contract theory
Under relational contract theory, the parties rely on the integrity and trust between the contracting parties. Most of these contracts are unwritten and therefore rely on the goodwill of people. Business transactions are numerous and keep changing, so it is cumbersome to document. In contract/will theory, contracting parties are held to their word because they signed the contract on their own free will. Courts will respect the sanctity of a contract between two willing parties. The relational theorist will not support the current case because if a significant frustration occurrence happens, the parties should discuss the changing contract like reasonable people and adjust if they are in a long-term relationship that requires them to be mutual partners. Both parties are not in it for one-sided profits; they have both invested a lot of time and resources on the project so it would be unfair to be subject to the strict wording of contract yet situations change all the time.[1] Will theorist will agree with the decision
because for a contract to be nullified for frustration, there must be a
significant change in the ability to perform the contract. If it is not such a
considerable frustration, like in the present case, courts should task the
parties to fulfil the contract they willingly signed.
Case Note of the Ooh! Media v Diamond Wheels Case
There are a few factors that can lead to contract
termination, one of which is frustration. Ordinarily, it is a common law
doctrine that allows either party to set aside a contract when an unforeseen
event occurs that makes it impossible to fulfil the contract’s obligations. Note
that courts will study the entire contract document and where some clauses are
capable of execution, it will order for their completion and set-aside the
other clauses for frustration[2]. In the present case between Ooh! Media Roadside v Diamond Wheels,[3] the
parties entered into a contract for advertising on the side of a building.
However, a new building came-up, blocking visibility from its primary side. The
defendant refused to honour the remainder of the contract due to frustration
because clause 11(c) in the agreement made the provision for terminating the
contract if the site became unsuitable for its intended use. Court of Appeal
(CA) held that for there to be a successful declaration of unsuitability, the
subject matter has to stand the objective determination test. In short, a
reasonable person out to know that buildings come-up every time and therefore,
a reasonable person ought to expect such changes and adjust accordingly. The CA
was adamant the doctrine of frustration only applies when the external
influence has made performance of the contract utterly different to its initial
intention, leading to frustration of the contract. In this case, the
advertising was still visible on various sides, although not as vividly as
before, therefore there was no contract frustration.
Frustration of Contract under the Relational Contract
Theory
Firstly, the Court of Appeal decision on Clause 11(C) about
radically changing of performance in the Ooh! Media case
contradicts the provisions of relational theory. The Court believed that common
sense would not allow the licensor to accept termination of the contract if the
agreement became unsustainable[4], the opposite of what relational contract theory
expects of parties. The relational theory applies when parties enter into
long-term contracts, and both have invested heavily in the project. [5] For
the agreement to succeed, there is an implied requirement for both parties to
act in good faith, parties must conduct themselves in an honest and trustworthy
way.[6] In
the present case, exhibits D11 and D12 show that since the Northbank Tower
came-up, the defendant’s revenue was up to 3 times less the previous amount.
After the defendant abandoned the site, it went 12 months without getting new
advertisers, and when they did, they were low-paying ones. The Court even
acknowledged Mr Dollison’s evidence that the advertisement industry was down
30%, and there was a slowdown in the economy due to the global recession. These
incidences led to the frustration because the Appellant intended to earn a profit
from advertising to the Northbound traffic. Relational contracts require
parties to work together at problem-solving, pain and gain sharing, and mutual
benefit. That means the parties build a relationship that responds to changes
with circumstances during the subsistence of the contract.[7] Due
to the conditions, the respondent should have understood the situation and
shared in the pain of their partner. Courts should also know that it is
impossible to write[8] all the clauses in a relationship contract
because numerous new circumstances often occur during the subsistence of the
contract. Once the Northbank Tower rose, it affected the profitability of the
advertisement. Under the provisions of relational contract theory, the licensor
should have adjusted their lease amount, and Court should have accepted that
the terms of the contract were frustrated even if there was no express
provision in the agreement.
Secondly, as concerns foreseeability of obstruction,
Court erred in finding that the defendant ought to have foreseen the
obstruction of the advertisement. The Court even acknowledged that the
Appellant might not have anticipated it, yet they required them to honour the
contract. As seen in the Codelfa
case, the Court observed that
frustration does not rely on the parties’ opinions or knowledge of the
occurrence that causes frustration. The Court should take the meaning of the
contract to be the agreement the parties would have made once the frustrating
incident had happened.[9] In the current case, Court acknowledged
Lord Wright’s observations in the Maritime
National Fish Ltd v Ocean Trawlers Ltd case that even if an occurrence is foreseeable or
not, parties do not enter into a contract in the belief that the incident would
not happen during the period of the contract. Lord Wright goes further by
saying that even if the event was foreseeable; it is not of much significance
if it was unforeseen at the time of writing the contract. Due to the preceding,
it is clear the licensee did not foresee the building of the Northbank tower.
Even if they did foresee its construction, it makes no difference because as
per the holding in the Codelfa
case, relational contract dictates
that the parties should assess the agreement as to reasonable people after the
frustrating occurrence. In the current suit, the licensee expectations were to
attract the attention of traffic travelling North. They did not foresee
disruption of the line of sight, and with the construction of the Northbank
tower, their target audience couldn’t see the advertisement. Further, the
Appellant in their evidence, said they had agreed with Twenty-Five King Street,
the original licensor, that the contract was on the basis that there would be
no obstruction of the billboard. In the circumstances, it would be best to
dissolve the agreement for frustration because the primary purpose of the
agreement was defeated.[10]
Frustration of Contract under Classical/Will Contract
Theory
Classical contract theorists would have reached the same
decision in the Ooh! Media case, although they would have used a
different ratio decidendi. Under classical/will theory, courts will find the
clauses of the contract binding because the parties willingly and freely chose
to abide by the commitments in the contract.[11] Parties agree and cause the other party to
commit their resources; it would be unfair for either party to terminate the
agreement they willingly entered. The effect of will theory is applicable when
courts are deciding on the test for frustration. In the Codelfa case,
the judge observed that courts must consider the terms and conditions of the
contract and contrast them with the situation after the frustration occurrence.
Courts insist that there must be a fundamental change in the contemplated and
actual performance of the contract. In the Brisbane City case, Court noted the holding of Lord Reid’s
observations in the Davis
Contractors case that courts
should only consider the wording on the contract and see if it can cater for
the new situation[12]. Will theory is opposed to relational theory
because there is a danger that a promisor may use the letter of the contract
when it favours them and then produce evidence to have the contract altered if
it does not favour them like in the Ooh!
Media case.
Due to the preceding, courts should be conscious that
situations change over time. Courts should not force parties to stick to
contract clauses that do not reflect the changing times. The relational
contract provides a more realistic approach because whenever there are changes
that could frustrate a contract, it allows the parties to sit and assess the
agreement as reasonable people in consideration of the changing situation, it
does not even have to be in writing. Will theory on the hand, is not so
forgiving. It advocates for parties to stick to the letter of the contract
because they freely signed it. There is a danger one of the parties could abuse
the agreement when it does not favour them by seeking to alter it using
unwritten means under relational contract theory.
[1] Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 352;
[2] Frustrated Contracts Act 1978 (NSW), Part 2, S. 7(2)
[3] Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255
[4] Pacific Carriers Ltd v BNP Paribas
[5] Hugh Collins. “Is a relational contract a legal concept?.” (2016). P.7
[6] Allsop Ibid, point 55
[7] Kate Vitasek and Karl Manrodt. Vested: How P&G, McDonald’s, and Microsoft are Redefining Winning in Business Relationships. Macmillan, 2012.
[8] James Allsop, J. Conscience, fair-dealing and commerce – parliaments and the courts” (FCA) [2015] FedJSchol 17, point 30
[9] Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 352;
[10] Scanlan’s New Neon Ltd v Tooheys Ltd [1943] HCA 43; (1943) 67 CLR 169 (4 February 1943)
[11] C. Fried, Contract as Promise 16 (1981)
[12] Brisbane City Council v Group Projects Pty Ltd [1979] HCA 54; (1979) 145 CLR 143 (1 November 1979)