Doctrine of Frustration under Indian Contract Act, 1872

Synopsis:

1.?????? Introduction

2.?????? Evolution of the Doctrine of Frustration

3.?????? Interpreting Section 56 of ICA

4.?????? Test to determine Frustration

5.?????? Factors included and excluded.

6.?????? Difference Between Section 56 and 32

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Introduction

When unexpected events happen, they can make it hard for parties to fulfil their contract obligations. The doctrine of frustration provides a fair solution for these situations, where the event occurs through no fault of either party involved in the contract. Indian Contract law explicitly incorporates the doctrine of frustration under Section 56 of the Contract Act.?

The doctrine discharges the contract by reason of supervening impossibility or illegality of the act agreed to be done.

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Evolution of the Doctrine of Frustration

The doctrine of frustration has evolved through various theories over time, reflecting the gradual shift from rigid adherence to contractual terms to a more equitable and realistic approach to unforeseen events.

Below is a summary of its progression:

1. Theory of Absolute Contracts

Origins: The earliest approach to contracts was rooted in the principle of absolute liability. Under this view, once a party enters into a contract, they are bound to fulfill it regardless of unforeseen or supervening circumstances.

Paradine v. Jane (1647)

The court held that a lessee was required to pay rent even though he was evicted from the property by an invading army.

The reasoning was that "when a party of his own contract creates a duty upon himself, he is bound to fulfill it, notwithstanding any accident by inevitable necessity."

Criticism: This rigid stance placed undue hardship on parties by ignoring unforeseen events and shifted all risks to the contracting parties.

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2. Theory of Implied Conditions

Shift in Approach: The first major relaxation of the absolute contracts rule occurred in

Taylor v. Caldwell (1863). Facts: A music hall rented for concerts was destroyed by fire before the scheduled events. The court excused the performance, introducing the concept of implied conditions. Judgment: Blackburn J. held that in contracts dependent on the continued existence of a specific thing, a condition is implied that impossibility of performance arising from the perishing of that thing excuses the performance.

Principle: The theory of implied conditions suggested that parties implicitly accounted for unforeseen events when entering into contracts.

Criticism: This theory faced opposition for being artificial, as it assumed the parties had considered the possibility of the event when they likely had not. Courts later criticized it as being speculative (National Carriers Ltd v. Panalpina (Northern) Ltd, 1981).

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3. Theory of Loss of Foundation/Object

Concept: This theory focuses on the destruction of the fundamental purpose or object of the contract due to unforeseen events.

Krell v. Henry (1903)

Facts: A room was rented to view the coronation procession of King Edward VII, but the event was cancelled due to the king’s illness.

Judgment: The court held that the cancellation of the procession destroyed the foundation of the contract, and performance was excused.

Principle: Performance may remain technically possible, but if the very object of the contract is frustrated, it becomes void.

Advantages: Unlike implied conditions, this theory avoids speculation about the parties' intentions and focuses on the impact of supervening events on the contract’s foundation.

4. Theory of Radical Change in Obligation

Formulated by Lord Radcliffe in Davis Contractors Ltd v. Fareham Urban District Council (1956)

Principle: Frustration occurs when an event radically alters the nature of the contractual obligation, rendering it fundamentally different from what was agreed upon.

Judgment: Mere hardship or inconvenience does not trigger frustration. The change must be so significant that the obligations under the contract become something entirely different from what was initially intended.

Latin Maxim: Non haec in foedera veni (“It was not this that I promised to do”).

This theory balances strict adherence to contractual terms with fairness, emphasizing the need for a radical transformation of obligations rather than minor or expected difficulties.

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Interpreting Section 56 of ICA

Section 56 of the Indian Contract Act codifies the doctrine of frustration, providing a statutory framework to deal with contracts that become impossible or unlawful to perform due to supervening events. The section consists of three paragraphs, each addressing distinct scenarios and implications:

Paragraph 1: Inherent Impossibility

Para 1 Deals with agreements that are impossible to perform from the outset. Such agreements are considered void ab initio.

Example: "A agrees with B to discover treasure by magic."

This paragraph aligns with the principle in common law that discharges obligations due to inherent impossibility.

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Paragraph 2: Supervening Impossibility or Unlawfulness

Covers contracts where performance becomes impossible or unlawful after the contract has been entered into.

Key Elements:

Impossibility: Not limited to physical or literal impossibility. It includes scenarios where performance becomes impracticable or meaningless in light of the contract's purpose.

Unforeseen Event: The event must occur due to factors beyond the control of the parties.

Judicial Interpretation:

In Satyabrata Ghose v Mugneeram Bangur and Co. 1954, SC

Mukherjee J. clarified that "impossible" includes impracticability or futility of performance due to an untoward event or changed circumstances. The performance must upset the foundation upon which the contract was based.

Other Relevant case:

Kesari Chand v Governor-General in Council: Supervening impossibility – Contracts rendered impossible due to government requisition or natural disasters.

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Paragraph 3: Compensation for Knowledge of Impossibility

• Addresses situations where the promisor knew or should have known that the act was impossible or unlawful at the time of contract formation.
• Provides relief to the promisee by mandating compensation for losses caused by non-performance.

Essentials:

1.?????? Promisor's knowledge or duty to know the impossibility.

2.?????? Promisee's lack of knowledge about the impossibility.

3.?????? Whether the promisor could have prevented the event leading to impossibility.

Illustration:

• "A contracts to marry B while already married to C. A must compensate B for the loss caused by non-performance."

However, it must be noted that the doctrine of frustration of contract is not to be lightly invoked by the courts to dissolve the contract. It must be applied within very narrow limits.

Section 56 applies only when the contract does not include provisions dealing with the consequences of supervening events. If ?the contract explicitly accounts for such events and provides a remedy, the terms of the contract prevail, and Section 56 cannot be invoked.

Once the contract is frustrated, the principle of restitution under section 65 of the Contract Act applies and the consideration received must be repaid.

Test of Frustration under Section 56

Essentials:

1.?????? Subsisting Contract: A valid contract must exist between the parties.

2.?????? Performance Pending: Some part of the contract must remain to be performed.

3.?????? Subsequent Impossibility: Performance must have become impossible, impracticable, or illegal after the contract was entered into, without the fault of either party.

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Energy Watchdog v. Central Electricity Regulatory Commission (2017)

The Supreme Court in this case introduced a multifactorial approach to determine frustration under Section 56 of the Indian Contract Act. The approach involves:

1.?????? Contractual Terms: What the contract explicitly states.

2.?????? Context of the Contract: The surrounding circumstances at the time of formation.

3.?????? Parties' Expectations and Assumptions: What the parties understood or assumed about risk allocation when entering the contract.

4.?????? Nature of the Supervening Event: The event's impact on the feasibility of performance.

5.?????? Possibility of Performance: Whether fulfilling the contract is practically possible in the changed scenario.

It is to be noted that Frustration terminates the contract automatically, independent of the will of the parties.

Factors Amounting to the Frustration of Contract

1.?????? Physical Destruction of Subject Matter

The destruction of the specific subject matter essential for the contract's performance renders it frustrated.

Examples:

• Factory premises destroyed by fire (Appleby v Myers).
• Collapse of a cinema wall due to heavy rain (VL Narasu v PSV Iyer).
• Cargo losing its mercantile character due to water and sewage damage (Asfar & Co v Blundell).

The subject matter must be specific to the contract; if not entirely destroyed but significantly altered, frustration may still apply.

Contracts are not frustrated if alternative sources for performance exist (Turner v Goldsmith).

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2.?????? Legal Changes Resulting in Subsequent Illegality

A contract becomes frustrated if legal changes render its performance illegal. It is Applicable to changes in domestic or foreign law unless otherwise specified in the contract (Energy Watchdog case).

Examples of legal changes:

• Prohibition orders by the government.
• Supreme Court orders banning specific activities.
• New laws under the Constitution of India affecting contract validity (e.g., Hamara Radio v State of Rajasthan under Article 19(1)(g)).
• War, as a legal change, may render contracts involving alien enemies illegal.

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3.?????? Loss of Object or Purpose

Performance may still be physically possible, but if the underlying purpose or object becomes redundant, the contract is frustrated. The object can also be lost due to governmental actions altering the terms of performance. If the object is not central to the contract, frustration is not accepted.

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4.?????? Delay in Performance

Frustration arises when delays are abnormal, unforeseeable, and radically alter the contract's commercial basis. Delays must upset the venture's objective to frustrate the contract. Temporary delays within commercial risks or contemplated in the contract do not frustrate it.

Examples:

• Delays affecting indefinite time limits.
• Delays that radically change the nature of obligations.

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5.?????? Death or Incapacity

Contracts requiring personal performance are frustrated by the death or incapacity of the party.

Example: Illness of a pianist preventing performance at a concert.

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Factors Not Amounting to the Frustration of Contract

1.?????? Inherent or Foreseeable Risks: Frustration is not applicable when the risk of a supervening event is foreseeable or inherent to the contract. Foreseeable risks accepted by both parties are excluded from frustration.

Example: A common carrier is liable for the destruction of goods even if a mob burns them, as the contract foresaw such risks (post-1970 political events).

2.?????? Performance Becomes Burdensome or Onerous: Impossibility, not mere burdensomeness, triggers frustration. Economic hardships or price increases alone do not lead to frustration unless they make performance impossible, not just difficult.

Example: A contractor facing a labor shortage cannot claim frustration as the contract still remains legally feasible (e.g., delay due to lack of skilled labor).

3.?????? Self-induced Frustration or Preventable Events: A party is not excused from performance if the event causing frustration was within their control or preventable.

Example: If a chartered trawler wasn’t licensed due to the party’s negligence, the contract is not frustrated due to the failure to act.

4.?????? Executed Contract: Frustration applies only to executory contracts, not executed ones. An executed contract cannot be invalidated by unforeseen events.

5.?????? The Foundation is not Substantially Damaged: Frustration does not apply if the essential basis of the contract (the foundation) is not substantially affected.

Example: If the leased property is only partially damaged, the contract may still be valid.

The Interplay between the Doctrine of Frustration & Force Majeure Clause

• Force majeure means an unavoidable accident or a chance occurrence.
• It is a wider term than “vis major” which means the acts of God.

A force majeure clause in a contract account for unforeseen events beyond the control of the parties—such as machinery malfunctions or labour strikes—that could disrupt contractual obligations. This clause aims to protect parties from liability when these supervening events occur, ensuring clarity and mitigating uncertainty in such situations.

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Distinction Between Section 32 and Section 56

Definition and Scope:

• Section 32: Applies to contingent contracts, which depend on the occurrence of a future uncertain event.
• Section 56: Deals with contracts that become impossible to perform due to an external force or unforeseen event after the contract is made.

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Nature of Condition:

• In Section 32, the contract dissolves automatically if the contingent condition is not fulfilled.
• In Section 56, performance becomes impossible or unlawful due to supervening events.

Trigger for Dissolution:

• Section 32: Depends on the non-occurrence of the agreed condition.
• Section 56: Arises due to an unforeseen external force making performance impossible.

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Key Difference:

• Section 32 relies on pre-agreed terms about future events.
• Section 56 applies to contracts not anticipating the external force causing impossibility.

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