This article is written by Sachin Yadav of Dr Ram Manohar Lohiya National Law University, Lucknow. It talks about the Knitty grains about the doctrine of frustration and the impossibility to perform a contract.
Table of Contents
Introduction
The novel coronavirus outbreak, which begins in Wuhan, China in December has spread rapidly across the globe. Millions of people are infected and thousands dead due to the virus. The WHO has declared the virus a global health emergency and rated the spread of the virus to be “very high”. It is alleged that the whole tragedy starts with negligence from the doctors, who had stored some deadly viruses originating from rats, in a laboratory in Wuhan. Due to the negligent handling of the virus, it leaked from the laboratory and spread to other parts of the city and afterward became a globalised problem. The pandemic, which is the largest in history, had seized the movement of every individual, blocked the commercial transaction, and collapsed the business. Now the question arises- what about the contracts entered between the individuals? Will it come under Section -56 of the Indian Contract Act, 1872 and be declared as frustrated due to impossibility to perform.
Defining “Frustration”
Section 56 of the Indian contract act says ”An agreement to do an impossible act is void”. Subsection (2) says “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”. The concept of frustration therefore clearly implies that occurrence of an unforeseeable event or change in the circumstances which was so basic as to be regarded by law, as it will strike at the root of the agreement and is beyond what was contemplated by the parties at the time they were entering into the contract. The section further says that when at the time the contract was made it was possible to perform but due to some unforeseeable event it becomes impossible to perform, the contract then also will be considered as frustrated.
Change in Circumstances Frustrating the Contract
In the pandemic the Olympic Games were postponed, the contract between the ticket-purchasers and the event organizing body will come under frustration. English case Taylor v. Caldwell is an authority in this situation, where the court observed: “the doctrine of frustration will apply with full force where the subject matter of the contract has ceased to exist”. Where the contract is to hire a room in the hotel to stay and witness the Olympics in this case also the contract becomes frustrated. Krell v. Henry is the authority in this case where the court held “where the contract can be physically performed but will not fulfil the object of the contract, it will be frustrated”. It is affirmed by the Supreme Court in Satyabrata Ghose v. Mugneeram Bangur and Co. held- ‘impossibility’ does not only mean physical impossibility but if it is impracticable and does not achieve the object, parties have in their mind.
Now it is clear that if there is totally unanticipated change of circumstances, the court will consider whether this change of circumstances had affected the contract to such an extent as to make it impossible to perform. And if the circumstances are not brought by the fault of the parties the court will not enforce the contract.
In this pandemic situation if there is a price hike due to the limited supply of material, will it make the contract impossible? The Supreme Court in Tarapore and Co. v. Cochin Shipyard Ltd, observed that “where the price hike is reasonable it may be ignored but the abnormal escalation in the price which will lead to injustice should not be allowed and the contract must be put aside”.
Whether Government Intervention Frustrating the Contract
It is well settled that in the wake of the pandemic the government had seized the movement of vehicles for transportation of goods and stopped many business transactions. Now it is to be determined whether the orders by the government will frustrate the contract. Let us understand that it depends upon the nature of the contract. The Supreme Court in Naihati Jute Mills v. Khyaliram Jagannath observed that” the effect of the government orders must be viewed in the light of the terms of the contract, if the parties had taken the absolute obligation to fulfil the terms of the contract, then it cannot be discharged. In the recent case Halliburton offshore services v. Vedanta Limited Delhi High Court upheld that lockdown due to COVID-19 will come under Force Majeure and performance cannot be completed because it involves overseas travel which is banned by the government due to the pandemic”. But in the subsequent case of Standard Retail Private Limited v. M/s G.S. Global Corp & Ors. The Bombay High Court did not declare the contract to be frustrated because the contract was for the distribution of steel and as per the lockdown guidelines steel transportation is an essential service and there was no restriction imposed upon its transportation.
Therefore the court had time and again interpreted the doctrine of frustration due to government intervention and upheld that temporary restriction by the government will not make the contract frustrated. To attract section-56, imports must be completely forbidden. In fact in the light of the following circumstances, the government of India had made following declarations-
- The ministry of finance via its office memorandum has stated that if any disruption happens in the supply due to COVID-19, the force majeure clause will come into force.
- The Ministry of new and renewable energy for its ‘solar project developments’ has said that if parties cannot meet contractual obligations due to COVID-19, they can invoke force majeure clauses.
Frustration and Lease of Land
In this cataclysm situation, one more thing which must be considered, is that if a lessee had acquired land under the lease terms, and the purpose for acquiring the land did not get fulfilled due to insufficiency of workers, material or any other reason, will it come under frustration? As far as Indian statutory laws and interpretations by the court are concerned, the position is lucid and it is that the ‘doctrine of frustration will not apply to leases’ accept few exceptions.
The Hon’ble Supreme Court in Mahadeo Prasad Shaw v. Calcutta Dyeing & Cleaning Co. held that where a property is wholly destroyed and permanently unfit for the purpose it was leased because of fire, tempest, floods, or other irresistible force, the lease may be avoided at the option of the lessee, but where the property is not destroyed permanently the lease cannot be frustrated only because the lessee is not being able to use the land for the purpose he had leased it. The laws in England is yet not well settled regarding the applicability of frustration on leased land but the house of lords in National Carriers Limited v. Panalpina (northern) Limited held that the doctrine of frustration can be applicable to lease of lands but in very rare cases depending upon the facts of the case. Indian statute is well settled that the impossibility must be of such a nature that it must kill the contract rather than keep it alive but capable of being performed at a future date.
As a conclusion to the applicability of frustration on the lease of land, it is clear that present COVID-19 case will not attract the doctrine of frustration because the purpose of the use of land is temporarily dismissed rather than permanently lost. The purpose of the leased land can be fulfilled after the atmosphere is free from the virus.
Conclusion
Contracts are made between the parties to fulfil some objective which each party had in their mind. Every case is different from each other and it should be decided as per the facts and circumstances of the case. The doctrine of frustration as a well-settled principle plays a role as positive law and does not leave the matter to be determined as per the intention of the parties. It must be applied within the framework of the contract and the evidence on record and in absence of a frustration clause, the case must be dealt with according to section-56. Now it is pertinent to note down whether the present pandemic will come under frustration? As discussed above frustration will apply to only those cases which are permanently rather than temporarily lost the ability to be performed. In the present case contracts in which time is the essence will be frustrated and in which time is not the essence will not come under frustration, because it can be fulfilled at a later time.
It is clear that the present pandemic may/may not frustrate the contract. In the wake of the pandemic, the decisions of the various courts have cleared that force majeure will apply only by examining the circumstances of the case, whether it can be performed or not. Frustration will apply to business transactions, transportation of goods only by considering the fact that whether the government had restrained the trade activity of that kind or not. If the trade activity of that kind is not restrained, then it will not be frustrating and come within the ambit of breach of contract.
As a conclusion to the doctrine of frustration in the light of the COVID-19 pandemic, some contracts will frustrate and some will not, it will be decided by considering the nature of the agreement and government’s orders regarding the performance of the specific contract.
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