This article is written by Rishabh Soni, a 3rd-year law student, Amity Law School Delhi; and Monesh Mehndiratta, of Graphic Era Hill University, Dehradun. He discusses the doctrine of Frustration under the Indian Contract Act of 1872.
It has been published by Rachit Garg.
Table of Contents
Introduction
Frustration in general scenario means defeated and this term has been widely used in agreements and contract between parties. The term frustration is being used to deal with unsuccessful transactions which could not be completed due to any reason. In law of contracts doctrine of frustration has emerged as one of the most common issues which have arrived to deal with failed contracts.
Have you ever entered into a contract? If you have, you might be aware that a contract creates mutual rights and obligations between the parties wherein they are bound to perform their duties.
What if a party fails to perform its duties? In this case, this surely amounts to breach of contract and the party will be liable. But what would happen if a particular circumstance renders it impossible for the parties to perform their duties? Such situations are usually out of the control of the parties and when such events occur, the contracts are said to be ‘frustrated’. This concept where the agreement becomes due to incapability or impossibility of being performed is called the doctrine of frustration.
The present article explains the doctrine of frustration. It provides the evolution of the doctrine and its position in India along with the reasons and effects of a contract being frustrated. But before dealing with the doctrine, the article explains the meaning of a contract, its essentials and the relevance of the doctrine in a contract. It further explains the relation between the force majeure clause and the doctrine and provides recent case laws on the doctrine.
Meaning of contract
A contract, in simple terms, can be understood as an agreement in writing made between the parties which creates mutual rights and obligations between them. It binds the parties in a relationship where both of them promise to fulfil their duties and obligations. The failure to perform the obligations can have consequences and leads to breach of contract.
In India, the Indian Contract Act, 1872 deals with contracts and other aspects related to it. The term ‘contract’ is defined under Section 2(h) of the Act as “agreement which is enforceable by law”. However, it also provides that “agreement which cannot be enforced by law will be void” under Section 2(g) of the Act.
Illustration: (i) A contracts to sell his house to B on payment of Rs. 10,00,000. B made the payment at once. Now, A is bound by the contract to sell his house to B.
(ii) A contracts with B to give him Rs 50,00,000 provided that B has to kidnap X. This contract involves illegal activity and cannot be enforced by law as it is unlawful and hence it will be void.
Essentials of a valid contract
- There must be an offer from one person and acceptance by the other.
- Both the parties must have the intention to enter into a legal relationship.
- The parties must be competent to enter into a contract which means they must be major, of sound mind and not disqualified from entering into a contract by any other existing law in force. This is given in Section 11 of the Act.
- There must be a lawful consideration and a lawful object. According to Section 23, the object is considered lawful when:
- It is not forbidden by law.
- It does not defeat any provision of any other law.
- It is not fraudulent.
- It does not involve any injury to any person or property.
- It is moral or not contrary to public policy.
- There must be free consent of the parties to enter into a contract. This means that the consent of the parties must not be obtained by coercion, fraud, undue influence, mistake or misrepresentation. (Section 14)
- The terms of contract or agreement must be clear and certain. (Section 29)
- The agreement must not be void or unenforceable.
- It must be capable of being performed (Section 56)
Evolution of doctrine of frustration
The origin of the doctrine of frustration can be traced back to the principle of absolute liability forming the basis of contracts in England. It is usually believed by the courts that the parties to a contract must fulfil their obligations in any situation and are absolutely liable for the same. This theory of absolute liability was laid down by the court in the case of Paradine v. Jane (1647). In this case, a person was sued for arrears of rent. He argued that he was evicted and kept out of possession of the land which was beyond his control. This is why he couldn’t receive the profits from the land from which he anticipated that he would get the profit and pay the rent. However, he was still held liable for not paying rent due to the theory of absolute liability.
In order to rectify and avoid the deficiencies of the theory of absolute liability, the concept of doctrine of frustration was introduced. The court for the first time recognised this doctrine in the case of Atkinson v. Ritchie (1809) wherein it was held that loading of a British ship on a foreign port is impossible due to outbreak of war between the two countries and hence, the contract is frustrated. Further, in the case of Taylor v. Caldwell (1863) defendants were discharged from their liabilities mentioned in the contract as it stood frustrated because it was impossible and incapable of being performed due to external factors.
Another big step was taken by the English courts in the development of the doctrine in the case of Krell v. Henry (1903). In this case, there was a contract to hire a flat for the coronation of King Edward VII but the coronation was cancelled. The court held that the plaintiff cannot claim the rent because the coronation was cancelled which was the foundation of the contract and hence, the contract stands frustrated. This case made the doctrine applicable to those contracts where the primary and commercial object of entering into a contract is destroyed.
Over the years, the following factors have been recognised that render the performance of a contract impossible:
- Subject matter is destroyed.
- When the party to a contract dies or becomes incapable of performing the obligations.
- Outbreak of war.
- Intervention of government which makes the contract illegal or unlawful.
- Change in circumstances.
- Delay in performance of contract where it is barred by limitation.
Position of doctrine in India
Indian law is mostly inspired by common law and eventually, it has inherited the concept of absolute liability. So, the doctrine of frustration acts as an exception to the theory of absolute liability. In India, the Indian Contract Act of 1872 deals with contracts and other aspects related to it. The term ‘frustration of contract’ is not defined anywhere in the Act. However, Section 56 of the Act makes the agreement that is impossible or incapable of being performed void indicating towards doctrine of frustration.
In England, the doctrine was recognised by courts and not mentioned in any statute unlike India which according to the Supreme Court is a positive rule of law. This was held in the case of Satyabrata Ghose v. Mugneeram Bangur and Co. (1954). The Court has held that the doctrine in India is also applicable in cases where the contract cannot be performed due to reasons or factors beyond the control of parties which means that it is applicable only in cases of subsequent impossibility. Further, in the case of Punj Sons Pvt. Ltd. v. Union of India (1986), the court held that the contract which required the supply of milk containers with tin coating, was frustrated because the tin ingots were unavailable. This clearly shows that restricting the scope of Section 56 and excluding cases of construction would be futile and defeat the whole purpose of the doctrine.
Doctrine of Frustration
As general rule parties to contract are having an intention towards the fulfillment of their part and in case of breach, party breaching is liable to compensate for the same. But an exception to this rule is laid down in Section 56 of the Indian contract act 1872. Section 56 deals with the doctrine of frustration as being acts which cannot be performed. Under this doctrine a promisor is relieved of any liability under a contract in the event of the breach of contract and contract will be deemed to be void.
Section 56 is based on the maxim “ les non cogit ad impossibilia” which means that the law will not compel a man to do what he cannot possibly perform.
The basis of the doctrine of frustration was explained by Supreme Court in the case of Satyabrata Ghose v. Mugneeram in which Justice Mukherjee held that the basic idea upon which doctrine of frustration is based is that of the impossibility of performance of the contract and the expression frustration and impossibility can also be used as synonyms.
According to the dictionary meaning, the term ‘frustration’ means “feeling of being annoyed on not achieving something you wished”. In terms of contract, it is a situation that makes the performance of a contract impossible and hence, the contract becomes frustrated. One of the essentials of a contract is that it must be capable of being performed. Section 56 of the Indian Contract Act, 1872 makes an agreement that is impossible and incapable of being performed void.
It provides that:
- An agreement which is incapable of being performed is itself void.
- A contract to do something which afterwards becomes impossible is void. If a contract contains performance of an act which becomes impossible to be performed or unlawful after it is made due to some unforeseeable circumstance or event, then it becomes void.
- The promissor must compensate for non-performance of the contract. If the promissor promises to do an act which he knew or he might have known is impossible, must compensate the promissee for the non-performance of the act.
Another similar provision to doctrine of frustration is Section 32 of the Indian Contract Act, 1872 which deals with contingent contracts. Both the provisions are based on performance of the contract however, both are different in their sense. Contingent contracts are those which are dependent on fulfilment of a particular condition or a future event and if the condition is not fulfilled, the contract stands dissolved. Doctrine of frustration on the other hand makes the contract void when the said act is impossible or incapable of being performed for reasons outside the control of parties.
Features of the doctrine
- According to English Law, there are certain conditions that must be fulfilled in order to make the doctrine of frustration applicable. These are:
- A valid contract must be subsisting between the parties.
- Any act under the contract or any part of it must not be fulfilled.
- The contract becomes incapable of being performed due to reasons outside control of parties.
- The cause of frustration must not be self induced or due to negligence of parties.
- It applies to the whole performance of the contract and not to any part thereof.
- Frustration of a contract is considered as a mixed question of law and fact.
- The contract is terminated once it is frustrated.
- While declaring a contract frustrated, courts must consider the common intention of both the parties.
Effects of the doctrine
The following are the effects or consequences of the doctrine of frustration:
- The doctrine terminates the contract automatically.
- It puts an end to the rights of parties to a contract.
- It discharges the parties from their obligations and duties.
- If the promissor knows that the contract or agreement is incapable of being performed or he is likely to know the same, he or she must compensate the other party for non-performance of the contract.
Force majeure clause and doctrine of frustration
Force majeure or ‘Act of God’ is an unforeseeable event which makes the performance of a contract impossible. Such an event can not be foreseen or controlled by the parties. In order to deal with such situations, the contracts usually contain a force majeure clause which discharges the parties from their obligations in any such situation. This is quite similar to the doctrine of frustration and whenever the force majeure clause is invoked, it is dealt in pursuance with the doctrine of frustration or Section 56 of the Indian Contract Act, 1872.
The following are the essentials of a force majeure clause:
- There must be an event which makes the performance of the contract impossible.
- It must be inevitable.
- It must be unpredictable and unforeseeable.
- The situation which leads to invocation of force majeure clauses must not be a result of either party’s act but a supervening act which cannot be foreseen by the parties.
- In order to take defence of this clause, all the conditions precedent must be fulfilled.
- The party taking the defence of force majeure clause must take necessary precautions to minimise the loss suffered by the other party to a contract.
In the absence of a force majeure clause in a contract, the parties are free to avail the doctrine of frustration embodied in Section 56 of the Act. In such a situation where the parties have resorted to the doctrine of frustration they can take the benefit of the principle of restitution according to which if a party received any benefits under the contract which later becomes frustrated, such benefit or profit must be returned. However, in case of force majeure clause, the consequences enlisted therein are followed.
Application of doctrine of frustration to lease deeds
It has been mentioned above that where there is no force majeure clause in a contract, the parties can avail the benefits of doctrine or frustration but the question to be considered is whether the doctrine applies to lease deeds as well. The Supreme Court has dealt with this issue in various cases where the contract dealt with rights and obligations of parties in a lease deed.
The Supreme Court in the case of Raja Dhruv Dev Chand v. Raja Harmohinder Singh (1968), held that the doctrine is not applicable to lease deeds. This is because Section 108(B)(e) of the Transfer of Property Act, 1882 deals with such a situation in cases of lease deeds. It provides that if a leased property or a part of it is destroyed or is unfit for use due to fire, flood, violence or any other reason enumerated in the Section, the lease can be avoided at the option of lessee. This was reiterated by the Supreme Court in the case of Sushila Devi v. Hari Singh (1971) wherein the court held that the doctrine is only applicable to contracts and not lease deeds.
Position of commercial impossibility in India
According to the settled principle “Pacta sunt servanda”, a party is absolutely liable to fulfil the obligations in a contract and must perform its duties. However, doctrine of impracticability or impossibility is an exception to this general rule. The doctrine provides that where a contract becomes impossible to perform due to any unforeseeable event that occurred after the contract was made or before its formation, the parties would be discharged from their obligations and liabilities. This is what the doctrine of frustration means. However, the doctrine of frustration requires that such events which render a contract impossible to be performed, must be beyond the control of parties to a contract. Such instances could be death of either party, natural disaster, any legislation enacted by the government, war and many more.
In India, Section 56 of the Indian Contract Act, 1872 mainly recognizes subsequent impossibility where a contract which once could be performed is rendered incapable of being performed due to the happening of any event beyond the control of parties to a contract. However, it does not cover commercial impossibility or impracticability. A contract may be performed theoretically but may not be profitable to any of the parties. It may be unprofitable or cause monetary loss to either of the parties. In such circumstances, parties cannot be discharged from their contractual obligations. Loss of money is not considered a valid defence unless there are exceptional circumstances. It can be said that commercial impracticability only exists in the form of impossibility of difficulty which renders a contract impossible to be performed due to any unforeseeable event outside the control of parties to a contract.
Difference between breach of contract and frustration of contract
Breach of contract and doctrine of frustration are two concepts related to contract. When a party to a contract fails to fulfil the obligations or omits to perform an act which was supposed to be performed, it leads to breach of contract. While doctrine of frustration is applied when the contract becomes incapable of being performed due to reasons beyond the control of parties to a contract. To betters understand the two concepts, let us understand the difference between the two:
| S. No. | Doctrine of frustration | Breach of contract |
|
|
It arises when the contract cannot be performed or becomes impossible to be performed due to factors outside the control of parties to a contract. | When a party to a contract omits to do an act enumerated in the contract or does an act contrary to the contract, it leads to breach of contract. |
|
|
No such liabilities are to be paid if a contract is frustrated. | The party breaching the contract has to pay compensation to the other party. |
|
|
No remedies are available where the contract becomes void due to the doctrine of frustration. | There are certain remedies for the breach of contract. |
|
|
Once the contract stands frustrated, the parties are discharged from their obligations. | The parties can mutually decide to perform their duties as per the contract. |
|
|
The contract becomes void due to the doctrine of frustration. | The contract becomes voidable due to breach of contract. |
|
|
Where the contract becomes incapable of being contract and it is clear that the parties are discharged from their liabilities, there is no need to take the recourse of a suit. | One party can sue the other for breach of contract. |
Recent case laws
National Agricultural Coop. Mktg. Federation of India v. Alimenta S.A. (2020)
Facts of the case
In this case, a contract was signed between the National Agricultural Coop. Mktg. Federation of India (NAFED) and Alimenta S.A. according to which a certain amount of commodity was to be delivered to Alimenta by NAFED. However, due to the cyclone, it was only able to deliver a part of the decided quantity of the commodity. The parties extended the contract and added the clause that the remaining quantity could be delivered next year.
Due to a hike in the price of commodities because of failure of crops in the US, the government refused to export the commodity and hence, the contract could not be performed as a result of which the other party took the recourse of arbitration for the default in the contract. The arbitral award was passed in the favour of Alimenta which was converted into a decree by the High Court. However, aggrieved by the decision, NAFED challenged the decision in the Supreme Court.
Issues involved in the case
- Whether there was a default on the part of NAFED?
- Whether the contract stands frustrated due to restrictions by the government?
Judgement of the Court
The Supreme Court in this case laid down a distinction between contingent contracts and contracts that are frustrated. The court observed that in contingent contracts, the contract becomes impossible of being performed due to exigencies mentioned in the agreement and the consequences mentioned therein are followed. However, if the exigencies due to which the contract became incapable of being performed is not mentioned in the agreement and is beyond the control of parties, it leads to doctrine of frustration.
It was held that in the present case, the contract was solely dependent on the policy of export laid down by the government and hence, is within the scope of Section 32 of the Indian Contract Act, 1872. This made the contract between the two null and void and so parties were discharged from their contractual obligations.
R. Narayanan v. Government of Tamil Nadu (2021)
Facts of the case
In this case, the petitioner was a bidder and licensee of one of the shops that he had taken from the respondent. He also paid the licence fee one year in advance but then due to the outbreak of COVID-19, he suffered financial losses and was not able to renew the licence even though it was mentioned in the contract. He filed a petition to waive off the licence fee for the period of lockdown and partially for the subsequent period.
Issues involved in the case
- Will the lockdown due to the outbreak of COVID-19 be treated as a force majeure event?
Judgement of the court
While dealing with the issue at hand, the Madras High Court laid down the distinction between force majeure clause and doctrine of frustration. The court observed that frustration occurs when the contractual obligations become incapable of being performed due to factors outside the control of parties and the agreement becomes void. On the other hand, in case of force majeure, a party is excused from performing the obligations while the contract continues to exist and for which the party invoking the force majeure clause must serve a notice on the other party as soon as possible. Therefore, the court in this case held that the lockdown period is a force majeure event and the licence fee to be paid by the petitioner for the said period must be waived off.
Energy Watchdog v. Central Electricity Regulatory Commission (2017)
Facts of the case
In this case, a public notice was issued by Gujarat Urja Vikas Nigam Limited (GUVNL) in order to invite proposals for the power supply. The same was done by Haryana Utilities. Both of them selected Adani enterprises for the supply of power and entered into an agreement. Due to a hike in the price of export of coal from Indonesia, a petition was filed by Adani Enterprises in the Central Regulatory Electricity Commission requesting to discharge them from the obligations of performing the contract due to the doctrine of frustration. The commission refused to do so which was challenged in the Supreme Court.
Issues involved in the case
Whether the doctrine of frustration is applicable in this case?
Judgement of the court
The court in this case held that the hike in prices of export of coal from Indonesia does not make the contract incapable of being performed and so the contract cannot be frustrated. There are alternative methods or steps to fulfil the obligations mentioned in the agreement and so the doctrine of frustration is inapplicable in this case.
The doctrine of frustration is however applicable only in 2 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.
Generally, frustration of contract can be in the following cases
- Death or incapacity of a party:- Where a party to the contract has died after entering into contract or the party is incapable of performing the contract, in such a situation the contract will be void ( Robinson v Davison).
- Frustration by virtue of legislation:- Where, a law promulgated after the contract is made, makes the performance of the agreement impossible and thereby the agreement becomes void ( Rozan Mian v Tahera Begum).
- Frustration due to change of circumstances:- This particular situation deals with those cases where there was no physical impossibility of performance of the contract, but because of the change in circumstances, the main purpose for which the contract was entered has been defeated.
Initial vs Subsequent Impossibility
Initial impossibility:- The object of making any contract is that the parties to contract would perform their respective promises, and where the contract is impossible to perform the parties would never enter into it. Initial impossibility deals with those cases where the contract was impossible to perform from the very beginning. For example, If a married man knowing that he cannot marry again promises to do so, then he is bound to compensate the other party.
Subsequent impossibility:- It deals with cases where the contract was possible to perform when it was entered but because of some event, the performance has become impossible or unlawful and therefore it discharges the party from performing it. For example, If A purchased Tickets from B for watching a cricket match and he pays 50% as an advance. If the match is cancelled then A can not recover from B as the cancellation of match was beyond the control of A.
Doctrine of frustration is applicable only in cases of Subsequent impossibility and where the contract was impossible to perform from the very beginning, where this doctrine has no application, Moreover this doctrine will also not be applicable in cases where there was a mere delay in performance and contract can still be performed.
Conclusion
Doctrine of frustration as enshrined in Section 56 of the Indian contract act 1872 deals with those cases where the performance of contract has been frustrated and the performance of it has become impossible to perform due to any unavoidable reason or condition. This doctrine is treated as an exception to the general rule which provides for compensation in case of breach of contract. But section 56 only deals with cases of subsequent impossibility as opposed to cases of initial impossibility.
The doctrine of frustration is a concept of English or Roman law. It was incorporated in the Indian law because laws in India are mostly inspired by the common law. The doctrine makes any contract or agreement which is incapable of being performed or becomes so after it is made, void and hence, discharges the parties from their liabilities mentioned in the contract. It is impliedly mentioned in the Indian law in Section 56 of the Indian Contract Act, 1872.
Usually, no compensation is to be given in case the contract stands frustrated but where one of the parties to a contract knew or was likely to know that the said act is unlawful or impossible of being performed, the other party must be compensated. Also, where one party has received any benefits due to the contract which later becomes impossible then the party must return the benefits so received. It must be noted that the courts in India have narrowed down the scope of the doctrine by excluding the cases where the events that rendered the contract incapable or impossible of being performed could be contemplated by the parties. It is suggested that the doctrine must be applied to all the cases of impossibility and frustration for the expansion and development of the doctrine.
Frequently Asked Questions (FAQs)
Which provision deals with doctrine of frustration in India?
The term ‘frustration’ or ‘frustration of contract’ is neither mentioned nor defined anywhere in the Indian Contract Act, 1872. However, Section 56 of the Act makes the agreement which is incapable of being performed, void, thus, impliedly mentioning about the doctrine of frustration.
What do you mean by contingent contracts?
Those contracts which are dependent on fulfilment of a particular event or happening of any future event are called contingent contracts. These are given in Section 32 of the Act. These are enforceable only on the happening of a particular future event while doctrine of frustration renders the contract void because it is incapable of being performed.
What is the difference between force majeure clause and doctrine of frustration?
Both the force majeure event and doctrine of frustration make the contract impossible to be performed due to factors outside the control of parties. However, the force majeure clause is usually mentioned in the contract and so are its consequences. In absence of any such clause, the parties can resort to the doctrine of frustration.
What is the basic idea behind Section 56 of the Indian Contract Act, 1872?
Section 56 of the Act is based on the maxim ‘Lex non cogit ad impossibilia’ which means that the law cannot force a man to do something which is impossible.
References
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:
Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.
[…] the doctrine of frustration, the impossibility of a party to perform its obligations under a contract is linked to the […]