Doctrine of Frustration

Updated: Jan 21, 2021


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.