This article is written by Suryash Kumar, graduated from Bangalore Institute of legal studies. The article talks about the various aspects of Doctrine of frustration.
Origin of the Doctrine of frustration
The doctrine of frustration of contract owes its origin to Roman law. Its application was seen in the Roman Contract law, where the parties were discharged because the thing has been destroyed or the purpose of the contract has become unattainable.
The Origin of Frustration of Contract is closely related to the English Rule: Subsequent impossibility of performance cannot be a valid defence by the defendant in cases of breach of an obligation under the contract. This rule was laid down in: Paradine vs Jane, 1647 (82) ER 897: 1647 Alyen 26. Brief facts of the case are: Jane was sued for rent due to Paradine. The defendant argued that the German Prince had invaded the area where the property was situated (Occupied the property), therefore he couldn’t use the property to make any profits. He had planned to pay the rent out of the profits which he would have made, had he used the property.
The defence was not held valid; as the obligation under the contract was absolute with no exception whatsoever. Though the defendant’s proposition was a reasonable and strong one- he couldn’t have done anything about the situation- the Judge held that responsibility under the contract should be honoured under all circumstances.
The Doctrine of frustration was evolved as a response to the aforementioned doctrine. There were cases where the contract couldn’t be performed through no fault of the defendant, and the rigidity of the English rule was found to be unreasonable, unfair, hence an exception to this rule was necessary. The doctrine of Frustration was incorporated in the contract law as a remedy to the above situation.
A contract is an agreement or set of obligations to be fulfilled by the parties to the contract. Sometimes, subsequent to the construction of contract an unforeseen circumstance may arise, which render the performance of the contract impossible. The object of the contract ceases to exist. This change in circumstance is not caused by the parties and it changes the nature of obligations, different from what was contemplated by the parties.
As with most laws in India, the contract act is influenced by English laws/doctrines(The act was passed when India was under colonial rule), this doctrine constitutes the Indian Contract Act,1872, as Section 56 (Agreement to do impossible act).
It speaks about two impossibilities i.e. Initial impossibility and Subsequent Impossibility. Initial impossibility undergirds the fundamental proposition that ‘’An agreement to do something that is intrinsically impossible is void’’. For example, an agreement to bring a person back to life who is dead, being impossible of performance, is void.
Subsequent Impossibility as the term suggests something that happens later, i.e. after the parties have got into a contract. Sometimes, it happens that at the time when the contract was constructed, the performance of the contract wasn’t an issue, but subsequently, because of the change in circumstances or factors, the performance becomes impossible or unlawful. An example here would be where a contract is made for the import of goods, and the import is thereafter forbidden by a Government Order.
Application of Doctrine under different scenarios:
In Taylor vs Caldwell, the court pointed out that the rule stated in Paradine vs Jane ‘’is only applicable when the contract is positive and absolute, and not dependent on any contingency either explicit or implicit’’.
Facts were as follows: the defendants agreed to let the plaintiffs operate on their premises for a concert. Subsequently, before the scheduled concert the premise was destroyed by fire without any fault of either party. It was held that the contract was not absolute, because its performance depended on the existence of the hall. It was, therefore, ‘’subject to a tacit understanding that the parties shall be expunged in a case, preliminary to breach, accomplishment becomes impossible from the exterminating of the thing without fault of the contractor’’.
This decision brought to the fore- the constant struggle between two conflicting doctrines-the principle of inviolability of contract which supports the principle of the paramountcy of contract and the principle that a contract is discharged when the common object or assumption has been annihilated by certain happenings or incidents.
Not Limited to Tangible Things
Furthermore, Krell v Henry (Coronation case) highlights that the above principle is not restricted to physical impossibilities. It also extends to cases where the performance of the contract is achievable tangibly, but the purpose for which the parties had constructed the agreement has failed to materialise. To better illustrate this point, we should discuss the facts of Krell v Henry, which are:
The defendant agreed to rent a flat from the plaintiff for two days, on which days it had been announced that the crowning would take place, and, therefore, a parade would pass along that place. Some portion of the rent was paid before the event. Later, the parade was dropped because the King was ill, the defendant objected to pay the remaining amount.
The court concluded that the real intention of the parties, which was given effect by the contract, was to have a view of the parade. This was the cornerstone of the contract; With the Coronation process not taking place on the given date, the object of the contract was frustrated. As a result, the plaintiff was not qualified to recover the balance of the rent. It is a perfect example of the court not restricting itself to physical possibilities.
- Destruction of subject-matter: The doctrine applies where the actual and specific subject-matter of the contract has ceased to exist. Taylor vs Cadwell best illustrates this point.
- Supervening illegality: Performance of the contract becomes impossible in the manner and the time contemplated ensuing from the change in circumstance. If the legislature passes law after the contract is constructed to deal with the changed situation, which makes the contract frustrated. A, a company in India dealing with exports and imports of dry fruits. A gets into an agreement with B, a supplier of dry fruits in Pakistan. Subsequently, war breaks out between India and Pakistan, as a result, the legislature passes a law, thereby making the imports from Pakistan illegal, the contract is frustrated by supervening illegality.
- Death or Incapacity of Party: When there is a contract that depends on the particular skill or specific act of the promisor, his death or incapacity terminates the contract. A classic case on this point would be Robinson vs Davison: A contract between the plaintiff and the defendant’s spouse(famous pianist), that she will be performing i.e. playing the piano at a concert organized by the plaintiff on a particular day. On the morning of the said day, she apprised the defendant that she was ill, and will not be playing the piano. The concert had to be postponed and this was a loss for the plaintiff. The court dismissed the case stating that she had the option to not play if she was sick to do so. The contract was clearly contingent on the fact that she was well enough to perform.
- Delay: The contract can also be frustrated by the inordinate delay. However, the delay must be serious which defeats the purpose of the contract. In Bank Line Ltd v Arthur Capel & Co where the ship was to be chartered for 12 months from April 1915 to 1916. The vessel was requisitioned until September 1915. It was held that the contract was frustrated by the delay. Freights had risen and it would be unfair to the owner if the old contract was enforced.
Limits of the Doctrine
The norm is that the parties will be held responsible for breach of the obligation under the contract and the parties getting discharged due to frustration is an exception. Acting in consonance with this approach, the courts have made an observation that change of circumstances must be ‘’such as to upend the object of the contract. Some impediment or some deviation is very common in all transactions, and it cannot be assumed that any agreement has been made on the implied understanding that such a thing will not take place to any extent’’.
‘’Commercial hardship’’ or ‘’Bad bargain’’ is an important limit to the doctrine.
Davis Contractors Ltd v Fareham UDC perfectly illustrates this point. Brief facts of the case are: Davis Contractors agreed with Fareham UDC to build 78 houses over eight months. Time taken to complete the project was 22 months because the plaintiff was short on labour and materials.
The plaintiff’ contended the delay had increased the costs, and the delay was caused due to circumstances beyond anybody’s control. They pleaded to the court to declare the contract frustrated, therefore were entitled to quantum meruit for the value of work done. The decision was in favour of the defendant. No doubt that the contract had become more onerous but in no way, this can be interpreted as the frustration of contract. This is what lord Reid stated as the difference between the contract becoming more onerous and it becoming frustrating.
Doctrine of Frustration in India
Section 56 of the Indian Contract Act: As with most laws in India, the contract act is influenced by English laws/doctrines(The act was passed when India was under colonial rule). This doctrine constitutes the Indian Contract Act,1872, as Section 56( Agreement to do impossible act). An agreement to do something, which was possible or lawful when the contract was constructed, but subsequently, becomes impossible or unlawful without any fault of either party, then such an act will be void.
Satyabrata Ghose v Mugneeram Bangur and Company & Anr.: The defendant company launched a scheme related to developing the land into a housing colony. The plaintiff was granted a plot on payment of advance money. The company committed to constructing the roads and drains necessary for improving the land, thereby making it suitable for building and residential purposes. Following the completion of development work, the purchaser was to pay the remaining amount to complete the conveyance. Meanwhile, a large part of the land was taken over by the State during the Second World War for war purposes. The company attempted to rescind the contract on the ground of supervening impossibility.
Held: The court dismissed the defendant’s suit stating that the ‘’impossibility’’ under Section 56( Agreement to do impossible act) doesn’t mean in the physical or literal context. It refers to change in circumstances which completely upsets the very foundation upon which the parties rested their bargain. The requisition orders, it must be noted were temporary in nature. There was no timeline mentioned within which the project had to be completed. With the absence of any deadline whatsoever in the contract, and when it was natural for some restrictions to be in effect during the war, thereby causing difficulties and delay in the project. This delay caused by the requisition order didn’t affect the fundamental objective or struck at the roots of the adventure.
Sushila Devi vs Hari Singh
This case expanded the scope of the Doctrine of Frustration. ‘’Impossibility’’ under Section 56 of the Contract act should not be restricted to humanely possible scenarios. In this case, lease of certain property was the subject matter of the agreement. Later, because of partition the property to be leased became a part of Pakistan, thereby making the terms of agreement impossible.
Grounds Of Frustration
- Destruction of subject-matter:The doctrine of impossibility is befitting ‘’where the specific subject-matter of the contract is annihilated. ‘’Taylor vs Cadwell’’ as discussed previously is a good example.
- Change of circumstances: A contract will frustrate ‘’where certain situations arise which make the accomplishment of the contract impossible in the way contemplated’’. Justice Kapur of the Punjab High Court in Pameshwari Das Mehra v Ram Chand Om Prakash explained the principle thus: ‘’It is clear that if there is entirely unforeseen occurrence the critical point that has to be pondered upon, whether this occurrence has influenced the responsibility of the parties in the contract to such an extent as to make it virtually impossible or even perilous or hazardous. If that be the case, the occurrence not having been brought about by the fault of either party, the courts will not enforce the contract’’. For example, A ship was chartered to load cargo but on the day she should have proceeded to her berth, an explosion occurred in the auxiliary boiler, which made it impossible for her to undertake the voyage at the scheduled time, the House of Lords held that frustration had occurred in the circumstances.
- Non-occurrence of contemplated event: There are times when the performance of contract is entirely possible, but only if a specific event occurs, which if doesn’t affect the core objective of the contract. It makes the purpose of the contract unattainable.The coronation case is the best example here. This has been discussed earlier in the article.
- Death or incapacity of party:’’A party to a contract is exempted from the obligation if it is contingent upon the survival of a given person, if that person dies’’. The essence of these type of cases that it requires individual to use his particular skill, in this case the promisor, his death or incapacity puts an end to the contract. An illustration where A contract between painter, and the person to draw his picture on a particular date. The painter dies before that date, hence the parties are automatically discharged.
- Government, Administrative or Legislative intervention: Contract will be dissolved when by the operation of legislative or administrative action which strikes the objective or purpose of the contract, thereby changing the fundamental nature of the contract. Thus, where a vendor of land could not complete the sale-deed because he was no longer the owner due to a law which came into effect, it was held that the contract had become impossible of performance.
- Intervention of War: War or War like situations has often raised difficult questions for the courts. In a particular case, appellants had agreed to sell to the respondents three hundred tons of groundnuts.The usual route at the date of the contract was via Suez Canal. The shipment was to be in November/December, but due to certain geopolitical development the canal was closed until April next year. It was stated that the appellants could have shipped through the alternate route which was Cape of Good Hope. Appellants refused to ship goods via Cape. The appellant’s argument was that it was a tacit understanding between the parties in the contract that the shipment should be via Suez. It was held that such an understanding was wrong. What the appellants could have done was shipped the shipment through Cape route,and they were bound by law (Sale of Goods Act,1893) to do this. Although this would have been more expensive for the appellants, but it didn’t render the contract fundamentally or radically different, hence there was no frustration of contract.
Application to leases: The “English Law’’ on application to leases is unsettled. In India this was discussed by the Supreme Court in Raja Dhruv Dev Chand v Raja Harmohinder Singh, where it was observed ‘’Authorities in the courts in India have generally taken the view that Section 56 of the Contract Act is not applicable when the rights and obligations of the parties arise under a transfer of property under a lease’’. This was one of the cases arising out of the partition of the country into India and Pakistan. The lease in question was that of an agricultural land for one year only. The rent was paid and the lessee was given possession. Before the land could be used for any crops, came partition which left the land in Pakistan and the parties migrated to India. The action was to recover the rent paid. It wasn’t successful because the respective judges pointed out that completed transfers are completely outside the scope of Section 56.
In a subsequent case of Sushila devi v Hari Singh the Supreme Court concluded that In this particular case there is no concluded contract since no deed was written or registered. It was an agreement to lease and that came within the scope of Section 56.There was frustration of the Contract as the parties could not go to give or take possession.
Effects of frustration
Frustration should not be self-induced: The frustration should not be caused because of any of the parties’ fault or action.One of the case illustrates this points where the exporter had an export licence to supply 3000 tons of sugar beet pulp pellets. They had applied to the government to increase their quota but that was refused. After exporting 1500 tons to the first buyer with an option to supply 1500 tons later. They also contracted with another buyer to supply them with 1500 tons of sugar . This was clearly beyond their limit under the licence. To get out of this exporters apportioned the 1500 tons between the two buyers equally. One of the buyers sued the exporters for the breach of the contract. The suppliers pleaded frustration.
This was not accepted, though the court referred to the principle stated in the American Uniform Commercial code that in such a situation the seller may apportion supplies in any case which is prudent and just but found no basis for applying the principle into English law.
The case of Thompson v . ASDA-MFI Group plc
This case represents an interesting scenario relatively ignored by the texts. How to the English Law should be interpreted where a party claims to be excused from performance because of his own action, not directly amounting to breach of the contract,has brought about a situation in which the contract provides for discharge of his obligations. The discharging term may be a condition precedent. For example where an estate agent’s entitlement to the commission was dependent on the sale of the principal’s property from which the principal withdrew. Or it may be a condition subsequent, as in New Zealand Shipping Co. ltd, where a shipbuilding contract had become void after a delay in delivery which the buyers alleged was caused by the builders’ own actions.
Thompson concerned a condition subsequent. In this case, a company which offered shares to its own employees and employees of its subsidiary and after an employee of a subsidiary had accepted the offer, the company’s subsidiary was sold to a bidder and the employee was informed that the scheme lapsed but he sued the company for breach of contract. Rule 5 of the scheme provided that the right to exercise an option depended on the option holder being employed by ASDA or its subsidiaries.
In order to attract the principle that a party is not to rely on his own act in not fulfilling a condition subsequent and thereby bringing a contract to an end, the act has to amount to a breach of duty owed to the other party under the contract. If a term cannot be implied into a contract that a party would not do an act which, if done, would prevent the fulfilment of a condition precedent or would cause a condition subsequent to be fulfilled, the contract takes effect according to its tenor.
In keeping the above principle in mind, the court held that the Company is not liable. If ASADA were so bound, it would be incapable of exercising other contractual rights, such as dismissing the plaintiff for misconduct, without incurring liability under the option contract.
- Frustration operates Automatically: Frustration operates independently and is conditioned to discharge the parties in a contract in certain circumstances. “irrespective of the parties affected, their dispositions and their interest and circumstances’’.
The legal effect doesn’t depend on the parties’ intention or opinions, or even knowledge, as to the event. This is particularly true of Indian law as Section 56 of the Contract act ‘’lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties.
- The adjustment of rights: The rights of the parties are adjusted under Section 65 of the Act.
Issues affecting the Operation of the Doctrine
- Negligence: When the frustration is caused by the negligence of one of the parties’. It also depends upon the particular facts of a case whether negligence will affect the operation of the doctrine.
- In circumstances where the incident leading to the frustration is anticipated and provided for by inserting a force majeure clause into a contractual agreement, frustration shall not apply. This is the case, however, only if the said clause adequately covers all eventualities.
In Jackson v. Union Marin Insurance Co. ltd, it was held that such an extensive damage was not covered under the expressed exceptions.The contract was frustrated.
The Doctrine of Frustration came into existence to deal with certain situations, where through no fault of the parties’, the contract was frustrated. The law is dynamic and takes shape according to the needs of the society. Perhaps, to an extent doctrine of Frustration brings clarity on the conflicting positions: the paramountcy of contract which supports the principle of absolute liability and the principle that a contract is discharged when the common object or assumption has been destroyed by the change of circumstances.
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