Doctrine OF Frustration under Indian Contract Act,1872
Introduction
A contract is an agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law. Execution of these obligations may be affected by unforeseen or supervening events, i.e., events which are unexpected or incapable of being known in advance by either of the parties and which ultimately discharge the parties from their contractual obligations.
The doctrine of frustration is a “doctrine” of special case of the discharge of contract by an impossibility to perform it. The Indian Contract Act, 1872 (“Contract Act) does not define the term frustration. The Black’s Law Dictionary defines frustration in relation to contracts as “the doctrine that if a party’s principal purpose is substantially frustrated by unanticipated changed circumstances, that party’s duties are discharged and the contract is considered terminated,” also termed as the frustration of purpose. In India, courts nuanced: “The expression ‘frustration of the contract’ is an elliptical expression. The fuller and more accurate expression is ‘frustration of the adventure or of the commercial or practical purpose of contract’”. This doctrine is a device to reconcile the rule of absolute contracts with a special exception which is demanded in certain circumstances in the name of justice.
The doctrine comes within the purview of section 56 of the Contract Act as it discharges the contract by reason of supervening impossibility or illegality of the act agreed to be done.6 A contract is also frustrated under section 32 when the condition, on which the contract is contingent, is not fulfilled or cannot be fulfilled because of impossibility (paragraph 1 and 2 of section 32, respectively). Nevertheless, the doctrine under Indian law is associated with section 56. As section 32 only applies when contracts are discharged and parties absolved of their obligations as per terms already contained in the relevant contract. Section 56 applies when contracts are discharged and parties absolved of their obligations as a result of subsequent impossibility due to outside forces and factors
While discussing the law on the doctrine, the courts have interchangeably used the terms ‘frustration’ and ‘impossibility to perform’.7 To determine whether the supervening event has made the performance “impossible” under the ambit of section 56, it is important to lay bare different factors adopted by the courts, including the recently developed “multifactorial approach” 8 . The courts in India and in England have identified a number of factors that may and may not render a contract frustrated. The question of whether the supervening event constitutes a frustrating event is a question of degree, 9 i.e., how substantially the supervening event has affected the performance. This paper focuses on restating the current legal position of the doctrine of frustration in India
Application of Doctrine of Frustration
The doctrine of frustration is however applicable in only two cases
If the object of the contract has become impossible to perform
Or
An event has occurred making the performance of the contract to be impossible beyond the Control of promisor.
Illustration
A, a resident of India entered into a contract with B, a resident of China for the export of 550 heavy Trucks. Initially, 100 Trucks were delivered, later war was announced between India and China and the government of India suspended all the business transactions with China. Now after this contract has become void.
A and B contract to marry each other. Before the time fixed for marriage A dies and therefore the said contract between A and B will become void as one party to a contract has died.
The condition necessary for the application of Section 56
There exist a valid and subsisting contract between the parties:- Existence of a valid contract is the foremost condition for the application of Section 56. The valid contract includes a contract entered in between competent persons and which is followed by some consideration.
There must be some part of the contract which is yet to be performed:- Section 56 will have applicability only if there is some part of the contract which is yet to be performed and without performing it the ultimate purpose of the contract is not fulfilled.
The contract after it is entered into becomes impossible of performance:- Another important condition for the application of section 56 is that the contract after it has been entered into has become impossible to perform and cannot be performed and therefore contract stands void.
To study the Factors that amount to Frustration
Physical destruction of the subject matter, loss of the object, subsequent illegality to perform, delay, death or incapacity of the party in a contract requiring personal performance, etc., are some of the factors that attract the provisions of section 56. An event may fall under one or more of such factors. Some of the most common and prominent factors are analyzed below:
1.The Subject Matter of the Contract is physically destroyed.
The destruction of the specific subject matter essential for the performance of the contract will render the contract frustrated. The landmark case Caldwell, 65 which laid down the foundation of the doctrine in the UK also falls under this category. This factor is strongly considered incases, such as where factory premises in which machine was to be installed is destroyed by fire,66 or where a wall of the cinema was collapsed by heavy rain and the contract stood frustrated.67 If the subject matter is not completely destroyed, but immensely, even then the contract may be discharged. It was held in a case that even though the cargo of dates was sold in the market for other purposes, yet it lost its mercantile character when it sank and was affected by water and sewage. Therefore, the cargo owner’s liability to pay the freight was discharged.68 The things which are destroyed must specifically be the subject matter of the contract and therefore, if the contract was not restricted to those specific goods, then it may not be discharged. A contract of agency to sell goods manufactured by defendant was not frustrated when the factory was burnt down because the contract was not restricted to the goods manufactured by the defendant at that particular factory
2.Legal Changes resulting in Subsequent Illegality
It is presumed that the parties intend to contract with reference to the law as existing at the time when the contract is made. However, a subsequent change in the law or in the legal position, affecting a contract and prohibiting the performance undertaken by the contract, is a well recognized ground for frustration under section 56. Here, “law” may include foreign law, unless otherwise reflected from the contract. In the Energy Watchdog, the Supreme Court held that unless the contract provides otherwise, “this would be true as a general statement of law […that…] if performance of a contract is to be done in a foreign country, what law would be relevant would be foreign law” and if the performance has become illegal under foreign law, the contract will stand discharged.
To discharge the contract, the change in the law must be such as to strike at the basis of the contract and not merely to suspend the performance under it. Such change in law may be brought by the Supreme Court’s order which prohibited stone crushing activity and as per the contract, the supplier was required to supply crushed stones from its own stone crusher, the change in legal position made it impossible to supply crushed stones. The Government’s Import Control Order of 1955 put a positive condition not to sell the imported goods and therefore, it was impossible for appellant to supply chicory of a specific type to the respondents. Further, any prohibition order of Government which makes the performance illegal will also frustrate the contract
The commencement of the Constitution of India also frustrated contracts which were in contravention to any article of the Constitution. A contract providing a monopoly of manufacturing radios and other electronic apparatuses was frustrated by the operation of Article 19(1)(g). The merging of different states into India or other states of India led to the discharge of a number of agreements which could not be performed because of the changed legal position.
Any legislation enacted by the Government which fundamentally changes the legal situation renders the performance illegal. However, in a case, the Supreme Court decided that the liability of a guarantor to pay on the default of principal debtor will survive even after the Nationalization Act came into force and the principal debtor is nationalized. It held that “the Contract of Guarantee has no co-relation with that of the Nationalization Act neither is dependent thereon: it is an independent contract and in all fairness has to be honored to fulfil the contractual obligation between the surety and the creditor”.
3. Loss of Object
As already explained, the term “impossible” has not been used in section 56 of the Act in the sense of physical or literal impossibility. The performance of a contract may be possible to carry out physically but if it has become redundant having regard to the object and purpose of the parties, by an untoward event or change of circumstances, then it must be held that the contract is frustrated. The landmark judgment of Krell v Henry captures this; where though the room could be hired yet the court declared the contract frustrated because the purpose of hiring the room (i.e., watching coronation procession) was lost. Therefore, the object or purpose of the contract can also be lost because of the non-occurrence of an expected event or the non-existence of a state of things. A contract under which the object of the purchaser was to sell the goods according to his own terms to a person of his choice, stood frustrated by a direction issued by the General Manager which authorized the district officer to nominate the person/persons to whom plaintiff had to sell the goods.
The court will not accept the plea of impossibility if even after the supervening event, the object of the contract is not rendered redundant and the contract can still be performed substantially in accordance with the original intention of the parties though not literally in accordance of the language.
4. Delay, Death or Incapacity to Perform
The delay and laches also result in frustration of contract. Though it is often a difficult matter to decide whether a contract has been frustrated by an event or change in circumstances which causes an unexpected delay in its performance.
The delay has to be so great and of such a character that it would totally upset the basis of the bargain and commercial object which the parties had in view. Such delay must be abnormal in its cause, effects or expected duration so that it could not be reasonably contemplated at the time of contracting.
The fulfilment of the obligations when the delay is over will not accomplish the object which both the parties to the contract had in view and for which they entered into the contract. Such delay will radically change the circumstances and then, it will be impossible to fulfil the obligations which parties originally had. If the delay was within the commercial risks undertaken by the parties and it does not frustrate the commercial purpose of the contract, there can be no frustration. In a case, delay in the supply of cargo did not frustrate the charter-party because such delay was already contemplated in the terms of the contract. Further, when a contract specifically lays down a time-limit, then a supervening event causing delay for an indefinite period may make the performance impossible.
The theory of radical change in the obligation also comes into play to determine whether the delay already suffered and the prospects of a further delay from that cause will make the ultimate performance “radically different”.
Differentiating section 32 and section 56 of the Contract Act
Under the Contract Act, Both sections 32 and 56 apply to cases of frustration of contacts and it is important to understand the difference between section 32 and section 56. The party(ies) may see an incentive to go under section 56 instead of section 32. This incentive is the compensation under the third paragraph of section 56 that a loss-incurring party may receive for loss through non-performance of act known to be impossible or unlawful. 56 Technically, under both sections 32 and , the contract can be discharged on the impossibility of certain events in the future. Section 32 deals with a contingent contract, which is dependent on the fulfilment of a condition for its survival. A contingent contract will dissolve under its own force if the condition is not satisfied, whereas, section 56 is attracted when a contract becomes impossible to perform because of an outside force. Therefore, it can be said that “it is sometimes a matter of doubt whether a contract falls under section 32 or section 56”.
In Satyabrata, the Supreme Court stated that: In cases, therefore, where the Court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of section 56 altogether. Although in English law these cases are treated as cases of frustration, in India they would be dealt with under section 32 of the Contract Act which deals with contingent contracts or similar other provisions contained in the Act.
Section 32 will not only apply to a contract that expressly provides a condition on which performance is dependent, but also to a contract where such condition is implied.
For instance, the contract of sale of property would be a contingent contract if the sale is impliedly dependent upon the consent of other joint owners on the partition. This would imply that even if the condition is implied in nature, its non-fulfilment should attract the application of section 32 and not section 56.
However, sometimes the courts have considered such cases under section 56 instead of section 32. For instance, where acquiring permission was impliedly required to sell the property, the Supreme Court scrutinized the case under section 56. It directed the respondent to approach the competent authority for its permission and stated that:
Unless the competent authorities have been moved and the application for consent/permission/sanction have been rejected once and for all and such rejection made finally became irresolutely binding and rendered impossible the performance of the contract resulting in frustration as envisaged under section 56, the relief cannot be refused for the mere pointing out of some obstacles.
Such cases should properly fall within the scope of section 32 and not section 56 because in such cases the contract is discharged by the nonfulfillment of the condition on which the contract was contingent and not by some outer force. Under English law, these cases are also treated as cases of frustration, which could be one explanation for Indian courts wrongly applying section 56 in such cases.
Conclusion
Factors and circumstances that the courts consider while determining the applicability or nonapplicability of section 56 have been dealt with in detail in this Paper. Situations in which the subject matter of the contract is destroyed; performance has become illegal; the purpose behind entering into the contract is lost; performance has been excessively delayed or the performer has died or is incapable of performing; are examples of factors that would attract the provisions of section 56. Conversely, when the risk is inherent to contract; frustration is self-induced; the contract is an executed contract; the contract can still be performed or the foundation of the contract is not substantially destroyed; are examples of factors that would not attract the provisions of section 56.
Suggestion
The contracting parties may avoid the realm of uncertainties caused by any future event by inserting well-drafted and specifically defined provisions in the contract, such as a force majeure clause. Such clauses may allocate the risks of any supervening event among the parties. However, the scope of such a clause will determine if it covers the supervening event, otherwise, there may be a need to apply section 56. The interpretation of the clause to determine its scope is mainly guided by commercial and market practices. The narrow application of both the doctrine and clauses such as force majeure clauses favours the enforceability of rights and obligations under a contract, which is important to safeguard the trust of people.
References
Research paper published by IIMA
By Yash Bhavsar