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KEY TAKEAWAYS

  • When the performance of the contractual obligations is rendered impossible due to circumstances which are beyond the control of the contractual parties, the doctrine of frustration of contract, envisaged under Section 56 of the Indian Contract Act comes into play
  • Loss of object theory and theory of radical change are used to justify the doctrine of frustration of contract
  • Some of the established grounds of frustration of contract are destruction of subject matter, subsequent illegality of contract, loss of object and delay, death, or incapacity to perform.

INTRODUCTION

Indian Contract Act is the primary statute governing drafting of contracts and related contractual obligations in India. When parties enter into a lawful contract, they legally bind themselves to fulfil certain obligations. However, in several instances, the performance of the contractual obligations is rendered impossible due to circumstances which are beyond the control of the contractual parties. In such a situation, the doctrine of frustration of contract, envisaged under Section 56 of the Indian Contract Act comes into play. Section 32 of the Act also deal with the frustration of contracts but is limited in scope to such circumstances which are envisaged by the contract.

In the case of Satyabrata Ghose v Mugneeram Bangur and Co., the Court had rightly pointed out that where a contract has itself provided, implies or expressly, that on the happening of certain events, the contract would be discharged or dissolved, then such a contract would be covered under Section 32 and not under Section 56. In the case of Chandnee Widya Vati Madden v Dr CL Katial, the Court held that Section 32 will apply not only to such contracts where a contingency is expressly stated but also to those contracts where a contingency is implied.

DOCTRINE OF FRUSTRATION

Doctrine of frustration envisages a mechanism to deal with such circumstances which render the fulfilment of a contract impossible. Since the contracts are generally legally binding, non-fulfilment of obligations leads to certain liabilities being imposed on the defaulting parties. Thus, the doctrine of frustration provides protection to the defaulting parties from payment of damages when the circumstances rendering the contract impossible are beyond the control of the parties. Section 56 of the Indian Contract Act, 1872 deals with the doctrine of frustration and the contract to do an impossible act. Section 56 provides that “A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”. However, where the promisor knew that the act which he promised to do was impossible or could have known with reasonable diligence that the performance of such act would be impossible and still entered into the contract, then such a promisor would be liable to pay compensation to the promisee for any loss suffered by the promisee due to the frustration of the contract.

The doctrine of frustration first evolved in the English case of Taylor vs. Cardwell. In this case, an opera performance could not be held as the opera house was destroyed by fire and a customer sued the organizers for breach of contract. The Court held that the opera house was accidentally destroyed due to no fault of the defendants and hence the defendants could not be held liable to pay damages.

THEORIES OF DOCTRINE OF FRUSTRATION

The loss of object theory has also been used to justify the doctrine of frustration. This theory states that where the basic underlying object of a contract has been destroyed or rendered impossible due to events which were beyond the control of the contractual parties and which were not reasonably foreseeable by the parties, then in such a scenario, the parties cannot be held liable to pay damages for the breach of contract.

There are primarily three essential ingredients of Section 56 of the Contract Act. These essentials are:

  • A valid contract must exist between the parties
  • The performance of the valid contract must be ongoing or must be pending
  • Such performance of the contract must be rendered void due to certain unforeseeable and uncontrollable circumstances (facts or law)

Thus, Section 56 of the Contract Act renders all such contracts void which provide for the performance of an impossible act. For example, a contract to deliver a treasure by magic would be void ab initio. It also provides a mechanism to deal with such contract which were initially made for the performance of a lawful act, but the act subsequently becomes either unlawful or impossible. Examples of grounds on which a contract may be considered to be frustrated are destruction of subject-matter or object of the contract, war, change in laws or action of executive, etc.

In the case of Krell v Henry, the main object of the contract was the happening of the coronation process and when the procession was cancelled, the object was considered to be destroyed and hence the contract was frustrated.

Another theory used to justify the doctrine of frustration is the theory of radical change in obligation. This theory was laid down in the case of Davis Contractors Ltd v Fareham Urban District Council, where it was held that if the circumstances for performance of the contract have changed to such an extent that the performance of obligation has become radically different to what it was at the time of entering into the contract, then such a contract should be considered to be frustrated as the promise did not agree to undertake such an obligation as has been rendered due to radical change in circumstances. Here the contractual obligations must be radically different to that which was agreed by the parties and mere hardship, or material loss will not be a ground for the application of this theory.

Unlike cancellation of a contract, the frustration of a contract may be considered to be an objective test as the Courts look at the contractual constitution and the impact of the circumstantial changes on the contractual obligations and the intentions of the contractual parties. The Court takes multiple factors into account such as the intention, assumptions and expectations of the parties, rationality behind the decisions of the parties, nature of the intervening event, etc. Thus, in light of these grounds, the Court decides on the frustration of the contract while ensuring that the ends of justice are met.

In the United Kingdom, we see that the liabilities and rights of the parties of the frustrated contract have been codified through the Law Reform (Frustrated Contracts) Act 1943. This Act allows for complete or partial payments where the Court deems it fit in light of equitable justice.

The 13th Report of the Law Commission of India stated that Article 56 covers the frustration of contract in an exhaustive manner and hence draws a distinction from the English Law as the relevant theory applicable to a particular case is not to be determined under the Indian Law.

SCOPE OF THE WORD ‘IMPOSSIBLE’

There has been a lot of litigation regarding the scope of the word 'impossible' used in Section 56. In some case, a contract may not be rendered literally impossible, but it may become practically impossible. In some instances, the performance of the contract may simply become useless if the object of the contract is destroyed and cannot be achieved by the performance of the contractual obligation.

In the landmark case of Satyabrata v. Mugneerma, the respondent company used to sell plots of lands. The appellant had purchased a plot from the respondents. However, the respondent could not fulfil the contract as the land was requisitioned by collector and hence the respondents offered to return back the appellant's money. However, the appellant filed a suit against the respondent. The Supreme Court of India held that the word 'impossible' used under Section 56 cannot be interpreted to mean merely physical impossibility but would also imply practical impossibility. Thus, the Apex Court observed, that where the object of the contract had become impossible, the contract would be considered to have been frustrated under Section 56.

In the case of Sushila Devi v. Hari Singh, the appellants leased some land to the respondents which could not be utilized by the respondents as the land became a part of Pakistan as a result of partition. The Court held that the contact had become practically impossible and hence the contract would be frustrated under Section 56.

Where the change in circumstances merely render one alternative of fulfilling the contract impossible, the relief under Section 56 cannot be invoked. For example, in the case of Tsakiroglou and Co Ltd v Noblee Thorl GmbH, it was pleaded that the contract must be declared to have been frustrated merely because the Suez Canal was closed down and the customary shipping route could not be used. The Court directed the party to use an alternate route even if it was expensive than the customary route. Thus, mere material loss cannot render a contract frustrated.

Another important aspect of Section 56 is that where the parties to a contract have anticipated or contemplated the happening of certain events and have laid down the consequences of such an event, then they would be bound by such consequences. In the landmark case of Delhi Development Authority v Kenneth Builders and Developers Ltd AIR 2016 SC 3026 [33], the Supreme Court of India held that if the parties contemplate the happening of certain intervening evets and expressly provide in the contract that even upon the happening of such events, the contract will continue to operate, then the happening of such events cannot be considered to be grounds of frustration.

GROUNDS OF FRUSTRATION

1. Destruction of subject matter

A contract would be rendered frustrated if the subject matter which was essential for the fulfil of the contractual obligations is destroyed. Even in such cases where the subject matter is not fully destroyed but destroyed to an immense degree, the contract would be considered to have been frustrated. In the case of Appleby v Myres [1867] LR 2 CP 651, the contract was considered to have been frustrated after the factory premises on which the machines were to be installed were destroyed.

2. Contract subsequently rendered illegal

In several instances, a contract is made in accordance with the existing provisions of law but due to subsequent changes in the laws, it is rendered illegal or contrary to the law. Such illegality may arise due to legislative changes in the law or due to judicial pronouncements. In several cases, a government restriction imposed on the import or export of goods has rendered the contract impossible and such contracts are frustrated due to subsequent illegality.

However, a temporary restriction imposed due to any statutory requirement will not essentially frustrate a contract.

3. Loss of object

Sometimes, even where the contract can be literally performed or physically performed, it's practical performance may have become redundant. Where due to any unforeseen and uncontrollable change of circumstances, the performance of contract is rendered redundant such that's it's performance will not have the result of achieving the purpose or object for which the parties entered into the contract, then in such a scenario, the contract would be considered to have been frustrated.

4. Death, delay, or incapacity to perform

Sometimes changes in circumstances lead to a significant delay in the performance of the contract. Such delay may be so long that the performance of the contract after the period of delay is over would not result in the fulfilment of the object or purpose of the contract.

In the case of Codelfa Construction Pty Ltd v State Railway Authority of New South Wales [1982] 149 CLR 337 [19], it was held that where a contract provides for the fulfilment of contractual obligations within a specified period of time, indefinite delay due to a supervening event may render the contract redundant and thus frustrated.

CONCLUSION

Since the doctrine of frustration has been codified under the Indian Contract Act, the need to depend on different theories or jurisprudential interpretations does not arise. However, the rights and liabilities have still not been as clearly codified as under the British Law. Thus, the liabilities as well as the rights, if any, of the parties to a frustrated contract have to be determined by the Courts on a case-to-case basis. Through a range of precedents, we see that certain grounds of frustration have been established by the Courts.

Relief under Section 56 is granted when a contract is subsequently rendered impossible, after entering into force, due to an unforeseen and uncontrollable event or change in circumstances. Where the contract has been rendered impossible due to any fault of the parties, the defaulting party cannot claim relied under this Section and would be held liable.

The test of radically different obligations is essential in determining whether a contract has been frustrated or not. This contract helps in ensuring that the doctrine of frustration is not easily invoked and is applied only in exceptional cases.


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