1. A.D.M. Forte, “Economic Frustration of Commercial Contracts: A Comparative Analysis with Particular Reference to the UK” (1986) Juridical Rev. 1 at 4. McKendrick, Ewan (Force Majeure and Frustration of Contract (London: Lloyd’s of London Press, 1995) at 37)Google Scholarstates that it is a “doctrine the limits of which are difficult to define”. Most attempted definitions are unsatisfactory (e.g., The Super Servant Two [1990] 1 Lloyd’s Rep. I at 8: out of the five heads of Bingham, LJ's definition, the last two concern prerequisites for frustration, the two preceding concern its effects, with only the first head looking at the essence of frustration. Taken alone, the first head is extremely vague). Others are based on examples rather than underlying principles (e.g., Chitty on Contracts (London: Sweet & Maxwell, 1999) at 1168–69). Treitel, G. (The Law of Contract (London: Sweet & Maxwell, 1995) at 779)Google Scholarperhaps conies closest by distinguishing between events which a party had undertaken would subsist and those which the parties had mutually assumed would subsist (although this line of thought concentrates less on the mechanism of change in the obligation, instead focussing on who should bear the risk of any such change). Treitel also notes that, “the distinction between the two situations is not easy to put into words”.

2. “… the principles of frustration now applied in Scotland harmonise in most essentials with those of Anglo-American law.” Cooper: “Frustration of Contract in Scots Law” (1948) 28 J. Comp. L. 1 Google Scholar at 5. According to Cooper, two distinguishing characteristics of Scots Law are the doctrine of restitution (Digest, XII, 4, 5,4; Stair, Institutions 1, VII, 7; Erskine Institutes III, i, 10; Cantiere San Rocco S.A. v. Clyde Shipbuilding and Engineering Co. Ltd. 1923 S.C. (H.L.) 105 at 1145) and the rejection of the Krell rule (Trevalion & Co. v. Blanche & Co. 1919 S.C. 617 at 622); see also Gloag, W.M., The Law of Contract (Edinburgh: Green, 1929) at 353 Google Scholarwho suggests that Krell’s non-applicability is founded on Scots Law’s acceptance of restitution. Due to a paucity of pertinent case law, Scots Law theory of frustration nevertheless draws heavily on English jurisprudence.

3. In many contracts such a distinction is somewhat blurred, as both parties have both pecuniary and material obligations. This investigation however assumes that it is always possible to distinguish between “buyer” and “seller”. A comprehensive study of those aspects of the argument exposed here which would not fully be valid in more complex contracts is beyond the scope of the current investigation.

4. E.g., Winfield, P.H., Pollock’s Principles of Contract, 12th ed. (London: Stevens & Sons, 1946) at 6.Google Scholar

5. The combined effect of a lower opportunity-cost ratio and an expansion of the production possibility boundary leads to productivity increases.

6. Hayek, F.A., The Constitution of Liberty (London: Routledge, 1960) at 141.Google Scholar

7. E.g., Smith, A., Lectures on Jurisprudence, Meek, R.L., Raphael, D.D., & Stein, P.G., eds., (Oxford: Clarendon Press, 1978) at 87.Google ScholarThe definition of the contract as a legally enforceable congruent offer and acceptance is an analytical a priori statement, and therefore does not advance our analysis a great deal. British legal theory sometimes has a tendency to shy away from abstract concepts. In cases of difficulty, recourse is often had to the “elephant test”: e.g., Buckland v. Regem [1933] All E.R. Rep. 676 at 682 per Scrutton, LJ: “There was a gentleman who was asked to define an elephant; he said he could not define an elephant, but that he knew one when he saw it. I am very much in the same position as that gentleman.”

8. Freeman, M.D.A., Lloyd’s Introduction to Jurisprudence (London: Sweet & Maxwell, 2001) at 559.Google Scholar

9. The more volatile the benefit, the greater the range of reasonably foreseeable values and the flatter the curve. Whilst a steeper curve may reflect a lower likelihood of extreme divergences in value, this in no way means they are less possible.

10. Under a Hegelian schema risk can be regarded as the antithesis of benefit because the one cannot logically exist without the other. (Risk is a meaningless concept unless placed in the context of benefit, and benefit is always held subject to the possibility that events either diminish or eliminate it.) The synthesis of these two concepts is reconciled in the legal institution of property; therefore property not only entails the enjoyment of benefit, but also the bearing of risk. Property in its current social and economic setting supercedes risk and benefit to such an extent that it is difficult to conceptualise them outwith the context of property. Nevertheless the predominance of property in modern society does not mean that its theoretical origins are incapable of analysis.

11. Pursuing the Hegelian dialectic further, the concept of ‘having’ only has meaning in the context of the notion of ‘not having’. The synthesis of these two concepts involves the possibility of transferring benefit (hence the legal institution of contract). Since benefit is inextricably linked to risk, contracts must involve an equivalent transfer of risk; furthermore, risk transfer must in the absence of contrary intention be assumed alongside corresponding benefit transfer, because risk and benefit lie naturally together. This is why risk can only be transferred independently by specific transaction (and accordingly why risk is withheld, but corresponding benefit transferred, only where there is specific legal provision).

12. Kronman, A.T. & Posner, R.A., eds., The Economics of Contract Law (Boston: Little, Brown, 1979) at 124.Google Scholar

13. For example by “contracting out” see C.O. Hardy in ibid, at 27.

14. Holmes, O.W., The Common Law (London: MacMillan, 1968, originally published 1881) at 235.Google Scholar

15. Atiyah, P.S., Promises, Morals, and Law (Oxford: Clarendon Press, 1981) at 161.Google Scholar

16. Holmes, supra note 14 at 234 gives the example of a guarantee that it shall rain tomorrow.

17. Atiyah, supra note 15 at 208.

18. Ibid. This is why the “just-in-time” approach, pioneered by Toyota in Japan, is inherently more risky than contracts for future performance. The higher risk associated with just-in-time normally pays off by reducing overheads. Sometimes however, unexpected events can disrupt planned schedules, leading to one-off losses which are extremely high. (In Toyota’s case the destruction by fire of a supplier’s factory led to a complete production stoppage at the principal factory.)

19. Kronman & Posner, supra note 12 at 123.

20. See supra note 9.

21. Hester, D.D. & Tobin, J., eds., Risk Aversion and Portfolio Choice (London: Wiley, 1967) at 11.Google Scholar

22. Paradine v. Jane (1648) [1558–1774] All E.R. 172 at 173.

23. Epstein, R.A., Contracts Small and Contract Large: Contract Law Through the Lens of Laissez-Faire (University of Chicago Law School, Working Paper No. 49, August 1997) at 131.Google ScholarThe validity of this claim is not contingent on an assumption of rational behaviour. Irrational behaviour is by its very nature motivated by internal, subjective value judgements of the actor. Therefore, the existence of irrational commercial decisions in fact strengthens Epstein’s claim.

24. This concept of value forms the basis of the Marxist conception of product value.

25. Simmel’s view that “value is never a ‘quality’ of the objects, but a judgement upon them which remains inherent in the subject” (i.e., observer) is true as a global view of value, but does not however means that certain aspects of value are not objective. Sinunel, G., The Philosophy of Money, David, Frisby, ed., trans. Bottomore & Frisby [originally Die Philosophie des Geldes, 1907] (London: Routledge, 1990) at 62.Google ScholarTherefore the objective Marxist analysis of value as “das Quantum der in ihm erhaltenen ‘wertbildenden Substanz’, der Arbeit” [Marx, K., Das Kapital: Kritik derpolitischen Ökonomie (Stuttgart: Kröner, 1969) at 18]Google Scholar is also partially valid.

26. Recognised in the Pandectist theory of the Voraussetzung. See generally: Winscheid, B., Lehrbuch des Pandektenrechts (Frankfurt-am-Main: Kütter & Loening) at 511 Google Scholar (§97).

27. One of the clearest examples is that of branded clothing: in some cases branded clothes even come from the same factory as ‘normal’ clothes, the only difference being the addition of a trade mark.

28. Park, C.S. & Srinivasan, V., “A Survey-Based Method for Measuring and Understanding Brand Equity and its Extendibility” (1994) 31 J. Marketing Research 271 CrossRefGoogle Scholar at 273.

29. Brown, R., “Advertising and the Public Interest: Legal Protection of Trade Symbols (1948) 57 Yale L.J. 1165 CrossRefGoogle Scholar at 1189.

30. Corbin, A.L., Corbin on Contracts (St. Paul, MN: West Publishing Co., 1962) at §1321.Google ScholarA good example of psychological risk manifesting itself is the value of Ratners’ jewellery in the wake of M.D. Gerald Ratners’ pronouncement that it was all “total crap” (Speech on April 24th 1991, attempting to explain why Ratners’ jewellery was cheaper than Marks & Spencer sandwiches). This did significant damage to the firm’s brand equity, with the share price plummeting and annual profits of £127M being followed by losses of £122M.

31. Atiyah, supra note 15 at 214.

32. The buyer is willing to accept an inflated price because of the final benefit she stands to gain from the compound product. Hence the “spare parts exception” in the law of design rights which prevents manufacturers exploiting the huge material added value in spare parts—Copyright, Designs and Patents Act 1988 (c. 48), s213(3)(b)(i), (ii).

33. Hayek, supra note 6 at 141.

34. See infra note 37.

35. E.g., Through a favourable emotional interaction with the performance, workmanship to produce other products, combination with other material resources controlled by the buyer, or application of particular ideas to the object’s use.

36. E.g., The subjective value of spare parts for a car falls dramatically where the owner replaces her car with another model with which the parts are not compatible.

37. The making of ex ante disadvantageous actions is inconceivable where it is accepted that humans have an innate concept of cause and effect. People are aware of the foreseeable consequences of their actions, or at the very least can identify the mechanism which (they believe) determines them (although this mechanism may itself be chance). If a person knows that a particular action (cause) will have a particular result (effect), then the very execution of the action means that the result must be intended and desired. It is here assumed that desired actions are ex ante subjectively advantageous, although a full investigation of this issue is not possible here. See also infra text to note 44.

38. A transaction is Pareto superior where at least one party regards itself as better off, and neither thinks it is worse off (see Freeman, supra note 8 at 558).

39. Friedman, M., Capitalism and Freedom (Chicago: University of Chicago Press, 1962) at 13.Google Scholar

40. ‘Voluntariness’ itself is an elusive concept: Kronman, A.T., “Contract Law and Distributive Justice” (1980) 89 Yale L.J. 472 CrossRefGoogle Scholar at 477–78.

41. Whereas promises made voluntarily are intended to bring future benefit, promises made under coercion are intended to avoid future loss. On the formal similarity of threats and promises, see Searle, J.R., The Philosophy of Language (London: Oxford University Press, 1971) at 48–49.Google Scholar

42. Atiyah, supra note 15 at 145.

43. Ibid.

44. Kronman, supra note 40 at 478–83.

45. The term “inelastic” is used deliberately here. For example the absolute human necessity to eat means that the price of food staples is demand inelastic. Also the (almost) universal need to earn a living renders the supply of labour relatively price inelastic.

46. See the U.S. case of Goebel v. Linn (1882) 47 Mich. 489, discussed in Dalyell, J., “Duress by Economic Pressure” (1942) 20 N. Carolina L. Rev. 237,Google Scholar reprinted in Kronman & Posner, supra note 12 at 70–71.

47. German law recognises this more explicitly in its provisions on frustration through Äquivalen-zstörung— Larenz, K., Lehrbuch des Schuldrechts; ErsterBand, Allgemeiner Teil (Munich: Beck, 1987) at 324–26.Google Scholar

48. Where a certain risk normally lies with a certain object, the “transfer of risk away from its normal location” may not entail actual transfer at all. Taking the example used above of car hire, an express agreement is necessary for the hirer to retain the risk of damage to the hire car.

49. See supra note 19.

50. Posner, R.A. & Rosenfield, A.M., “Impossibility and Related Doctrines in Contract Law: An Economic Analysis” (1977) 6 J.Legal Stud. 83,CrossRefGoogle Scholarreprinted in Kronman & Posner, supra note 12 at 123.

51. Posner and Rosenfield (ibid, at 124) note that a manifested risk is essentially a transaction cost of the self-insurer. (Where transaction costs = magnitude of loss x probability). Insurance companies operate on the basis of this type of Pareto superiority, allowing them to function as general risk managers on a voluntary basis. Accordingly insurance companies do not as a rule accept the risk in cases where manifestation of the risk would lead to enormous claims against them (such as damage caused by armed conflict).

52. Corbin, supra note 30 at § 1321.

53. Ibid., §1356 at 473.

54. See supra note 35.

55. E.g., If the value of material counterperformance (i.e. payment) turns out to be greater than ex ante expected by the buyer, the contract can only be regarded as onerous for that party if the intended purpose of the contractual object yields a gain which is insufficient to offset the increased value of the counterperformance paid. Accordingly, if the contractual object can still be sold on by the buyer to a third party for a profit, then the original contract cannot be regarded as being onerous.

56. Davis Contractors Ltd. v. Fareham U.D.C. [1956] A.C. 696 at 729 per Lord Radcliffe.

57. Hardy, “Risk and Risk Bearing” in Kronman & Posner, supra note 12 at 26.

58. National Carriers Ltd. v. Panalpina (Northern) Ltd. [1981] A.C. 675 at 700 per Lord Simon.

59. This definition of “radical change” is the author’s. It is submitted here that this definition is more useful than those accepted in case law and academic literature. The definition accepted in case law was given by Lord Radcliffe in Davis Contractors Ltd.v. Fareham U.D.C. [1956] A.C. 696 at 729 as being a change such as to render the performance “a different thing from that contracted for”, expressed by the maxim non haec in foedera veni (paraphrasing Virgil, Aeneid, Book IV line 339); this of course leads on to the question of what a “new thing” is. The definition in the standard English Law text on contract law Chitty, (supra note 1 at 1174-75 runs to fifteen lines, the first twelve of which describe the process of comparing the old with the new obligation, and the last three of which state the requirement that a determination as to whether a radical change has occurred should be made; this is not a definition.

60. [1903] 2 K.B. 740.

61. E.g., The closing of the Suez Canal or the depreciation of a currency.

62. As in the “Suez” cases: Tsakiroglou & Co. Ltd, v. Noblee Thorl GmbH [1962] A.C. 93; Ocean Tramp Tankers Corp. v. V/O Sovfracht (The Eugenia) [1964] 2 Q.B. 226.

63. E.g., Where expected hindrances (such as import tariffs) to the delivery of goods are removed.

64. Although the goods are still supplied at the contract price, the buyer still loses because the change in objective value will have lowered the market value of the goods, thus realising a loss on resale at new prices.

65. Wilkie v. Bethune (1848) 11 D. 132 where an employer was bound to pay his servant in potatoes, the price of which increased dramatically as a result of the crop failure of 1846. The contract was construed equitably, allowing payment in an equivalent foodstuff. This case has however been criticised by Gloag, who calls for a strict interpretation. See Gloag, W.M., The Law of Contract (Edinburgh: Green, 1929) at 339.Google Scholar

66. E.g., Where inflation erodes the value of the counterperformance.

67. E.g., If in Krell v. Henry the coronation had gone ahead and the procession had unexpectedly stopped in front of the flat and indulged in a display of pageantry. The subjective enjoyment derived from the use of the flat would have been much greater.

68. Krell v. Henry [1903] 2 K.B. 740; Congimex Companhia Ceral de Comercia Importadora e Exportadora SARL v. Tradax Export SA [1983] 1 Lloyd’s Rep. 250 at 253 (concerning the imposition of soya bean meal import restrictions in Portugal, the intended subsequent destination of the goods).

69. E.g., Where the “seller” falls into unexpected cash-flow difficulties, rendering the influx of cash more welcome (and valuable).

70. E.g., Where the “seller”, having anticipated cash-flow difficulties and made a contract objectively advantageous to the “buyer”, now no longer needs the cash as much and regrets having contracted for such a low price.

71. [1903] 2 K.B. 740. This case centred on a dispute over the enforceability of the obligation to pay rent for a private room which had been hired with the intention of watching the coronation of King Edward VII. As a result of the King’s ill-health on the appointed day, the coronation was postponed. It was clear from the circumstances of the contract that it had been made with the express intention of watching the coronation: a payment greatly inflated above the normal daily rate had been agreed upon. The court accepted the tenant's argument that the obligation to pay for the room should be cancelled.

72. This analysis of contracts is confined to the contractual parties only. It is possible however that a global view of contracts would identify losses falling outwith the contractual relationship (such as environmental damage).

73. Taking the modified Krell scenario (see supra note 67), such a display would have made no difference to the landlord.

74. This would contradict a basic premise underlying contract law (that people should remain true to undertakings which other people have reasonably relied on.) Cf. Atiyah, P.S., Essays on Contract (Oxford: Clarendon Press, 1986) at 21.Google Scholar

75. Considering the Suez cases in this context, frustration would have entailed passing the change of price risk to the buyers, even though the buyers might already have made subsequent contracts to sell the goods at the original contract price. If these contracts too could have been frustrated on the same basis, the result would have been to pass on to the ultimate consumer bear the consequences of the elevated risk. In addition there would have been a great deal of uncertainty all through the chain of contracts as to the precise nature of the obligations of each buyer and seller.

76. Fried, C., Contract as Promise: A Theory of Contractual Obligation (Cambridge, MA: Harvard University Press, 1982) at 62.Google Scholar

77. Hirshleifer, J., Research in Law and Economics: Evolutionary Models in Economics and Law (London: J.A.I. Press, 1982) at 52.Google Scholar

78. As in Victoria Seats Agency v. Paget (1902) 19T.L.R. 16 and Clark v. Lindsay 1902) 19 T.L.R. 202 which specifically referred to the procession and the possibility of cancellation and so frustration did not occur (See also: Treitel, G., An Outline of the Law of Contract (London: Butterworths, 1989) at 307).Google Scholar

79. Rolle, J. in Paradine v. Jane (1648) [1588-1774] All E.R. 172 states the rule of absolute responsibility. Ibbetson notes in “Absolute Liability in Contract: the Antecedents of Paradine v. Jane” in Rose, F.D., ed., Consensus ad Idem: Essays in the Law of Contract in Honour of Guenter Treitel (London: Sweet & Maxwell, 1996) at 35 Google Scholarnote 74 that “no authority is cited for the proposition”. It would appear that this principle had previously been so fundamental to the common law that its validity had been assumed.