Australian Contract Law
Australian Contract Law
Discussion about English contract law center around primary classical and relational theory, with a deep division between traditional and critical lawyers. With the ongoing Covid-19 pandemic, many organizations are frustrated and are unable to meet their contractual obligation, with a significant legal problem of identifying the right theory that can help in justifying the contractual frustrations (Lindsay, 2020). Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd case is a useful illustration of the frustration principle. The court of appeal had followed classical theory tenants by ruling that changes in social and economic circumstances never caused any frustrations to the parties involved. Although from a traditional perspective, the ruling was right, it failed to consider the need for flexibility and renegotiations to create a stronger relation that benefits all parties irrespective of circumstances.
A Case Note
In Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd (2011) 32 VR 255, the appellant was Ooh! Media Roadside Pty Ltd and the respondent was Diamond Wheels Pty Ltd. The legal issue involved Diamond Wheels failure to meet contractual agreement concerning the payment of rooftop billboard.
The respondent contracted a rooftop advertisement site from the appellant in the Melbourne central business district for five years for outdoor marketing. Later, another party got permission to construct an office tower that eventually would obstruct visibility of the rooftop from vehicles moving into the city along Kings Way (Lindsay, 2020). Since the direction blocked was on a major arterial road, the value of the billboards for Diamond Wills diminished, although it was still visible from other parts and the fundamental nature of the bargain remained unchanged.
Summary of the Procedural History
The appellant repudiated the contract at Victoria Courts and charged the respondent for a breach of contract. Later, the respondent used the frustration principle for defence by arguing that the new building that obscured the rooftop jeopardized outdoor advertisement. At first, the court sided with the respondent, but upon appeal, the judges ruled that the landscape changes never met frustration threshold despite the diminished its value.
Summary of the Ratio Decidendi
In as much as the new building obstructed one direction of the rooftop, the space was still significant for advertising since all the other directions were visible. Besides, the judge argued that Diamond Wills should have insulated itself from the possibility of reduced visibility in the contract given that it was evident that the area landscape was changing, which would eventually affect the visibility of the rooftop (Abbott, 2013). The doctrine of frustration encompasses the distribution of risks and losses that may arise from unanticipated circumstances at the time of the agreement. Legally, frustration occurs due to fundamental changes in circumstances that make the meeting of the contractual obligation commercially or physically impossible, without the fault of the parties involved (Abbott, 2013). Notably, a contract does not meet the doctrine of frustration when the venture fails to meet one of the party’s expectations. In Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd case, the court of appeal could have held the contract as frustrated in case the new building obscured all the primary directions for visibility to the extent that no advertisement would happen on the rooftop. Nevertheless, since the new building only caused some obstruction and it is still practical to advertise on the rooftop, there was no contract frustration.
Relevance of the Classical theory to the Case
The classical theory supports the decision that the court of appeal made regarding Diamond Wheels frustration problem. However, it fails to consider the development that could have affected the socio-economical circumstances of the contract (Mouzas & Blois, 2008). The classical theory is never a flexible theory that considers the interest of parties and changes that may hamper a contractual bargain. In many instances, agreements drawn based on classical theory are based on a solitary moment when parties entered into an agreement (Campbell, 2004). The classical approach originated from the will theory perspective of offer and acceptance basis. The will theory relies on the premise that parties that enter in a contract do so since they have the freedom to do so (Abbott, 2013). The view implies that contracts develop from promises, which all parties have to safeguard. Considerably, the primary scope of a contract is the offer and party’s acceptance and the promise to meet the obligations. In English Law, it is agreeable that to create a contract, parties must have a common intention to become legally bound by the obligations.
The fundamental principle of the classical contract law relies on Pacta sunt servanda, which implies that parties have to keep agreements irrespective of the situations. Given that each reasonable individual that enters into a contract does so voluntarily, the law does not warrant any party to denunciation an agreement later(Abbott, 2013). Following the classical theory tenants, Ooh! Media Roadside Pty Ltd and Diamond Wheels Pty Ltd agreement concerning the rooftop advertising was enforceable irrespective of the changes that occurred in the physical space. Arguably, the two parties must fulfil the contract terms unless the changes were fundamental to the extent that advertisement on the rooftop became impossible. While the classical theory protects the independence of a contract and freedom of parties in making agreements, it fails to consider unforeseeable events that may change contractual terms.
When entering into a contract, parties can make mistakes on business changes that may hamper a contract. The doctrine of clausula rebus sic stantibus can help in amending the principle of pacta sunt servanda. According to the principle of clausula rebus sic stantibus, an agreement remains binding only if the circumstances do not change from the time of the contractual agreement (Campbell, 2004). Based on the principle, it is impractical to base the Diamond Wheels case on classical theory. The rigidity of the pacta sunt servanda doctrine creates unfair justice to Diamond Wheels Pty Ltd. A fair judgement could have considered the changes in circumstances and whether the parties still have a common interest in the contract. Besides, regarding the theory of just and reasonable solution, the court had the power to initiate justice and make a reasonable judgement that can satisfy all parties regarding the circumstances involved. It was quite legally unfair for the judge to dismiss the charges in visibility that occurred and the commercial losses that the physical changes caused to Diamond Wheels. The best law lies on the premise that contracts can not remain feasible if the subject matter that the parties consented has undergone some changes, disappeared, or got destroyed.
Relevance of the Relation Theory to the Case
Perhaps, the court would have arrived at a better decision if at all, it based the ruling on relational theory. Relational contract theory emanates from the view that contracts represent relations and not independent transactions. Based on the theory, the outcome of contracts relies on the relationship of the parties and the circumstances that ensue after the contract (Mouzas & Blois, 2008). The terms of a contract are just a representation of an agreement since the legality of a contract predominantly depends on the understanding and the behaviour of the parties involved. As such, any party that gets into a contract must consider the social and economic circumstances that may affect a contractual relationship over time. Whether parties can continue fulfilling their obligation to a contract depends on the purpose and the relationship. Contractual relationship depends not just on internal values, but also the social and economic factors. Parties using relation theory should create ways that can help in building trust and relationship for long-term benefit.
One of the founders of the theory, Macneil, notes that transactional relationships follow some norms, which parties to a contract have to consider if an agreement is to remain viable. Some of the norms that Macneil provided are reciprocity, role integrity, reliance and expectation, flexibility, creation and restraint of power. According to the theorist, the main goals of parties to a contract should be the preservation of relation and the harmonization of relation conflict following changes in social and economic circumstances (Mouzas & Blois, 2008). At times, parties entering a contract do not see the move as a conclusive obligation, but as a beginning of negotiations and adjustment over time with changes of circumstances for better relation. The extent of adjustment and renegotiations follows established norms and not litigation (Campbell, 2004). Considerably, parties to a contract using the relation approach do not take litigation seriously due to the flexibility offered and the possibility for renegotiations. In case of changes in situations, parties to a contract must reconsider their agreements to ensure fairness and reciprocity and to meet the expectations of each other. In the Media Roadside Pty Ltd v Diamond Wheels Pty Ltd case the judge could have opened ground for renegotiation or ended the contract due to lack of trust and a viable relation.
Ooh! Media Roadside Pty Ltd v Diamond Wheels Pty Ltd case court ruling followed the classical theory approach, although the court could have deemed the contract null in case the judge used relation theory. From a classical perspective, the ruling was right since contracts are distinct from circumstances and parties voluntarily accept to meet contractual obligations. Nevertheless, the ruling failed to consider that contracts are just the beginning of negations and not obligations that parties must meet. When entering contracts, parties cannot envision all circumstances or changes that may arise over time. Considerably, parties have to renegotiate and make adjustments to make their agreement viable and to create a productive relation. Following the relation theory, the ruling that the court of appeal made was unjust and unfair since it never considered the plight of Diamond Wheels Pty Ltd. Although the obstruction that the new building created on the rooftop advertising space never met the frustration threshold, it was a significant change that warranted renegotiation and adjustment if at all the contract was to remain viable.
Abbott, N. (2013). Allocating and managing the risk of the unexpected. Presented at the Legal Wise Contracts Law Conference in Melbourne. https://www.cbp.com.au/WWW_CBP/files/39/396e31ce-a0e7-49c3-ae54-068f6142c4e1.pdf
Campbell, D. (2004). Ian Macneil and the relational theory of contract. Center for Legal Dynamics of Advanced Market Societies (CDAMS) Discussion Paper. http://alliancecontractingelectroniclawjournal.com/wp-content/uploads/2017/04/Campbell-D.-2004-%E2%80%98Ian-Macneil-and-the-Relational-Theory-of-Contract%E2%80%99.pdf
Lindsay, G. (29 April 2020). COVID-19 – Contracts Part 2 – Frustration (29 April 2020) – Kott Gunning Lawyers. Kott Gunning Lawyers. Retrieved 9 September 2020, from https://www.kottgunn.com.au/updates/covid-19/covid-19-contracts-part-2-frustration/.
Mouzas, S., & Blois, K. (2008). Relational contract theory: confirmations and contradictions. In the Proceedings of 24th IMP Conference. https://www.impgroup.org/uploads/papers/6764.pdf