Allocation of risk CASES

In English contract law, allocation of risk determines which party should bear the financial or legal consequences of unforeseen events—especially where performance becomes difficult or impossible.

Definition and Principles

This approach confirms that, unless the contract provides otherwise, the party best placed to manage or avoid the risk must bear its consequences. It prevents penalising the innocent party when unexpected events impact only one side.

Case Example: Blackburn Bobbin Co Ltd v T W Allen & Sons Ltd (1918)

The seller agreed to deliver Finnish timber, but due to the outbreak of war, supply became impossible. The buyer was unaware the seller relied on imports. The court held the contract wasn’t frustrated, and the seller bore the loss—reaffirming that only disappointed expectations of one party shouldn’t relieve contractual duties when that party controlled the risks.

Role in Contracting

Allocation of risk encourages cautious planning and risk mitigation. Parties must assess potential vulnerabilities—such as supply disruptions or other external shocks—and decide in advance who will absorb those risks.

Practical Applications

Modern contracts often include clauses to manage risk explicitly, such as:

• Force majeure clauses, excusing performance under specified circumstances.

• Limitation of liability, indemnities, or insurance requirements to spread or cap exposure.

• Clear stipulations on who bears cost overruns, delays, or damage during performance.

Importance and Caution

Proper risk allocation enhances fairness and predictability. Without clarity, the “least cost avoider” principle applies—assigning loss to the party most able to prevent it through careful action or control.