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Post No.: 0532deal

 

Furrywisepuppy says:

 

A party can get a contract invalidated if the other party fails to perform their side of the deal or if the other party acts fraudulently.

 

Under Common law, goods and services have an ‘implied warranty’ that they’ll be fit for purpose for a reasonable time. (What’s ‘reasonable’ can be debated though!) When a seller sells goods when knowing the buyer’s specific purpose, there’s an implied warranty that the goods sold will be fit for that purpose.

 

So even if a restaurant chef accepts a shipment of poor quality meat from a supplier because that meat was well-hidden amongst the total delivery – the chef has not assumed the risk of poor quality meat, and the supplier knew the chef wasn’t looking to make dog food out of it. (What’s wrong with dog food? I suppose that’s just me!) Hence the supplier will be liable for damages, either for their failure to perform (for they didn’t fulfil their obligation to deliver an order of only select-grade meat) or because they acted fraudulently (for they hid that inferior meat in the chef’s order with the intent of tricking him/her into accepting and paying for it, knowing that had he/she noticed that meat upon delivery, the chef wouldn’t have accepted it).

 

Some problems (claims of surprise) occur because of assumptions made at the very inception of an agreement – but other unforeseen problems can occur after a bargain has been struck. Whether the courts will enforce such contracts as written can depend on whether the risk was or should’ve been understood at the time of agreement i.e. whether the problem should’ve reasonably been foreseen, such as whether it was a clear gambling situation.

 

If someone hired a private/executive box for the purpose of watching a football match, and this box hire was sold on the basis and purpose of watching a particular match, but then this match was cancelled, then the contract’s purpose has been ‘frustrated’ and everybody will be released from their contractual obligations. The mistake was in assuming that the very – important, not minor – thing that went wrong wouldn’t go wrong. The stadium hiring out the box may not have promised to put on a football match but the basic premise of the undertaking was that there would be a match that day – that’s why these two parties made the bargain they did. And so if this underlying premise disappears, and it wasn’t the fault of the party claiming frustration or it wasn’t in their control, then there’s no point to the contract and so the contract is called off and ‘the loss lies where it falls’.

 

What this means depends on whether money was paid in advance or upon completion of something. Since nothing was completed here for there was no match to watch (there was a failure of consideration) – any items and monies should be recovered to whoever had them before the deal, as if the deal never happened at all. ‘The loss lies where it falls’ normally means that each party shall bear their individual losses up to the frustrating event, any obligations due before the frustrating event are no longer due afterwards, and there are no grounds for suing each other. However the law nowadays tends to seek to prevent cases of ‘unjust enrichment’, where one party is unfairly enriched at the expense of another – so this area is one for qualified lawyers and judges looking at each individual case on its own individual basis to figure out!

 

In all of these mistakes, they would’ve been made simpler to handle if the parties anticipated certain potential scenarios and explicitly accounted for them (‘contingency clauses’) when drafting the contracts (and perhaps insisted on a bit of a discount to compensate for those risks too?) That’s sometimes difficult though. But if both parties are equally innocent and were equally unfocused on or didn’t account for the contingency that in the end sank the bargain, and both parties weren’t gambling or taking a chance that the contingency might happen, then the default rule is that the court is willing to call the whole contract off and the loss lies where it falls. The key to these frustration cases is that the parties hadn’t bargained with the possibility of the surprising event in mind, and therefore their minds had not truly met – there was no ‘meeting of the minds’.

 

However, if you had hired a taxi to take you to the airport but then found out that your flight had been cancelled, then in this case you’ll still owe the taxi driver money if they turn up on your doorstep at the agreed time – the deal was to take you to the airport for a certain fee, and there was a risk that you should’ve understood that your flight may get cancelled.

 

If you had hired a shipping company to take a particular consignment to a particular place for a particular fee and then something happened (e.g. a war along the shipping route) that meant that the ship had to take a longer detour, then the shipping company cannot charge you for this unexpected detour – the deal was to take a particular consignment to a particular place for a particular fee, and there was a risk that they should’ve understood that sometimes a journey may take longer (or be quicker) than expected.

 

Whose risk was it that things could turn out a little worse, more expensive, or at least more difficult, than had been assumed? It’s you in the taxi scenario and them in the shipping scenario. There may have been assumptions that you were going to the airport to catch a particular flight or the shipping company would be taking a certain route, but that doesn’t matter because these risks should’ve reasonably been foreseen. (Of course, if these contingencies where specifically considered and negotiated for when the contract was formed then whatever was agreed to under these circumstances would stand.)

 

There are limits though – the courts won’t go as far as to demand or to have expected the shipping company to have used planes to deliver your consignment as this would’ve multiplied the costs significantly. In this case, the deal would be called off. The shipping company had to get it to the agreed destination within reason; and up to about a third extra in costs is generally considered within reason. So if they had no reasonable commercially practicable solution or alternative but to fly it aboard a fleet of cargo planes then the deal would be considered frustrated and called off.

 

A little risk is natural – or learn to include a clause that accounts for the potential scenario next time. So if you and the shipping company considered the possibility of a wartime incident and accounted for it when making the deal (e.g. by explicitly stating that the obligation to deliver the consignment was absolute), and then an incident occurred that made the deal impossible (e.g. the ship sank from an armed strike, taking down your consignment with it too), then the shipping company must not only reimburse the shipping fees but also fully recompense you for the value of your lost consignment (damages) because you both specifically considered and foresaw this possibility and even explicitly contracted for it. If the parties have talked about a certain possibility then that possibility logically becomes foreseen – it can no longer be regarded as a surprise.

 

Under the circumstances, if there’s something like a war going on and the other party is clearly struggling, there are many things more important than money though – and so you might want to offer them some ‘forbearance’ if you can, and be patient or refrain from exercising a legal right even if something is your legal right. Don’t forget the humanity just because it’s law. Woof.

 

An explicit contract term specifying a specific clause (e.g. something that says that either party can cancel the contract if it gives the other party 10 days notice) shows that the parties had contemplated the possibility of that scenario, and thus neither party can then claim that it was unforeseen or a surprise that neither party had anticipated. Therefore, in most circumstances, such a term must be adhered to. The express provision overrides any argument that one party might make about, for instance, acting in good faith between the two parties.

 

Where there’s no reasonable alternative or solution, there’ll be a case of ‘commercial impracticability’ (albeit this notion can be unsatisfactory due to its vagueness), and the deal will be called off. So if a theatre burns down and there was a deal to put on some shows for a certain night, then this deal would be called off because it’d be impossible to put on those shows – there was an unexpressed assumption that the theatre would exist at the time and the contract was formed on that crucial basis.

 

Unless specific clauses are put in, it’ll be assumed that actors or athletes will be uninjured or alive at least until the end of filming or the end of their contracts, but if something becomes impossible or illegal to continue with then the default rule (i.e. unless otherwise expressed) is that the deal will be called off.

 

Laws are considered stable hence unforeseen changes or amendments in laws can potentially frustrate and scupper deals too.

 

Oftentimes, certain risks are foreseeable because they happen frequently enough, hence clauses covering them are written into contracts. Almost never are clauses written for the possibility of death though – usually life insurance is taken out for a crucial employee for the term of their contract (hence it won’t be the deceased’s estate that pays out in the event of their own death but an insurance company’s), otherwise the default rule stands.

 

‘Force majeure’ or ‘acts of God’ include wars, natural disasters, epidemics, major catastrophes, major strikes, riots and new government regulations, and these will call a deal off and the loss will lie where it falls too. In Common law, parties must spell out what constitutes force majeure in contracts because this isn’t automatically applied. Rarely will a contract state that in such an event the party that was unable to perform its obligations has to make up for the losses suffered by the other party – such possibilities of disaster are more often taken care of by a price discount and/or insurance cover.

 

This is all obviously unless one of the parties caused the situation of commercial impracticability (even if it was partly accounted for in a discount of price) – in which case, the other party can sue them for damages. If it’s about a contract for someone to work for you, you may not be able to force them to do that but you could stop them from working elsewhere such as for a competitor, as well as get them to pay you damages for their breach.

 

…All contracts involve some risk – but surprises are risks that the parties hadn’t intended to contract for and didn’t have in mind at all. They weren’t meant as a gamble for the kinds or magnitudes of risk that transpired.

 

Post No.: 0503 examined mutual versus unilateral mistakes. If a surprise is mutual then the whole thing is called off. But if a surprise is unilateral then the unsurprised party is usually entitled to insist that the risks were understood by arguing that those kinds of risks are what people take in these kinds of deals. For instance booking a holiday and then the weather turns out terrible. (Well you can’t get your money back but perhaps you could’ve taken out weather insurance?) Or buying a futures contract and then the price goes down. (Well you can’t complain but perhaps you could’ve put in a stop-loss or an option to back out?) Otherwise the courts will have to try to interpret the language of the contract to see what was intended.

 

Woof!

 

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