This article is written by Simhadri Bharadwaja, a law student from Nalsar law university, Hyderabad. The doctrine of frustration as mentioned under The Indian Contracts Act, 1872  is explained in this article.

Introduction

The entire topic of Frustration is elucidated from the Doctrine of Frustration (§56) to Effects of Frustration (§65) as mentioned in The Indian Contracts Act.

Initial impossibility [S.56]

Section 56 of The Indian Contracts Act, 1872 begins by laying down a straightforward principle that “an agreement to do an act impossible in itself is void”. For instance, an agreement to discover treasure by magic, because of its impossibility of performance, is void. An agreement to do an act that is impossible from the very beginning whether the parties were aware of such impossibility or not the agreement will be void. 

Subsequent impossibility [S.56]

What if the parties enter into a contract and at that time of entering it was possible to perform the contract but due to some supervening reason or factors beyond the control of either of the parties the performance of the contract becomes impossible or unlawful. Agreements of such a nature are frustrated and hence void. For example, A agrees to sell a tract of land to B but owing to some Governmental policy this tract of land has been taken by the government for some official purpose. The agreement stands frustrated and B cannot sue A for non-performance of his obligation as the performance of A’s duty has become impossible.

Doctrine of Frustration

In the well known case of Taylor v. Caldwell, the defendants agreed to allow the plaintiffs to use their music hall to conduct a concert for a few days. But before the performance of the concert the hall was destroyed by fire without the fault of either party. The plaintiffs sued for their loss. The court quashed their argument stating that the performance of the contract has become physically impossible because of the destruction of the subject-matter that is the music hall in this case. 

This principle is not restricted to just physical impossibilities; it also applies to cases where the very reason/object why the parties entered into the contract fails to materialise. The well-established authority is Krell v. Henry. In this case, the defendants were keen on watching the coronation procession. So they hired a flat from the plaintiffs from June 26 to June 27. But owing to the King’s illness the procession was cancelled and the defendants refused to pay money for the flat. 

The court held that the doctrine of frustration applies as the very object of the contract, as recognised by both the contracting parties, was to have a view of the coronation process. The happening of the coronation hence forms the heart of the contract. The very object of the contract was frustrated by the non-happening of the coronation and the plaintiff was held not entitled to receive money as rent fees.

Hence, the doctrine of frustration applies in two scenarios, first where performance is physically impossible and second where the very object/reason why the parties entered into the contract has failed to materialise.   

Commercial hardship

Sometime there may be alterations to situations where performance is not practically cut off but only rendered more difficult or costly. Such cases do not fall under the scope of Section 56 and this is amply shown in the case of Sachindra Nath v. Gopal Chandra. In the case, the plaintiffs rented out certain premises to the defendants for a restaurant at a rate higher than usual. The defendants agreed to pay a higher price expecting huge profits as the British soldiers were stationed in the town. 

But due to the passing of a government order, the British soldiers were prohibited from entering the area. Because of this, no profit was materialised as expected. The defendants pleaded frustration and did not want to pay the rent. The court quashed their plea and said that the alteration of circumstances must be such as to upset altogether the purpose of the contract and mere unprofitability cannot render the contract to be frustrated.

In the Indian Supreme Court case of Ganga Saran v. Ram Charan Ram Gopal where there was a contract of sale of certain quantities of cotton manufactured by Victoria Mills, Kanpur. This meant that the respondents agreed to procure cotton from the mill and sell it to the appellants. But owing to some issues Victoria Mill was unable to supply cotton to the respondents and the respondents plead frustration due to impossibility of performance. 

But the court held the respondents to be liable stating that the performance did not become impossible as the respondents could have procured similar quantities from another mill and delivered to the appellants. The mill does not form the reason/object why the contract was entered into. The object was to deliver certain quantities of cotton irrespective of the existence or non-functionality of the mill.

In a similar case of Harnandrai Fulchand v. Pragdas the privy council famously held that “ the closing or even the destruction of the mills would not affect a contract”. If there are more than one ways of performing a contract and due to closing or destruction of a mill one way is cut off, the party is still bound to perform by the other way of procuring goods from some other mill.

Specific grounds for frustration

The doctrine of frustration is applicable to a great variety of contracts. It is impossible to lay down a straightforward list in which this doctrine applies and in which this doctrine does not apply. The law in this matter is always growing and evolving. Yet there are few well-established situations recognised by the courts where the doctrine of frustration applies and they have been discussed below.

1. Death or incapacity of party

A party to a contract can be excused from performance if performance depends on the existence of that person or if the party becomes so ill that they will be unable to perform their obligations. Therefore, where a contract requires personal performance by the promisor, his death or incapacity will put an end to the contract. 

This has been well-established in the case of Robinson v. Davison where there was a contract between the plaintiff and the defendant’s wife who agreed to perform piano at a concert of the plaintiff on a stipulated date. But due to sudden illness she was unable to perform at the concert and this was informed to the plaintiffs on the morning of the date of performance. This caused the concert to be postponed and caused losses to the plaintiff. 

The plaintiffs filed for breach of contract. The court quashed their claim and said that the contract was frustrated as she became ill without there being any mistake or negligence on her part. The nature of the contract was such that the terms required personal performance and incapacity by the means of illness put the contract to an end.

2. Government, legislative and administrative interventions

A contract after formation can be held frustrated if, at the time of entering, performance was possible or lawful but after entering due to some Legislative or Administrative intervention the contract has become impossible or unlawful. In various cases, the court has reiterated over and over that when a owner of a land ceases to be the owner anymore due to some policy of the government. The contract of sale of a piece of land now owned by the government is frustrated due to the impossibility of performance.

Similarly, In the case of Man Singh v. Khazan Singh, where certain parties agreed to the sale of trees of a certain forest and the Government of Rajasthan passed an order which forbade the cutting of the trees in that area. The contract was held frustrated as it became unlawful subsequent to entering into a contract owing to governmental order. 

3. Non-occurrence of contemplated event

Sometimes the performance of a contract is entirely possible but due to the non-occurrence of the event which forms the heart of the contract the contract becomes frustrated. In Krell v Henry,  a room was hired specifically to view the king’s coronation procession but the contract was held frustrated as the coronation was postponed. To get such a result one has to show that the non-occurrence of the event was of such a nature that it forms the heart of the contract and non-occurrence uproots the very foundation of the contract.

4. Change of circumstance

Law has to adapt itself to economic changes. Marginal price escalations can be ignored. But when the prices rise out of proportion from what could have reasonably expected by the parties and making performance so crushing to the contractor as to border virtually on impossibility, the law would have to offer relief to the contractor in terms of price revision. This was recognised in the case of Easun Engineering Co Ltd v. Fertilizers and Chemicals Travancore Ltd. In this case, there was a price hike of 400% of a certain type of oil due to the outbreak of war in the Middle East. The appellants plead that this is a mere case of commercial hardship and hence damages should be awarded for breach of performance.

The court quashed this argument and said that the price escalated out of all proportions making things impossible for the respondents to supply the oil. Commercial Hardship is about not allowing a party to avoid the contract for lack of profitability. But an escalation of 400% in the prices makes the performance of the contract impossible and hence the court held the contract frustrated. In this case had there been mere marginal rise in the prices frustration could not have been availed.

5. Destruction of subject-matter

This is the most straightforward heads under frustration. The doctrine of frustration applies with full force when the actual subject-matter of the contract has ceased to exist. Subject-matter of the contract is a thing without which a contract cannot be performed. The authority, in this case, is Taylor v Caldwell in which a contract to lease out a music hall for a certain date was held frustrated due to the destruction of the hall. The performance of the contract became physically impossible due to destruction of the subject-matter hence the contract was held frustrated.

Effects of frustration

1. Frustration should not be self-induced

One of the main conditions required to claim frustration is that it should not be self-induced. This principle was best explained in the case of Maritime National Fish Ltd v. Ocean Trawlers Ltd.  In this case, the appellants hired a trawler (fishing vessel) named “St.Cuthbert” from the respondents. The trawler was hired for use in Canadian waters only. Both the parties were aware that this would require the Canadian Governments license. The appellants had 5 trawlers in their possession but the Canadian Government gave license to only 3 of their trawlers. The Government asked the appellants to name the 3 trawlers for which they wanted to use the license. The appellants named 3 trawlers but did not include St.Cuthbert. They then repudiated the contract and pleaded frustration. 

The courts did not grant the plea of frustration and held this to be a breach of contract as the impossibility of performance was induced by the acts of the appellants himself and not by a supervening act. Frustration operates automatically in which the parties get placed in the circumstance by some act beyond the control of the parties. Thus the court held that frustration, in this case, was the result of the appellant’s own choice of excluding the respondent’s ship from the license and, therefore, they were not discharged from the contract.

2. Restitution under frustration (S.65)

Section 65: Obligation of person who has received advantage under void agreement, or contract that becomes void.—When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.

• Discovered to be void

The first part of this section is concerned with agreements that are void ab initio and the agreement is discovered to be void some time later. If parties enter into an apparently valid contract and pass benefits under the contract. But later on they discover that the agreement was void ab initio then the benefits passed under the agreement they believed to be valid have to be returned or restituted to the other party. 

In Devinder Singh v. Shiv Kaur where a minor gave a shop to the defendant under a partnership but it was later discovered that the agreement was void. The court held that the minor could recover the shop back.

Another illustration could be, If money is paid for sale of certain goods, which are unknown to the parties, have already perished at the time. Afterwards, the parties discovered this, the agreement became void due to impossibility of performance and any money transferred under the void agreement is refundable. To avail restitution under this section the parties must not be aware of the void nature of their contract. The intention of Section 65

 is to prevent a party to a void agreement to retain benefits under it. For this section to apply to the parties and restitution to happen the parties should not be aware of its void nature, it has to, later on, be discovered to be void. 

If the parties are aware of the void nature of the contract and still enter into the contract then restitution under this section will not be allowed. For example, A promises to sell Ganja to B a narcotic substance prohibited from sale and both A and B are aware of this. Despite knowing the contract to be void B pays a certain amount for the commodity. If A defaults B cannot sue him as he was already aware of the void nature of the contract. 

• Becomes void

The second part of Section 65 deals with a contract which was initially valid but subsequently becomes unlawful or impossible to perform. Any benefit that has been delivered under the valid contract has to be returned once this valid contract becomes void. In the case of Fibrosa Spolka Akeyjna v. Fairbairn Lawson Combe Barbour Ltd where 1000 pounds were paid in advance under a contract for the purchase of machinery but due to the outbreak of war the contract became illegal. 

Their Lordships held that any money advanced under a valid contract ought to be returned to the other party if the contract became unlawful subsequently. The utmost important condition of this section is that the benefits should have been passed under the valid contract only not after it became void. 

This was further explained clearly in the case of Jagadish Prosad Pannala v. Produce Exchange Corpn Ltd, there was a contract for sale of maize starch at the price of Rs77 the ceiling price set by the government is Rs 78. The goods were delivered on January 3rd and paid for. But on December 16 a new government order made the ceiling price Rs 48 and this was to apply to all contracts in which delivery was after January 1st. The buyer sued for the difference in price. Though on the face of it, it seems like restitution is the right solution, the court did not allow restitution. 

The court agreed with the plaintiff to the extent that the valid contract became void due to the government order which made the contract unlawful. But the court also held that the benefits were not received under the contract as the benefits were given only after the contract became void. The contract became void on January 1st as per government order but the goods were delivered on January 3rd that is after the contract became void.  An essential ingredient of Section 65 is that the benefits must be received under the valid contract only then restitution is allowed.

Conclusion

The doctrine of frustration as provided under Section 56 of The Indian Contracts Act, 1872 is an exception to the general rule of contracts where compensation is provided in case of a loss. Hence it can be understood that a contract gets frustrated when without the fault of either of the parties the performance of the contract becomes impossible.

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