Doctrine of Frustration

Introduction

A contract, by its essence, is a binding agreement between two or more parties that creates legal obligations enforceable by law. These obligations, however, may become unattainable due to unforeseen or supervening events which were unexpected or unknowable at the time of contracting. Such events can potentially discharge parties from their contractual duties, leading to what is known as the doctrine of frustration.

Doctrine of Frustration

• The doctrine of frustration serves as a legal mechanism for the discharge of contractual obligations when performance becomes impossible or radically different from what was anticipated due to unforeseen circumstances.
• While the Indian Contract Act, 1872 does not explicitly define “frustration,” it is understood within the broader framework of Section 56, which deals with the discharge of contracts due to supervening impossibility or illegality.
• Frustration, in the context of contract law, refers to the doctrine whereby a party’s principal purpose under the contract is substantially frustrated by unexpected changes in circumstances, leading to the discharge of that party’s contractual duties.
• Black’s Law Dictionary encapsulates this concept as “the doctrine that if a party’s principal purpose is substantially frustrated by unanticipated changed circumstances, that party’s duties are discharged and the contract is considered terminated”[1].
• Indian judicial interpretation of frustration is nuanced. Courts often elaborate on frustration as the “frustration of the adventure or of the commercial or practical purpose of the contract”. This reflects a deeper understanding that frustration is not merely about the impossibility of performance but also about the underlying commercial purpose being undermined.
• In India, Section 56 of the Contract Act governs the doctrine of frustration.[2] This section provides that a contract is discharged when performance becomes impossible due to unforeseen events that are beyond the control of the parties. It recognizes the principle that parties should be absolved of their obligations when external factors make the performance of the contract impossible.

Origin and Evolution of the Doctrine of Frustration

• The doctrine of frustration, a significant aspect of contract law, finds its roots in the case of Taylor v. Caldwell[3] in England. Prior to this judgment, contract law, both under Roman Law and Common Law, was notably rigid. It adhered strictly to the principle of “absolute contracts”, which held that parties were bound to their contractual obligations regardless of unforeseen or supervening events that made performance impossible or excessively onerous.
• Historically, the rigidity of Common Law is illustrated by the case of Paradine v. Jane[4], where a lessee was held liable for rent arrears even though he had been evicted due to being an alien enemy. The prevailing reasoning was that a party must fulfill their contractual duties despite unforeseen events, as they might have provided for such contingencies within the contract itself.
• The case of Taylor v. Caldwell[5] marked a pivotal shift. In this case, an opera house rented for concerts was destroyed by fire before the scheduled event. The court, led by Blackburn J., introduced the concept of an “implied condition” or “implied term.” Blackburn J. posited that in contracts dependent on the continued existence of a specific person or thing, there is an implied condition that performance will be excused if that person or thing ceases to exist[6]. This theory suggested that such an implied condition is present from the outset of the contract, even if not explicitly stated by the parties. However, this theory faced criticism for being more of a legal fiction than a practical solution, as it assumed the parties had subconsciously considered such a possibility.
• The limitations of the implied condition theory were highlighted in the House of Lords case of National Carriers Ltd v. Panalpina (Northern) Ltd.[7] The court criticized the implied term theory as overly speculative and intrusive, suggesting that it did not accurately reflect the parties’ intentions and the reality of contractual negotiations.
• A more sophisticated approach emerged with the “loss of object” or “loss of foundation” theory. This theory, exemplified by Krell v. Henry[8], posits that a contract is frustrated if a supervening event destroys the foundation or primary purpose of the agreement. In Krell, the contract’s purpose of attending a coronation procession was nullified when the procession was cancelled. The courts recognized that the contract’s purpose had been rendered impossible, thereby justifying the discharge of obligations.
• The theory of imposing a “just and reasonable” solution also emerged. This approach suggests that even if a contract is absolute in its terms, it should not be enforced in a manner contrary to the parties’ intended purpose, especially when unforeseen events radically change the contract’s nature. This theory faced criticism for potentially allowing courts too much discretion to alter contractual terms based on subjective notions of fairness.
• The “radical change in the obligation” theory, also known as the “construction theory,” was articulated by Lord Radcliffe in Davis Contractors Ltd v. Fareham Urban District Council[9]. Lord Radcliffe defined frustration as occurring when the circumstances under which performance is required have fundamentally changed, making the obligation radically different from what was initially undertaken. This theory emphasizes that frustration occurs not merely due to hardship or inconvenience, but when performance becomes fundamentally different from the contract’s original terms.
• The evolution of the doctrine of frustration has led to significant legislative and judicial developments. In the UK, for instance, the Law Reform (Frustrated Contracts) Act 1943 was enacted following the case of Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour Ltd[10]. This Act addressed the limitations of previous case law by allowing for the recovery of payments made under frustrated contracts, either in full or partially, and in a manner deemed equitable by the courts. It represents a move towards a more pragmatic and fair approach to handling cases where performance becomes impossible due to unforeseen circumstances.

Interpretation of Doctrine under the Indian Contract Act, 1872

• The doctrine of frustration in India is codified under Section 56 of the Indian Contract Act, 1872, offering a structured approach to handle contracts that become impossible or unlawful to perform. Unlike the rigid Common Law approach, Section 56 provides a framework that is flexible and considers the actual circumstances affecting the performance of a contract.
• Section 56 states that an agreement to perform an act that becomes impossible or unlawful is void.
• The first paragraph of this section aligns with the Common Law principle that inherently impossible contracts are void ab initio. For instance, a contract to discover treasure by magic is void because such agreements are inherently impossible to perform.
• The second paragraph, however, introduces a broader interpretation, accommodating not only literal impossibility but also situations where performance becomes impracticable and useless from the perspective of the contract’s purpose. This interpretation recognizes that the performance of a contract may be significantly impacted by unforeseen events, even if the act itself is not physically impossible.
• The seminal case of Satyabrata Ghose v. Mugneeram Bangur and Co.[11] illustrates the application of Section 56. In this case, the Supreme Court held that the requisitioning of land for military purposes did not render the contract impossible as it did not prevent the overall performance. This case highlighted that Section 56’s notion of impossibility extends beyond literal interpretation to include impracticability, emphasizing that the frustration of the contract’s purpose is crucial for invoking the doctrine.
• Mukherjee J.’s explanation in the case further clarified that “impossible” under Section 56 encompasses situations where performance is not just physically impossible but also impracticable and useless. This broader interpretation deviates from the strict Common Law understanding, allowing for more nuanced application based on the contract’s purpose and the impact of unforeseen events.[12]
• Indian law, however, does not allow for self-induced frustration. If a party’s fault or failure to prevent an event causes impossibility, that party cannot claim frustration under Section 56. This principle stands in contrast to Common Law, where self-induced frustration was sometimes recognized. The requirement that the event causing impossibility must be beyond the control of the parties ensures that Section 56 is applied to genuinely unforeseeable circumstances.
• Illustration (e) under Section 56, which deals with a situation where illness renders performance impossible, further demonstrates that “impossible” includes events that prevent performance in a practical sense. This illustration supports the interpretation that Section 56’s application is justified even when the impossibility is not literal but results from events impacting the contract’s execution.[13]
• Indian courts have consistently maintained that frustration should not be invoked lightly. The performance of a contract must be rendered radically different from what was originally agreed upon, rather than merely becoming more onerous or inconvenient.
• The case of Tsakiroglou and Co Ltd v. Noblee Thorl GmbH[14] illustrates that a contract will not be frustrated merely due to increased costs or the need for alternative performance routes. Similarly, under Indian law, increased costs or difficulty alone do not suffice for frustration.
• Section 56 primarily applies when contracts lack provisions for unforeseen events. If a contract includes a force majeure clause or alternative performance modes, parties must adhere to these provisions rather than seeking relief under Section 56. The Supreme Court has emphasized that if parties have explicitly addressed potential intervening circumstances in their contract, Section 56 does not apply. The presence of a force majeure clause or specific contractual provisions overrides the application of Section 56.
• The Supreme Court has confirmed that Section 56 provides an exhaustive framework for dealing with frustration, and reliance on Common Law theories or foreign judgments is not necessary. This stance was reinforced in cases like Purshotam Das Shankar Das v. Municipal Committee Batala[15] and Dhruv Dev Chand v Harmohinder Singh[16], which affirmed that Section 56 is comprehensive and should not be supplemented by Common Law doctrines. This ensures that Indian law on frustration is self-contained and tailored to the Indian legal context.

The test of frustration under Section 56

The test of frustration under Section 56 of the Indian Contract Act determines whether a contract is frustrated due to unforeseen events. It involves assessing whether the performance of the contract has become impossible or illegal because of a significant and unexpected change in circumstances.

Key aspects of the test include:

1. Existence of a Contract: There must be a valid and existing contract.

2. Unforeseen Change: The performance must have become impossible or impractical due to a radical change in circumstances that was not anticipated by the parties.

To invoke the doctrine of frustration, it is crucial that a radical change in the fundamental assumptions on which the contract was based occurs. This change must be so significant that it renders the performance of the contract impracticable, illegal, or impossible, and this must occur without any fault on the part of either party. The change must go to the root of the contract, fundamentally altering the nature of the parties’ obligations and the contract’s purpose.

3. Objective Assessment: Courts examine the contract’s terms, the context of the agreement, and the nature of the supervening event objectively, rather than based on the parties’ intentions or subjective expectations.

The determination of frustration involves an objective test, even though it may appear subjective. Courts assess whether the supervening event has fundamentally altered the contract by examining the contract’s construction in light of the facts existing at the time of its formation. This means considering whether the performance of the contract, given the new circumstances, deviates significantly from what was originally agreed upon by the parties.

Factors Amounting to Frustration of Contract

1. Destruction of the Subject Matter: If the specific subject matter essential for the contract’s performance is physically destroyed, the contract may be frustrated. For example, if a factory where machinery was to be installed is destroyed by fire, or if a cinema wall collapses, making it impossible to perform as intended, the contract is likely to be discharged. Even if the subject matter is not entirely destroyed but significantly damaged, frustration may still apply.

2.Subsequent Illegality: If a change in the law makes the performance of the contract illegal, the contract may be frustrated. This includes new laws or regulations that prohibit the contract’s performance, such as a government order banning certain activities or changes in foreign law affecting the contract. For instance, if a contract required supplying goods that become illegal to import, the contract would be discharged. The change must fundamentally alter the basis of the contract, not just cause temporary issues.

3. Loss of Object: If the contract’s object or purpose becomes impossible due to unforeseen events or changes in circumstances, the contract may be considered frustrated. For example, if a contract to rent a room specifically for watching a coronation procession is frustrated because the procession is cancelled, the contract is voided as the primary purpose of the contract no longer exists. The contract is frustrated if the object of the contract becomes redundant or impossible to achieve.

4. Delay, Death, or Incapacity: Significant delay in performance, especially if it radically changes the nature of the contract, can result in frustration. If the delay is so extensive that it disrupts the fundamental purpose of the contract, it may be discharged. Similarly, the death or incapacity of a party who is required to personally perform under the contract can also lead to frustration. For instance, if a pianist falls ill and cannot perform at a concert, the contract may be frustrated due to the personal nature of the performance required.

Factors not Amounting to Frustration of Contract

1. Contractual Foreseeability: When a contract includes risks that are inherent or foreseeable, it means that the parties have anticipated these risks in their agreement. For instance, if a contract anticipates potential delays due to adverse weather conditions, such risks would not justify a claim of frustration if such conditions occur.

2. Acceptance of Risks: If the parties have consciously accepted certain risks or contingencies, frustration cannot be claimed for those risks. For example, a contractor agreeing to a fixed price for a construction project assumes the risk of price fluctuations in materials.

3. High Degree of Foreseeability: Events that are within the realm of ordinary foreseeability do not justify invoking frustration. The standard is whether an average person would have reasonably anticipated the event. For example, a rise in labor costs due to market conditions that was reasonably predictable would not frustrate a contract.

4. Commercial Impossibility: The doctrine of frustration does not apply to situations where the performance of the contract becomes economically burdensome. Increased costs or changes in economic conditions that make the contract more expensive do not amount to frustration. For instance, if the cost of raw materials increases, it does not discharge the contract if performance remains possible.

5. Onerous Performance: Mere difficulty or added expense in performance does not constitute frustration. For example, if a contract becomes financially difficult to perform due to unforeseen circumstances, it does not necessarily mean the contract is frustrated.

6. Legal and Physical Possibility: If the contract remains legally and physically possible to perform, frustration is not applicable. For example, if a construction project becomes more costly but can still be completed, the contract is not frustrated.

7. Negligence or Fault: A party cannot claim frustration if the frustrating event is the result of their own negligence or fault. For instance, if a party’s failure to maintain equipment leads to its breakdown, resulting in non-performance, frustration is not a valid claim.

8. Preventable Events: If a party had the means to prevent the frustrating event or mitigate its effects but failed to do so, frustration cannot be claimed. For example, a business that does not take necessary precautions to safeguard its operations from foreseeable risks cannot later claim frustration.

9. Opportunity to Avoid: Frustration is not available if the party had the opportunity to avoid the event. For example, if a contract becomes difficult due to changes in law that the party could have anticipated and planned for, frustration is not applicable.

10. Completed Transactions: The doctrine of frustration does not apply to fully executed contracts or transactions that have already been completed. For instance, if goods have been delivered and partial payment has been made, the remaining obligation to pay cannot be discharged by claiming frustration due to market changes.

11. Concluded Transfers: Once a contract is fully executed, such as a lease deed, it cannot be invalidated by subsequent events. For example, if a lease deed is executed and a subsequent event makes the property less desirable, frustration cannot be claimed to alter or terminate the lease.

12. Non-Substantial Damage: The doctrine of frustration requires substantial damage to the contract’s foundation. Minor damages or inconveniences do not meet the threshold for frustration. For example, if a property is partially damaged but remains usable for its intended purpose, the contract is not frustrated.

13. Opportunity for Remedy: If there is a possibility to remedy or mitigate the effects of the frustrating event, frustration cannot be claimed. For instance, if a contract can still be performed through adjustments or modifications, frustration is not applicable.

Interplay Between Frustration and Force Majeure

In Indian Contract Law, the interplay between the doctrines of frustration and force majeure is crucial in understanding how contracts are impacted by unforeseen events. Force majeure clauses are incorporated into contracts to address specific events that disrupt performance, such as natural disasters or strikes, by providing relief mechanisms like deadline extensions or suspension of obligations. This clause is designed to allocate risk for these events and ensures that parties are not penalized for factors beyond their control. However, the presence of a force majeure clause does not automatically negate the application of the doctrine of frustration.

Frustration under Section 56 of the Indian Contract Act, 1872, applies when an unforeseen event fundamentally changes the nature of the contract, making it impossible or radically different to perform. Unlike force majeure, which deals with pre-defined events, frustration is assessed based on whether the event radically alters the contract’s fundamental nature. Even if a force majeure clause exists, it may not cover every possible unforeseen event. If the event is not included in the force majeure clause or the clause is deemed inadequate to address the impact of the event, the doctrine of frustration may still be invoked.

Indian courts have recognized that while a comprehensive force majeure clause can provide specific relief mechanisms, it does not preclude the possibility of frustration. The adequacy of the force majeure clause in covering the specific event is crucial; if it fails to address the event or its impact, frustration may be considered. Therefore, while force majeure clauses offer a pre-defined approach to handling disruptions, they do not completely eliminate the applicability of frustration if an unforeseen event fundamentally disrupts the contract beyond the clause’s scope.

[1] Bryan A Garner, Black’s Law Dictionary (9th edn, West Group 2009)

[2] Indian Contract Act, 1872, s. 56.

[3] [1863] 3 B&S 826.

[4] [1647] EWHC KB J5.

[5]  [1863] EWHC QB J1.

[6] Supra note at 3.

[7] [1981] 1 All ER 161.

[8] [1903] 2 KB 740.

[9] [1956] AC 696.

[10] [1942] 2 All ER 122.

[11] AIR 1954 SC 44.

[12] Ibid.

[13] The Indian Contract Act 1872, s 56, illustration (c).

[14] [1962] 2 All ER 145.

[15] AIR 1949 EP 301.

[16] AIR 1968 SC 1024 [8].