Contracts are agreements that define the obligation of the parties to each other. Failure to adhere to the terms outlined gives rise to the right to compensation in favour of the aggrieved party[1]. However, there could be factors that are beyond the control of either or both parties that may make it impossible for the contract to be executed. This is termed as Force Majeure in law and could include “Acts of God” and other happenings occurring on a large scale such as changes in relevant laws. The terms to the contract can either be expressly written down or implied[2]. Under normal circumstances, terms and conditions relevant to the contract are all written. However, courts can factor in information not written in the contract depending on the specific facts of the case. This is especially where such information was relied on in making the decision on whether to enter into the contract. This essay evaluates the application of the law of contract based on the experience of Brian, the Managing Director of Computer Tech Pty Ltd.
Regis Plaza gets into a contract with Brian to host his conference. However, their building is locked up by government after an earthquake. They subsequently arranged for an alternative which Brian rejected in favour of a different building. Brian latter asked to be compensated but Regis Plaza declined.
In contracts, there may be circumstances that could arise that are beyond the control of the parties to the contract. These circumstances can frustrate the contract and render it unenforceable. In law, this is described using the term Force Majeure, a term that applies to changes in law, economic crises, and “Acts of God”[3]. Acts of God can include events such as floods, earthquakes, tornados, tsunamis, drought and others. There are a number of conditions that must be fulfilled for a contract to be voidable under the Force Majeure clause[4]. These include externality, unpredictability and unavoidability.
The externality element refers to the fact that the party to the contract has nothing to do with it. It has to have occurred out of no initiated action by them[5]. There is also the question of unpredictability where the party is expected not to have been able to reasonably predict such an occurrence. For example, a person who fails to prepare for a catastrophic event despite the existence of prior disaster warnings may not be able to invoke the impossibility/impracticality defence in contract[6]. However, provisions on Acts of God are more explicit in that they are described as those that could not have been avoided irrespective of the level of foresight involved.
Even where there are such Acts of God, the parties to the contract need to do everything in their power to deliver on their obligations. This means that in the event that they are not able to provide the services or products as agreed, they ought to do their best under the circumstances to provide reasonable alternatives to the other parties in the contract[7]. This rule was established in the case of Schweiger v Solbeck (1951) where it was established that the courts only invoke the doctrine of Act of God where the defendant had not role in causing or increasing the impact of the disaster[8]. In the determination of what constitutes a reasonable measure, the courts examine the facts of the case where the main elements are comparability of alternative service to the initial service, the options available to the party, and the amount of time available for such an arrangement.
For defence on the basis of Acts of God to hold, the frustration must be solely based on the natural events that have occurred. Where there are any human acts of omission or commission that aggravate the situation, the defence cannot hold[9]. It is therefore incumbent on the party using this defence to demonstrate that there is nothing they could have done to prevent the impact as witnessed. One of the early authorities was the case of Wolf v Shelley (1581) where the concept of frustration of a contract by virtue of death of a party or Act of God was first established[10]. This formed the basis for subsequent developments that currently define what can be viewed as an Act of God.
Regis Plaza’s predicament was as a result of an earthquake. They may therefore be able to avoid liability as the contract was frustrated by an Act of God. However, it could be noted that the plaza was affected while other nearby buildings were not affected. Brian could raise the argument that this difference indicates that Regis Plaza failed to institute features that would make their building less prone to earthquakes. Unless Regis Plaza could prove that there is a good reason for the difference (such as the building maybe being closer to the epicentre of the earthquake), their defence based on “Acts of God” may not hold. To their credit on the other hand is the fact that they offered to provide an alternative by availing a portable building which would provide the same advantages as the original conference hall. Brian rejected this alternative and Regis Plaza could use his rejection to demonstrate that they played no role in frustrating the contract. It’s likely that the courts would rule in favour of Regis Plaza.
In this case, Edwin/Golden Retreat assures Brian that he has capacity to host 40 guests but after Brian begun to conduct his conference, government agents forced them to evict 9 of their guests. The level of dissatisfaction was heightened by the provision of poor food that made the rest of the guests very dissatisfied. Apart from the promise on the seating capacity, Brian had also been promised that Edwin would provide the tastiest food in the city. Brian intends to sue over breach of condition despite the fact that neither of the promises were in writing.
Failure to include the verbal promises made in the contract makes it difficult for such promises to be enforced. The general application of this rule is based on one rationale: that numerous verbal negotiations take place before a final contract is signed[11]. The final contract is believed to be a consensus on all the issues that are relevant to the contract. In other words, all negotiations before the formation of the contract become secondary to the terms of the written contract. The rationale of applying this rule is that contracts could become unenforceable where the terms are not definite and where negotiations that may not necessarily been agreed on are used to dictate what happens in the contract[12]. This is what is known as the parole evidence rule which disallows the use of prior negotiations that have not formed part of the written contract. The only exceptions that can be allowed are interpretations that may be applied to give meaning to the terms outlined[13]. Such interpretations are admissible for as long as they do not have the overall impact of reversing the real terms of the contract.
It would therefore take ambiguity in a written contract for the courts to resort to the promises made during the negotiations as the basis for getting the actual meanings intended. If the information is admitted, Brian would be able to prove that there was intentional misrepresentation. This is a criminal act and the guilty person is bound to compensate the aggrieved party for both direct and indirect costs incurred as a result of the misrepresentation.
In applying the parol evidence rule in contracts, Brian is in a weak position. The fact that the promises made are not included in the written contract means that the probability of applying them is low. The only loophole that exists would be if there are inferences to capacity in the written contract and where there is no explanation on what constitutes capacity. If Brian can prove that there was an agreement that capacity would imply to having the ability to host 40 guests, then he could have legal recourse and be able to not only claim the cost of hiring the conference hall but also be able to sue for additional costs incurred.
On the promise to provide the tastiest food in the city, it will be difficult to obtain remedies based on this promise in the event that clarifications on the terms are sought from the pre-contract negotiations. The question of taste is subjective and difficult to determine by comprehensive standards.
Contracts bind parties to certain obligations. However, liability to each other can be avoided if the contract is frustrated by Acts of God. In the case of Regis Plaza, liability could be avoided if they can prove that there was no role played by in making the impact of the earthquake as big as it was on their building.
The parole evidence rule is used to guide the interpretation of contracts and keep them more certain. Accordingly, Brian may find it difficult to institute action against Edwin unless there’s a loophole in the contract that makes it necessary for reference to be made to promises made during the negotiations.
Australian Contract Law, Terms of a contract (2012) Australian Law Contract < http://www.australiancontractlaw.com/law/scope-terms.html>
Carter, John W, Cases and materials on contract law in Australia (LexisNexis Butterworths, 2012)
Gibson, Andy, Business law (Pyront, NSW: Thomson Reuters, 2011)
Insite Law, Terms of the Contract (7 September 2012) Magazine Insite Law < http://www.insitelawmagazine.com/ch7termsofcontract.htm>
Lindgred, Kevin E, Business law of Australia (Chatswood, NSW: Lexis Butterworths, 2011)
Morris, Mark O; Evensen, Elizabeth, ‘What’s happening to the parol evidence rule? More holes in the dike’ (2000) 67.2 Defense Counsel Journal 209-220
Perell, Paul M, ‘The ambiguity exception to the parol evidence rule’ (2001) 36.1 The Canadian Business Law Journal 21,35
Peterson, Jeannie Marie, Principles of contract law (Pyront, NSW: Thomson Reuters Australia, 2012)
Schweiger v. Solbeck, (1951) 191 Or 454, 230 P2d 195
[1] Australian Contract Law, Terms of a contract (2012) Australian Law Contract < http://www.australiancontractlaw.com/law/scope-terms.html>.
[2] Ibid.
[4] Insite Law, Terms of the Contract (7 September 2012) Magazine Insite Law < http://www.insitelawmagazine.com/ch7termsofcontract.htm>.
[5] Ibid.
[6] Peterson, Jeannie Marie, Principles of contract law (Pyront, NSW: Thomson Reuters Australia, 2012).
[9] Lindgred, Kevin E, Business law of Australia (Chatswood, NSW: Lexis Butterworths, 2011).
[10] Ibid.
[11] Morris, Mark O; Evensen, Elizabeth, ‘What’s happening to the parol evidence rule? More holes in the dike’ (2000) 67.2 Defense Counsel Journal 215.
[12] Ibid.
[13] Perell, Paul M, ‘The ambiguity exception to the parol evidence rule’ (2001) 36.1 The Canadian Business Law Journal 21,35.
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