ATIN KUMAR DAS, LL.M III SEMESTER, NATIONAL LAW INSTITUTE UNIVERSITY, BHOPAL

INTRODUCTION

 

Section 56 of the Indian Contract Act, 1872 provides:

 

AGREEMENT TO DO IMPOSSIBLE ACT – An agreement to do an act impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful – A contract to do an act which, after the contract is made, becomes impossible, or, by reason of same event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

v  For an example: A agrees with B to discover treasure by magic. The agreement is void.

v  A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.

 

HISTORICAL OVERVIEW

 

In the seventeenth century the judges in Paradine vs. Jane[1] laid down what is sometimes called the rule as to absolute contracts. It amounts to the law casts a duty upon a man which, through no fault of his, he is unable to perform, he is excused for non performance; but if he binds himself by contract absolutely to do a thing, he cannot escape liability for damages for proof that as events turned out performance is furtile or even impossible. It was held that “when the party by his own contracts creates a duty, 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; though the land be surrounded or gained by the seas, or made barren by wildfire, yet the lessor will have his whole rent.

If a contract is made, and for whatever reason it later becomes impossible to for one party to perform their obligations, then we need to think about frustration. Be careful to note that frustration is about subsequent impossibility; if a contract was impossible to perform right from the outset, then the issue is one of mistake and not frustration!

You should first establish whether or not the particular situation in question has been expressly provided for in the contract. Such a provision is called a force majeure clause. For example, a contract for the sale of some goods being imported by sea might say, “in the event of the cargo being lost at sea, this is what happens…”. A force majeure clause is only valid if the provision is full and complete – that is, it has to be specific about what risk is being provided for.[2]

 The doctrine of frustration, the frustration is divided into two important parts:

v  Initial impossibility: Section 56 first lays down the simple principal that “an agreement to do an act impossible in itself is void.” For example, an agreement to discover a treasure by magic, being impossible of performance, is void.

 

v  Subsequent Impossibility: Section 56 lays down the effect of subsequent impossibility of performance. Sometimes the performance of a contract is quite possible when it is made by the parties. But some event subsequently happens which renders its performance impossible or unlawful. In either case the contract becomes void. Where, for example, after making a contract of marriage, one of the parties goes mad, or where a contract is made for the import of goods and the import is thereafter forbidden by a government order.In this context there was a famous case of Chamanlal Jain vs. Arun Kumar Jain[3], in this case the court held that where a singer contracts to sing and becomes too ill to do so, the contract in each case becomes void.

 

 

 

 

MEANING OF FRUSTRATION

 

To understand the concept of frustration first we analyze one famous case decided by BLACKBURN J in the case of Taylor vs. Caldwell[4], “rule is only applicable when the contract is positive and absolute, and not subject to any condition either expressed or implied”. The fact of the case is that the defendants had agreed to let the plaintiffs the use of 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.[5]

 

The plaintiff 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 case, before breach, performance becomes impossible from the perishing of thing without default of the contractor.”

 

Thus, the doctrine of frustration comes into play in two types of situation, first, where the performance is physically cut off, and, second, where the object has failed. The Supreme Court of India has held that Section 56 will apply to both kinds of frustration. Referring to the section, B. K. MUKHERJEA J of the Supreme Court observed in Satyabrata Ghose vs. Mugneeram Bangur & Co.[6] as follows:

 

This much is clear that the word “impossible” has not been used here 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. And if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do.

THEORIES OF FRUSTRATION

The theories of frustration are divided into two important parts:

v  Theory of Implied Term

 

The theory of implied term was explained by LORD LOREBURN in F.A. Tamplin co ltd vs. Anglo – Mexican Petroleum Products co ltd[7] in these words: A court can ought to examine the contract and the circumstances in which it was made, not of course to vary, but to explain it, in order to see whether or not from the nature of it the parties must have made their bargain on the footing that a particular thing or state of things would continue to exist. And if they must have done so, then a term to that effect will be implied, though it be not expressed in the contract.

 

In another case LORD SUMNER observed in Joseph Constantine steamship Line Ltd VS. Imperial smelting corpn Ltd[8] in this case Lordship observed that the meaning of the frustration of contract and its application to the actual occurrences, the court has to decide, not what the parties actually intended but what as reasonable men they should have intended.

 

v  Just and Reasonable Solution

 

According to DENNING LJ attempted to explain the doctrine of frustration on a different basis in the case of British Movietonews Ltd vs. District Cinemas Ltd[9]. He said the court really exercises a qualifying power a power to qualify the absolute, literal or wide terms of the contracts in order to do what is just and reasonable in the new situation.

 

 

 

 

Theories not Applicable in India

 

Referring to the theories B.K. MUKHERJEA J of the supreme court said in Satyabrata case[10], in India the only doctrine that we have to go by is that of supervening impossibility or illegality as laid down in section 56 of the contract Act, taking the word ‘impossible’ in its practical and not literal sense. Section 56 does not leave the matter to be determined according to the intention of the parties.

 

Commercial Hardship

The alteration of circumstances must be “such as to upset altogether the purpose of the contract. Some delay or some change is very common in all human affairs, and it cannot be supposed that any bargain has been made on the tacit condition that such a thing will not happen in any degree. It is observed by Lord LOREBURN in F.A. Tamplin steamship Co. v Anglo Mexican Petroleum Products[11]. A situation like this has been described as one of commercial hardship, which may make the performance unprofitable or more expensive or dilatory, but is not sufficient to excuse performance, for it does “not bring about a fundamentally different situation such as to frustrate the venture.” The doctrine of frustration or impossibility does not apply to a situation so as to excuse performance. “Where performance is not practically cut off, but only rendered more difficult or costly. Such cases may not fall within the purview of section 56 and this is amply shown by the Privy Council decision in Harnandrai Fulchand v. Pragdas[12],in this case the privy council held that the adventure was not frustrated as the stipulation as to delivery did not make delivery by the mills a condition precedent. It was a simple case of breach.

 

 

 

 

Review of Literature

v  Anson’s discuss the comparison and development of doctrine of frustration in England as well as in India, in his book “Law of Contract”.

v  Athiyah P.S.,explain the historical development of frustration of contract in his book “Law of Contract”

v  Chesire, Fifoot and Furmston Michael, discuss the position of doctrine of frustration in England, in his book “Law of Contract”.

v  Treitel G.H., discuss the effects of frustration with English and Indian cases, in his book “The Law of Contract”.

v  Doughton Davis and Davis Martin, explain the failure of frustration of contract, in his book “Contract Law”.

v  Singh Avtar, discuss the Indian position of frustration of contract with recent cases, in his book “Contract and Specific Relief”. 

 

Formulation of Problem:

The Doctrine Of Frustration Under The Indian Contract Act?

 

 

Statement of problem

In the research researcher tries to find out how the provisions of Indian Contract Act is different from the English law with some recent judicial pronouncement.

 

 

Aims and Objectives:

The main aims of the project are as follows:

1.       The paper essentially seeks to outline the relevant contract provisions pertaining to frustration.

2.       To identify or examine the Indian law comparison with English law.

3.       To examine the current status of frustration in the eye of Law of contract with some recent cases.

Scope, focus and limitations of the project: (Hypothesis)

v  To analyze the provisions of Indian Contract Act, 1872.

v  To analyze the conflict between the cases of Indian law and English law.

v  To analyze the recent cases and articles on Doctrine of frustration.

v  To Analyze Recent Judicial pronouncements.

 

 

Sources of data:

The researcher has mainly relied upon secondary sources such as books and articles.

 

 

Methods of analysis:

This project uses both the analytical and descriptive methods. The Analytical method is used widely throughout this project while examining the role of the state, its various mechanisms (legislature, judiciary, executive). Descriptive method is also used in this project to give illustrations and instances of subjugation being perpetuated by several books and articles.

 

 

References and style of footnoting:

All references are cited and a uniform style of footnoting has been followed throughout the project, acknowledging the respective sources that have been used.

 

 

 

 

 

 

 

 

 

 

CHAPTERISATION

 

CHAPTER I

 

Comparative Study of Doctrine of Frustration

Contract frustration in English law

If a contract is made, and for whatever reason it later becomes impossible to for one party to perform their obligations, then we need to think about frustration. Be careful to note that frustration is about subsequent impossibility; if a contract was impossible to perform right from the outset, then the issue is one of mistake and not frustration!

You should first establish whether or not the particular situation in question has been expressly provided for in the contract. Such a provision is called a force majeure clause. For example, a contract for the sale of some goods being imported by sea might say, “in the event of the cargo being lost at sea, this is what happens…”.[13] A force majeure clause is only valid if the provision is full and complete – that is, it has to be specific about what risk is being provided for.

If there isn’t a force majeure clause, then we need to look at the three sorts of frustration established in case law:

v  Supervening illegality.  Since the contract was made, a new law has made it illegal to carry it out! The best example is Avery v Bowden [14], in which a ship was supposed to pick up some cargo at Odessa. With the outbreak of the Crimean War, the government made it illegal to load cargo at an enemy port, so the ship couldn’t perform its contract without breaking the law. The contract was therefore frustrated.

v  Further performance rendered impossible. Two key reasons:

v  Destruction of the subject matter: e.g. I agree to sell you my house, but then my house burns down.

v  The non-availability of a party, due to death, illness, or other exceptional circumstances. E.g. you hire a famous band to play at a party, but the lead singer is taken ill and can’t perform.[15]

v  The nature of the contractual obligations becomes significantly different from what was agreed:

v  The non-occurrence of an event which formed the basis of the contract. A slightly bizarre example: in 1901, a coronation procession was organized for King Edward VIII, but it had to be cancelled at the last minute because the King was ill. Someone had hired a flat for the day from which to view the procession. He refused to pay the day’s rent, because he said the contract had been frustrated. The court said he was right: the whole point of hiring the room was to watch the procession; if the procession wasn’t going to happen, then there was no benefit to be gained from hiring the room!

v  Government intervention of some sort, which makes it unreasonable for the parties to carry on with the contract.[16]

There are some points to be careful of here:

v  A contract isn’t frustrated just because it’s become more difficult or expensive to perform. That’s a risk that you take when you enter into a contract. We’re looking for some sort of physical impossibility.

v  The supervening event must be beyond the control of both parties.

v  The event must be unforeseeable by both parties.

 

The legal effects of frustration

v  At common law: the contract is automatically brought to an end at the time of the frustrating event.

v  The relevant statute is the Law Reform (Frustrated Contracts) Act 1943. It only applies where there’s no express provision in the contract for what happens if it’s frustrated. The key provisions are:

v  If some sort of pre-payment or deposit has been made, the buyer can get that pre-payment back, minus any expenses incurred by the seller.

v  If the contract has already been partly performed, it’s a bit more complicated. You have to pay for any benefit you’ve already received. Suppose the contract is for a complete garden makeover, and at the time of the frustrating event, the contractor has already installed a swimming pool in your garden. You have to compensate the gardener for the expenses he’s incurred in installing your pool.[17]

 

 

Doctrine of frustration under Indian Contract Act

 

According to Section 56, an agreement to do an act impossible in itself is void (for example, an agreement to discover treasure by magic). Supervening impossibility or illegality refers to the intrusion or occurrence of an unexpected event or change of circumstances beyond the contemplation of the parties; such event or change of circumstances must be so fundamental as to be regarded by law as striking at the root of contract as a whole or the basis of the contract no longer exists.In this regard there was a famous case of Syed khurseed Ali vs. State of orissa[18], in this case the hon’ble court held that Doctrine of frustration under section 56 is attracted in the event of a subsequent unforeseen event or contingency for which, neither of the parties is responsible neither parties is responsible.[19]

Subsequent impossibility in the UK is referred to as Doctrine of Frustration. A contract is deemed to have become impossible of performance and, thus, void under the following circumstances:
a) destruction of the subject matter of the contract;

b) by death or permanent incapacity of the parties (like insanity) where the contract is personal in nature;
c) supervening impossibility or illegality, involving actions contrary to law or public policy;
d) outbreak of war, war restrictions (avoidance of trading with alien enemy, and so on);
e) imposition of government restriction or orders or acquisition by government; and
f) non-existence or non-occurrence of a particular state of things. Apart from the above circumstances, impossibility does not discharge a person from the contract. He who agrees to do an act should do it unless impossibility arises in any of the ways mentioned above.[20] .

Section 56 of the Indian Contract Act, 1872 stipulates:

"Agreement to do impossible act: An agreement to do an act impossible in itself is void.
Contract to do act afterwards becoming impossible or unlawful: 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. Compensation for loss through non-performance of act known to be impossible or unlawful: Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise." Frustration may be defined as the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both striking at the root of the agreement, and as entirely beyond what was contemplated by the parties when they entered into the agreement. If an event which could not be foreseen by both parties supervenes, frustration would apply. Section 56 of the Indian Contract Act, 1872 does not deal with the cases in which an event, the parties took it for granted will never happen does happen and makes the performance of the contract impossible. If it be held that this Section is exhaustive, no relief can be granted to any of the parties on the happening of such an event, but this would be against the very principle underlying the Section If the inability to perform the contract is due to the fault of one of the parties, he cannot successfully plead frustration. It is also true that if the parties expressly contract with reference to the occurrence of the supervening events, frustration is inapplicable. But there is another type of case outside these rules. The parties when they made the contract, may have foreseen the supervening event as probable, but may have made no express provision with respect to it. Here, if such event occurs, frustration can be pleaded.[21]

IMPOSSIBILITY OF PERFORMANCE AMOUNTS TO FRUSTRATION

A man can be expected to do what is humanly possible but he cannot be expected morally or legally to do what is not physically possible. It cannot be disputed that when a thing is beyond the human control it cannot be expected from the party which had undertaken to do the work to suffer the consequences of not proceeding with the contract work and in such a situation both the parties are relieved from their contractual responsibilities. [22]

The word "impossible" in Section 56 of the Indian Contract Act, 1872 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 unless from the point of view of the object and which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do. If the performance of a contract becomes impracticable or useless having regard to the object and purpose the parties had in view then it must be held that the performance of the contract has become impossible. But the supervening event should take away the basis of the contract and it should be of such a character that it strikes at the root of the contract. The essential principles on which the doctrine of frustration is based is the impossibility, or, rather, the impracticability in law or fact of the performance of a contract brought about by an unforeseen or unforeseeable sweeping change in the circumstances intervening after the contract was made. In other words, while the contract was properly entered into in the context of certain circumstances which existed at the time it fell to be made, the situation becomes so radically changed subsequently that the very foundation which subsisted underneath the contract as it were gets shaken, nay, the change of circumstances is so fundamental that it strikes at the very root of the contract, then the principle of frustration steps in and the parties are excused from or relieved of the responsibility of performing the contract which otherwise lay upon them. Whether the contract has become impossible of performance can be determined with reference to the terms of the contract and the supervening circumstances. If the supervening circumstances are such which were within the contemplation of the parties at the time of the contract or which could reasonably be within their contemplation, it could take the case out of the purview.[23]

 `

 

 

CHAPTER II

 

Specific Grounds of Frustration

 

“The principle of frustration of contract, or of impossibility of performance is applicable to a greater variety of contracts. It is therefore, not possible to lay down an exhaustive list of situations in which the doctrine is going to be applied so as to excuse performance. Yet the following grounds of frustration have become well established.

v  Destruction of subject Matter

The doctrine of impossibility applies with full force where the actual and specific subject matter of the contract has ceased to exist. On this point in India there was a recent case of Supreme Court of india Markfed Vanaspati & Allied Industries v. Unioin of India [24]in this case the Supreme Court held that Force Majeure clause can be invoked when it pertains to the contractual obligation that has purportedly become impossible of performance.

 

In other case of W.B. Khadi and Village Industries Board v. Sagore Banerjee[25],in this case the Supreme Court held that where tenanted premises comprised land and building, the court said that once the structure was completely destroyed, the tenancy ceased. No right was available to the tenant to apply for possession if the landlord re constructed the premises.[26]

 

In another famous case of Ghee seng Motor v. Ling[27], in this case there was a contract between carriage of goods by sea, a vessel sank with cargo. There was evidence to show that the vessel had started taking in water. When the vessel was discovered to be tilting, the water in the bilge was pumped out but no action was taken to go to the nearest port to have the vessel berthed and the condition of the vessel checked. The court said that the sinking of the vessel could not be described as an inevitable accident. Reasonable care had not been taken to prevent the sinking of the vessel. The defence of frustration failed.

 

v  Death or Incapacity of party

The whole contract is based on the assumption of the continuance of life, and on the conditions which existed at the time. That assumption is made by both; it is really the foundation of the contract. In this regard there was a famous English case Robinson v. Davison[28], there was a contract between the pianist and sponsor that she play piano at a concert. On the morning of the day she informed the plaintiff that she was too ill to attend the concert that result plaintiff lost a sum of money. The plaintiff’s action for breach of contract failed. The court said that under the circumstances she was not merely excused from playing, but she was also not at liberty to play, if she was unfit to do so.

In India in this regard there was a recent case of N. Chandrasekhar v T.N. Cricket Assn. [29]

In this court held that a one day international match could not be held because of rainfall, actual buyers of tickets only were allowed refund to the extent of 1/3 of the ticket money.

 

 

v  Government, Administrative or Legislative Intervention

A contract will be dissolved when legislative or administrative intervention has so directly operated upon the fulfillment of the contract for a specific work as to transform the contemplated conditions of performance. In the case of Naihati Jute Mills v. Khyaliram Jagannath[30]the fact of the case is that the buyer applied for licence of import but the rules had been changed and to obtain a licence he must show that he had used an equal quantity of Indian jute. Thus the buyer failed to supply the licence and was sued for breach. He pleaded frustration caused by the change in Government policy. But he was held liable. SHELAT J pointed out that if the government had completely forbidden imports, section 56 would have applied. But the policy of the government was that the licensing authority would scrutinize the case of the each applicant on its own merits.

v  Intervention of War

Intervention of war or warlike conditions in the performance of a contract has often created difficult question. In a case before the Patna High Court (A.F. Ferguson v. Lalit Mohan Ghose)[31], performance of a contract of life insurance had become impossible because the insurer was a German company and on the outbreak of war its business was closed by the Government of India and the disposal of pending policies was handed over to a the money paid by him under the policy.

 

 

 

 

 

 

 

CHAPTER III

 

Effects of Frustration

“It is well settled that if and when there is frustration the dissolution of the contract occurs automatically. It does not depend, as does rescission of a contract, on the ground of repudiation or breach, or on the choice or election of either party.

v  Frustration should not be self induced

Explaining the principle that frustration should not be self induced, Lord WRIGHT said in Maritime National Fish Ltd vs. Ocean Trawlers Ltd[32]in this case the appellants hired the respondents trawler, called “st. Cuthbert” to be employed in fishing industry only. Both parties knew that the trawler could be used for that purpose only under a licence from the Canadian government. The appellants were using five trawlers and, therefore, applied for five licences. Only three were granted and the government asked the appellants to name three trawlers and they named trawlers other than the st. Cuthbert. They then repudiated the charter and pleaded frustration in response to the respondent’s action for the hire.

The Judicial Committee of the Privy Council held that the frustration in this case was the result of the appellants own choice of excluding the respondents ship from the licence and, therefore they were not discharged from the contract.[33]

v  Frustration operates Automatically

Frustration operates automatically to discharge the contract irrespective of the individuals concerned, their temperaments and failings, their interest and circumstances. The legal effect of frustration does not depend on their intention or their opinions, or even knowledge, as to the event. The belief, knowledge and intention of the paties are evidence, but evidence only on which the court has to form its conclusion whether the changed circumstances destroyed altogether the basis of the adventure and its underlying object. In the case of Bombay Dyeing & Mfg v State of Bombay[34] in this case Supreme Court has laid down that frustration puts an end to the liability to perform the contract. It does not exterminate the contract for all purposes. For example, whether the doctrine of frustration would apply or not has to be decided within the framework of the contract and, if the contract contains an arbitration clause, the arbitrator could decide the matter of frustration.[35]

Act of God

The act of god is one of the important effect in the doctrine of frustration. The act of god we find in the law of tort but now we are discussing the expression in doctrine of frustration. Sir EDWARD COKE was the first who used the expression Act of God in the law. According to him the act of god means storms, lightning or etc are the part of Act of God and the most important point is that which is the intervention could not happen by the human being. In this regard there was a famous case called Shelley’s case, in this case the hon’ble court held that Act of God means storms, lightning or etc are act of god as they could not happen by the intervention of man.

Law Reform (Frustrated Contract) Act 1943

Any other contracts for the sale or fro the sale and delivery of specific goods, where the contract is frustrated by reason of the fact that the goods have perished.

In the first type of contract of sale excluded from the Act of 1943, the risk has not passed to the buyer, while in the second type it has so passed. It thus seems that all contracts for the sale of specific goods are kept outside the operation of that Act, Whether risk has passed or not, provided only that the cause of frustration is the perishing of the goods. But if the goods are not specific or if the frustration is due to some other reason, such as requisitioninig, the act of 1943 applies.

 

 

CONCLUSION

The Doctrine of Frustration The doctrine of frustration describes a situation where after the conclusion of a contract, unforeseeable events occur, rendering the performance of that contract impossible. Under that doctrine, courts have the power to discharge any contract that falls within its scope as "frustrated". In the present case, our task is to examine whether the agreement between Jerry and Prudence is valid, or something "radically different" from that which was originally agreed, hence a frustrated contract. Courts nowadays seem to be reluctant when it comes to discharging contracts as frustrated. The current policy on such matters is to prevent parties from using the doctrine as a defence protecting them from a bad bargain. Another parameter is an expected foreseeability of events occurring after the formation of a contract, events which would have a negative impact on its validity. This is why we should eliminate such possibilities before reaching a "verdict"

 

 

BIBLIOGRAPHY

 

 Beatson J, Anson’s, “Law of Contract” Oxford University Press, Edition: XXVIII 2006.

Atiyah P.S., “Law of Contract” Clarendon Press- - Oxford, Edition: II 1995.

Davis Martin, “Principles of Contract”, Cavendish Publishing Ltd., Edition: III 1999.

Stone Richard, “Principles of Contract”, Cavendish Publishing Ltd, Edition: II 1995.

Chesire, Fifoot and Furmston Michael, “Law of Contract”, Oxford Publication, Edition: XV 2006.

Treitel G.H., “The Law of Contract”, Oxford University of Press, Edition: VI 2006.

Singh Avtar, “Law of Contract”, Eastern Book House Lucknow, Edition: X 2008.

 

 

WEBLIOGRAPHY

http://www.webster.com

http://www.wikipedia.org

http://www.docstoc.com.

http://www.ssrn.com.

http://www.legalserviceindia.com

http://www.manupatra.com

http://www.lexisnexis.com.

http://www.webwilson.com

http://www.indiatogether.com

http://www.ezineartcle.com

http://www.ebcwebstore.com

http://www.heinonline.com

http://www.legalpundit.com

http://www.indiankanoon.com

 

 

 

 

 

 

Tags :Corporate Law