to give notice of the impediment to the other party, otherwise the non-performing party should be responsible for damages.
Thirdly, under English law, the contract is only frustrated if the intervening event has destroyed its substratum or so radically interfered with performance that the whole complexion of the contract has been altered, hence a temporary impediment is not sufficient unless it has this effect, whereas a temporary impediment, regardless of its gravity, clearly is a sufficient excuse under Article 79.
All in all, the frustration under English law has either deny the possibility of relief or to restrict the ambit of the relief as far as possible. Contracts are to be performed, and a relieving power would introduce uncertainty, and the possibility of dispute, in many cases. This is not what business people desire. They are willing to recognise that outside events may alter the nature of the obligation. Thus exemption under CISG reflects commercial reality more than frustration under English law.
 

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