Doctrine of Frustration

DOCTRINE OF FRUSTRATION:

INTRODUCTION:

The General Principle of the Indian Contract Act provides that to discharge a contract, the parties to the contract must act upon the agreed terms of the contract. However there occur some exceptional circumstances when the performance by either party is rendered impossible or useless and when such an event occurs, the parties plead discharge of contractual obligation under Section 56 of the Indian Contract Act, which talks about the Doctrine of Frustration.

Section 56 of the act specifically talks about two types of situations which include initial impossibility and subsequent impossibility. Initial impossibility means that an agreement to do an impossible act in itself is void.

For Example, An act to find a treasure by magic is a case of initial impossibility and thus such a contract would be treated as void.

Due to the recent outbreak of COVID-19, the second part of Section 56 has presumed greater importance. The Doctrine of Frustration under the Indian Contract Act states the situations under which the parties to a contract shall be discharged from the contractual obligations without actually having to perform the contractual obligations.

IMPOSSIBILITY OF PERFORMANCE OR FRUSTRATION:

The doctrine of Frustration as such is not mentioned anywhere in the Contract Act. The doctrine is arrived at by the court by interpreting Section 56 of the Indian Contract Act.

The meaning of the term Frustration could be understood with help of case law.

In Taylor V. Kadwell [1], the defendants had agreed to let the plaintiff use their music hall between certain dates for the purpose of holding a concert there. But before that first day on which a concert was to be given, the hall was destroyed by fire without the fault of either party. The plaintiffs sued the defendants for their loss. It was held that the contract was not absolute, as its performance depended upon the continued existence of the hall.

It was, therefore, subject to an implied condition that the parties shall be excused in a case of a breach if performance becomes impossible from perishing of an essential to the contract without any default of the contractor. In such a case the party can take the defence of Frustration as the causing of fire was an unpredictable event. The above-mentioned case talks about the physical impossibility of the performance of a contract.

However, the Supreme court of India in the case of Satyabrata Ghose v. Mugneeram Bangur & Co.[2] observed that the word “impossible” has not been used in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view.

The well-Known case of Krell v. Henry [3] acts as an example to the above-mentioned point, wherein the defendant agreed to hire a flat to view a coronation procession, however, due to the ill health of the King, the coronation procession was cancelled and thus, it was though physically and literally possible the contract was considered to be frustrated as the purpose for which the contract was entered into was defeated due to the non-happening of the procession.

COMMERCIAL HARDSHIP AND IMPOSSIBILITY:

A few changes in the plan of action or the contemplated sequence of an event is natural to every human being. Therefore, while interpreting section 56 of the Indian Contract Act, the Courts made it absolutely clear that a distinction be drawn between Commercial hardships on parties and impossibility of performance.

The Supreme Court of India in the case of Ganga Saran v. Firm Ram Charan Ram Gopal [4], upheld the principle laid down by Privy Council in the case of Hurnandrai Fulchand v. Pragdas Budhsen. [5]

In the above-mentioned cases the defendants faced Commercial Hardships (Such as non- availability of raw materials/addition in cost/delay in receiving goods from supplier which resulted in further delay in performing contractual obligation and so on) and pleaded for frustration of Contract on such grounds. These difficulties faced by the contracting party are not to be regarded as a ground of frustration of contract.

SPECIFIC GROUNDS FOR FRUSTRATION:

1. Destruction Of Subject Matter: A contract between parties is rendered frustrated when the specific subject matter of the contract ceases to exist.

For Example: when A promises to sell his car to B at a specified date in the future for a consideration in exchange. And right before the transfer is affected, the car is destroyed in an accident, the Doctrine of impossibility is made applicable and the contract is discharged.

Taylor v. Caldwell [6] is the leading case explaining the phenomenon of destruction of Subject Matter. Similarly, The Madras High Court in the case of V.L. Narasu v.P.S.V. Iyer, [7] held that where a contract to exhibit a film was made and could not be performed by the owner of the complex while the movie still had its appeal was considered as frustrated as the wall of the theatre collapsed killing 3 people and thus rendering the performance impossible.

2. Change of Circumstances: The circumstances under which a contract is formed to be performed may be completely different from the actual circumstances on the day of performance. Therefore, these changes are to be taken into consideration while determining whether a contractual obligation can be performed or not.

An important point to remember is that if such change in circumstances does not materially affect the contract or the contractual obligation, then such changes shall be ignored.

The parties to a contract which is to be executed in the future are always at the risk of a sudden change in circumstances such as an abnormal rise or fall in price, a sudden depreciation of currency, an unexpected obstacle to execution and so on, However, such changes do not in themselves affect the contract and its execution and this principle was laid by the Supreme Court in Alopi Parshad & Sons ltd. V. Union of India. [8] Therefore, Hardship or inconvenience or material loss does not entail Doctrine of Frustration.

3. Non-occurrence of Contemplated Event: When a contract is entered into on the basis of occurrence of a contemplated event and the event does not take place or is cancelled, the contract May be frustrated. However conflicting views and judgments have been issued in this regard.

Example: Where A hired an apartment from B to view a procession and due to some reasons, the procession was cancelled, the contract was regarded as Frustrated.

4. Death or Incapacity of Party: A Contract that is based on the personal skills and performance by an individual shall be frustrated when such party to the contract is incapable of performing such contractual obligation.

For Example: A enters into a contract of signing and performing at an award night, However, right before his performance, he became severally ill and couldn’t perform on the day of contract and his incapability of performing due to illness was considered as a valid ground of discharge of contract due to Frustration. Robinson v. Davison [9] is a leading authority in this regard.

5. Government or Legislative Intervention: When the Foundation of a contract is affected by the government or by a legislative or administrative action, the parties to the contract can plead frustration.

For Example: If A entered into a contract with B to sell Forest Trees and the government having jurisdiction over A’s source of such tress (such as a forest) prohibits cutting of trees in that area than the contract shall be frustrated.

What is important to note is that The Supreme Court of India in Satyabrata Gose v Mugneeram Bangur and Co. [10] clearly specified that an intervention of temporary nature which does not affect the foundation of the contract will not have the effect of dissolving the contract.

Another important point to be remembered is that if the terms of the contract show that the parties have taken an absolute obligation regardless of administrative changes, they cannot claim discharge unless the act is actually performed upon.

6. Intervention of War: The happening of a war or a war-like situation often hampers the fulfilment of contractual obligations by the parties.

However, if the intervention of War is due to the delay caused by the negligence of a party, the principle of frustration cannot be relied upon.

If there are more than one way of performing a contractual obligation and the War cuts off only one of them, the party is bound to perform the obligation from the alternatives available, however inconvenient or expensive.

FRUSTRATION SHOULD NOT BE SELF-INDUCED:

No contractual obligation shall be frustrated where such impossibility of performance is brought about by the act of parties to the contract.

For Example: If A rents a motor vehicle from B for the purpose of using it as a conveyance vehicle for transportation of passengers along with his 2 other vehicles and is granted a license to use only 2 vehicles for the stated purpose and A decides to use his own vehicles instead of the one hired from B, he shall still be liable to pay the amount agreed upon to B for his vehicle and A cannot plead frustration of Contract as such frustration was self-induced. This principle has been held in Maritime National Fish ltd v. Ocean trawlers ltd. [11]

COVID-19 AND THE DOCTRINE OF FRUSTRATION:

With the outbreak of COVID-19, various countries across the globe implemented measures to break the chain of the virus. The nationwide Lockdown which was implemented in India in the Month of March resulted in numerous breaches of contracts as no individual was allowed to step out to perform his/her Duties. As a result of such breaches of contract, the Indian courts saw a rise in cases of parties demanding discharge of obligation owing to Frustration of Contracts. The lockdown resulted in suppliers failing to perform and deliver on the estimated date and time.

Globally we saw China issuing over 1600 ‘FORCE MAJEURE CERTIFICATES’ in the month of February. These certificates were estimated to cover contracts over amount 15 billion dollars.[12]

Meaning of the term Force Majeure:

“Force majeure” is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied clause in a contract, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract. (Energy Watchdog vs. CERC [13].) Unlike the Doctrine of Frustration which is a common law principle, the Force Majeure is a Clause in the Contract. The event to be treated as Force Majeure is specifically referred to and described in the Contract.

One of the most Common Example of the Force Majeure Clause is: “The Act of God”. For Example: An insurer while drafting an insurance contract shall entail all the cases wherein the insured shall be paid compensation for his/her loss. However, the insurer would always add the Force Majeure clause which would render no liability of the insurer against the insured in the event of loss due to an “Act of God”.

Which simply means that if the insured suffers any loss due to an earthquake or a Tsunami, the Contract shall be dishonoured by the Force Majeure clause and shall be discharged.

An event to be lawfully included in the contract as a Force Majeure clause must be External to the parties of the contract, which means the event is beyond the control of both the parties, must be unpredictable and irresistible. Therefore, COVID-19 and the imposition of Lockdown all qualify as an unpredictable and independent event, however there exist no straight jacket Formula to be applied to such cases of frustration or force majeure. The courts decide the applicability of such doctrines on the basis of Facts and Circumstances of the case.

For Example: If a buyer of goods tries to frustrate the contract of purchase due to the imposition of lockdown and the delay in delivery of goods, an important factor which will be considered before passing any kind of judgment would be whether the “Title” of the goods was passed to the buyer as per the relevant enactment and whether a delay can actually result in frustration of Contract.

CONCLUSION:

Therefore, an in-depth analysis of the Doctrine of Frustration provides that it is an interpretative doctrine and is applicable only when the courts find It so as per the facts and circumstances of the case. The doctrine acts as an aid to parties who for no fault of their own are unable to perform the contractual obligation.

REFERENCES:

[1] 122 ER 309

[2] AIR 1954 SC 44

[3] (1903) 2 KB 740 (CA).

[4] AIR 1952 SC 9.

[5] (1922-23) 50 IA 9, on appeal from the Bombay High Court: Hurnandrai Fulchand v Pragdas Budhsen, (1922-23) 50 IA 9: AIR 1923 PC 54 (2).

[6] 122 ER 309

[7] AIR 1953 Mad 300.

[8] AIR 1960 SC 588.

[9] (1871) LR 6 Exch 269.

[10] AIR 1954 SC 44.

[11] 1935 AC 435 (HL).

[12] https://www.bloombergquint.com/opinion/coronavirus-key-legal-issues-for-india-inc-with-covid-19

[13] MANU/SC/0408/2017