In general, the main idea of the contracts are the performance of the mutual obligations regulated in the contract by the parties. Within the scope of “pacta sunt servanda” principle, the parties are bound by the contract itself and the provisions of the contract should not be affected of the changing conditions emerged following the conclusion of the contract. As a rule, the parties are obliged to comply with the provisions of the contract as regulated.
However, due to the conditions which occur in an unanticipated way and out of the parties’ control, the principle of pacta sunt servanda can be sometimes too rigid in terms of the performance of the obligations by the parties. At this point, the principle of “clausula rebus sic stantibus” may satisfy the needs of the parties with regard to the performance of the obligations. As of today, it is seen that most of the different jurisdictions have acknowledged to adapt the contract in line with the changing conditions.
In this context, due to certain situations or circumstances that may arise beyond the parties’ control, the parties may not be able to perform their obligations as agreed. In this case, the impossibility of the performance can be discussed. For example, if a seller is not able to deliver the goods due to governmental decision prohibiting the said goods or if the goods are burnt due to fire; the creditor may base on the impossibility of the performance. However, in terms of termination, it is important to determine whether the impossibility arises from a situation that a party can control or not.
Also impossibility of the performance before due date should be considered under the concept of “anticipatory performance” while the impossibility after due date should be considered as “actual breach”. In this manner, the time when the performance becomes impossible is also important in terms of the classification of the breach and its consequences.
On the other hand, it is problematic to determine the difference between the change in circumstances that makes the performance impossible, more difficult to perform or frustrate the purpose. Depending on the features of the present case, the change in circumstances may cause the impossibility of the performance, frustration of purpose or make the performance onerous for one party. In case of such change in circumstances, then the contract can be terminated, adjusted or renegotiated by the parties as legal remedies.
As being a current example, our century already has a reason to lead a change in circumstances in terms of the parties’ obligations in a contract, called “Covid-19”. It could be easily said that the effect of Covid-19 has changed the conditions that are stipulated in the contracts for parties. The effects of Covid-19 have been realized as the impossibility of the performance in some of the contracts while for other contracts, the effects have been realized as hardship which means the performance becomes onerous for one of the parties.
Within the scope of above mentioned explanations, we will review the impossibility of performance in terms of termination for the following parts of this study in English Common Law. The effects of the Covid-19 will be also taken into account while assessing the situation for impossibility of performance.
1.1.1. English Law
When it comes to impossibility of the performance in English Common Law, the “doctrine of frustration” should be definitely mentioned. This doctrine applies when the performance becomes impossible after the conclusion of the contract without the faults of the parties and so the parties will no longer be obliged to carry out the performance. In such situation, the contract will be deemed as “discharged by frustration”. It should be noted that we could not deal with doctrine of frustration if the common presumption is not true at the time of the conclusion of the contract; however if the common presumption is changed after the conclusion of the contract, then the doctrine of frustration will apply. This is one of the limits in terms of the application of the consequences of the doctrine. The illuminating example of such distinction has been seen in two different coronation case: Krell v. Henry (1903) and Griffith v. Brymer (1903). In the first well-known case, the contract was accepted as discharged by frustration since the coronation was cancelled after the formation of the contract while in the second case, the cancellation of coronation was apparent before the formation of the contract.
On the other hand, it is not possible to apply the doctrine of frustration in every change of circumstances occurred beyond the parties’ control. In the cited book of Helen Gubby in this study, she argues that this doctrine does not apply on the excuse that the change simply makes the performance more onerous than estimated and she added that the initial obligations stated in the contract should differentiate radically as a result of the change in circumstances in order to apply the doctrine. However, according to Kötz; this doctrine applies if the change makes the performance more onerous than the aim of the contract at the time of the formation. Although it seems like these two opinions are not in the same direction, we are of the opinion that Kötz also mentions about the changes in circumstances which go to the roots of the contract, in other words fundamental changes.
In the event of doctrine of frustration, it is accepted that the contract is discharged after the frustrating event and termination takes place automatically (different than the civil law), unlike the situation in case of the mistake. Because, the contract is discharged ab initio in case of mistake since it never enters into force.
The doctrine of frustration has also outcomes on the monetary obligations. The Law Reform (Frustrated Contracts) Act 1943 regulates the provision of adjustments in case a contract is discharged. Accordingly, if the money is paid before the event which makes the contract discharged, the paid amount can be claimed based on the unjust enrichment (if there is no obligation which is performed by the counter party in remuneration for the paid money until the frustrating event) and if the frustrating event takes place before the money is due, then there will be no need for making payment.
On the other hand, it could be said that the doctrine of frustration also applies where the change in circumstances makes the performance impossible. Firstly, it should be noted that if the party, whose performance becomes impossible, is at fault; then the doctrine of frustration does not apply. If the debtor can foresee the risk of impossibility or the risk can be noticed by the counter party, the doctrine of frustration will not be applied as well.
Based on the changes in circumstances, the impossibility may be categorized as follow: (i) legal impossibility, (ii) physical impossibility and (iii) impossibility of purpose.
1.1.1.Categories of the Impossibility
(I) The legal impossibility comes into question when the performance regulated in the contract becomes impossible as a result of an amendment in the law or decision of administrative authorities. For example, if the amendment in law declares embargo against a relevant state, then the performance regulated under the contract becomes impossible and the contract is treating as discharged (Fibrosa Skolpa Akcyjna v. Fairbairn Lawson Combe).
Having said that, it cannot be automatically said that the performance under the contract will be immediately impossible due to the legal restrictions by law. Each contract should be evaluated under its own provisions and the effect of the amendment should be analyzed whether it causes fundamental change in terms of performance. For example, in the case Metropolitian Water Board v. Dick, Kerr & Co Ltd., the interference of the government to a reservoir construction was evaluated as a change in circumstance since the duration of the interference is supposed to take long as creating a fundamental change regarding the performance agreed in the contract. Therefore, the contract was accepted as discharged event if there were time extension provisions in the building contract. On the other hand, in the case Cricklewood Property and Investment Trust Ltd. v. Leighton’s Investment Trust Ltd (1945), the limitations by government were not accepted as a fundamental change based on the fact that the period of the lease will still continue more than ninety years.
(II) The physical impossibility comes into question when the performance regulated in the contract becomes physically impossible as a result of related event. For example; if a seller is not able to supply the goods since the raw material of the goods is burnt in a storehouse, then the performance becomes physically impossible. However, if the raw material can still be procured from a third person by the seller, then the impossibility of the performance does not exist. In terms of physical impossibility, a contract may become impossible (including but not limited to) a) provided that one of the parties is death or incapacitated, b) when subject matter is destroyed or unavailable or c) when the subject matter which consists of the performance of the specific goods is destroyed.
From the point of first situation, it should be indicated that the party’s death or incapacity is important if the performance depends on the personal character of the party. It should also be noted that, if the party is not able to perform due to temporary illness after the formation of the contract, this failure of the performance cannot be evaluated as impossibility, but this should be called as breach of contract. However, if the illness of the party emerges beyond its control, then it can be accepted that the performance is frustrated.
It is also possible that subject matter can be destroyed or unavailable after the formation of the contract. In such cases, the contracts are accepted as frustrated as well. The case of Taylor v. Calwell is a classic but good example for the destruction of the subject matter. In this case, the claimant rented the concert hall for a concert which will take place in the future; however, the music hall was destroyed as a result of a fire. So the question is whether the contract became frustrated as a result of the fire and the claimant is entitled to ask for compensation. In the judgement, it had ruled that the claimant cannot ask for compensation, since there is a clause in the contract which eliminates the liability of the music hall’s owner in case of the destroyed of the music hall without its fault.
As it is seen in the case, the performance became impossible as a result of the perishing of the music hall. Yet, the important part is the limitation of the owner’s liability due to the fact that the fire did not occur due to its fault. Having said that, we are of the opinion that whether the owner took all necessary measures to prevent the fire or it had negligence for the occurrence of the fire should be analyzed in case the subject matter is destroyed. Otherwise, elimination of the related party’s liability automatically in each case where the subject matter is destroyed would be contrary to the good faith.
With regard the termination in case the subject matter destroyed or unavailable, the contract will be terminated ex officio without a further notice.
Lastly, if the subject matter consists of the performance of specific goods but if the source of those goods are vanished without any fault of the seller, then the contract becomes frustrated due to the impossibility of the performance, unlike the performance in kind. For example, if the seller undertakes to sell potatoes grown in a specific area but if the area is destroyed as a result of a natural disaster, the performance becomes impossible due to the frustrating event (Howell v. Coupland 1876).
(III) If the main purpose of the performance does not exist anymore, the performance is accepted to be impossible. Hereby, the performance of the contract is not impossible, contrarily the performance is still possible to carry out. However, the recipient party indicates that the performance is not as much valuable as for him/her at the time of the formation of the contract.
1.1.2. Assessment of Covid-19 Effects In Terms of Impossibility
Along with its bad effects to the human health all around the world, Covid-19 has been also affected the performance of the contracts concluded by the parties. As a result of the necessary measures taken by the governments, the performance of the obligations under the contracts have become impossible or considerably onerous for the contracting party. Within this scope, we will review the effects of the Covid-19 on the contracts concluded under English Law.
As stated above, the general principle in English Law is to be bound by the contract itself and the parties bear the risks of the bad bargain. In other words, the principle of pacta sunt servanda has still significant importance. However, the doctrine of frustration is an exception to this general acceptance. In this manner, it should be analyzed whether the Covid-19 creates the impossibility of the performance or not, with regard to the doctrine of frustration. At this point, the force majeure clauses in the contracts should be taken into account as well.
If the effects of the Covid-19 creates legal impossibility, physical impossibility or makes purpose impossible as stated above, then the affected party may assert that the performance and also contract are discharged due to the frustrating event in the circumstances. However, since the doctrine of frustration is an exceptional concept and the requirements for frustration to make the performance impossible are rigid due to the fact that the performance of the obligation is required to be significantly difficult comparing the time when the contract is concluded in English Law, the affected party should prove that he/she took all measures in order to remove the effects of the Covid-19; yet he/she failed.
In fact, force majeure is a concept which the common law systems are not familiar to. On the other hand, most of the contracts include the provision of “force majeure”. The force majeure provisions intended to protect the parties for not to be assumed as a breaching party in case of change in circumstances occurred beyond the control of the parties. Without prejudice to the situations counted as force majeure in the contract, considering the precautions taken by the government, it could be said that the Covid-19 should be accepted as an infectious disease within the scope of force majeure. However, it should be also pay attention whether “infectious disease” or such expressions which may cover the situation of Covid-19, are regulated under the article of force majeure in the contract. We are of the opinion that, the English courts may interpret the force majeure situations narrowly, in other words they may only accept the situations counted in the contract as force majeure within the scope of the principle of pacta sunt servanda, unlike Turkish Law. Therefore, whether the effects of the Covid-19 constitute force majeure or not, should be analyzed separately for each contract.
If it is accepted that the effects of Covid-19 create force majeure for the related contract, then it means that carrying out the performance is no longer possible due to the force majeure event. However, it could not be said that in case of force majeure, the contracts are automatically discharged. Firstly, the consequences of force majeure stated in the related contract should be analyzed. Most of the force majeure clauses are held obliged the affected party to notify regarding the unforeseen event in order to start the suspension period. In the suspension period, the obligations of the parties are suspended but the contract is still valid, unlike frustrating event. This is the main difference between the consequences of force majeure and frustrating event, even if these concepts have similar features. However, the force majeure clause itself can limit the suspension period and stipulate that if the effects of the force majeure event does not disappear within the suspension time, the parties may be free to terminate the contract.
As a result, if the effects of the Covid-19 can be considered as force majeure in the contract, the contract and the obligations of the parties will most probably be suspended (might be varied as per the each situation). If there is no force majeure clause in a contract, then the doctrine of frustration might be applied if the performance becomes impossible. In case of frustration, the contract is treated as discharged, but not suspended.
Atty. Sema Dar
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