Hardship and Frustration in Contract

A popular newspaper recently reported that Kenya Broadcasting Corporation is currently engrossed in a commercial suit with a Dubai-based business man, Ajay Sethi who seeks damages in the amount of KSh49bn.

The subject matter of the suit is a joint venture between the two parties to set up a24 hour entertainment and sports channel which was to be hosted by KBC.

On one hand, the joint venture was terminated by KBC on what they say was due to the cannel’s failure to attract advertising, something which was in turn caused by poor programs. On the other hand, Ajay Sethi and his company, Channel 2 Corp Group aver that the joint venture was terminated in bad faith since the only issue which was brought to their notice was that of a bad signal, something that the claimant tried to rectify by purchasing better equipment to strengthen the signal. More so , the claimant avers that after terminating the joint venture, KCB went ahead and engaged China’s Star Times to set up a similar channel.

If the two parties’ averments are anything to go by, it can be rightly said that the joint venture suffered from hardship. From the poor signal, to the poor programming which was not fit for the market, to the lack of advertisers…all that can be looked at as hardship.

Did the parties have any way of remedying this hardship, yes. Yes, because hardship unlike frustration is not something beyond any one’s making. Hardship accounts for all those challenges in business which parties to a contract can remedy, subject to their obligations according to the contract.

The poor signal, for example, could be remedied by better equipment, equipment that strengthens the signal. Poor programs can be remedied by hiring experts to advise on what programs can be consumed by the market. The lack of advertisers has something to do with marketing of the channel.

Frustration -those other things that make performance of the contract impossible, those which neither party is capable of controlling, make a contract void ab initio. Such things that frustrate a contract include weather conditions, say, strong winds, hurricanes, storms; acts of war, subsequent illegalization of a trade, among others. The legal consequence of a contract which is found to have been frustrated is that the contract is automatically terminated at the point of frustration. Future obligations are discharged, and obligations which were supposed to be performed before the frustrating event must be performed.

Hardship, even if severe, has never and does not constitute frustration. Frustration only occurs when performance of the contract becomes impossible, when the contract becomes fundamentally different from what the parties had contemplated.

It may not matter that the burden of performing the contract has increase, despite the increase of the burden being a consequence of no fault by any of the parties.

When interpreting circumstances that constitute frustration, the courts use a very narrow definition. The party who wants to succeed in claiming frustration must prove that it was not the intention of the parties to be bound by the terms of the contract in the new circumstances which have emerged unexpectedly. The interpretation of circumstances that constitute frustration are not, and should never be subject to the discretion of the court.

A contract will not be frustrated on the following grounds:
1. Where the event causing the hardship was foreseen by the parties or could have been reasonably foreseen
2. Where the party who is pleading frustration is at fault.
3. Where one of the parties faces a hardship, inconvenience or material loss; – where the party struck a bad bargain

How to avoid frustration

Frustration can be avoided by drafting contracts in a broad perspective. A clause on force majeure helps to streamline what frustration is by providing for what will happen to the contract in instances where there are supervening circumstances, not the fault of any party; but at the same time maintaining the existence of the contract.

Restitution

This is a remedy available at common law where a party is refunded the sum he or she has deposited for performance of the other parties obligations under the contract. Restitution is available only where the other party has performed any obligation. Usually, part performance of the contract precludes the remedy of restitution. This however does not mean that a party will not get restitution, depending on the facts of the case.

Conclusion

Whereas hardship and frustration seem similar, it is important to distinguish the two. Frustration, unlike hardship, makes the contract void, ab initio.

BY SAMALI BITALA

This article appears in our newsletter, The Deuteronomy Vol 5, Issue 4, of August 26th, 2016

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