This article is written by Deepali Bhanot, a law student from Amity University, Haryana.
Table of Contents
Introduction
The conceptual matrix revolving around contracts incorporates the element of certainty. People usually tend to enter into a contract to ensure the performance of other party’s obligations, a digression from which may attract legal consequences. The term contract is derived from a Latin term “contractus” which means to work on a contract. The law of contract is based on a principle of “pacta sunt servanda” which means “agreements are to be kept”. The intention of the parties behind entering into a contract is to always assure that the other party keeps its promise and guarantee the performance. The perturbations that legal implications may ensue keep the parties bound to a contract. The objective of each party to a contract is to fulfill its subject as well as to satisfy the other party. No party wants the promise to get broken as no party wants to encounter the difficulties following non-fulfillment of a promise.
Therefore, a legal sanction ensuring the performance of any promise becomes indispensable and that’s why people feel free and safe to enter into a contract. The Indian Contract Act, 1872 lays down that for an agreement to become a contract there are many conditions which are to be satisfied. Agreement must be made for a lawful object, with a lawful consideration and between competent parties. If all of the mandatory conditions are satisfied then an agreement becomes a contract. Parties to a contract are legally obliged to perform their part of the contract otherwise repercussions may follow. Law of contract provides for performance of a contract and also for recovery of damages if the contract is rescinded. However, there are certain situations in which law empowers a party to abandon its obligation under a contract and to set itself free. These unprecedented situations may arise when something happens beyond the control of the defaulting party and which adversely impacts the fulfillments of one’s obligation.
The notion about contractual obligations
From the above discussion, we can safely presume that parties enter into a contract to safeguard its performance or to conveniently recover damages in case of a breach. Each party to a contract has certain contractual obligations which he is legally bound to fulfill to repel adverse consequences. Therefore, entering in a contract legally approbates the performance of promises. For a contract intention to create legal relationships is necessary. From the facts and circumstances surrounding the contract, one can infer whether parties intended to create legal relationships or not. There is no provision in Indian Contract Law which provides guidance as to the same subject however; in English law it is so. The intention to create legal relationships is necessary for formation of a contract. Intention to create legal relationships exists when parties intend legal consequences to ensue in case of breach of contract. This assures the fulfillment of other party’s obligations otherwise he would have to suffer harm. Therefore each party to a contract would have to make performance of his obligations certain, an aberration from which may dismantle the very foundation of a contract. It may attack the sole reason behind entering into a contract and may question its legal sanctity.
Exemption from performing contractual obligations
Parties to a contract are legally bound to perform their obligations in a contract but under certain circumstances they may be exempt from doing so. When any substantial event occurs which renders the fulfillment of one’s obligations impossible then parties are excused of performance. If the event bringing out this change is beyond a party’s control then, a party may get absolved from its liability. Therefore, it is not necessary for a party to perform his part of the contract when the performance has become inconceivable due to some reason which is beyond the control and contemplation of parties. In legal sense, frustration of a contract excuses a party from performing its contractual obligations.
What is frustration of contract
The concept of frustration of a contract emanates from “Doctrine of frustration” which is ingrained in Sec-56 of The Indian Contract Act, 1872. This doctrine provides that a party may abandon its contractual liability if the performance of their part of the contract is rendered impossible or impracticable. Basically, when because of the occurrence of any substantial event, the circumstances surrounding the parties are altered drastically which somehow makes the fulfillment of their contractual obligations extremely difficult or impossible; we say a contract gets frustrated. Therefore, when occurrence of any supervening event which is not because of party’s default but beyond their control, dismantles the very foundation of a contract and destroys the purpose behind its performance or renders the performance impossible, the contract is said to be frustrated. The radical change in circumstances or because of any intervening event, a party is absolved from its contractual liability and contract gets frustrated. If the purpose which the parties contemplated at the time of entering into a contract gets completely destroyed, it brings about frustration of a contract.
Effects of frustration of contract
Frustration of a contract automatically bring about the end of that contract. The contract discontinues, which puts an end to contractual liabilities of parties under a contract. However, it becomes pertinent to note here that frustration of a contract should never be because of a party’s own default.i.e, it should not be autogenic. It should always be because of any befalling event.
In the case of Maritime National Fish Ltd. v Ocean Trawlers Ltd.,1935 the permission to be granted to trawlers for fishing was dependent on a condition that trawlers must primarily obtain a license. The trawlers were not allowed to implore frustration when they committed fault and initiated fishing without license.
Frustration of a contract renders it void however arbitration clauses may continue to subsist.
Change of circumstances
The change of circumstances surrounding the performance of a contract shares a proximate nexus with frustration of a contract. If any considerable or drastic alterations of circumstances transpire, which renders the performance of a contract impossible or pragmatically worthless, it may automatically bring about frustration of a contract. So, the change in circumstances which is so significant and substantial, which attacks every possibility of performance of the contract and renders it useless, may cause the contract to be frustrated. It becomes relevant to note here that change in circumstances must be such that it should render the performance either impossible or extremely onerous. Any trivial change in circumstances will not bring about frustration.
In the case of Joseph Steamline Ltd. v Imperial Smelting Corp., 1941 the boiler of the ship which was hired to carry cargo exploded therefore, it was held that this change in circumstances made the performance impossible leading to frustration of contract.
In Easun Engg. Co. Ltd. v Fertilizers and Chemicals Travancore Ltd., 1991, there was a contract for the supply of Power Transformers. The terms of the contract strictly labelled it as a “firm price” contract which means that the price is not to be altered till the execution of the contract. The contract also laid that the condition of firm price would not prevail if delay in supplying transformers is caused due to any “force majeure” event and therefore in that situation the defaulting party is not required to pay damages. Subsequently, there was a 400% increase in the price of transformer oil due to which the party couldn’t supply transformers and other parties claimed damages. The court observed that abnormal or exorbitant increase in price of transformer oil is not a natural and ordinary event but a substantial and drastic event. Therefore, the contract stands frustrated.
Frustration should not be misused
The defaulting party may plead frustration in court to protect his interests which are at stake due to some intervening and unprecedented event. Pleading frustration may excuse the defaulting party from performing his part of the contract as it will be unjustly detrimental to his interests. Therefore, it is the safeguard provided in contract law when default happens not because of one’s fault but due to something which is beyond his control. However, the doctrine of frustration must not be misused. It shouldn’t act as a yardstick in the hands of unscrupulous people to achieve their fraudulent objectives.
Any party cannot plead frustration due to any trivial change in circumstances. The circumstances necessary to bring about frustration must always be substantial in nature which somehow attacks the foundation of the contract. If frustration is allowed even for most irrelevant and insignificant alterations many people will misuse this protection for concealing breach of contract. The defaulting party may simply rescind or breach a contract and may easily abandon his liability by pleading frustration. This phenomenon will cause unnecessary mental harassment and suffering to the other aggrieved party. Therefore, it may ease the process of abuse of this protection and may distort the element of legal sanctity appended to contract. To prevent this abuse, the concept of commercial hardship has evolved by many judicial precedents.
Commercial hardship
The concept of commercial hardship encompasses all the trifling alterations in circumstances which are not that much significant to dismantle the roots of a contract. As mentioned earlier every alteration in circumstances doesn’t cause the contract to be frustrated. Facing some hardships which render the performance of the contract onerous is very obvious in the ordinary course of business. These untoward situations may cause delay in performance or may altogether render it impossible. However, these minor difficulties don’t terminate the contract and the defaulting party cannot escape his liability. These hardships may render performance unfruitful or more extortionate. Only a substantial and fundamental change in circumstances will be deemed to be sufficient to frustrate a contract. Few instances of commercial hardship are depreciation of currency, difficulty in procurement of goods etc. therefore, any obstacle or impediment encountered will tantamount to commercial hardship, which will not frustrate the contract.
In the case of Ganga Saran v Ram Charan Gopal, 1952 the contract was entered into for supply of particular quality of cloth. The terms of the contract stipulated that the supplier would be supplying the cloth as soon as they received it from Victoria Mills. The mill at a particular time failed to supply cloth to the supplier in consequence of which they pleaded frustration of contract. The court observed that performance of their obligation to supply cloth was not made dependent on the condition that suppliers will supply cloth only when they receive it from the mills. The stipulated term doesn’t act as a condition precedent but only shows the manner in which things were to be done and therefore, the contract is not frustrated.
Similarly, in Purshottamdas Tribhovandas v Purshottamdas Mangaldas, 1986, it was held that the contract by a Hindu girl’s father to give his daughter in marriage would not be frustrated simply because the girl expresses her reluctance and unwillingness to marry.
In the leading case of M/S Alopi Parshad & Sons Ltd. v Union of India, 1960, the plaintiffs were Government agents who were supplying ghee to Army personnel. Due to the intervention of the Second World War plaintiffs requested revision of prices but received no response. The plaintiffs continued the consignments however, the contract terminated in 1945 and plaintiffs pleaded frustration.
The court observed that the performance of the contract was not made impossible due to the prevailing situation but onerous and thus, the contract is not frustrated. It is not that every alteration in circumstances will bring about frustration of contract. Only those changes which are so significant and fundamental in nature which render the fulfillments of one’s obligation under a contract impossible or extremely difficult, can make a change. In the present case the plaintiffs continued the delivery of ghee which imports that performance was not made impossible and therefore, plaintiffs have right to claim the remuneration in accordance with conditions stipulated in the contract.
The court further says that parties to a contract may encounter some unprecedented situations which they didn’t anticipate however these petty alterations are not sufficient to vindicate a party from its contractual liability. The party would be required to perform his part of the contract even if performance becomes difficult. Only in situations where it is expressly declared in the terms of contract that the parties may abandon their responsibility if a completely different set of circumstances arise, he may escape from his liability, not because of court’s discretion but because of terms of the contract.
Conclusion
The intention of legislature behind the Indian Contract Act, 1872 is to append a legal sanctity to contracts. The sanctity of contracts is the foundation of this law which ensures certainty and non-aberration by parties. Parties bound to a contract are required to perform their obligations otherwise they may face serious consequences. This law attaches the mandatory element in relation to performance as well as provides for the damages in case of any infringement. The law assures the protection of aggrieved parties from immoral and deceitful individuals by providing for remedies if the contract is rescinded. If one promises to perform an act must perform it or must pay damages.
However, it would be wrong to infer that law provides protection only to aggrieved parties. A defaulting party may also renounce their liability under a contract if they encounter any untoward change in circumstances which render the performance of their promise impossible or way too difficult. The only purpose behind this relaxation is to ensure equal status and grant equal protection. The defaulting party must not be compelled to perform its promise in a situation where it has become impossible. No party must be forced to perform an impossible thing or an extremely difficult thing as it would be unfair and unjust on its part. Therefore, if any changes of circumstances take place which were not self-induced, the defaulting party may desert its obligations as continuance would be detrimental to its interests.
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