DOCTRINE OF FRUSTRATION - SECTION 56 OF THE INDIAN CONTRACT ACT, 1872

 

DOCTRINE OF FRUSTRATION - SECTION 56 OF THE INDIAN CONTRACT ACT, 1872:

 

1. INTRODUCTION:

 

An agreement between two or more parties that results in enforceable or otherwise discernible legal obligations is known as a contract. Unforeseen or supervening events, that is, events that are unexpected or incapable of being known in advance by either of the parties and which ultimately release the parties from their contractual obligations, may affect the execution of these obligations.

 

The doctrine of frustration is a ‘doctrine’ of special case of the discharge of contract by an impossibility to perform it. The term "frustration" is not defined in the Indian Contract Act of 1872. 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. The phrase "frustration of the contract" is elliptical, according to Indian courts. Frustration with the adventure or with the practical or commercial goal of the contract is the fuller and more accurate expression. This doctrine serves as a means of balancing the rule of absolute contracts with the special exception that, in some cases, justice demands.

 

The doctrine falls under the purview of Section 56 of the Contract Act because it discharges the contract as a result of the act's subsequent impossibility or illegality. Under Section 32, a contract is also rendered null and void if the condition that made it a conditional agreement is not met or cannot be met due to impossibility.

 

However, the doctrine in Indian law is associated under purview of section-56. As stated in the relevant contract, section 32 only applies when contracts are fulfilled and parties are released from their obligations. When contracts are terminated and parties are released from their obligations as a result of a subsequent impossibility brought on by outside forces and factors, Section 56 is applicable.

 

2. DOCTRINE OF FRUSTRATION:

 

A provision in the legal system for the discharge of a contract where, subsequent to its formation a change of circumstances renders the contract legally of physically impossible, is known as ‘Doctrine of frustration’.

 

Originally in English law this term was confined to the discharge of maritime contract by frustration of the adventure but it was now been extended to cover all cases where an agreement has been terminated by supervening events beyond the control of either party. A fundamentally different situation arises unexpectedly whereby performance cannot be properly demanded as it become impossible of performance. For instances, destruction of subject-matter of contractor, non-occurrence of a particular sate of thing subsequent to the conclusion of contract, death or incapacity in a contract of personal service etc.

 

Second para of section 56 of the Act, provides law relating to discharge of contract by reason of supervening or subsequent impossibility of the act agreed to be done. It sates:

 

“A contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”.

 

In India, the landmark case of Satyabrata vs. Mugneeram, (AIR 1954 SC 44), the SC held as: the essential idea upon which the doctrine of frustration is based is that of impossibility of performance of the contract; in fact, impossibility and frustration are aften used as inter-changeable expression. The changed circumstances make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform an impossibility. The doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of section 56 of the Indian Contract Act, 1972.

 

In Davis Contractors Ltd. Vs. Fareham Urban District Council (1956), Lord Radcliff said: frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable to being performed because the circumstances in which performance is called for would render it  a thing radically different from that which undertaken by contract, there must be a well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.

 

In C.B.I. Staff Co-op. Bldg. Society Ltd. vs. D.R. Koteswara Rao, (AIR 2004 A.P. 18), the court observed: Frustration signifies a certain set of circumstances arising after the formation of the contract, the occurrence of which is due to no fault of either party and which renders performance of the contract by one or both parties physically and commercially impossible. The court regards these sets of circumstances as releasing the parties from any further obligation. Where the entire performance of a contract becomes substantially impossible without any fault on either side, the contract is prima facie dissolved by the doctrine of frustration. 

 

In the case of Gwalior Reyon Silk Manufacturing Co. vs. Shri Andwar and Co., (AIR 1991 Ker. 134), the court has made it clear that if the promisor knew or by a reasonable attempt or diligence he could know that the performance of promise was impossible or unlawful and the promisee had no knowledge of its being impossible or unlawful then the promisor shall be bound to pay compensation for loss caused to promisee for non-performance of such promise.

 

This can explain by reference to the following cases:

 

Taylar vs. Caldwell, (1863)

The defendant agreed with the plaintiff to hire him a music hall and gardens for the purpose of entertainment. Before the day of performance arrived, the music hall was destroyed by fire. The plaintiff sued the defendant for damages for breach of contract which the defendant though by no fault of his own, was unable to perform.

 

Krell vs. Henry, (1903)

 

The defendant agreed to hire a flat from the plaintiff for June 26 and 27, 1902. The contract contains no reference to the coronation procession, but the coronation was to take place on those days when it was agreed to pass the flat. The coronation was cancelled. Held that the plaintiff could not recover the rent. The court considered that the procession and the relative position of the flat lay at foundation of the agreement. The contract was therefore discharged.

 

In Stubbs M. Holywell Railway Co., (1867), it was held that a contract for personal service was put to an end by the death of the party to whom the services were to be rendered. 

 

3. THEORIES OF FRUSTRATION:

 

Many theories have been developed under English law for explaining the basis of discharge of contract due to frustration.  It is to be noted that these theories do not apply in India.

 

i. Theory of implied term:

 

According to this theory if it appears that the contract has been made on the basis of that a particular thing or state of things would continue to exist, then a term to this effect will be implied, though it may not be expressed in the contract and if there is a change therein then the contract will be discharged and the parties will be discharged from their obligation of performing the contract.

 

ii. Theory of radical changes in obligation:

 

According to this theory the contact is held to be frustrated when without the fault of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.

 

iii. Theory of just and reasonable solution:

 

In British Movietonews Ltd. v. London and District Cinemas Ltd., (1951), Denning L.J., has explained the basis of the doctrine of frustration. According to him the court has inherent jurisdiction to make such change in the contract as may be just and reasonable according to circumstances. Thus, if the circumstances are changing, they may change the contract accordingly as may be just and reasonable according to circumstances. But on appeal the House of Lords did not approve it. Viscount Simon has made it clear that the parties cannot be relieved from obligation only on the ground that doing so is just and reasonable.

 

iv. Theories of disappearance of the foundation of contract:

 

According to this theory, when circumstances are changed and due to this basis of contract is finished, then the contract becomes void and it has been discharged and parties are relieved from the obligation of performing it.

 

As has been said above, these theories developed in England, are not applicable in India, as stated in case of Satyabrata Ghosh vs. Mugnee Ram (1954).

 

4. CONDITIONS FOR A CONTRACT TO BE DECLARED VOID ON THE GROUND SUBSEQUENT IMPOSSIBILITY OF FRUSTRATION OF CONTRACT:

 

Following conditions must be fulfilled to get the contract void on the ground of subsequent impossibility or frustration of contract: -

 

• a) There must be valid contract between the parties at the time of its making.
• b)  The contract must be executory that is any part of the contract must remain to be performed.
• c)  After making contract, its performance must be impossible, or it should be unlawful due to such event which could not be prevented by the promisor.

 

5. GROUNDS OF FRUSTRATION:

 

Following are the well-recognized grounds of frustration on which the doctrine of frustration may be applied.

 

i. Death or incapacity of the party of contract:

 

If a contract is based on the promisor’s personal skill or ability, then the promisor is bound to make performance of that contract personally and if the promisor is bound to make performance of that contract personally and if the promisor dies or suffer from illness and due to this he becomes incapable or unable to make performance of the contract personally, then contract is discharged and he is relieved from performances of the contract.

 

The case of Rabinson vs. Davison, is a very important case on this regard. In this case there was a contract between the plaintiff and the wife of defendant. The wife of the defendant was a high-class piano artist. She promised that she would play piano at a concert on a specific date. On that day she became seriously ill and became incapable to play piano. She informed the plaintiff that due to illness she would not play piano on the date. The plaintiff had to postpone the concert and lost sum of money. The plaintiff filed suit for breach of contact. Then plaintiff decided that the contract was discharged and consequently the wife of defendant was not liable for breach of contract.

 

ii. Destruction of subject-matter of the contract:

 

on the destruction of subject-matter of the contract, the contract is frustrated because its performance become impossible. Consequently, the parties of the contract are relieved from the obligation of performance of contract, as in Taylor vs. Coldwell, is a good example of this, which has discussed above.

 

In the case of Havel vs. Coopland, (1876), the defendant promised to give crops of potato available from his land to the plaintiff but due to some disease the crops of potato were destroyed. The court held that the contract was frustrated because its performance became impossible. Consequently, the parties of the contract were relieved from the performance of contract.

 

iii. Non-happening of a particular event:

 

If a contract is based on happening of a particular event and non-happening of that particular event the performance object of the parties cannot be achieved and having regard to their object its performance becomes worthless the contract is discharged and parties are relieved from performance of contract. Literally the performance may not be impossible. For this it is necessary that event is the basis of contract. On this point the case Krell vs. Henry, is the best example. Its facts and principle have been described above.

 

iv. Change in law and interference of the government:

 

If the contract is valid at the time of its making but later on it becomes invalid by reason of change in law, then in such a situation it is deemed that the performance of the contract is not legally possible and therefore the contract is frustrated, and parties are relieved from performance of it. Thus, if any person makes agreement to sell a land to another person but before execution of sale due to change in law, he does not remain the owner of the land then contract shall be frustrated, and the parties of the contract shall be relieved from its performance.

 

In the case of Man Singh vs. Khazan Sigh, (1961), a contract was made for sale of trees of a forest. After contract Rajasthan Government passed an order preventing cutting of trees in that area. The court held that the contract was frustrated, and parties were relieved from the performance of the contract.

 

v. Change of circumstances:

 

If the changes of circumstances make the performance of the contract impossible, the contract will frustrate, and parties will discharge from their obligations under the contract. If, however, despite the changes of circumstances, the performance is still possible, the contract will not be deemed to have been discharged.

 

vii. Building Contracts:

 

where the execution of contract is delayed or otherwise becomes impossible by the happening of an external event, the contract is discharged. But much will depend upon the fact and circumstances and each case has to be judged on its own merit. A good illustration of the frustration of building contract is Metropolitan Water Board vs. Dick, Kerr & Co. Ltd., (1918), in this case the defendant contracted with the plaintiff to construct a reservoir within a period of six years. After the lapse of two years, the minister of Munitions, while exercising his statutory power, ordered them to stop the work and remove their plant. The House of Lords held that the contract was discharged having being frustrated by said order.

 

vii. War:

 

Such contracts which were made in pre-war time among the citizens of belligerent states, become suspended during war time and after the war is over the rights and obligations of the parties are revived except in the following conditions when contracts after war are not revived and ceased to exist:

 

a)   If these contracts give help to enemy.

b)   If the contracts are of such nature that they cannot be suspended.

 

Those contracts which are made among the citizens of the belligerent states, they are not only suspended but they are finished, and they become inoperative and despite the end of war they are not revived.

 

6. CONSEQUENCES OF FRUSTRATION OF CONTRACT:

 

When the performance of the contract becomes impossible or unlawful it is held to be frustrated and parties are discharged from the obligation of performing it. However, if before the contract being frustrated any money is given then the money will be refunded to the party which has given it under section 65. Thus, if a party has received any benefit under the contract before it being frustrated it will be bound to return it to the party from which it has received it or to make compensation, therefore.

 

7. LIMITATION:

 

The application of the doctrine is bound by the contractual terms and the principles of fairness and justness. It is not applied to cases where the factors do not amount to the frustration of contract as discussed hereunder.

 

i. Self-introduced frustration:

 

For the application of doctrine of frustration, the frustration should not be induced by any party. This doctrine does not apply if the act or omission due to which the performance has become impossible must not have been done willfully with the object of that the contract be frustrated or its performance be made impossible. If the act or omission has been with the said object, the doctrine of frustration cannot be applied to discharge the party from the obligation to perform the contract.

 

ii. Executed Contract:

 

The principle of frustration applies to executory contract and not to the executed contract. The executed contract means such contract any part of which remains to be performed. Executed contracted means that contract no part of which remains to be performed, i.e., which has been fully executed.

 

iii. Contract being illegal due to the event which promisor could prevent:

 

It has been made clear in the second paragraph of Section 56 that if performance of contract is possible at the time of creation of contract but after that its performance becomes impossible or unlawful due to the happening of some events which cannot be prevented by the promisor then the contract will be void when its performance becomes impossible or unlawful. If the happening of the event could be prevented by the promisor, then he cannot protect himself from the consequence of non-performance of contract and thud he will be held liable for the breach of contract.

 

iv. Commercial difficulty:

 

Mere commercial difficulty i.e., difficulty in finding the goods which are to be supplied under the contract or increase in the price of the goods to be supplied or increase in the cost of the work etc., is not sufficient to hold the contract, frustrated or worthless. On the basis of profit less than expected it cannot be said that the contract has become frustrated.

 

These are the factors not amounting to the Frustration of Contract.

 

8. CONCLUSION:

 

The doctrine of frustration, which is included in section 56 of the Indian Contract Act, gives the parties a way out when performance becomes impossible due to an unavoidable supervening event. The application of the doctrine raises doubts about the contract's sanctity in light of some altered circumstances. Unlike Indian Law, which codified this doctrine in section 56, which eliminated the need for developing and using theories to justify the application of the doctrine. English courts developed various theories to justify the application of the doctrine under specific circumstances.