The Doctrine of Frustration (Indian Contract Act, 1872)

KEY TAKEAWAYS

• The Doctrine of Frustration is rooted in the legal principle summarized by the Latin maxim “Les Non-Cogit Ad Impossibilia”, which asserts that the law cannot compel individuals to perform impossible tasks. This principle acknowledges the limitations imposed by external circumstances beyond the parties' control. 
• The Indian Contract Act, of 1872 does not explicitly define the Doctrine of Frustration, however, Section 56 of the Act addresses scenarios where a contract becomes impossible to fulfil or is rendered unlawful due to circumstances beyond the promisor’s control. This section provides a legal framework for the “voidance” of contracts under such circumstances. 
• Contract serves to establish mutual communication and rights among parties, defining obligations and remedies in normal circumstances, however, the doctrine of frustration provides an exception, recognizing situations where unforeseen events make contract performance impossible or impracticable, leading to the contract's nullification. 

INTRODUCTION

In simple terms, a contract is a written agreement between parties that establishes mutual rights and obligations. It binds them to fulfil their primes, and failure to do so constitutes a breach. In India, the Indian Contract Act, of 1872 governs contract. Under section 2(h) of the act, a contract is defined as an “agreement enforceable by law”, while section 2(g) states that an agreement not enforceable by law is void. 

In American law, “The Theory of Impossibility and Impracticability” and in English LAW, “The Frustration of Contract” under the Doctrine of Frustration and the Indian legal system these concepts are encompassed within section 56 of the Indian Contract Act, 1972. Frustration occurs when external factors beyond the parties' control make it impossible to fulfil the contract as intended. This encompasses both the inability to meet contractual obligations and the failure to achieve the contract's intended purpose. 

In simpler terms, frustration arises when a contract becomes impossible to carry out, meaning the original purpose envisioned by the parties is thwarted. If this impossibility arises from unforeseen events beyond their control the promisor is excused from their obligations. 

The Doctrine of Frustration applies when circumstances change after the contract is forced, rendering it physically or commercially impossible to fulfil its terms, or altering the required performance into something fundamentally different from what was initially agreed upon. However, it does not cover initial impossibilities that render a contract void from the outset, such as when a party agrees to perform an act that is scientifically impossible at the time of contract formation. 

VALID CONTRACT UNDER THE INDIAN CONTRACT ACT, 1872

The term ‘Contract’ is derived from the Latin word ‘Contractum’, which means ‘drawn together’. It is “an agreement entered into between two or more persons/parties subject to certain terms and conditions for a lawful consideration”. Section 2(h) of the Indian Contract Act, of 1872 defines a contract “as an agreement enforceable by law”. Thus for the formation of a contract, there must be – 

• An agreement
• The agreement should be enforceable by law

Agreement = Offer + Aceeptance

Contract = Agreement + Enforceability

Section 2(e) of the act defines agreement as “every promise and every set of promises forming the consideration for each other, is an agreement”.

Example: A and B enter into an agreement. A promises B to sell his house for Rs. 50,000/- and B accepts to purchase it for the said amount. It is a contract between A and B. 

In a contract, there are two parties namely the ‘promisor’ or ‘offeror’ (i.e. A in the above example). The other party is ‘promisee’ or ‘acceptor’ (i.e. B in the above example). In the above example, A and B entered into an agreement. The agreement is enforceable and hence, it is a contract.  

Valid Contract: According to Section 10 of the Indian Contract Act, 1872, “all agreements are contracts if they are made by the “free consent of the parties, competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void”. A contract is said to be valid if it can be enforceable in a court of law. According to Section 2(h) of the Indian Contract Act, of 1872. For a contract to be enforceable, it must contain the constituents enshrined in Sec. 10 of the Indian Contract Act, of 1872. According to Sec 10 of the act, a contract is said to be “Valid”, if two or more competent parties freely consented to enter into an agreement not declared void with a lawful object for a lawful consideration. 

Essentials of a Contract – 

1.    Two parties (Offeror Sec. 2(a) & Acceptor Sec. 2(b)): To constitute a contract, there must be an offer and acceptance. Therefore, in every contract, there must be at least two parties (otherwise the contract will be invalid) namely, the offeror and acceptor. The offer and acceptance must be communicated properly to each other. 

2.    Consensus-ad-idem (Identity of Minds): For a contract to be valid, there must be consensus-ad-idem. It means the identity of minds between the parties to the contract, in other words, both the parties to the contract must have agreed/consented about the subject in the same sense and at the same time. In the absence of a consensus between/among the parties, the contract is declared ‘Null and Void’. 

Example: A has two houses namely ‘X and Y’. An offer to sell ‘X’ to B. B accepts thinking that it is ‘Y’. Here, there is no identity of minds, and hence it is not enforceable. 

3.    Capacity to Contract (Sec. 14): the parties to the contract must be competent to enter into a contract. According to Sec. 11 of the Indian Contract Act, 1872, any person is competent to contract provided – 

• He is a major (NOT a minor) – according to Sec. 3 of the Indian Majority Act, 1875 a minor is a person who has not completed the age of 18 years. The age of minority extends to 21 years if a guardian of a minor’s person or property is appointed (under Guardians and Wards Act, 1890)
• He is of sound mind (NOT of unsound mind)
• He is not disqualified by law in force to contract.

4.    Free consent (Sec. 14): According to Sec. 14 of the Indian Contract Act, “two or more parties are said to consent when they agree upon the same thing in the same sense and at the same time”. Consent is said to be free when it is not caused by flaws in consent viz. coercion or undue influence fraud, misrepresentation or mistake. 

5.    Lawful Consideration (Sec. 2(d)): consideration is one of the most essential elements for the formation of a contract. It means “something in return”. It is a process for the contract. It refers to both the parties. For a contract to be valid and enforceable there must be a lawful consideration. 

Example: A sells his house to B for Rs. 10 Lacs. Here, A’s lawful consideration is Rs. 10 Lacs. Similarly, B’s lawful consideration is the house. Therefore, it is said that “a contract without consideration is void”. In other words, a contract without consideration is not valid and enforceable. Therefore, it has been contained/enshrined in the Latin maxim “Ex nudo pacto non oritur action”, which means ‘out of a nude fact, no cause of action arises’, in other words, a contract without consideration is void

6.    Legal relationship: For a contract to be enforceable, it must create a legal relationship between/among parties. Mere domestic or social agreements do not give rise to legal relationships/consequences. 

Example: A lawfully wedded wife is entitled to enforce her claim of maintenance by filing a suit against her husband. However, she cannot sue her husband for pocket money or other things outside the legal necessity like costly jewellery, car etc. 

Case – Balfour V. Balfour, (1919) – The defendant in the instant case was a civil servant in Ceylon. When he left for England, he promised his wife (plaintiff) to send 30 pounds every month, but he did not send the amount, and the plaintiff filed a suit against her husband. It was held that the suit is not actionable/maintainable on the ground that it does not give rise to legal consequences. 

7.    Lawful object (Sec. 23): For a contract to be valid, the object for which it has been entered into must be lawful. According to Sec. 23 of the Indian Contract Act, 1872 “an agreement entered into with lawful consideration or object is declared void” if it is –

• Forbidden by law
• Defeats any provision of law
• Fraudulent
• Causing injury to the person or property of another
• Immoral or opposed to public policy

8.    Terms must be certain: the terms and conditions of the contract shall be furnished in the agreement without any ambiguity or vagueness. In other words, the terms of the contract must be clear and certain. Otherwise, the contract is not valid and enforceable. 

Example: A offers B to supply 100 tons of oil, in the above example, the terms of the offer are not clear, since the nature of oil (whether coconut oil or groundnut oil etc.) is not mentioned.

Case: Taylor V. Portington (1855) - the plaintiff in the instant case A promised to take defendant B’s house on lease for three years provided “it is thoroughly repaired and the drawing rooms are decorated according to the present style”. It was held to be not enforceable since the terms were too vague and uncertain. 

9.    Possibility of performance: one of the essential elements of a contract is “possibility of performance”. If the performance of a contract is impossible, it is void. Thus section impossibility of performance renders the contract void. Thus section 56 of the act states that “an agreement to do an act impossible itself is void”. 

Example: A contract to construct a building within two days. 

EVOLUTION OF DOCTRINE OF FRUSTRATION

The Doctrine of Frustration of Contract finds its origins in Roman Law, with its earliest mention seen in Roman Contract law, particularly in the case of Paradine V. Jane (1647). In this case, parties were relieved of their obligations due to the destruction of the contract’s subject matter or the impossibility of fulfilling its intended purpose, where a defendant was held responsible for rent arrears despite being forcibly evicted from the leased land. 

Another Doctrine of Frustration origin is the principle of absolute liability, which historically governed contracts in England. Under this principle, parties were expected to fulfil their contractual obligations regardless of any intervening circumstances, leading to a strict application of liability. 

However, recognizing the limitations of absolute liability, the Doctrine of Frustration emerged as a corrective measure. Its early recognition can be traced back to Atkinson V. Ritchie (1809), where the court acknowledged that the outbreak of war between nations made it impossible to lead a British ship in a foreign port, thereby ‘frustrating the contract’. Subsequent legal developments, such as in Taylor V. Caldwell (1863), further affirmed the concept of frustration, particularly when external factors rendered contract performance unfeasible. 

A significant milestone in the evolution of the Doctrine occurred with Krell V. Henry (1903). Here, a contract to rent a flat for the coronation of King Edward VII became void when the coronation was cancelled. The court ruled that since the primary purpose of the contract was nullified by the cancellation, the plaintiff couldn’t claim rent, establishing frustration as applicable in cases where the fundamental purpose of a contract is undermined.

DOCTRINE OF FRUSTRATION: POSITION OF DOCTRINE IN INDIA

Drawing from common law traditions, Indian law upholds the Doctrine of Absolute Liability as fundamental. However, this principle makes an exception for the Doctrine of Frustration. Under Indian jurisdiction, contractual matters are governed by the Indian Contract Act of 1872, which though lacks a precise definition of ‘frustration of contract’, implies its existence through Section 56, this section renders agreements void if they become impossible or impracticable to perform, thereby hinting at the Doctrine of Frustration. 

In contrast to England, where the doctrine evolved through judicial interpretation rather than legislative enactment, Indian law views it as a positive legal principle. This was affirmed by the Supreme Court in the case of Satyabrata Ghose V. Mugneeram Bangur and Co. (1954), which clarified its applicability in cases where contractual performance is hindered by factors beyond the parties' control, particularly in instances of subsequent impossibility. 

Punj Sons Pvt. Ltd. V. Union of India (1986) the doctrine of frustration was further explained in this case. The court here recognized this doctrine of frustration by stating that when there is a contract which involves ‘the supply of tin-coated milk containers’ it is impeded by its unavailability of the tin ingots. This case highlights the “impracticability” of limiting the further scope of contract acts section 56 and excluding construction cases, as it undermines the purpose of the doctrine 

Ganga Saran V. Ram Charan, in this case, the Supreme Court of India expressed their view on the legal application of frustration within Indian legal scope. The Supreme Court here highlighted that “we affirm that the Doctrine of Frustration constitutes an integral aspect of contract law, governing the discharge of contracts in cases of supervening impossibility or illegality of the agreed-upon actions, thereby falling under the purview of Section 56 of the Indian Contract Act, of 1872.” These remarks by the Supreme Court explain the relevance of the doctrine of frustration across diverse legal systems. 

FEATURE AND EFFECT OF DOCTRINE OF FRUSTRATION

Features of the Doctrine:

The doctrine of frustration entails several effects:

1.    Frustration must not be self-inflicted: This means that the actions or faults of any involved parties cannot cause it. This was observed in the case of Maritime National Fish Ltd V. Ocean Trawlers Ltd, that the principle of frustration should not be self-inflicted. In this case, the appellants have chartered the respondent trawlers, the ‘St Cuthbert’, explicitly for fishing purposes, which required a license from the Canadian government. Despite knowing this requirement, the appellants, who operated five trawlers, applied for licenses for all five vessels. However, only three licenses were granted and the appellants named trawlers other than the ‘St Cuthbert’ in their application. Subsequently, they repudiated the charter agreement and pleaded frustration when the respondents claimed action for the hire. The Judicial Committee of the Privy Council concluded that the frustration in this instance stemmed from the appellant's deliberate choice to omit the respondent's ship from the license applications. As a result, they were not absolved of their contractual obligations. 

2.    Frustration of part of a contract: English and Indian courts typically maintain that the Doctrine of Frustration pertains to the entire performance of a contract rather than just a partial frustration. However, it's important to note that this perspective might be too broad, considering the inherent flexibility of the doctrine. 

3.    The legal rights or obligations: Under Section 65, the rights of the parties undergo adjustments. This section pertains to the obligation of a person who has benefited from the void agreement or a contract that becomes void. When such an agreement or contract is deemed void, the individual who has received any benefit from it is obligated to either restore the benefit or provide compensation to the person from whom it was received. 

Effect of the Doctrine: Once a frustrating event occurs, the contract is automatically terminated, and all future obligations under the contract are discharged. This is because if one party becomes unable to fulfil their obligation, the corresponding obligation of the other party must also cease. Additionally, since 1943, under common law, any money or goods received under the contract by either party must be returned. A similar provision can be found in the Indian Contract Act, of 1872. Thus, the effect of frustration on the contract is to restore the parties, as much as possible, to their pre-contractual positions.

APPLICATION OF THE DOCTRINE

Section 56 of the Indian Contract Act is crucial in the application of the Doctrine of Frustration. It states that agreements to perform impossible acts are void, and if a contract becomes impossible or unlawful due to uncontrollable events, it is rendered void. However, contracts with precise clauses addressing unforeseen developments are exempt from this provision. In such cases, parties are still obligated to fulfil the contract terms, despite unexpected events. 

One commonly used contractual provision for addressing unforeseen circumstances is the ‘Force Majeure’ clause, which covers unavoidable events impacting contract performance. It provides relief when circumstances beyond control affect contract execution. The COVID-19 pandemic in 2020 saw various ministries in India invoking Force Majeure provisions. 

FORCE MAJEURE CLAUSE AND THE DOCTRINE OF FRUSTRATION

Force Majeure, often referred to as an ‘Act of God’, describes an unforeseeable event that renders contract performance impossible. Such events are beyond the control and anticipation of the involved parties. Contracts commonly incorporate a force majeure clause to address these scenarios, absolving parties of their contractual obligations. This clause mirrors the Doctrine of Frustration and is typically interpreted in alignment with either the doctrine of frustration or section 56 of the Indian Contract Act, of 1872. 

Key components of a force majeure clause include:

• The occurrence of an event that renders contract performance impossible. 
• The inevitability of the event.
• The event's unpredictability and enforceability. 
• The event is beyond the control of either party and arises as a supervening act.
• Satisfaction of all prerequisites for invoking the force majeure clause. 
• The party invoking the force majeure clause must take measures to minimize the other party’s loss. 

In the absence of a force majeure clause, parties may turn the doctrine of frustration under section 56 of the act. In such instances, the principle of restitution applies, mandating the return of any benefit received under the frustrated contract. However, when a force majeure clause exists, its specified consequences are adhered to.

DIFFERENCE BETWEEN BREACH OF CONTRACT AND FRUSTRATION OF CONTRACT

INITIAL AND SUBSEQUENT IMPOSSIBILITY 

Initial Impossibility: The fundamental aim of entering into any contract is for the parties involved to uphold their respective promises. Contracts are typically not entered into if they are impossible to fulfil. Initial impossibility refers to scenarios where the contract was inherently impossible to fulfil from the very beginning. 

Example: If a married man knowingly promises to marry again, despite the impossibility, he is obliged to compensate the other party.

Subsequent Impossibility: It applies to scenarios where a contract was initially feasible to execute upon its formation. However, unforeseen events subsequently render the performance impossible or unlawful, thereby absolving the party from fulfilling their obligations. 

Example: If A contracts with B to deliver a specific item by a certain date, however, before the delivery date arrives, the item is destroyed in a fire that was not caused by either party’s actions. 

CONCLUSION

In conclusion, contracts are governed by the Indian Contract Act, of 1872, which establishes mutual rights and obligations between the parties, necessitating free consent, lawful consideration and a lawful object for the validity of a contract. The Doctrine of Frustration, enshrined in Section 56 of the act, addresses situations where unforeseen events make contract performance impossible or impracticable. Its evolution from Roman to English law and integration into Indian Jurisprudence highlights its significance in modern legal frameworks. ‘

Legal precedents such as Satyabharta Ghose V. Mugneeram Bangur and Co. (1954), underscore the doctrine’s applicability in cases of supervening impossibility. The interplay between the Doctrine of Frustration and the Force Majeure Clause exemplifies the adaptability of contract law to unforeseen circumstances, ensuring fairness and equity in commercial transactions. Distinguishing between initial and subsequent impossibility further refines its applications, recognizing inherent impossibility versus unforeseen disruptions over time. 

In essence, while contracts provide a framework for legal relationships, the Doctrine of Frustration acts as a safeguard, mitigating the impact of external factors on contractual obligations and fostering stability in commercial dealings.