Incorporated in Frustration of Contract

Introduction

In English Law, it is incorporated in Frustration of Contract and Frustration of purpose under the Doctrine of Frustration. American Law is in the Theory of Impossibility and Impracticability, and under the Indian Legal System, was incorporated under section 56 of the Indian Contract Act 1872.

Frustration, in general meaning, defeated, and it has been widely used in agreements and contracts between parties. Frustration has been used to deal with an unsuccessful transaction that could not be performed for some reason. In contract law doctrine of Frustration has been incorporated as one of the most common issues which have been arrived to deal with failed contracts.

In general, rule parties involved in contracts are liable to perform their parts and anyone breach. Party breaching is liable to compensate for the same, But Section 56 of Indian contract act 1872 is an exception to this general rule and deals with Doctrine of Frustration as being act has not been performed. Under this Doctrine, a promisor is free of any liability under a contract in the event of the breaching of the agreement, and the contract will be deemed to be void.

History

A.   In English Law

The Doctrine of Frustration of contract has borrowed its origin from Roman law. The very first mention was seen in the Roman Contract law in the case of Paradine vs Jane where the parties are discharged because the thing has been destroyed or the purpose of the contract has become impossible to perform.

Facts of the case: Jane was sued for rent by Paradine. The defendant argued that the German Prince had taken the area where the property was situated, therefore he could not use the property to make any profits. He had planned to give the rent out from this property when he would be made a profit from this by using it.

The defence was not held liable, as the obligation under the contract was absolute, with no exception whatsoever. However, the defendant's reason was reasonable and robust. He couldn’t have done anything with the situation- the Judge held that responsibility under the contract should be honoured under all circumstances.

The origin of the Doctrine can be taken back to the Queen's Bench judgment in the case of Taylor v Caldwell in 1863 in England.

The Doctrine of Frustration has evolved as a response to the Doctrine mentioned above. There were so many instances where the contract was impossible to perform through no fault of the defendant, and the strictness of the English law was found to be unhelpful, unjust. Hence an exception for this rule was required. Therefore, incorporated the Doctrine of Frustration in the contract law to remedy the impossible circumstances.

Krell vs Henr: In 1903, when an Englishman Krell leased his apartment in London to C.S Henry for viewing a royal procession, which subsequently got cancelled, Henry negated to pay Krell the rest balance. Krell filed the petition, but the English Court held against him on the ground that the main base of that contract between them was "frustrated". The Court thought if Krell and Henry had foreseen the cancellation of the King's procession, they would not have agreed. It found that the procession was the base of this contract. The English law explained the principle beyond cases where the subject matter of the contract has been destroyed, resulting in performance impossible, to cases where the impossibility of performance follows the finishing of an "express condition or state of things" essential to the contract.

B.    In Indian Law

Major Indian Case Related to Doctrine of Frustration:

Satyabrata Ghose v Mugneeram Bangur and Company & Co

The defendant company have been launched a scheme related to developing the land into a housing colony. The plaintiff has given a plot on the promise of advance payment. The company promised to construct the roads and drains necessary for developing the land, thereby becoming more suitable for building and residential purposes. After completing complete work, the purchaser has to pay the rest amount to complete the conveyance. Meanwhile, the State took a large portion of the land during the Second World War for war purposes. The company tried to revoke the contract on the ground of supervening impossibility.

Held: The Court put away the defendant stating that the ''impossibility'' under Section 56 (Agreement to do the impossible act) doesn’t mean in the literal or physical context. It mentioned changing in circumstances which completely impossible the primary foundation upon which the parties rested their bargain. The requisition order was stated that it must be not temporary but permanent. There was no timeline has been mentioned within which the project should be completed. With the absence of any specific deadline in the contract, and if it was natural for some restrictions to be in effect during the war, therefore causing difficulties and delay in the project. This delay has been raised due to the requisition order didn’t affect the fundamental objective or struck at the roots of the adventure.

Parshotam Das v. Municipal Committee, Batal

The Frustration of the contract has been found in this case also. The principle was applied by Teja Singh J of the Punjab High Court.

A municipal committee leased out a few Tonga stands to the plaintiff for Rs 5000. But no one came forward to use the stand throughout the year and the plaintiff could not realize anything. He sued for the refund of his money.

It was held that “the plaintiff obtained the lease and committee granted the same to him on the assumpting that the Tonga stands would be used by drivers and plaintiff will recover the fees from them, but drivers did not use the stands and Doctrine of Frustration applied with full force.

Sushila Devi v. Hari Singh 1971 AIR 1756, 1971 SCR 671

This case explained the scope of the Doctrine of Frustration. ‘’Impossibility’’ under Section 56 of the Indian Contract act should not be restricted to humanely possible scenarios. In this case, the lease of that property was the primary matter of the agreement. Later, because the portion of the property to be leased became a part of Pakistan, making the conditions of the agreement impossible to perform.

Force Majeure and the Doctrine of Frustration: "Frustration is an English contract law doctrine that behaves like a device to keep aside contracts where an unpredicted event either exhibit contractual obligations impossible or radically changes the party's primary purpose for entering into the contract.

Nirmala Anand v. Advent Corporation Pvt. Ltd

 This case was related to suit for specific performance of an agreement to purchase a flat in building construction on a plot leased out by the municipality. The Court stated that unless the competent authorities have been moved and application for consent  have been rejected once and for all. Those rejection made finally became irresolutely binding and rendered impossible the performance of the contract resulting in Frustration u/s 56 the relief cannot be refused for the pointing out of some obstacles.

It is now confirmed that Frustration automatically brings the contract to an end at the time of the impossible event. This is, in contrast, to release by breach of contract, where the innocent party may choose to treat the contract as dismissed. Moreover, a contract, which is discharged by Frustration, is clearly different from other, which is void by mistake. A frustrated contract is valid until the time of the supervening event has been occurred, and it is automatically ended after that. In contrast, a contract void based on a mistake is completely null and void from the beginning.

Description of Section 56 of Indian Contract Act, 1872 (Force Majeure)

Force Majeure (S.56 of the Indian Contract Act, 1872.): It relieves one or both parties from liability to perform contract obligations when performance is prevented by an unforeseen event or circumstance beyond the parties’ control. Typically force majeure circumstances may include fire, flood, civil unrest, or terrorist attack. It is a term used to describe a "supervening force" event. The importance of a force majeure clause is two-fold: it distributes risk and keeps the parties on notice of circumstances that may suspend or excuse service.

The Doctrine of Frustration (S.56 of the Indian Contract Act, 1872.): The essential ingredient upon which the Doctrine of Frustration of contract is based is that of the impossibility of performance of the contract; ‘impossibility’ and 'frustration' can often be used as interchangeably. The changing events make the performance of the contract impossible to perform, and the parties are absolved from the further performance of it as they did not promise to perform an impossibility.

The parties shall be exempted if substantially the entire contract becomes impossible to perform or, in other words, impracticable by some cause for which neither was responsible. The spirit of force majeure and the Doctrine of Frustration embodied sections 32 and 56 of the Indian Contract Act.

What are the conditions required to prove the Frustration of the contract?

The Frustration of contract can be proved upon the fulfilment of the following conditions -

• The contract should be valid
• The contract is not performed yet
• The performance of the contract has become impossible
• The impossibility has occurred due to an event uncontrollable by both parties.

What are the grounds for Doctrine of Frustration?

·        Non-occurrence of Contemplated Event

Sometimes the event of the contract is entirely impossible to perform, but owing to the non-occurrence of an event aroused by both the parties as to the reason for the contract and the value of the performance is wholly destroyed. Herne Bay Steam Boat Co v. Hutton

·        Destruction of subject matter

The Doctrine of Frustration applies when the destruction of the subject matter of the contract has ceased to exist.

Again it has been explained in the landmark judgment of Taylor vs Caldwell, where Taylor had agreed to perform an event, but on that day of the performance, the hall burned down where the event was taken place where the event was taking place. The burning of the hall renders the impossibility of carrying forward the contract. The subject matter is destructed then contract will become automatically frustrated. Another example for this situation is Howell v. Coupland the defendant contracted to sell a specified particular quantity of potatoes to be grown on his farm, but was not able to fulfil the contract because crops had been destroyed by a disease. Decision held by the Court of appeal, Mellish LJ said: “if the potatoes had been fully grown at the time of contract, and after that disease had come and destroyed the crop then performance have been excused; and we can’t think if it makes any difference that the potatoes were not in existence. But there was an agreement to sell and buy particular potatoes which has been grown on that specific land, therefore neither party is liable if the performance impossible.”

·        Death or incapacity of a party

If any contract demands the personal performance of the parties, the death or incapacity of the party will make the contract void because the contract cannot be performed anymore. Robinson v. Davison: There was a contract between the plaintiff and the defendant’s wife, who was a pianist, she should play the piano at a concert to be given by the plaintiff. On a particular date and specified place. On the morning of the day she informed the plaintiff that she was ill and not able to perform. The concert had to be postponed and the plaintiff would suffer loss. The plaintiff’s action for breaching of contract failed. The Court said that under the circumstances, she was not merely excused to perform. The whole contract was based on the assumption of the defendant's continuance of life. This assumption is made by both parties, this was only the reason for the foundation of the contract, but if the foundation has been failed, then the entire contract has been failed and in this situation Mrs, Davidson’s part an entire and total incapacity to do the thing.

·        Frustration by legal or government intervention

Law is formulated after forming a contract, becoming the performance impossible, then the contract becomes void—Metropolitan Water Board v. Dick Kerr & Co. Ltd.In this case, the contract was made in July 1914; the firm's contractor contracted with the Waterboard to construct a reservoir within six months. But notice has been issued by the Defence of the Realm Acts, the contractor has stopped the construction, and they claimed contract had been frustrated, and House of Lords held the same.

·        The Frustration of the contract arose due to a change of circumstances

The impossibility of a contract is not due to the physical impossibility to perform, but the circumstances have been completely changed, which was the reason to defeat the contract.  If the circumstances change, then the contract is automatically dissolved, and the parties are absolved from performing it. Pameshwari Das Mehra v. Ram Chand Om Prakash

·        The Intervention of War

The intervention of war may make the performance of contracts difficult. Therefore contract will be void. Tsakiorglou & Co. Ltd v. Noblee & Thorl GMBH

What is the impact of the Doctrine of Frustration?

• The contract is frustrated automatically - After the frustrating events, a contract will be void automatically. The obligations of the parties involved get terminated immediately after the contract has been frustrated.
• Further obligations are discharged - Both the parties are discharged from any obligations after the contract is said to be frustrated.
• Accrued obligations - The legal rights or obligations already accrued before the frustrating event occurred are left undisturbed.

Applicability of Doctrine of Frustration in times of COVID-19

Covid-19, or coronavirus, was declared a pandemic on March 11, 2020. It led to a lockdown and financial slowdown across the country and in all sectors. The impact of this pandemic was severe and was increasing day by day. The doctrine of Frustration has played a significant role because due to financial slowdown and lockdown, suppliers were not able to perform their contractual obligations. Suppliers are seeking a delay to perform their contractual obligation to avoid the compensation.

On February 19, 2020, the Department of Expenditure, Procurement policy division, Ministry of Finance has issued an office memorandum related to the 'Process for Procurement of Goods, 2017', which serves as the dictum for procurement by the Government of India.

This memorandum, in essence, stated that covid-19 could effectively cover under the Doctrine of frustration clause because it is a natural calamity and beyond the possibility to perform the contractual liability.

Conclusion

The Doctrine of Frustration comes into the picture when an impossible event occurs and rendering the performance of the contract become impossible. The Frustration of the contract construct the contract void, and it also discharges the parties from any liability. This Doctrine is an exception to the general principles of contract for compensating the breach of contract under when compensation is usually given for not performing the contract. But when the Doctrine of Frustration is put in, there is no fault of the parties involved in the contract, and therefore, the party should not be made to compensate in such an event.