Frustration of Contract

ORIGIN OF THE DOCTRINE OF FRUSTRAION OF CONTRACT

Although the origin of this doctrine has been accredited to the English rule of subsequent impossibility, not being a valid defence to discharge of party from contract, in reality it owes its origin to Roman law, wherein either due to destruction of the object or the purpose of the contract becoming unattainable, the parties were relieved from their contractual obligations.  

The English rule, not accepting subsequent impossibility as a valid defence, led to many judgements which were highly debated; like the case wherein J was sued by P due to non-payment of rent, however the area in which the property was situated came under the area invaded by the German prince, making it impossible to make profits which would have been used to pay the rent. However, the defence of subsequent impossibility was not held to be  valid and the contractual obligation was given paramount importance necessitating it to be performed. Even when the defendant made a very strong case the judge did not side with them[1]. In today’s time, is a ground for and if this case was contested under , the doctrine of frustration would have led to a more just judgement, as the contract couldn’t be performed due to no fault of the defendant.

INDIAN CONTRACT ACT 1872

Section 56 of the Indian Contract Act: As with most laws in India, this Act is influenced by English laws/doctrines (The Act was passed when India was under colonial rule).

Agreement to do an impossible act: An agreement to do an act impossible in itself is void.

Contract to perform an 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.[2]

Compensation for loss through non-performance of act known to be impossible or unlawful: Where one person has promised to be 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 of Contract

THEORIES OF FRUSTRATION

Two of the most well-known theories putting forward the justification for doctrine of frustration are:

THEORY OF IMPLIED TERM

According to this theory the contract cannot be discharged, because it is implied by the party while entering into it, that it will no longer be binding if the frustration even occurs. In the words of Lord Loreburn, “It is my opinion the true principle, for no courts have absolving power but it can infer from the nature of the contract and surrounding circumstances that a condition which was not expressed was a foundation on which the parties contracted……were altered conditions such that, had they thought of them , they would have taken their chances of them”[3].

JUST REASONABLE SOLUTION

According to this perspective, a party, or for that matter, their advocate, cannot be expected to have a foresight of a prophet, or, any party could be blamed for not foreseeing  an event which a just, reasonable man wouldn’t have been able to anticipate and  to make them comply to the contractual obligations  would be unjust, thus arises the need of the doctrine of frustration of contract.[5]

INDIAN PERSPECTIVE

Indian Contract Act holds a paramount position in deciding cases. The doctrine of supervening impossibility or illegality as enshrined in Section 56 of Indian contract act, taking the term impossible in practical rather than literal sense, it must be borne in mind, however that, section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties.[6]

SPECIFIC GROUNDS OF FRUSTRATION

The law is most certainly in the process of constant and gradual evolution and thus the principle of frustration of contract is nowadays applicable to more and more contracts making it impossible to create an inventory of situations restricting its ambit in which the doctrine would be applicable so as to excuse performance[7]. However, there is consensus about the following grounds for its applicability.

Destruction of the subject matter
  • The doctrine of frustration applies with fervour where the actual or specific matter does not exist anymore.[8]

Example – If the music hall which was promised to be let out was destroyed it will lead to the application of frustration of contract.[9]

  • The doctrine would be applicable even if though the subject-matter is intact is not available to the contracting parties.

Example – a ship was chartered from April to April of next year but was requisitioned in September before it could have been delivered the house of lords held that the charter party had frustrated.[10]

EXCEPTIONS
  • If despite the subject matter going out of their hands, the party can still perform the contract, it will not lead to the applicability of the doctrine.

Example- If a ship was chartered for 5 years and it was requisitioned in the 3rd year where in the government was paying more money than the freight agreed upon parties the contract was not held to be frustrated.[11]

  • Reasonable care, if not taken, resulting in the destruction of the subject-matter, it will not lead to the application of the doctrine.

Example-If the ship continued on course despite evidence suggesting that the vessel had stared to sink by taking in water leading to it getting tilted, and eventually if the ship sinks leading to destruction of goods on it, the doctrine would not be applicable as reasonable care was not taken.[12]

Frustration of Contract

CHANGE OF CIRCUMSTANCES

If there was a completely unanticipated change in the circumstances not have been brought due to the fault of either party, having affected the performance of the contract to an extent making it virtually impossible or extremely difficult or hazardous, the courts will not enforce the contract.[13]

Example-Thus if because of bad weather and labour strikes it took 22 months to complete a construction assignment which was to be completed in 8 months and costed much more it would lead to frustration of contract.[14]

If there is very high escalation of prices, such as 400 per cent owing to war, with respect to original prices on which certain transformers were undertaken the contract was held to be frustrated[15].

EXCEPTIONS

Where if the parties could have anticipated the alteration of circumstances, they can hardly complain and the doctrine will not be applicable[16]. Like highway department was not absolved from contractual obligation for an accident on account of heavy rains and flood, evidence suggesting that there was no preventive measure taken.

NON-OCCURRENCE OF CONTEMPLATED EVENT

Sometimes due to non-occurrence, an event anticipated by both of the which formed the backbone of the contract, by being the main objective to enter into the contract, then though the contract remains entirely possible, the value of performance has been destroyed leading to the applicability of the doctrine of frustration.

Example-the the postponement of proposed coronation procession will lead to frustration of contract to hire a room to view it s viewing it formed the foundation of the contract.[17]

EXCEPTION

However, if the event by evidence indicated that the event did not form the foundation of contract then the doctrine will not be applicable.

Example-Lord justice Vaughan William said that if for example, a person takes a break to have a vacation in Epsom to see races there, but if for any reason the races are postponed, but he would not be relived of his bargain because the occurrence of the event does not form the foundation of the contract.[18]

DEATH AND OF PARTY

If the performance of the contract depends upon existence of a given person, if that person perishes or becomes too ill to perform it, the party can be excused on the ground of frustration.

Example- So if the plaintiff lost a large sum of money due to postponement of concert as the defendants wife was too ill to perform on the specified day, formulating that if the contract require personal performance by the promisor, her death or incapacity puts an end to the contract on the grounds of frustration.[19]

GOVERNMENT, ADMINISTRATIVE OR LEGISLATIVE INTERVENTION

  • Parties will be discharged of their contractual obligation if a legislative or administrative intervention is in disconsolance with the performance of the contract even thought this change was not anticipated.[20]

Example – By a contract made, a firm of contractors contracted with water board to construct a reservoir to be completed within six months. but by a notice issued under defence of realms act the contractors were required to stop their work, they were not held liable for breach of contract as the doctrine of frustration was applicable.[21]

  • When the intervention makes the performance of the contract unlawful, the courts will have no choice but to dissolve the contractual obligation.

Example-X had a license to import chicory for manufacturing coffee powder. The condition of the licence was that he would use chicory only in his factory. He agreed to sell the whole ship hold to Y. though before the arrival, the sale of such imported goods was banned, the doctrine of frustration was applicable leading to dissolution of the contract.[22]

Exception

If though the intervention by legislature or administration is of a temporary nature and does not uproot the foundation of the contract, the doctrine of frustration will not be applicable thereby not relieving the party from their contractual obligation.[23]

Frustration of Contract

INTERVENTION OF WAR

War or warlike situations not only create major impediments in performance of contract but can also lead to the dissolution of the contract.

Example- In a case before Patna high court performance of a contract of life insurance become impossible because the insurer company was German and because of outbreak of war its business was closed by the government of India. The contract was declared void on grounds of frustration and the assured was allowed to recover money.[24]

Exceptions

  • 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.[25]
  • When there is more than one way of performing the contract, and war cuts off one of them, the party is still bound to perform by the other way, however inconvenient or expensive may it be (like taking the goods via a longer route of cape of good hope when Suez canal was closed)[26].

EFFECTS OF FRUSTRATION OF CONTRACT

Frustration should not be self-induced

Explaining the doctrine, Lord Wright said the essence of frustration is that it should not be  due to the act or election of the party. [27]

Similarly, Lord Summer said, “I think it is now well established that the principle of frustration assumes that the frustration arises without blame or fault on either side. Reliance cannot be placed on a self-induced frustration”.[28]

Example X employed Y’s trawler called St. Cuthbert  to be employed in the fishing industry only both the parties knew that the trawler could only be used under a licence from the Canadian government X used 5 trawlers thus needed 5 licences though only 3 were granted and government asked X to name 3 trawlers and X did not name St Cuthbert , they repudiated the charter and pleaded frustration. The committee of the privy council held that the doctrine of frustration cannot be applied as X chose to exclude ST Cuthbert from getting the licence and therefore will not be discarded from contract.[29]

Frustration operates Automatically

Frustration will operate automatically. Discharge of the contract irrespective of the individuals concerned, their temperament and failings, their interest and circumstances, it does not depend on their intention or their opinion or knowledge as to the event.[30]

CONCLUSION

Occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law as the root of the agreement, and as entirely beyond what was contemplated by the parties when they entered into contract. [31] The doctrine of frustration comes into picture when either the performance is physically cut off or the object has failed leading in both the cases to contract to become void , this doctrine has evolved like most laws but retains in itself the essence to provide justice.


[1] Paradine v Jane [1647] EWHC KB J5
[2] INDIAN CONTRACT ACT 1872, http://comtax.up.nic.in/Miscellaneous%20Act/the-indian-contract-act-1872.pdf
[3] Templin Steamship Co Ltd v Anglo-Mexican Petroleum Products Co Ltd, (1916) 2 AC 397,408.
[5] British Movietonews Ltd v London & District Cinema Ltd, 1952 AC 166 (HL)
[6] Satyabrata Ghose v Mugneeram Bangur &Co 1942 AC 154 (HL)
[7] Corbin, Arthur L. “Recent Developments in the Law of Contracts.” Harvard Law Review, vol. 50, no. 3, 1937, pp. 449–475. JSTOR, www.jstor.org/stable/1333316. Accessed 12 Jan. 2020.
[8] Marked Vanaspati & allied industries v Union of India, (2007) SSC 679.
[9] Taylor v Caldwell, (1863) 3 B&S 826: 122 ER 309.
[10] Bank Line Ltd v Arthur Capel & Co, 1919 AC 435 (HL).
[11] Trampling S.S CO Ltd v Anglo-Mexican Petroleum Products Co Ltd, (1916) 2 AC 397 (HL).
[12] Turner v Goldsmith, (1891) 1 QB 544 (CA).
[13] Pameshwari Das Mehra v Ram Chand Om Prakash, AIR 1952 Punj 34,38.
[14] Davis Contractors Ltd v Fareham Urban Distt Council, AC 696,715:(1956) 3 WLR 37 (HL).
[15] Easun Engg Co Ltd v Fertilisers and Chemicals Travancore Ltd, AIR 1991 Mad 158.
[16] Vedantacharya v Highway Deptt by South Arcot, (1987) 3 SCC 400.
[17] Krell v Henry, (1903) 2 KB 740 (CA).
[18] Herne Bay Steam Boat Co v Hutton, (1903) 2 KB 683 (CA).
[19] Robinson v Davison, (1871) LR 6 Exch, 269: 40 LJ 172: 24 LT 755: (1861-73) ALL ER Rep 699.
[20] Storey v Fulham Steel Works Co Ltd, (1907) 24 TLR 89 (CA).
[21] Metropolitan Water Board v Dick Kerr & Co Ltd, 1918 AC 119 (HL).
[22] Boothalinga Agencies v V.T.C Poriaswami Nadar, AIR 1969 SC 110: (1969) 1 SCR 65.
[23] Satyabrata Ghose v Mugneeram Bangur & Co,  AIR 1954 SC 44: 1954 SCR 310.
[24] A.F. Ferguson & Co v Lalit Mohan Ghose, AIR 1954 Pat 596.
[25] Gambhirmull Mahabirprasad v Indian Bank Ltd, AIR 1963 Cal 163.
[26] Tsakiorglou & Co Ltd v Noblee & Thorl GMBH, 1962 AC 93: (1961) 2 WLR 633.
[27] Maritime National Fish Ltd v Ocean Trawlers Ltd 1935 AC 524 (PC)
[28] Sushila Devi v Hari Singh (1971) 2 scc 288: AIR 1971 SC 1956
[29] Maritime National Fish Ltd v Ocean Trawlers Ltd 1935 AC 524 (PC)
[30] Davis Contractors Ltd v Fareham Urban Distt Council, 1956 ac 696,715: (1956) 3 WLR 37 (HL)
[31] Cricklewood Property & Investment Trust Ltd v Leighton’s Investment Trust Ltd 1945 AC 221 (HL)

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