This article has been written by Shubhi Srivastava pursuing a Diploma in International Contract Negotiation, Drafting and Enforcement from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

The principles of contract allow parties to enter into a legal relationship in order to fulfil their rights and obligations. Along this way, various hurdles are presumed, which, by means of remedies, can be solved. However, when a party is prevented from performing their duties due to some external reasons and it becomes unavoidable, then the doctrine of frustration comes into play.

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This Doctrine comes from the English Law concept. Frustration, in a literal sense, means purpose is defeated. When, in a contractual sense, any agreement loses its purpose and becomes impossible to perform. The doctrine fills the void in a contract regarding supervening events based on the principle of fairness and equity.

Meaning of doctrine of frustration

Any contract is said to be ‘frustrated’ when, due to the unforeseen circumstances arising after the contract is formed, the performance of that agreement becomes impossible. In this concept, the agreement becomes inoperative due to its incapability or impossibility of being performed. This is called the doctrine of frustration. The doctrine of frustration comes under Section 56 of the Indian Contract Act, 1872. This doctrine is based on the Latin maxim ‘Les Non Cogit Ad Impossibilia’, which means law cannot bind a person to perform a contract that has become impossible to perform due to unforeseen reasons.

In English law, the impossibility of the performance of a contract is termed the ‘Doctrine of Frustration’. The rationale behind it is that if performance becomes impossible as it cannot be performed or due to illegality of the act that was agreed to be done, it is imperative to absolve the parties from further performance of it as they never promised to perform an impossibility.

What is a contract

A contract is an agreement enforceable by law, as per Section 2(h) of the Indian Contract Act, 1872. It is simply an arrangement between consenting parties to bind each other to fulfil obligations in exchange for considerations for any lawful object. An agreement, when enforced by the law, becomes a valid contract.

How can we execute any contract

Any contract is created in order to fulfil the objects that parties are seeking. Thus, when the contract is operative it is valid and when it becomes inoperative by any means, it becomes void or impossible to perform. A contract can be discharged in the following manner-

  • By performance.
  • By mutual consent/agreement.
  • By breach.
  • By impossibility of performance.

The impossibility of performance is covered by Section 56 of the ICA; an agreement to do an act impossible is void.

Note: The doctrine of frustration concept is an English law concept; in India, it is popularly called the supervening impossibility.

Grounds of doctrine of frustration

The doctrine allows the contract to be discharged when an unforeseen event occurs, which makes it impossible to fulfil.

Cases that cover the scope of supervening impossibility are, as under-

Destruction of subject matter

This refers to a situation where the specific object/subject that is essential for the fulfilment of the contract is destroyed, making it impossible to perform.

Taylor vs. Caldwell (1863) In this case, the doctrine of impossibility through destruction of the subject matter was established. The Defendant, here, was discharged from performing, and his failure to perform was not a breach of the contract.

Failure of ultimate purpose

Also, called frustration of purpose, it occurs when the fundamental reason behind the contract does not exist anymore; in such a case, the sole purpose of the agreement is defeated.

In the case  of Krell vs. Henry (1903), the Court of Appeal held that the contract was discharged. The objective circumstances made it clear that the parties saw viewing the coronation procession as the foundation of the contract, and this had been rendered impossible. The defendant did not have to pay the fee. The plaintiff was not entitled to recover the balance of the rent fixed by the contract.

Death or incapacity of party

This has a huge and significant impact on the validity of the contract. The death of a party leads to legal implications, such as the termination of a contract. If, in this case, it can be assigned to some legal heir, or the provisions of succession are applicable, the contract continues to be enforceable.

Under Section 11 of the ICA, the incapacitability of the party is a situation where one of the parties lacks legal capacity under the law. Like being mentally unfit, minor, or intoxicated at the time of entering into the contract, the legality of such an agreement stands void.

Robinson vs. Davison, 21-CV-7897 (LTS) (S.D.N.Y. Sep. 27, 2021)

Change of law

When the applicable laws of the agreement are changed after the formation of the contract, which affects the obligations of the agreement, it becomes impossible to perform such obligations. In such cases, parties may renegotiate the terms and legality under the existing laws and form new contracts.

Outbreak of war/civil unrest

In war-like situations, when any transaction or activity is under strict control, it is impossible to execute the agreement. In such a case, it becomes void. This concept is especially applicable in international contracts where one of the parties comes under the war, so it becomes impossible for them to perform their obligations.

Cases that do not cover the scope of supervening impossibility are, as under-

  • Difficulty in performance
  • Hardships
  • Impossibilities due to the default of third person
  • Strikes/lockouts
  • Failure of one of the objects

Note: Commercial hardships do not amount to the impossibility of performance or the doctrine of frustration.

Effect of doctrine and frustration

When agreements become frustrated, it is implied that the contract is discharged and thus it can be ‘terminated’. Which refers to the condition where the parties don’t bind each other anymore and are not bound to fulfil obligations. They cannot be held liable for non-performance. But parties may also seek restitution; they can recover any money or benefit they have provided to the other party.

Compensation

If the promisor who has knowledge of the agreement, if that is unlawful or required to perform, is an impossible act, then the agreement becomes void, and any loss incurred by the promisee shall be compensated by the promisor.

Section 65 of the ICA says whichever party receives the benefit due to the non-performance of the agreement becomes liable to restore it to the person from whom they have received it.

Stages of impossibility of performance

Section 56 can be observed in parts; thus, contracts become void in situations-

Initial impossibility

Paragraph 1 of Section 56 of the ICA states that when the act in itself is impossible to perform ab initio, the agreement is void. Simply put, an agreement that is impossible from the very beginning is called an initial impossibility.

Subsequent impossibility

Paragraph 2 of Section 56 of the ICA states that, by reason of some event, when the act becomes impossible/unlawful, after the contract is made, it is called a subsequent impossibility. A contract that becomes impossible subsequently due to the impossibility of execution of that factor of the agreement, which is the very basis of the contract.

Breach of contract vs. frustration of contract

Breach of contract

Breach of contract occurs when one party to a contract fails to fulfil their obligations as agreed upon in the contract. This can happen in a number of ways, such as:

  • Non-performance: This is when a party fails to perform their obligations at all. For example, if a contractor agrees to build a house but never starts construction, this would be a breach of contract.
  • Defective performance: This is when a party performs their obligations, but does so in a way that is not satisfactory. For example, if a contractor builds a house but does so in a shoddy manner, this would be a breach of contract.
  • Delay: This is when a party fails to perform their obligations on time. For example, if a contractor agrees to build a house by a certain date but does not finish on time, this would be a breach of contract.

Frustration of contract

Frustration of contract occurs when an event occurs that makes it impossible or impracticable for one party to fulfil their obligations under the contract. This can happen in a number of ways, such as:

  • Act of God: This is an event that is caused by nature, such as a flood, earthquake, or hurricane. For example, if a flood destroys a warehouse that is being used to store goods, this would be an act of God that could frustrate a contract for the sale of those goods.
  • Change in law: This is a change in the law that makes it impossible or impracticable for one party to fulfil their obligations under the contract. For example, if a new law is passed that makes it illegal to sell a certain product, this would be a change in law that could frustrate a contract for the sale of that product.
  • Impossibility of performance: This is when an event occurs that makes it impossible for one party to fulfil their obligations under the contract. For example, if a supplier of goods goes out of business, this would be an impossibility of performance that could frustrate a contract for the purchase of those goods.

Key differences between breach and frustration

The key differences between breach of contract and frustration of contract are:

  • Breach of contract is caused by the acts of the parties, while frustration of contract is caused by external factors.
  • Breach of contract focuses on the failure to fulfil obligations, while frustration of contract focuses on the impossibility or impracticability of fulfiling obligations.
  • Breach of contract can be remedied by damages, while frustration of contract can lead to the termination of the contract.

How is frustration different from force majeure

Force majeure is a french term that means ‘greater force’. It is a condition when, due to the intervention of some natural cause, any obligation cannot be further performed. These are unforeseen circumstances that have little to no control by human powers, usually termed as acts that are created by greater power, like events that come under ‘Act of God’ like natural disasters, floods, etc. If COVID-19 made it impossible for a party to perform its contractual obligations, then it qualified as force majeure.

The doctrine of frustration covers those situations that, due to some legalities, are now impossible to perform. Force majeure can be one of the conditions due to which contracts can be frustrated. Thus, we can understand doctrine as a legal concept covered by Section 56 of the ICA. But force majeure is a contractual concept.

In the landmark case of Energy Watchdog vs. CERC, (2017), the Supreme Court of India ruled that an abnormal rise or fall in fuel prices does not constitute a force majeure event in a contract for an electricity power purchase agreement (PPA). This decision has far-reaching implications for the interpretation of force majeure clauses in commercial contracts, particularly in the energy sector.

The court held that force majeure is an extraordinary event or circumstance beyond the control of the parties that prevents them from fulfilling their contractual obligations. A mere increase or decrease in fuel prices, standing alone, does not meet this high threshold. The court reasoned that fluctuations in fuel prices are an inherent risk of the energy business and that parties to a PPA should anticipate and account for such risks in their contractual arrangements.

The court also rejected the argument that the sharp rise in fuel prices had frustrated the contract, rendering it impossible to perform. The doctrine of frustration applies only in rare and exceptional circumstances where an unforeseen event completely transforms the nature of the contractual obligations, making it radically different from what the parties originally contemplated. The court found that the increase in fuel prices, while significant, did not fundamentally alter the nature of the PPA or render it impossible to perform.

This decision provides much-needed clarity on the scope of force majeure clauses in energy contracts. It sends a strong message that courts will not lightly excuse parties from their contractual obligations based on ordinary commercial risks, such as fluctuations in fuel prices. This decision is likely to encourage parties to negotiate more carefully drafted force majeure clauses that clearly identify the events that will be considered force majeure and the procedures for invoking such clauses.

Application of doctrine of frustration to lease deeds in India

The doctrine of frustration is a significant legal principle that finds application in lease deeds in India. It comes into play when an unforeseen event or a substantial change in circumstances renders the fulfilment of lease agreement terms impossible or impracticable. The underlying rationale behind this doctrine is the notion of fairness. It recognises that it is inequitable to bind parties to a contract when the circumstances that existed at the time of entering into the agreement have undergone a fundamental transformation.

The doctrine of frustration operates on the premise that an unforeseen event or change in circumstances must be beyond the control of the parties involved. This means that the event or change could not have been reasonably anticipated or prevented by either party at the time the lease agreement was entered into. Examples of such events could include natural disasters, wars, government regulations, or unforeseen economic downturns.

When the doctrine of frustration is successfully invoked, the lease agreement is deemed to be discharged, and the parties are released from their respective obligations. This means that neither party can enforce the terms of the agreement against the other. The court may also order the parties to make restitution to each other for any losses incurred as a result of the frustration.

The application of the doctrine of frustration in lease deeds in India is subject to certain conditions. Firstly, the event or change in circumstances must have occurred after the lease agreement was entered into. Secondly, the event or change must have rendered the performance of the lease agreement impossible or impracticable. Thirdly, the parties must not have provided for the event or change in circumstances in the lease agreement itself.

The doctrine of frustration serves as a valuable legal tool to address situations where unforeseen events or changes in circumstances disrupt the foundation of a lease agreement. It ensures that the parties are not held liable for circumstances beyond their control and promotes fairness and equity in contractual relationships.

Elements of frustration

In order for the doctrine of frustration to be successfully applied to a lease deed in India, the following elements must be present:

  • Unforeseen event or change in circumstances: There must be an unforeseen event or change in circumstances that could not have been reasonably anticipated by the parties at the time the lease deed was entered into.
  • Impossibility or impracticability of performance: The unforeseen event or change in circumstances must make it impossible or impracticable for one or both parties to fulfill the terms of the lease agreement.
  • Frustration must be total: The frustration must be total, meaning that it must make it impossible or impracticable to perform the entire lease agreement, not just a part of it.
  • No fault of the parties: The frustration must not be caused by the fault of either party to the lease deed.

Effects of frustration

If the doctrine of frustration is successfully applied to a lease deed in India, the following effects will occur:

  • The lease deed will be terminated: The lease deed will be automatically terminated, and the parties will be released from their obligations under the agreement.
  • Restitution: The parties may be entitled to restitution for any losses they have suffered as a result of the frustration.

Exceptions to the doctrine of frustration

There are a few exceptions to the doctrine of frustration. The doctrine will not apply if:

  • The lease deed contains a force majeure clause: A force majeure clause is a provision in a contract that excuses performance in the event of an unforeseen event or change in circumstances. This clause is designed to protect both parties from being held liable for damages if an event beyond their control prevents them from fulfilling their obligations under the lease. Force majeure events can include natural disasters, wars, strikes, and other events that are outside of the parties’ reasonable control.
  • The party seeking to rely on the doctrine of frustration has assumed the risk of the unforeseen event or change in circumstances: If a party has assumed the risk of an unforeseen event or change in circumstances, they will not be able to rely on the doctrine of frustration. This is because the party has agreed to take on the risk of the event occurring and, therefore, cannot claim that the event was unforeseen or beyond their control.
  • The party seeking to rely on the doctrine of frustration has contributed to the frustration: If a party has contributed to the frustration of the lease deed, they will not be able to rely on the doctrine of frustration. This is because the party’s own actions have made it impossible for the lease to be performed as originally intended. For example, if a party fails to pay rent on time or refuses to comply with the terms of the lease, they may be considered to have contributed to the frustration of the lease.

Case laws

In Satyabrata Ghosh vs. Mungneeram Bangur (1954) the Supreme Court interpreted the term ‘impossible’. The court held that Section 56 is not applicable on the ground that the restitution is of a temporary nature. The plea of frustration cannot be implied by the non performance of duties.

Paradine v. Jane, Aleyn, (1647), the first case on this concept. It was pointed out that subsequent happenings will not affect a contract already made. The court, in short, did not believe in the impossibility concept. But rather held to perform it anyhow or pay the compensations.

In Energy Watchdog v. CERC, (2017), mere incidence of expense, delay or onerousness is not sufficient. There must be a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.

Arti Sukhdev Kashyap Ors. vs. Daya Kishore Arora (1994) held that merely because the performance is delayed does not amount to frustration.

Har Prasad Chaubey vs. Union of India (1973) held that if the object becomes void as it is not in the same understanding with both parties, it is thus frustrated.

Conclusion

In conclusion, it is a fundamental principle of contract law that provides a mechanism to solve situations that face the impossibility of performance due to unforeseen circumstances. It allows parties to release themselves from obligations in the event of frustration. The doctrine of frustration paves the way for a just consequence of such an unfortunate event which has happened without any fault of the contracting parties. Based on the concepts of absolute liability, fairness and equity, this is taken to be an exception to the general rule, which provides the concept of paying damages to the party that has been breached.

References

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