contract

govind kumar (Querist) 11 March 2011 This query is : Resolved
Essay on The Doctrine of frustration

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Mamta (Expert) 11 March 2011
Doctrine of frustration

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.

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. .
FRUSTRATION - MEANING, SCOPE AND APPLICABILITY

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.(16)

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.(17)

LORD RADCLIFF has succinctly summarised the law relating to frustration of contracts as under:

"....frustration occurs whenever the law recognises that without default of either party, a contractual obligation has become inapplicable of being performed because the circumstances in which the performance is called for would render it a thing radically different from that which was undertaken by the contract. '....It was not this that I promised to do.' There is, however, no uncertainty as to the materials upon which the Court must proceed. 'The data for decision, on the one hand, the terms and conditions of the contract, read in the light of the then circumstances and, on the other hand, the events which have occurred.' In the nature of thing there is often no need for any elaborate enquiry. The Court must act upon a general impression of what its rule requires. It is for that reason that special importance is necessarily attached to the occurrence of an unexpected event that, as it were, change the face of the things. But even so, it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play."(18)

LORD RADCLIFF, in the same judgment, further states:

"There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing than that contracted for."(19)

Frustration is a developing concept; like negligence, its categories are never closed but are as wide as the categories of human conduct. Its effect is immediate, automatic, it guillotines a contract without the option of either party which becomes dissolved. If the parties later purport to act under it they are really making a new contract. The Court supplying enlightened common sense to do justice, decides whether the contract is at an end. The doctrine is invented by the Court in order to supplement the defects of the actual contract. The theory of the implied condition has never been acted on by the Court as a ground of decision, but is merely stated as a theoretical explanation.(20)

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.

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. (21)

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.(22)

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.(23)

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.(24)

HAPPENING OF UNPRECEDENTED EVENTS CAUSES FRUSTRATION

To attract the plea of frustration, it must be shown that the situation has changed so drastically and so radically that neither party to the contract could have at all foreseen that because of something happening at another place which may be a foreign country would result in execution of the contract almost as good as an impossibility. The impact which the market receives due to an event happening elsewhere in the guiding factor for determining whether or not frustration has occurred.

Where after the firm price contract for supply of transformers there was a subsequent 400% rise in price of transformer oil due to the war, there was frustration of contract. The abnormal increase in price due to war condition, was an untoward event or change of circumstances which "totally upset the very foundation upon which the parties rested their bargain." Therefore, supplier could be said to be finding itself impossible to supply the transformers which it promised to do.(25)

The parties to an executory contract are often faced, in the course of carrying it out, with a turn of event which they did not at all anticipate - a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like. Yet this does not in itself affect the bargain they have made. If, on the other hand, a consideration of the terms of the contract, in the light of the circums