29 November 2018
Alastair Nokes graduated with a first class LLB Law degree in July 2018. He is an aspiring solicitor and is currently attending BPP University in Manchester, undertaking the Legal Practice Course with integrated Legal Practice Masters. Alastair will join TLT as a trainee solicitor from September 2019, where he will commence a two-year training contract.

Mistakes happen, things change, it is a fact of life, raising the question ‘how should the law of contract deal with the situation when there is a change in circumstances either, before or after a contract has been executed?’ Currently, the law in this area of contract is in a state of confusion which must be rectified. There are two closely related but currently separate doctrines; common mistake and frustration. Both doctrines cover situations in which there has been a subsequent change of circumstances, rendering performance of the contract drastically different to the way in which the parties intended. The only difference being the timing of the event.

The main argument presented was that this distinction is ludicrous and thus should be abolished in favour of a new approach. This would not only accurately realise the intentions of the commercial parties who are the main users of these doctrines but would also ensure a reduction in costs for all associated when changes occur after the contract has been signed.

Common mistake, as introduced in the case of Bell v Lever Bros, is a novel concept. It applies, when prior to the signing of a contract, a change in circumstance occurs which renders performance of the contact impossible. In this case two executives were removed from their offices before their terms of office came to an end, with Lever Brothers agreeing to pay them compensation.  However, unbeknown to Lever Brothers, both managers had stolen money from the company which would have allowed them to remove the officers without compensation. The company tried to recover the money it paid, arguing the contract should be set aside on the basis of common mistake. The Court rejected this argument, however did confirm the existence of such a doctrine, despite the inadequacies of this case. The Court held that the reason behind this doctrine is upholding the consent belonging to the parties and ensuring they are only held to the bargain they agreed. Nevertheless, it was argued using this and other cases that the rationale for the doctrine of common mistake, is in fact risk allocation, the courts are allocating the risk of a particular event to one party or the other. Common mistake is simply the tool they use to undertake this.

Frustration is a more widely used doctrine, covering the situation after a contract has been signed, owing to the fault of neither party, there is a change of circumstances making the contract impossible to perform. This was seen in the case of Taylor v Cadwell where the Surry Music Hall was burnt down before the concerts, for which the venue was hired, could be held. The Court held that neither party would be bound by the contract, as it had been frustrated, meaning neither party was liable to pay the other for the Music Hall. This doctrine has been subsequently applied in a number of cases, most prominently a series of cases regarding the cancelled coronation of King Edward VII. Frustration is most commonly applied in long term contracts, which are the preserve of commercial parties, thus when developing a new doctrinal approach, this must be considered. Again, the rationale for the doctrine frustration, is the allocation of risk by the courts. They are deciding which party must bear the risk and therefore assume the costs of the event which has occurred.

As we can see from the proceeding paragraphs, the two doctrines cover virtually identical factual situations; are based on the same underlying rationale; and affect the same type of contracts. Therefore, there is no logical reason for a continued distinction between these, they should be treated in the same way and should be considered one single unified doctrine. This would help to ensure certainty within commercial contracts, which is understood to be the main aim of commercial parties, thus developing a more user-friendly approach.

Having concluded that a ‘New Approach’ is required in this area, my dissertation considered the method which the courts should adopt. The argument presented was that the Court should examine the contract to discover where the risk of the event has been allocated; as every contract, no matter how short, will allocate the risk of every event to one party or the other. This can either be done by express agreement or implicitly within the contract. Once this has been uncovered the court should use the allocation and assign any losses as the contract dictates. This change would be greatly beneficial, it would increase certainty for the parties, as they would know from the outset their potential liabilities allowing them to plan effectively for this. It would reduce overall costs for parties, as there would be less dispute following a change in circumstances. Finally, it would encourage parties to fully consider possible changes in circumstances, drafting a contract which would allow their expectations to be realised, rather than the current one size fits all approach. An easy way for parties to deal with this situation, utilising the inherent flexibility of the New Approach would be drafting a force majeure clause, a standard clause in many commercial contracts. This would alleviate any potential issues of injustices caused by the New Approach.

All things considered, this area of law is currently in a state of chaos. Two doctrines cover identical areas, yet adopt different approaches, which must be rectified to benefit those who use these doctrines. There must be a new methodology which, it is submitted, is the only solution in this area. The courts must examine the contract to determine where the risk of the event is, using this to assign the losses of any event to one party or the other. This would encourage parties to draft force majeure clauses, to deal with the change in circumstances in the way which they believe to be most appropriate. This would allow mistakes and changes in circumstance, which are a fact of life, to be appropriately dealt with by the law of contract.