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contract theory

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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)

 

 

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