Legal Agreements

The Doctrine of Frustration under the Indian Contract Act, 1872

The contract is formed by a process of communication between the individuals. A contract is a legal agreement between two or more parties that creates obligations that are enforceable or otherwise recognised by law. Unforeseen or supervening events, i.e., occurrences that are unexpected or cannot be predicted in advance by either party and ultimately discharge the parties from their contractual responsibilities, may have an impact on the execution of these obligations.¹

When parties join into contracts, it imposes a contractual obligation on them to perform the terms of the agreement. However, contract fulfillment is frequently rendered impossible owing to unanticipated circumstances. The contract is considered to be frustrating in such instances. When the fulfillment of a contract becomes impossible due to unforeseen circumstances, the contract is said to be frustrated. The concept of frustration is a “doctrine” of a unique circumstance of contract discharge due to an inability to perform it. ²

The author has addressed in detail in the article where the phrase Doctrine of Frustration originates from in the Indian Contract Act³ and why it is vital to have it in our legal system. In addition, the article will seek to clarify the peculiar position Doctrine of Frustration had under Section 56 of the Indian Contract Act, as well as its genesis and modern-day relevance and applicability.

What is the Doctrine of Frustration?

The term frustration has been elaborated under the Black Law dictionary as “The prevention or hindering of the attainment of a goal, such as contractual performance”.

Any layperson would tell you that the word “frustration” means, among other things, “defeated” and “exasperated.” Nevertheless, this phrase is frequently used in contracts and agreements between parties. Transactions that were unsuccessful or could not be completed for some unanticipated reason are referred to as being frustrating. The general rule of contracts states that the parties to a contract have to fulfill their obligations under the contract, and in case of a breach, the party breaching the contract has to compensate the other for the damages caused. The Doctrine of Frustration is an exception to this rule.

The idea of frustration has emerged as one of the most fundamental concepts in contract law to address broken agreements.

Indian courts emphasised: ‘Frustration of the contract’ is an elliptical word. Frustration of the adventure or of the business or practical objective of contract’ is the fuller and more precise phrase. ⁴ This idea serves as a means of balancing the rule of absolute contracts with the particular exception that, under some conditions, fairness demands.⁵

The Doctrine of Frustration basically talks about the impossibility of the performance of the contract by the parties. It means that the contract cannot be executed because of an incident beyond the control of the signing parties. The performance of such a contract becomes frustration, i.e. it becomes complicated, impossible, or even illegal. The frustration of a contract can be due to any unforeseen, impossible events and events out of control of the parties.

Evolution of Doctrine of Frustration

Prior to 1863, there was a basic principle of contract law that a party to a contract was obligated to fulfil all of its obligations and could not use a defence of later impossibility of performance.

Roman law is the source of the doctrine of frustration, which is closely related to English Rule. When the parties were released because the object has been destroyed or the intended goal cannot be achieved, it is relevant.

The precedent-setting ruling regarding the priority of absolute contracts was noted in Paradine v. Jane.⁶ When a lessee who was being sued for rent arrears argued that he had been evicted and kept out of possession by an adversary from abroad, this was an uncontrollable incident that had prevented him from receiving the profits from the land from which he had anticipated receiving the money to pay the rent.He was still held liable because “where the law creates a duty or charge and the party is disabled to perform it and hath no remedy over, there the law will excuse him… but when the party of his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.” However, even for nineteenth-century judges, this method proved overly stringent and potentially unjust.

The landmark ruling in the case of Taylor v. Caldwel ⁷ has influenced the development of modern law. Given that the idea of the sanctity of contracts applies solely to a definite and absolute guarantee and is not subject to any express or inferred conditions, Blackburn J. decided that the defendants, in this instance, were not responsible for damages. It was held that, “as being subject to the implied term that the parties will be excused if, prior to the breach, performance is rendered impossible due to the item’s deterioration without the contractor’s fault… We believe the general rule is that it is indicated that performance obligations that depend on the survival of a specific person or item will be excused in contracts where performance is contingent on their continuing existence. In none of these situations is the promise anything other than affirmative, and there isn’t an express clause stating that the destruction of the person or thing will pardon the performance; rather, such justification is legally implicit.”

The Doctrine of Frustration as per Indian Contract Act

The phrase “frustration of contract” is not defined under the Indian Contract Act of 1872. However, Section 56 of the Indian Contract Act, 1872 governs the Agreement to Perform Impossible Acts in India. A court of law in India can void a promisor’s promise to carry out an impractical act. If any action taken after the contract is established is rendered impossible or if one party fails to fulfill their obligations because of unforeseeable circumstances, the contract appears to be frustrated.

An agreement to do an impossibility is void in and of itself, per Section 56. Furthermore, it specifies that when a contract to perform an act is rendered impossible or rendered unlawful due to an occurrence that the promisor cannot control, the entire contract is rendered void.

Consider the following scenario: A and B have a contract for A to receive cargo at a foreign port, but A’s government later declares war on the nation where the port is situated. In this instance, the contract’s performance is impeded by unanticipated events, leading to contract frustration.

In the case of SatyabrataGhose v. MugneeramBangur and Co.⁸., The doctrine of frustration is developed in the context of Indian laws. According to Justice Mukherjee, the first paragraph of Section 56 is akin to common law principles in that the responsibility to comply is discharged due to the inherent impossibility.

The meaning of the Doctrine of Frustration was also defined by the Supreme Court in the case of Syed Khursheed Ali v. the State of Orissa, and it was determined that the Section 56 doctrine is invoked in the event of a subsequent unforeseeable incident for which neither party is accountable.

Applicability of Section 56

According to Indian law, contracts that already contain a clause addressing the implications of specific unanticipated situations are exempt from the terms of this section.

In the case of Delhi Development Authority v Kenneth Builders and Developers Ltd., ⁹. It was decided that if both parties agreed at the time of contract formation that any supervening event would not influence contract performance, the defense under section 56 would not apply.

Section 56 is also based on the adage “les non cogitadimpossibilia” which essentially states that the law will not force or compel a man to do something that he cannot conceivably do in a humanitarian manner.

• Force Majeure clause: The Latin phrase “casus fortuitous” refers to unavoidable events, and such clauses in a contract are sometimes referred to as force majeure clauses. This provision is intended to relieve the party from any approaching uncertainty that may affect the contract’s performance or from any unanticipated incident over which the parties have no control.

Following the advent of the Covid-19 pandemic in 2020, various ministries invoked the Force Majeure provision by publishing an office memorandum declaring the Covid-19 situation a natural disaster and halting contract fulfillment for a reasonable period of time.

The scope of this force majeure clause was considered by Justice McCardie in Lebeaupin v Crispin ¹⁰, and how it differs from a vis major clause. The judges explained how the term “force majeure” has a broader meaning. The abrupt failure of machinery and strikes are examples of situations that are not covered by the vis major clause (Act of God), but are covered by the force majeure clause. The overarching goal of this provision was to protect the performing party from circumstances over which he had no control.

What Are The Conditions Required To Prove Frustration Of Contract?

The Doctrine of Frustration can only be proved once the following conditions are fulfilled in a contract:

• The existence of a valid contract;
• The contract is not performed yet;
• The performance of the contract has become impossible;
• The impossibility has occurred due to events uncontrollable by both parties.

Grounds for Doctrine of Frustration

The following grounds need to be fulfilled in order to pass the test for Doctrine of Frustration:

• Impossibility of performance: The Doctrine of Frustration arises from the impossibility to complete an activity. But the principle cannot be limited to physical impossibilities. It was held in SatyabrataGhose vs. MugneeramBangurn& Co &Anr. that the term ‘impossible’ has not been used in Section 56 of the Contract Act in the sense of physical or literal impossibility. It is not necessary that the performance of the act be literally impossible, but it may be impracticable, and if an event totally changes the very foundation of the contract, it can be said that the promisor finds it impossible to do the act which he promised to do. Therefore, when we say the object of the contract is lost, the contract is said to be frustrated.
• Destruction of subject matter: The Doctrine of Frustration applies when there is the destruction of the subject matter of contract.

This was further explained in the landmark judgment of Taylor vs. Caldwell, where Taylor had entered into an agreement to perform at an event, but on the day of the event, the hall where the event was to take place burned down. The burning of the hall depicts the impossibility of carrying forward the contract. This shows that the destruction of the subject matter of the contract will make the contract automatically frustrated.

• Death or incapacity of a party: If the contract demands the personal performance of the parties, the death or incapacity of the party will make the contract void because the contract cannot be performed anymore.
• Frustration by legal or government intervention: Where a law is promulgated after a formation of a contract, making the performance impossible, then the contract becomes void.
• The frustration of contract due to change of circumstances: This situation occurs when there is no physical impossibility of performance of the contract, but due to a change in circumstances, the main reason for which the contract was formed is defeated. The changed circumstances dissolve the contract, and the parties are absolved from the performance of the contract.
• The Intervention of War: The intervention of war makes the performance of contract difficult, thereby making the contract void.

What is the effect of the Doctrine of Frustration?

The contract is frustrated automatically– The general rule is that the occurrence of the frustrating event puts an end to the contract automatically. The parties are not required to rescind the contract as the obligations of the parties get terminated immediately after the contract is frustrated.

Further obligations are discharged– Both parties are discharged from any obligations after the contract is said to be frustrated.

Accrued obligations– The legal rights or obligations already accrued before the frustrating event occurred are left undisturbed.

Landmark case laws

The Indian courts were critical in formulating, elaborating, and evolving the Doctrine of Frustration. The author has discussed some of the important case laws on Section 56 of the Indian Contract Act and the Doctrine of Frustration.

1. Alluri Naryana Murthy Raja v. District Collector, Vishakhapatnam

In this case, it was determined that the petitioner was awarded leasehold rights for lifting sand in a river under a contract in MaddiGramme Panchayat, Vishakhapatnam district. The residents of the village forbade him from conducting inquiry operations on the grounds that it would deplete groundwater, damaging irrigation systems. Even the filing of a criminal lawsuit against them and the issuance of an injunction by a civil court did not dissuade the villagers. The undisputed facts were that due to events that occurred after the parties entered into the contract, the deal became impossible, and Section 56 of the Contract Act, 1872 was consequently applied to all fours of the contract.

• Industrial Finance Corporation V. Thletdc. Anr&Naonroasr¹¹

The court decided in the preceding instance that the notion of frustration, as envisioned by Section 56 of the Contract Act, does not and cannot have any application in the setting of facts. The guarantee is invoked when the principal debtor fails to pay the entire amount due. The Contract of Guarantee has no relationship with the Nationalisation Act and is not dependent on it: it is an independent contractor that must be honored in order to fulfill the contractual obligation between the surety and the creditor. Taking recourse to Section 141 by the surety, in our opinion, is completely misplaced, and we need not dilate further because we have already dealt with the issue in this judgment, except to record that the doctrine of frustration, as contended, cannot be invoked in light of the provisions of Section 141 of the Contract Act.

• CIT Group Inc V. Transclear SA ¹²

The court, while delivering the judgment, observed that where delivery was physically and legally possible, but the seller’s supplier chose not to make the items available for any reason, the contract was not breached.

• Mary v. State Of Kerala and Others¹³

The Apex court, in the following case, pronounces that the contract does not specify the implications of non-performance. On the face of it, this Court concluded that the parties are not liable, depending on the doctrine of frustration.¹⁴

In the above case, it was held that just because the genuine object of the contract, as envisaged by the parties, was the purchase or employment of the products for a specific purpose, the theory of frustration can be imported, and the required words can be inferred if necessary.

Conclusion

When an unanticipated occurrence occurs that makes contract fulfillment impossible, the Doctrine of Frustration comes into effect. Contract frustration renders the contract unenforceable and releases the parties from all duty. This idea is an exception to the standard norms of contract under which compensation for breach of contract is usually granted.  However, when the Doctrine of Frustration is applied, there is no wrongdoing on the side of the parties, and so the party should not be forced to recompense in such a case.

The doctrine of frustration, incorporated under Section 56 of the Indian Contract Act, provides a way out to the party(ies) when the performance has become impossible, owing to any supervening event, without their fault. The application of the doctrine questions the sanctity of the contract under certain changed circumstances. English courts evolved various theories to justify the application of the doctrine under certain circumstances, whereas Indian Law has, by codifying this doctrine in Section 56, obviated the need for evolving and applying theories to justify the application of the doctrine. Factors and circumstances that the courts consider while determining the applicability or non-applicability of Section 56 have been dealt with in detail in this Paper.

Frequently Asked Questions (FAQs)

Read our article:Difference between Force Majeure and Doctrine of Frustration

1. SatyabrataGhose v MugneeramBangur and Co AIR 1954 SC 44 [14]; Dhruv Dev Chand v Harmohinder Singh AIR 1968 SC 1024 [6]
2. Joseph Constantine Steamship Line Ltd v Imperial Smelting Corporation Ltd [1942] AC 154.
3. https://en.wikipedia.org/wiki/Indian_Contract_Act,_1872
4. Ram Kumar v PC Roy and Co Ltd AIR 1952 Cal 335 [23]; Andhra Pradesh Mineral Development Corporation Ltd v Pottem Brothers 2016 (3) ALT 297 [69]
5. HirjiMulji v Cheong Yue Steamship [1926] A O 497, 510 (Lord Sumner), affdNirmal Lifestyle Ltd v Tulip Hospitality Services Ltd, Arbitration Petition No 550, 864 and 891 of 2013 [14] (Bombay High Court, 27 November 2013).
6. (1646) Aleyn 26
7. (1863) 3 B. & S.826
8. AIR 1954 SC 44 (14)
9. AIR 2016 SC 3026 (33)
10. [1920] 2 KB 714
11. E Appeal (Civil) 3239 of 2002
12. (2008) Bus LR 1729
13. 2013 AIR SC 6082.
14. 2020 SCC ONLINE SC 381.