Risk Allocation in Frustrated Contracts: Building the Case for a New Sri Lankan Act

Abstract

The freedom of contract allows parties to decide on the terms of a contract according to their own wishes. As a vitiating factor frustration of a contract is used as a method for terminating a contract. The Sri Lankan law governing doctrine of frustration is the Roman-Dutch law. However, as Judge Weeramantry observes (Weeramantry, 1967), with the evolvement of time both the common law and the civil law have come to similar terms with regard to their effect relating to the doctrine, and the distinctions that remain are purely theoretical. The judiciary has also been quite keen on adopting the more readily available English doctrines as a whole and it can be seen that the law now that governs the doctrine of frustration in practice is the English law. The English law relating to frustration has changed from one of strict liability, where parties were held liable for their respective promises irrespective of events making performance not possible to a more liberal one, where parties were excused for events that resulted in non-performance, which were beyond their control, through developments in the common law. However, even with these changes in the common law it still yielded some unjust results which resulted in an imbalance of the risk allocation of frustrated contracts. The basic question then was to decide, who should bear the loss resulting from an event that has rendered performance by one party uneconomical (Posner and Rosenfield, 1977). To address these issues with the recommendations of the Law Commission the UK introduced The Law