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Frustration of contract under Section 56 of the Indian Contract Act

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This article has been written by Vanshika Sharma and Shantanu Dhingra.

Introduction

When parties enter into a contract, there is a general assumption that they would want to fulfill their contractual obligations and complete the conditions of the contract, hence, they have entered into a legally binding agreement but there might be circumstances that would lead to this fulfillment of contractual obligations to be impossible or impractical. When these circumstances are out of the control of the parties and when they render the contract to be impossible to fulfill, such a contract is said to be frustrated. Frustration is an umbrella term which covers all the possible circumstances which might lead to fulfillment of the contractual obligation to be impossible or impractical.  

The reason why ‘the doctrine of frustration’ holds an important place in law as it provides a mechanism to deal with such unpredictable and unfortunate circumstances which lead to a contract being frustrated. Considering the binding nature of contracts and the consequences it leads to when a party does not fulfill his/her contractual obligations ‘The doctrine of frustration’ provides a just mechanism for the parties to protect them from paying damages in cases where events transpire which were unpredictable and out of their control. Unlike most common law countries, ‘the doctrine of frustration’ has not been developed by just years of jurisprudence; it is explicitly incorporated in Indian law under Section 56 of The Indian Contract Act, 1872.  

Even though the Indian Contract Act does not explicitly define the term frustration it still covers all the bases and provisions of ‘doctrine of frustration’ under Section 56. The doctrine of frustration is a “doctrine” of a special case of the discharge of contract by an impossibility to perform it. 

There is also another provision for frustration of contract in the Indian Contract Act under Section 32 but it does not cover frustration due to circumstances which were unpredictable and outside the control of the parties, it only absolves parties of obligations as per conditions already mentioned under the contract. This paper would be an attempt to explain the special position doctrine of frustration held under Section 56 of the Indian Contract Act as well as explain its genesis and its modern day relevance and application.

History and development of doctrine of frustration

As is the case of most provisions under common law, doctrine of frustration’s genesis can be traced back to Roman law. It can be traced back to a provision under Roman Law which stated that parties should be absolved of their contractual obligations if events transpire which are of no fault of their own and which were not foreseeable. For example, if a man promised to deliver a slave on a certain day and that particular slave died before the delivery due to actions unforeseeable and out of his control the man would have been protected under Roman Law. 

Moving past ancient times, the first instance of doctrine of frustration can be traced back to the Queen bench Judgment in 1863 in the case of Taylor vs. Cardwell. In this particular case, an opera house was destroyed due to an accidental fire and consequently was not able to hold the performance of the opera, the plaintiff (a buyer of the ticket for the opera) sued the defendant for breach of contract. However, it was held that the defendant is not liable to pay the damages as the very object on which the entire fulfillment of the contract was based was destroyed by no fault of either party hence it was held that the parties were discharged of their contractual obligations. Prior to this case, it was assumed that the parties could have provided for such circumstances in their contract if they wished to and they are only using the circumstance as an excuse to not fulfill their contractual obligations. 

Prior to this, there was a rigidity in common law in matters of frustration as seen in the landmark ruling of Paradine v. Jane. In this case, a tenant was made liable to pay the arrears rent even though the circumstances which led to him not paying the rent were out of his control. This rigidity was, however, changed after the Cardwell case. However, the reasoning giving for frustration under the Cardwell case was criticized as the reasoning given was that when the parties enter into a contract that there is an implied condition that they would be absolved of obligations in case of an unpredictable and unfortunate event transpire. This reasoning was criticized by many legal scholars as they believed it to be just a ‘legal fiction’ created in courts.

It was criticized by the House of Lords under National Carriers Ltd v. Panalpina (Northern) Ltd as they said individuals not party to the contract are intruding in the contract. The doctrine of frustration was, however, strengthened when the “loss of object” theory was given to justify doctrine of frustration, this theory stated when the main object on which the entire contract surrounds is destroyed by an event which is not reasonably foreseeable and out of the control of the parties the completion of the contract becomes impossible and hence, the parties should not be made liable to pay the damages in such a case. This was a more sophisticated theory and was firstly used in the landmark case of Krell v Henry. Thus, it can be observed that the roots of the doctrine of frustration are ancient but it has developed over time and continues to be extremely relevant till date.

Important cases

As observed that even though doctrine of frustration is specifically included in Indian law under Section 56 of the Indian Contract Act, the explanation and the ambit of the doctrine continues to develop and evolve through continued jurisprudence. Following are some leading cases relating to doctrine of frustration and section 56 in Indian Law:

Satyabrata v. Mugneeram 

This case established the scope of Section 56 under Indian Law. The facts of the case are as follows:  The respondent’s company was involved in purchasing large plots of lands and subsequently they used to divide these large plots and divide it into smaller plots for individuals to purchase, individuals were given an incentive to purchase these plots as the respondents’ company developed roads, tanks, parks and everything which was necessary for residential purposes. On 30th November 1946, the appellant purchased a plot but the land was requisitioned by the Collector. So the respondent offered to give the appellant the amount which he gave for the purchase of the plot back. The appellant denied this and filed a suit. 

The Supreme Court held that reasoning given by English law for frustration is not applicable to Indian law and “impossibility” not just means physical and literal impossibility but impossibility under Section 56 means practical impossibility as well. The court observed that if the fulfillment of the contract becomes impossible not just due to literal physical impossibility but also when the object of the contract becomes impractical to fulfill it would be under the ambit of Section 56 of the Indian Contract Act.

Sushila Devi v. Hari Singh 

This case is another case which established that impossibility under Section 56 does not mean just literal impossibility but practical impossibility as well. The facts of the case are as follows: The appellants were owners of a village and they leased a property in the village to the respondent for a period of three years starting from Jan, 1947 but as the India and Pakistan partition was going on the village became a part of Pakistan and it was not possible for the respondent to use the land due to communal reasons. The appellants argue that it was self-imposed frustration but it was held that if the fulfillment of the contract becomes practically impossible it would be deemed to be frustrated under section 56 of the Indian Contract Act.

Nirmala Anand v. Advent Corporation Pvt. Ltd

This case held that frustration automatically brings a contract to an end. It held that the contract stands until the event which frustrates it but after the occurrence of that event the contract automatically gets frustrated.

Specific instances of frustration under Section 56

Physical damage of the subject matter, disappearance of the item, resulting illegality to execution, delay, death or incapacity of a participant in a contract involving personal success, and so on are some of the instances of Frustration under the provisions of Section 56. One or more of these factors can apply to a case. Some of these factors are analysed below: 

Physical destruction of the subject matter

The contract would be frustrated if the particular subject matter required for the performance of the contract is destroyed. For example, in V.L. Narasu v. P.S.V. Iyer, a contract for screening a movie in a cinema hall became impossible to perform because the rear wall of the hall collapsed due to heavy rainfall, killing three people, and the hall’s license was revoked until the building was restored to the satisfaction of the chief engineer. There was no obligation on the part of the owner to rebuild. 

The things destroyed need to be the subject matter of the contract; thus, if the contract was not exclusive to such particular commodities, it could not be frustrated. In Turner v Goldsmith, the contract of the agency to deliver goods manufactured by the defendant was not frustrated after the factory was burned down since the contract was not exclusive to products produced by the defendant at that specific factory. 

Changes in the law that end in subsequent Illegality

A resulting alteration in the law or in the legal situation that affects a contract and prevents the contract’s performance is a well-known cause of frustration under section 56. Until the contract specifies differently, “Law” may include international law. 

To discharge the contract, the alteration in the law must hit at the contract’s foundation rather than just suspending performance under it. A Supreme Court order could bring about such a change in the law. Furthermore, any government prohibition decree making the performance unconstitutional would lead to frustration of the contract.

The commencement of the Indian Constitution also put an end to contracts that were in violation of any of the Constitution’s articles. The application of Article 19(1)(g) frustrated a contract granting a monopoly on the manufacture of radios and other electronic devices.

The party’s death or incapacity to perform

If the fulfilment of a contract is contingent on the life of a certain entity, that person will be excused from performing if that person becomes unable to perform. Thus, when the essence or provisions of a contract compel the promisor to perform the contract personally, his death or incapacity terminates the contract.

For example in Robinson v. Davison, the plaintiff and defendant’s wife, an accomplished pianist, had agreed that she would play the piano at a concert held by the plaintiff on a specific date. She became ill on the morning of the concert and was unable to attend. The plaintiff lost funds when the concert had to be rescheduled. The plaintiff’s claim for breach of contract was dismissed. According to the court, she was not only excused from playing, but she was also not at liberty to play if she was deemed unfit and the contract was frustrated.

The non-occurrence of events

Sometimes the fulfilment of a contract is often completely probable, but the validity of the performance is destroyed due to the non-occurrence of an event anticipated by all sides as the justification for the contract. 

In Herne Bay Steam Boat Co. v. Hutton, the Royal Naval Review was proposed. The defendant chartered a two-person steamboat to transport a group of paying passengers to see the naval review and enjoy a day cruise through the fleet. The review, though, was cancelled, and the defendant was unable to use the ship. Nonetheless, he was held liable to pay the outstanding sum of the hire, minus the benefit earned by the plaintiff in the usual course of business. 

Ingredients of Section 56

There are 3 Ingredients of section 56:

Difference between initial and subsequent impossibility

A contract to do an act which is impossible or becomes impossible is void as per section 56 of Indian Contract Act, 1872. 

Initial impossibility 

The aim of any contract is for the parties to fulfil their respective promises, and if the contract is impossible to fulfil, the parties will never enter into it. The term “initial impossibility” refers to situations in which the contract was impossible to fulfil from the start. As per first paragraph of Section 56 the impossibility must be pre-existing in fact or in law. 

For example, if a man who is already married enters into a contract with a woman and promises to marry her, knowing that he cannot have two wives at the same time, then that contract would be void. It doesn’t matter whether the promisor was aware of such impossibility or not, anyway it would make the contract void. 

Subsequent impossibility 

It is also known as supervening impossibility. The second paragraph of Section 56 mentions the effects of the subsequent impossibilities on the contract’s performance. When a contract is made between the parties, it is often very possible to carry it out. However, something comes afterwards that makes it difficult or illegal to carry out the task. In this case, the contract is considered void. This case is called Post-contractual or Subsequent Impossibility. 

Some examples of such impossibility are: When one of the parties to a marriage arrangement becomes insane, or when a contract is made for the import of merchandise and the import is then prohibited by the government, or when a musician contracts to sing and becomes too ill to do so, the contract becomes void in any case. 

Generally, it is not due to the error of either of the parties so as a consequence the contract and its obligations are terminated. 

Section 56 and COVID-19

The novel coronavirus (COVID-19) has been declared a global pandemic by the World Health Organization (WHO), and a state of public health emergency has been declared in every country around the world. Without a doubt, COVID-19 has had and will continue to have a negative impact on the global economy and contracts’ performance. 

There are two scenarios in which a force majeure clause can apply to a pandemic:

If COVID-19 is not designated as a force majeure case, or if the contract contains an explicit force majeure provision, an injured party can seek redress under Section 56 for frustration/impossibility (to fulfil a duty or conduct work).

Force majeure or the law of frustration cannot be enforced as a general rule; rather, each case’s interpretation would be determined by the facts and circumstances. The successful implementation of force-majeure or the doctrine of frustration in the case of Covid-19 is dependent on the specifics of the contract’s clause and the reality of the situation. 

Conclusion

It can be observed that the doctrine of frustration holds a very important place when it comes to contracts law. The doctrine of frustration has been given statutory authority under Section 56 of the Indian Contract Act. The Indian Courts Interpret frustration not only to include events which make the fulfilment of obligations of terms under the contract physically impossible but practically impractical and defeat the purpose of the contract. There is not an exhaustive list of events which can frustrate a contract, it continues to develop as the doctrine of frustration in India is a dynamic provision as under section 56 of the contract act. It talks about events which make the purpose of the contract impossible and there is a fortitude of events which can be under this ambit.


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