Mistake and Frustration Address the Same Problem

8 Apr

The Confluence of Misapprehension and Misfortune: How Mistake and Frustration Address the Same Problem and Why They Are Increasingly Outdated

Introduction

The doctrines of common mistake and frustration in English contract law are often treated as distinct pillars, addressing fundamentally different junctures in the life of a contract – formation and discharge, respectively. However, a closer examination reveals that they grapple with the same core issue: the divergence between the parties' anticipated contractual exchange and the reality that subsequently unfolds. This article argues that this shared foundational concern renders their traditional separation increasingly artificial and that, in their current forms, both doctrines are becoming outdated in effectively addressing the complexities of modern contractual relationships.

At their heart, both mistake and frustration emerge when the assumptions underpinning a contract prove false. Common mistake arises when both parties enter into an agreement based on a shared misapprehension about a present fact. This misapprehension, operating at the formation of the contract, is traditionally seen as negating the necessary consent to contract. Frustration, conversely, occurs when, subsequent to the contract's formation, an unforeseen event renders performance radically different from that contemplated by the parties, or even impossible. This event discharges the contract, releasing the parties from future obligations.

Despite this temporal distinction, the underlying concern is remarkably similar. As Andrew Kull compellingly argues, "Mistake and frustration are the rule, not the exception, and they are two names for the same problem". Every contract is built upon a myriad of assumptions, both explicit and tacit, about the present and the future. A "mutual mistake" about present value inherently reflects projected but unknowable future values, and every agreement is to some extent "frustrated" by the inherent uncertainty surrounding the precise costs and values at the time of performance. The crucial element in both doctrines is a disparity between the anticipated exchange and the realised exchange, a disparity whose risk was allegedly not allocated by the contract.

The traditional distinction, which posits mistake as concerning existing circumstances and frustration as arising from supervening events, is increasingly seen as a "distinction without a difference" in the modern legal landscape. With the expansion of the grounds for excuse in both areas, the availability of relief often hinges on whether a "basic assumption" underlying the contract has been undermined. Whether this assumption relates to a fact existing at formation or a future event that fails to materialise becomes less significant than the fundamental impact on the agreed exchange.

Furthermore, the remedial landscape for both doctrines reveals a similar struggle in providing adequate redress in the absence of a clear wrong. English law, traditionally geared towards remedying breaches arising from culpable actions, finds itself in less familiar territory when dealing with shared misapprehensions or unforeseen supervening events where neither party is at fault.

In cases of common mistake, the common law historically rendered the contract void, a drastic outcome with potentially unjust consequences. While equity offered the possibility of rescission on terms, recent case law, particularly The Great Peace, has narrowed the scope of equitable relief, arguably leaving English law with "effectively, no remedy for mistake". This sterility has even led to the remedy of rectification being employed in situations that resemble substantive mistake.
Similarly, the common law consequences of frustration, which allowed accrued rights to be enforced but discharged future obligations, were often unsatisfactory, particularly regarding the allocation of losses incurred before the frustrating event. The Law Reform (Frustrated Contracts) Act 1943 aimed to ameliorate these difficulties by allowing for the recovery of money paid and compensation for valuable benefits conferred. However, this Act has been heavily criticised for its poor drafting, interpretative challenges, and failure to adequately address non-monetary benefits and the overall allocation of losses. The Act remains dependent on the terms of the original contract for loss reallocation, highlighting the persistent challenge of addressing unallocated risks.

The perceived inadequacies and artificial distinctions within both doctrines point towards their increasing obsolescence in the face of complex commercial realities. Modern contracts often involve intricate webs of interconnected obligations and are susceptible to a wide range of unforeseen disruptions. The blunt instrument of rendering a contract void ab initio for mistake or discharging it entirely for frustration can be ill-suited to achieving just and commercially sensible outcomes.

The emphasis on a strict all-or-nothing approach in both doctrines fails to acknowledge the possibility of partial impact or the potential for adjustments to the contractual terms rather than complete termination. The development of the concept of "change of circumstances" in civil law jurisdictions, which sometimes allows for renegotiation or adaptation of contracts, offers a potential avenue for a more nuanced approach.
The historical development of both doctrines, often linked to specific historical and theoretical contexts (such as the will theory in mistake and responses to the Great War in frustration), may no longer align with contemporary understandings of contractual obligations and risk allocation.
The reliance on often fictional "implied terms" or the elusive concept of "basic assumptions" as the foundation for both doctrines can lead to uncertainty and unpredictable judicial outcomes.

Conclusion

In conclusion, while traditionally viewed as distinct, the doctrines of common mistake and frustration are fundamentally concerned with the same problem: the failure of underlying contractual assumptions and the resulting disparity between intended and realised performance. Their separate development and the limitations inherent in their remedial frameworks suggest that they are becoming increasingly outdated tools for navigating the complexities of modern contractual life. A more unified and flexible approach, potentially drawing inspiration from doctrines like "change of circumstances," may be necessary to provide a more effective and commercially relevant framework for addressing unforeseen events that fundamentally alter the basis of contractual agreements. The future of this area of law may lie in moving beyond the rigid dichotomy of mistake and frustration towards a more holistic consideration of risk allocation and the equitable adjustment of contractual obligations in the face of unforeseen contingencies.

Bibliography

Journals

Kull, A, 'Mistake, Frustration, and the Windfall Principle of Contract Remedies' (1991) 43 Hastings LJ 1
Xiangjun, P, 'A Comparative Study on the Legal Consequences of Change of Circumstances and the Doctrine of Frustration' (2023) 17 HK J Legal Stud 47
Yu, G, 'The Theoretical Foundation of the English Doctrine of Frustration: Efficiency or Justice?' (2019-2020) 7 City U HK L Rev 47