Doctrine Of Frustration
In American Law it is the Theory of Impossibility and Impracticability and in
English Law it is the Frustration of Contract and Frustration of Purpose under
the Doctrine of Frustration and under Indian Legal System it is covered under
section 56 of the Indian Contract Act 1872.
The doctrine of frustration is based on the maxim Lex non cogit ad Impossibilia. It means that ‘Law does not compel the Impossible'. In a contract between the two parties, there is a fundamental assumption that the performance of the contract depends upon the continued existence of a given person or a thing and any impossibility arising later on (by the perishing of the person or the thing) shall excuse the performance of the contractual obligation. Such a condition is implied in all contracts.
Frustration means when the contract is rendered impossible of its performance by the external causes which are beyond the contemplation of the parties concerned. It includes both:
The doctrine of frustration is relevant when it is alleged that a change of circumstances after the formation of the contract has rendered it physically or commercially impossible to fulfill the contract or, has transformed the required performance into a radically different obligation from that undertaken in the contract. The doctrine is not concerned with initial impossibility which may render a contract void ab initio, as where a party to a contract undertakes to perform an act which, at the time when the contract is made, is physically an impossible act according to the existing scientific knowledge and achievement.
Primarily in premature times the rule laid down was of Absolute Contracts according to which it was held that a man was strictly bound by his contract, and that, in the absence of any express limitation of his liability, he must take the consequences of being unable to perform his obligation in changed circumstances. Therefore, it admitted no exception in favour of the promisor, who was liable for the breach of his promise, notwithstanding the subsequent occurrence of an accident or other contingency which prevented him from performing it.
The classic decision on the rule as to absolute contracts is a case of Paradine vs Jane case, where a lessee who was sued for arrears of rent pleaded that he had been evicted and kept out of possession by an alien enemy; such an event was beyond his control, and had deprived him of the profits of the land from which he expected to receive the money to pay the rent.
In this he was held liable on the ground that:
Where the law creates a duty or change and the party is disabled to perform it and hath no remedy over there, the law will excuse him but when the party of his own contract creates a duty or charge upon himself he is bound to make it good, if he may not withstanding any accident by inevitable necessity, because he might have provided against it by his contract.
Though this rule was peculiar to English Common Law, it continued to be enforced until 1863. Even shortly before that year, courts still refused to recognize any general principle that, a party might be released from the liability in the absence of an express condition which operates to release him in the particular event which accrued.
However, in 1863 in Taylor v. Caldwell case, Blackburn J., giving the judgment of the court of the Queen's Bench, held that the defendant were not liable in damages, since the doctrine of the sanctity of contracts applied only to a promise which was positive and absolute, and not subject to any condition expressed or implied. The learned Judge employed the concept of an implied condition to introduce the doctrine of frustration into English law, since he said, that it might appear from the nature of the contract that the parties must have known from the beginning that the fulfillment of the contract depend on the continuing existence of a particular person or thing.
Though the Doctrine of Frustration was first introduced into English law to cover situations where the physical subject matter of the contract had perished, it was quickly extended to cases where, without any such physical destruction, the commercial adventure envisaged by the parties frustrated.
Hypothesis:
The doctrine of frustration is relevant, when it is alleged that a change of circumstance or the alteration of the conditions, after the formation of the contract but before the conclusion of the contract, has rendered the fulfillment of the contract impossible, physically as well as commercially. The doctrine is not concerned with the initial impossibility which may render the contract void ab initio.
The principle of frustration of contract is applicable to a great variety of contracts. It is therefore, not possible to lay down an exhaustive list of situations in which the doctrine of frustration is going to be applied so as to excuse the performance of the contractual obligation undertaken.
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 Cladwell, 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 first day on which a concert was to be given, the hall destroyed by fire without the fault of either party. The plaintiff sued the defendant 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 found.
Contractual Excuse Clause In English Legal System:
English law has developed the Doctrine of 'Frustration which is discussed in the present topic. When the performance of a contract becomes impossible, the purpose which the parties had in mind is frustrated. If the performance becomes impossible because of supervening or unexpected and unforeseen events, the promisor is excused from the contractual obligation such a condition is implied in all contracts and is known as Doctrine of Frustration.
According to Chitty:
Frustration is so much concerned with the change in circumstances that it cancels the base of the contract as a whole or in case of performance, makes it different with that which was in consideration by the parties in the beginning and is concluded by the legal order.
Law relating to frustration in India is dealt under section-56 of the Indian Contract Act, 1872 which says that:
An agreement to do an act Impossible in itself is void. 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, become void when the act becomes impossible or unlawful, where one person has promise to do something which he know, or with reasonable diligence might have known, and which the promise did not know, to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such a promise sustains through the non- performance of the promise.
Section 56 of the Indian Contract Act, 1872 lays down a positive rule of law and the courts cannot travel outside the term of that section. It broadly simplifies the English rule and it neither leaves the matter to be determined according to the intention of the parties nor does it leave any scope for the consideration of the different theories propounded in England. The basis of the doctrine of frustration in India has been explained in Satyabrata Ghose v Mugneeram Bangur by Justice Mukherjee.
It is as follows:
Contractual Excuse clause in the Indian Legal System:
Law relating to frustration in India is dealt under section-56 of the Indian Contract Act, 1872 which says that:- An agreement to do an act Impossible in itself is void.
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, become void.
When the act becomes impossible or unlawful, where one person has promise to do something which he know, or with reasonable diligence might have known, and which the promise did not know, to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such a promise sustains through the non-performance of the promise. Section 56 of the Indian Contract Act,1872 lays down a positive rule of law and the courts can not travel outside the term of that section.
In fact, impossibility and frustration are often used as inter changeable expressions .The Changed circumstances make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform an impossibility. The Doctrine of frustration is really an aspect or factor the law of the discharge of contract by reason of supervening impossibility or illegibility of the act agreed to be done and hence comes within the purview of section-56 of the Indian Contract Act, 1872.
Therefore It can be said that the provisions contained in section 56 Of the Indian Contract Act,1872 Lays down a positive rule of law and English Authorities therefore, cannot be of direct assistance, though it cannot be denied that they definitely have a persuasive value in showing how English Courts Have dealt with cases under similar circumstances or under similar conditions.
Indian Law On Doctrine Of Frustration And Its Essential Elements
A. Indian Law On Frustration:
The basis of the frustration in Indian legal system can be traced in the words of: Viscount Simon L. C's Opinion: Frustration is the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the agreement and as entirely beyond what contemplated by the parties when they entered into the agreement.
The legal basis of the doctrine of frustration in India was further strengthened be in Satyabrata Ghose v Mugneuam Bangur case in which Justice Mukherjee of the Supreme Court of India stated:
The essential idea upon which the doctrine is based is that of impossibility of performance of the contract, in fact Impossibility and Frustration often used as inter-changeable expressions. The changed circumstances make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform impossibility. The doctrine of frustration is really and aspect or part of the law of the discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of section 56 of Indian Contract Act, 1872.
In another case of Ganga Saran v. Ram Charan, Justice Fazal Ali of Supreme Court of India expressed his views about the legality of frustration in India. The Supreme Court observed:
We hold therefore that the doctrine of frustration is really an aspect or part of law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of section-56 of the Indian Contract Act.
Therefore, it is observed that since times the doctrine of frustration occupies an ambient position in various legal systems. In English Law, it is covered under the expression Frustration and in Indian Legal System; it comes under the scope of section 56 of the Indian Contract Act, 1872.
It is evident from these observations that the modem international merchant is expected to have a considerable degree of foresight. He should therefore guard himself against an unexpected or a supervening event.
B. Essential Elements of Doctrine of Frustration:
Frustration refers to when the contract is rendered impossible of its performance by external causes beyond the contemplation of the parties. It includes both:
The doctrine of frustration is relevant, when it is alleged that a change of circumstance or the alteration of the conditions, after the formation of the contract but before the conclusion of the contract, has rendered the fulfillment of the contract impossible, physically as well as commercially.
The doctrine is not concerned with the initial impossibility which may render the contract void ab initio. The principle of frustration of contract is applicable to a great variety of contracts. It is therefore, not possible to lay down an exhaustive list of situations in which the doctrine of frustration is going to be applied so as to excuse the performance of the contractual obligation undertaken.
The law upon this matter is undoubtedly under the process of evolution still. Yet, there are some grounds which have become established as to when the Doctrine of Frustration can be invoked. They are:
Let us discuss it in details:
(a) Destruction of the subject Matter:
The most obvious application of the doctrine of frustration starts from the case like Taylor v. Caldwell. In which the subject matter of the contract was destroyed. In this case the defendants had agreed to permit the plaintiffs to use a music-hall for concerts on four specified nights. After the contract was made, but before the first night arrived, the hall was destroyed by fire. Blackburn J., giving the judgment of the Court of Queen's Bench, held that the defendants were not liable in damages, since the doctrine of the sanctity of contracts applied only to a promise which was positive and absolute, and not subject to any condition express or implied.
The learned judge employed the concept of an implied condition to introduce the doctrine of frustration into English law, since he said that it might appear from the nature of the contract that the parties must have known from the beginning that the fulfillment of the contract depended on the continued existence of a particular person or thing.
He held that the particular contract in question was to be construed as:
Subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing, without default of the contract.
Taylor vs Caldwell also points out that a contract may be frustrated by, destruction of only a part of the subject matter also. The contract related to the Surrey Gardens and Music Hall was discharged though, only the hall was destroyed, while the gardens still remained in use, as a place of entertainment. It is enough if the main purpose of the contract is defeated.
Therefore the principle evolved here is that, in cases where the performance depends upon the continued existence of a given person or a thing then a condition is implied that the impossibility of performance arising from perishing of that very person or thing shall excuse the performance of the contractual obligation. In words of J. Blackburn A condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.
However, it is to be noted, that, the partial destruction of the subject matter, which does not have this drastic effect will not frustrate the whole contract though, it may provide for one party with an excuse for performing in full or give the other party the option to rescind. The principle evolved in case of Taylor v. Caldwell was soon applied in other cases and was also accepted by the legislature in relation to agreements for the sale of goods.
b) Destruction of a Thing (other than the subject matter) BUT essential for the performance of the contract:
A contract may be frustrated in cases where, what is destroyed is not the subject matter of the contract but something which is essential for the performance of the contractual obligation. In case of Appleby v Myers case it was held that a contract to install machinery in a particular factory can be frustrated by the destruction of the factory, even though the subject matter of the contract here is the machinery. Now, as for answering to the question, that:
But frustration cannot be pleaded if the event which made the performance of the contractual Obligation impossible existed already before the conclusion of the contract and, could have been covered by adding some appropriate clause to the contract.
(c) Unavailability of the subject matter or the thing essential for the performance of the contract:
A contract may also be frustrated if the thing or the person essential for its performance, though not ceasing to exist or suffering with a permanent incapacity becomes unavailable for that purpose. In other words, in a case where, a person or a thing essential for the performance of the contract becomes unavailable at the time fixed for the performance, as a result of some supervening event But becomes available later on then in such cases, this kind of temporary unavailability will most obviously frustrate the contract, if it is clear from the nature of the contract that, it was to be performed only at that particular time or within that specified time and, if the unavailability factor extended over the whole of that time.
It can be very well explained by the famous case Robinson vs Davidson. In this case the contract to play in a concert on a particular day was held to be frustrated by the illness of the performer on that very day.
A contract may even be discharged in cases where the subject matter to be obtained from a particular source becomes unavailable without the fault of the either party. To understand this, it can be categorized into following three groups:
(d) When the method of performance becomes Impossible:
A contract may be held to be frustrated if the method of performing the contractual obligation becomes impossible. However, it is to be noted here that, ‘Where a contract provides for an attractive methods of performance, it is not frustrated if one or more of them become impossible, so long as, at least one method remains possible'. For example, if the contract is to deliver at X or Y, delivery must be made at X if delivery at Y becomes impossible. Similarly if the contract is to ship from X or Y shipment must be made from X is shipment from Y becomes impossible as held in the Furness Bridge case.
(e) Death of the party:
Certain personal contracts, such as contracts of employment apprenticeship or agency etc., are discharged by the death of either party. Even a commercial contract may involve reliance by one party on the personal skill of the other, in which case, the death of that party can discharge the contract. The same rules apply, where a party is permanently incapacitated from performing such a contract. In Jackson vs Union Marine Insurance Co. Ltd.16 the Court held the contract to write a book is frustrated by the supervening insanity of the author.
(f) War:
After the parties have entered into the contract and the war breaks out then:
In this case the following statement of facts was given by Lord Reid:
The appellants agreed to sell to the respondents three hundred tons of Sudan groundnuts c.i.f. Hamburg. The usual and normal route at the date of the contract was via Suez Canal Shipment was to be in November/December, 1956, but on November 2, 1956, the Canal was closed to traffic and it was not reopened until the following April. It is stated that the appellants could have transported the goods via the Cape of Good Hope. The appellants refused to ship goods via the Cape. The question now is whether by reason of the closing of the Suez route, the contract had been ended by frustration.
The appellant's argument was that, it was an implied term of the contract that shipment should be via Suez. But it was held that such a term could not be implied. The customary or usual route via the Suez Canal being closed, the appellants were bound [by the Sale of Goods Act. 1893, Section 32(2)] to ship the groundnuts by a reasonable and practical route and, though the appellants might be put to greater expense by shipping the groundnuts via the Cape of Good Hope, that did not render the contract fundamentally or radically different, therefore, there was not any frustration of the contracts in the sense perceived.
However, if there are more than one ways of performing a contract and the war cuts off only one of them, the party is still bound to perform by the other way, however inconvenient or expensive it may be. This appears from the decision of the Privy Council in Twentsche Overseas Trading Co. Ltd. vs Uganda Sugar Factory Ltd.
Indian Interpretation in Gambhirmar vs Indian Bank Ltd, it was held that, if the intervention of a war is due to the delay caused by the negligence of a party the principle of frustration cannot be relied upon.
In yet another Laid Mohan Ghose case the Patna High Court held that, the further 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 firm of chartered accountants. The assured was accordingly allowed to recover the money paid by him under the policy. In another Calcutta case, a contract of carriage by river was intercepted by the enemy seizing the boat along with cargo, during the hostilities between India and Pakistan. The court allowed the carrier the plea of impossibility.
Therefore the trend observed is that the doctrine of frustration will not be applied where performance is actually prevented, as it was seen in number of charter party cases in which ships were trapped for a long time after the outbreak of hostilities in 1980. But there is a marked reluctance, to hold the contracts frustrated where the performance has become merely more difficult or less advantageous for one party.
The Suez Canal cases also rejected the argument that the greater expense caused to the party prejudiced by the closure of the canal was a ground of frustration. In words of Lord Simon:An increase of expense is not a ground frustration.
(g) Strike:
In French law it is said that a strike is not, in jurisprudential principle, a case of frustration and the same view is accepted in India as well.
A promisor may not be absolved of his duty to carry out his promise (of performance) merely because there is a strike by the workmen employed in the performance of the contract.
According to Williston:
Whether a strike will result in impossibility of performance or not would depend upon various other factors of the contract .
If the strike renders the performance impossible in any circumstances, the doctrine of frustration can be invoked for excusing the contractual obligation.
(h) Export and Import Prohibitions:
Apart from the case of war, a contract may be frustrated because subsequent to its conclusion, if the government has prohibited its performance, e.g. by placing an embargo on the exportation or importation of the goods sold.
However, great care should be applied in applying frustration in such cases because not every governmental prohibition has the effect of rendering the contract illegal. Sometimes the effect is merely to suspend and postpone the performance of the contract, it is always necessary to relate the prohibition to the terms of the contract, especially those governing the time of performance. The prohibition operates as a frustrating event only if; it is final and extends to the whole time, still available for the performance of the contract.
It these conditions are not satisfied, a party would be well advised to wait until the time of performance has expired, before treating the contract as frustrated because, the prohibition may be removed in time to allow the performance. If the government prohibition extends beyond the stipulated time for performance, it is normally safe to assume, that the contract is frustrated because, there is an implied condition in every contract that its performance shall be legal at the date when the contract is to be performed.
The rule, that a subsequent government prohibition operates as a frustrating event only if it oversees the whole of the contract period, applies likewise ,if the prohibition does not come into operation at once and, exporters are allowed a time of grace during which they may perform existing contracts.
In RO SST Smyth & Co. Ltd the contract provided for the shipment of horse beans from a Sicilian port c.i.f. Glasgow during October and November 1951. By an Italian regulation dated October 20, 1951, the exportation was prohibited as and from November 1, 1951, except under special license.
The sellers failed to ship, and the buyers claimed the damage. It was held by Justice Devlin that they were entitled to succeed.
The prohibition did not operate as a frustrating event; it merely reduced the time of shipment from two months to one month and, after the issue of the Italian regulation the sellers had still 10 day's grace within which they could have affected the shipment. If the prohibition of export had been instantaneous, it would have operated as a frustrating event, and the same would have been the case, if the sellers could have proved that they had no shipping facilities during the remaining 10 days.
Further, sometimes the government prohibition may allow exporters to perform at least some of the contracts into which they have entered into. It may thus leave the loopholes. It may, e.g. allow the exporters who have goods already on lighters or have begun to load them on the vessels, to fulfill their contracts. In these cases, an exporter who wishes to plead the frustration has the heavy burden of proving that, he could not avail himself of one of these loopholes.
(i) Change of Circumstances:
Frustration of the contract also occurs, if there is a material alteration in the conditions of the contract or if there is a fundamental change in circumstance (after the formation of contract but before the conclusion) and the change is so fundamental that, if the contract still remains (i.e. if the performance continues) then, it would result in a new and altogether different contract which is entirely different from that, as originally concluded by the parties. To hold the parties to such a contract would mean substitution of a different contract than what was originally agreed to or contemplated for.
It is however, easy to ascertain whether the contract is frustrated or not but it is difficult to ascertain the cases, where the performance is possible and where the fundamentally different situation has arisen unexpectedly.
The English courts have shown that the courts consider the principle of Sanctity of Contracts as infinitely of higher importance than the requirements of commercial convenience. Also, that they are not inclined to accept a contract as frustrated where the contract is capable of its performance.
The contract is declared frustrated only when the change in circumstance or change of the conditions is so fundamental so as to render the performance impossible or, if possible than the performance would result in something different from that contemplated for.
For example, in a contract for supply of goods, if the performance is delayed inordinately for reasons beyond the control of the parties and consequently the prices which were fixed in relation to the then existing conditions of labor and costs of raw material are entirely outdated, it may well be argued that the spine (Foundation) of the contract has gone in this category fall cases, in which the contract is aimed at the execution of a particular object and which has been defeated by the occurrence of the supervening events.
Normally an event, which was within the contemplation of the parties when they entered into the contract, does not operate as a frustrating event, even though they did not expect or consider it probable that it would happen; but in exceptional cases the doctrine has been applied where the parties were aware of the possibility that, the frustrating event might occur but still omitted to provide for that eventuality.
In Metropolitan Water Board vs Dick Kerr and Co. it was held that, the contract was frustrated since it was likely that there would be total change in conditions by the time, the restriction might be lifted.
However, at times it is difficult to contend successfully that the alteration in the condition or the change in the circumstance would be so fundamental that it would results in frustration of the contract for example in popular known cases of Suez-Canal.
In this case, the Suez Canal was closed November 2, 1956, as a result of Military operations between Egypt and Israel. The exporters in East Africa had sold certain goods for shipment in specified European destinations.
The contract was made before the date of closure of the Suez Canal but it had to be performed after that date i.e. when the Suez Canal closed. Now, when the date of the performance of contract came, the canal was closed, hence, the shipment was not possible.
However, it was possible to ship the goods (via Cape of Good Hope) to their destination. This route was no doubt longer and caused considerable additional expenditure. It became clear from it that the additional expense was of such a magnitude that the contract would not have gained. Hence the contract was frustrated on this ground.
The question that arose here was:
Whether the necessity to ship via the alternate route (i.e. via Cape of Good Hope) constituted a radical difference in the character of the seller's obligation or not?
To this, the House of Lords answered in negative. The court held that .the sellers were under a duty to send the goods by a reasonable and practicable route when the usual route via the Suez Canal was not available. In the present case, the alternate route was available i.e. via Cape of Good Hope.
In the Court of Appeal Harman L.J. stated that the general attitude of the English courts to the issues of frustration is given in the following expression:
Frustration is a doctrine only too often invoked by a party to a contract who finds performance difficult or unprofitable, but it is very rarely relied upon with success.
It is, in fact, a kind of last ditch, and, as Lord Radcliffe says in his speech in the most recent case, it is a conclusion which should be reached rarely and with reluctance.
Frustration of Venture
English Law was first to introduce the doctrine of frustration in the landmark case of Taylor v. Caldwell .It was later applied to the cases where, the commercial venture envisaged by the parties was frustrated without the destruction of the subject matter of the contract. It first appeared in 1874, in case of Jackson v. Union Marine Insurance Co. Ltd. In this case a ship was required to proceed from Liverpool to Newport to load a cargo for San Francisco. On the first day, out from Liverpool the ship ran aground, and it took six weeks to refloat her, and another six months to complete repairs.
The jury was asked whether the time necessary for getting the ship off and repairing her so as to be a cargo-carrying ship was so long as to put an end in a commercial sense to the commercial speculation entered upon by the ship owner and the charterers. The jury answered in the affirmative, and the Court of Exchequer Chamber held that the charter party ended upon the mishap. Bram well B. said that the jury had found that a voyage undertaken, after the ship was sufficiently repaired would have been a different voyage... different as a different adventure...
It must be noted here that the principle of frustration is not only confined to physical impossibilities. It also extends to cases where the performance of the contract becomes physically possible, and the object that the parties had in mind failed to materialize.
The well-known coronation cases Krell v. Henry is the one that illustrates this:
In it the defendant agreed to hire from the plaintiff a flat for June 26 and 27, on which days it had been announced that the coronation procession would pass along that place. A part of the rent was paid in advance.
But the procession having been cancelled owing to the King's illness, the defendant refused to pay the balance. It was held that, the real object of the contract, as recognized by both the contracting parties, was to have a view of the coronation procession. The foundation of the contract here was- taking place of the procession and, the object of the contract was frustrated by not happening of the coronation. Hence, the plaintiff was not entitled to recover the balance of the rent.
Thus the Doctrine of Frustration comes into play in two types of conditions:Where the performance is physically cut off. And Where the object has failed to materialize.
Provisions And Codification Of Law In Indian Legal System
A. Provisions In Indian Legal System:
The Supreme Court of India has held that section 56 of the Indian Contract Act, 1872 (which covers frustration) is to be applicable to both kinds of frustration i.e.
In Satyabrata Ghose vs Mugneeram Bangur Justice Mukherjee of Supreme Court of India observed that:
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 It can concluded here that the concept of Frustration of venture was first introduced in English Law to cover situations where the physical subject matter of the contract was destroyed or had perished as in Taylor v. Caldwell but, it was quickly extended to cases where, without any such physical destruction, the commercial venture envisaged by the parties was frustrated.
It should be kept in mind that English writers in their compilations have discussed the above mentioned doctrine under other titles like:
When the performance of a contract becomes impossible, the very purpose which the parties had in mind gets frustrated. If the performance of the contractual obligation becomes impossible on account of a supervening event, the promisor is excused from the performance of the contract. This is known as the Doctrine of Frustration under the common law and is covered under Section-56 of the Indian Contract Act, 1872. This doctrine is based on the maxim ‘Lex non cogit ad impossibilia' i.e. is - the law does not compel to do something which is impossible.
In words of Justice Krishna Iyyer quoting Anson in Union of Indian vs Domoni and Co. held:
Most legal system makes provision for the discharge of contract where subsequent its formation, a change of circumstances senders the contract legally or physically impossible of performance. And indeed it is a part of statutory aw of India.
In Indian Legal System there is a codification regarding the law in all its facts under sections 32 to 36, section 56 and 65 in Indian Contract Act 1872.Section 32 to section 36 deals with contingent contracts. Discussion:
Section 32, Section 33, Section 34, Section 35 and Section 36.
In section 32 it is postulated that if the contingent event becomes impossible, the contract is void.
Section 33 of the contract Act of India speaks of enforcement of contingent contracts i.e. contingent on event not happening.
Section 34 of the Indian Contract Act refers to cases where event on which a contract is contingent is deemed impossible, if it is the future conduct of a living person.
Section 35 of the Indian Contract Act, 1872, deals with contracts becoming void which are contingent on happening of a specified event with in a fixed time. It also advents as to when the contracts may be enforced which are contingent on specified events not happening within the fixed time.
Section 36 of the contract Act of India (1872) postulates that in a contingent contract to do anything or not to do anything, if an impossible or unexpected event or if a supervening event happens, are void, irrespective of the fact whether the impossibility, of the event is known to the parties to the contract or not, at the time of formation of the contract.
Section 56 of the Indian Contract Act (1872) Says that:
An agreement to do an act impossible in itself is void. A Contract to do 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 where one person has promised to do something which he knew, or with reasonable diligence might have known, add which the promisor did not know, to be impossible or unlawful, such promisor must make compensation to such promisor for any loss which such promise sustain through the nonperformance of the promise.
C. Operation under Indian Legal System:
In Indian legal system, Doctrine of Frustration [under provisions of section 56 of the contract Act of India (1872)] operates in two ways:
Section- 65 Section 65 of the Indian Contract Act, 1872 says that, when an agreement in discovered to be void or when the contract becomes void, any person who has received any advantage under such an agreement or contract, is bound to restore it or, in other words the person who received the advantage must make a compensation for it (the advantage received) to the person for whom he received it.
It can be concluded here that the Doctrine of Frustration is exhaustively codified in Indian legal system.
D. Self Induced Frustration:
A party cannot rely on self-induced frustration, that is, frustration due to one's own conduct or due to the conduct of those for whom one stands responsible. The principle of frustration is that- should not be self-induced as explained in Maritime National Fish Ltd v Ocean Trawlers Ltd. In this, it was explained that:
The essence of frustration is that it should not be due to the act or election of the party.
The facts of the case were:
The appellants hired the respondents' trawler, called the St. Cuthbert to be employed in fishing industry only. Both parties knew that the trawler could be used for that purpose only under a license from the Canadian government. The appellants were fishing five trawlers and, therefore applied for five licenses. Only three were granted and, the Government asked the appellants to name three trawlers and they named the trawlers. They then repudiated the charter and pleaded frustration in response to the respondents action for the hire.
The judicial Committee of the Privy Council held that the frustration in this case was the result of the appellant's own choice of excluding the respondent's ship from the license and, therefore, they were not discharged from the contract.
In yet another case Bank line v Arthur Capel & Co. Lord Summer had observed that:
I think it is now well-settled that the principle of frustration of an adventure assumed that the frustration arises without blame or fault on either side. Reliance cannot be placed on a self-induced frustration.
View taken by Indian Legal System the Indian courts have taken the view that if the event which made the performance of the contract impossible, happened because of the fault of the promisor, then it is undoubtedly a case of self-Induced frustration and the promisor will be liable in such a case the Supreme Court in Boothalingam Agencies vs V.T.C. Periasamy held:
In other words, the doctrine of frustration of contract, cannot apply where.
The event which is alleged to have frustrated the contract arises from the act or election of the party-We hold that this principle cannot be applied to the present case for there was no choice or election left , to the appellant to supply chicory other than under the terms of the contract. On the other hand, there was a positive prohibition imposed by the license upon the appellant not to sell imported chicory to any other party but he was permitted to utilize it only for consumption as raw material in his own factory.
The essence of self-induced frustration is, that the act or omission which results in frustration, must be something deliberate and intentional. Frustration is not ‘self-induced', if what is shown is merely passive negligence. It should be of such a character, that it might' tie fairly inferred there from, that the promisor has no intention of performing the contract and has in effect repudiated it.
The principle of frustration of a contract assumes that, the frustration arises without blame, as fault on either side. Reliance cannot be placed on self-induced frustration. But it may give the other party to the contract the option to treat the contract as repudiated. Where, antecedent to frustration, the promisor is not only diligent in obtaining the permit, but even withdraw his application for permit the prior conduct on his part would enable the other party to repudiate the contract (under section 39). This constitutes a case of self-induced frustration.
Therefore the conclusion drawn is that, a party cannot rely on the self-induced Frustration, that is, a frustration due to one's own conduct or due to the conduct of those for whom one is responsible. The doctrine therefore, does not protect a party whose own breach of contract actually results in frustrating event nor does it protect him if the breach is only one of the factors, leading to the frustration. The onus of proving that the frustration is self-induced is not the party who alleges it in the case.
LEGAL EFFECTS AND JUDICIAL INTERPRETATIONS UNDER INDIAN LEGAL SYSTEM:
The most obvious legal effect of the doctrine of frustration is the discharge of the contractual liability of the contract. The legal effect of the frustration does not depend on the intention or opinion or, even the knowledge of the parties to the contract regarding the event. The belief, knowledge and intention of the parties, however, are evidences on which court is required to from its conclusion that whether the changed circumstances altogether destroyed the very basis of the contract or not.
Therefore it can be said that, frustration operates automatically to discharge the contract irrespective of the intention or interest of the parties concerned and also irrespective of the circumstances.
The Indian Law under Section 56 of the Indian Contract Act, 1872 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties.
It has been exhaustively explained by the Supreme Court in Satyabrata Ghosh vs Mugneeram & Co.Justice B. K. Mukherjee in his case observed that: Satyabrata Ghosh v. Mugneeram & Co. AIR 1954 SC 44.
The doctrine of frustration is really an aspect or part of law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of Section 56 of the Indian Contract Act.
‘Frustration' puts an end to the liability to perform the contract and 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.
The other legal effect which emerges out is the Adjustment of the rights of the parties and the rights of the parties are adjusted under section 65 of the Indian Contract Act (1872).
Conclusion:
Therefore, it can be summed up by saying that ‘Frustration' occurs when the law recognizes that without the fault of either party, a contractual obligation has become incapable 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.
According to Frustration of Contract, where existence of a specific thing is, either by terms of contract or in contemplation of parties necessary for the performance of a promise in the contract, the duty to perform the promise is discharged if, the thing is no longer in existence at time for performance. And the Frustration of Purpose excuses a promisor in certain situations, when the objectives of contract have been defeated by circumstances arising after formation of agreements, and the performance is excused under this rule even though there is no impediment to the actual performance.
Therefore it can be said that Frustration is in the sense, unforeseen and unexpected dissolution of the contract due to the occurrence of some accidents which makes its performance impossible.
In other words, Frustration means, the dissolution of the contract due to impossibility of performance of the contractual obligation, which happens unexpectedly.
‘Frustration' therefore refers to an unexpected dissolution of the contract due to impossibility of performance of the contractual obligation of the contract. And the same view is adopted by the English Courts as well as the Indian Courts. Doctrine of Frustration has been discussed under various heads by the English as well as Indian writers such as - Impossibility, Supervening Impossibility, Discharge by Subsequent Impossibility and Discharge by operation of Law.
Therefore from the discussion of the Doctrine of Frustration it is evident that, in English Law and in the Legal System of India, the difficulty in performance of contractual obligation or making it more expensive, does not naturally changes the nature of the contract and also does not make it a completely new contract. The occurrence of unexpected events like fall of value of currency, high price of raw materials, scarcity of some goods, which extraordinary increases the extend of contractual obligations and restrain the contracting parties to get the commercial profit which they had anticipated at time of the formation of contract however, is not sufficient, to excuse the performance and define frustration.
The conclusion drawn here is that although the ‘Doctrine of Frustration' is very near to the rule of altered conditions or the change in Circumstances but it is not exactly like it. The Doctrine of Frustration relates to the effect of the event or events which prevents the performance purpose of the contract while the rule of altered conditions or the change in Circumstances relates to or discusses the change of fundamental condition of the contract, which forms the very base of the contract.
The doctrine of frustration is based on the maxim Lex non cogit ad Impossibilia. It means that ‘Law does not compel the Impossible'. In a contract between the two parties, there is a fundamental assumption that the performance of the contract depends upon the continued existence of a given person or a thing and any impossibility arising later on (by the perishing of the person or the thing) shall excuse the performance of the contractual obligation. Such a condition is implied in all contracts.
Frustration means when the contract is rendered impossible of its performance by the external causes which are beyond the contemplation of the parties concerned. It includes both:
- Impossibility of the performance of the contractual obligation and
- Impossibility of the fulfillment of the ulterior purpose for which the contract was entered into.
The doctrine of frustration is relevant when it is alleged that a change of circumstances after the formation of the contract has rendered it physically or commercially impossible to fulfill the contract or, has transformed the required performance into a radically different obligation from that undertaken in the contract. The doctrine is not concerned with initial impossibility which may render a contract void ab initio, as where a party to a contract undertakes to perform an act which, at the time when the contract is made, is physically an impossible act according to the existing scientific knowledge and achievement.
Primarily in premature times the rule laid down was of Absolute Contracts according to which it was held that a man was strictly bound by his contract, and that, in the absence of any express limitation of his liability, he must take the consequences of being unable to perform his obligation in changed circumstances. Therefore, it admitted no exception in favour of the promisor, who was liable for the breach of his promise, notwithstanding the subsequent occurrence of an accident or other contingency which prevented him from performing it.
The classic decision on the rule as to absolute contracts is a case of Paradine vs Jane case, where a lessee who was sued for arrears of rent pleaded that he had been evicted and kept out of possession by an alien enemy; such an event was beyond his control, and had deprived him of the profits of the land from which he expected to receive the money to pay the rent.
In this he was held liable on the ground that:
Where the law creates a duty or change and the party is disabled to perform it and hath no remedy over there, the law will excuse him but when the party of his own contract creates a duty or charge upon himself he is bound to make it good, if he may not withstanding any accident by inevitable necessity, because he might have provided against it by his contract.
Though this rule was peculiar to English Common Law, it continued to be enforced until 1863. Even shortly before that year, courts still refused to recognize any general principle that, a party might be released from the liability in the absence of an express condition which operates to release him in the particular event which accrued.
However, in 1863 in Taylor v. Caldwell case, Blackburn J., giving the judgment of the court of the Queen's Bench, held that the defendant were not liable in damages, since the doctrine of the sanctity of contracts applied only to a promise which was positive and absolute, and not subject to any condition expressed or implied. The learned Judge employed the concept of an implied condition to introduce the doctrine of frustration into English law, since he said, that it might appear from the nature of the contract that the parties must have known from the beginning that the fulfillment of the contract depend on the continuing existence of a particular person or thing.
Though the Doctrine of Frustration was first introduced into English law to cover situations where the physical subject matter of the contract had perished, it was quickly extended to cases where, without any such physical destruction, the commercial adventure envisaged by the parties frustrated.
Hypothesis:
The doctrine of frustration is relevant, when it is alleged that a change of circumstance or the alteration of the conditions, after the formation of the contract but before the conclusion of the contract, has rendered the fulfillment of the contract impossible, physically as well as commercially. The doctrine is not concerned with the initial impossibility which may render the contract void ab initio.
The principle of frustration of contract is applicable to a great variety of contracts. It is therefore, not possible to lay down an exhaustive list of situations in which the doctrine of frustration is going to be applied so as to excuse the performance of the contractual obligation undertaken.
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 Cladwell, 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 first day on which a concert was to be given, the hall destroyed by fire without the fault of either party. The plaintiff sued the defendant 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 found.
Contractual Excuse Clause In English Legal System:
English law has developed the Doctrine of 'Frustration which is discussed in the present topic. When the performance of a contract becomes impossible, the purpose which the parties had in mind is frustrated. If the performance becomes impossible because of supervening or unexpected and unforeseen events, the promisor is excused from the contractual obligation such a condition is implied in all contracts and is known as Doctrine of Frustration.
According to Chitty:
Frustration is so much concerned with the change in circumstances that it cancels the base of the contract as a whole or in case of performance, makes it different with that which was in consideration by the parties in the beginning and is concluded by the legal order.
Law relating to frustration in India is dealt under section-56 of the Indian Contract Act, 1872 which says that:
An agreement to do an act Impossible in itself is void. 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, become void when the act becomes impossible or unlawful, where one person has promise to do something which he know, or with reasonable diligence might have known, and which the promise did not know, to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such a promise sustains through the non- performance of the promise.
Section 56 of the Indian Contract Act, 1872 lays down a positive rule of law and the courts cannot travel outside the term of that section. It broadly simplifies the English rule and it neither leaves the matter to be determined according to the intention of the parties nor does it leave any scope for the consideration of the different theories propounded in England. The basis of the doctrine of frustration in India has been explained in Satyabrata Ghose v Mugneeram Bangur by Justice Mukherjee.
It is as follows:
- The essential idea upon which the doctrine is based is that of Impossibility of Performance of the contract. In fact, impossibility and frustration are often used as interchangeable expressions.
- The changed circumstances make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform impossibility.
- The doctrine of frustration is really an aspect or pact or the law of the discharge of contract by reason of supervening impossibility or illegibility of the act agreed to be done and hence comes within the purview of section-56 of the Indian Contract Act, 1872
Contractual Excuse clause in the Indian Legal System:
Law relating to frustration in India is dealt under section-56 of the Indian Contract Act, 1872 which says that:- An agreement to do an act Impossible in itself is void.
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, become void.
When the act becomes impossible or unlawful, where one person has promise to do something which he know, or with reasonable diligence might have known, and which the promise did not know, to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such a promise sustains through the non-performance of the promise. Section 56 of the Indian Contract Act,1872 lays down a positive rule of law and the courts can not travel outside the term of that section.
In fact, impossibility and frustration are often used as inter changeable expressions .The Changed circumstances make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform an impossibility. The Doctrine of frustration is really an aspect or factor the law of the discharge of contract by reason of supervening impossibility or illegibility of the act agreed to be done and hence comes within the purview of section-56 of the Indian Contract Act, 1872.
Therefore It can be said that the provisions contained in section 56 Of the Indian Contract Act,1872 Lays down a positive rule of law and English Authorities therefore, cannot be of direct assistance, though it cannot be denied that they definitely have a persuasive value in showing how English Courts Have dealt with cases under similar circumstances or under similar conditions.
Indian Law On Doctrine Of Frustration And Its Essential Elements
A. Indian Law On Frustration:
The basis of the frustration in Indian legal system can be traced in the words of: Viscount Simon L. C's Opinion: Frustration is the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the agreement and as entirely beyond what contemplated by the parties when they entered into the agreement.
The legal basis of the doctrine of frustration in India was further strengthened be in Satyabrata Ghose v Mugneuam Bangur case in which Justice Mukherjee of the Supreme Court of India stated:
The essential idea upon which the doctrine is based is that of impossibility of performance of the contract, in fact Impossibility and Frustration often used as inter-changeable expressions. The changed circumstances make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform impossibility. The doctrine of frustration is really and aspect or part of the law of the discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of section 56 of Indian Contract Act, 1872.
In another case of Ganga Saran v. Ram Charan, Justice Fazal Ali of Supreme Court of India expressed his views about the legality of frustration in India. The Supreme Court observed:
We hold therefore that the doctrine of frustration is really an aspect or part of law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of section-56 of the Indian Contract Act.
Therefore, it is observed that since times the doctrine of frustration occupies an ambient position in various legal systems. In English Law, it is covered under the expression Frustration and in Indian Legal System; it comes under the scope of section 56 of the Indian Contract Act, 1872.
It is evident from these observations that the modem international merchant is expected to have a considerable degree of foresight. He should therefore guard himself against an unexpected or a supervening event.
B. Essential Elements of Doctrine of Frustration:
Frustration refers to when the contract is rendered impossible of its performance by external causes beyond the contemplation of the parties. It includes both:
- Impossibility of the performance of the contract and;
- Impossibility of the fulfillment of the ulterior purpose for which the contract was entered into.
The doctrine of frustration is relevant, when it is alleged that a change of circumstance or the alteration of the conditions, after the formation of the contract but before the conclusion of the contract, has rendered the fulfillment of the contract impossible, physically as well as commercially.
The doctrine is not concerned with the initial impossibility which may render the contract void ab initio. The principle of frustration of contract is applicable to a great variety of contracts. It is therefore, not possible to lay down an exhaustive list of situations in which the doctrine of frustration is going to be applied so as to excuse the performance of the contractual obligation undertaken.
The law upon this matter is undoubtedly under the process of evolution still. Yet, there are some grounds which have become established as to when the Doctrine of Frustration can be invoked. They are:
- Destruction of the subject Matter
- Destruction of a thing (other than the subject matter) But essential for the performance of the contract
- Unavailability of the subject matter or the thing essential for the performance of the contract
- When the method of performance becomes Impossible
- Death of the party
- War
- Strike
- Export/Import Prohibitions
- Change of Circumstances
Let us discuss it in details:
(a) Destruction of the subject Matter:
The most obvious application of the doctrine of frustration starts from the case like Taylor v. Caldwell. In which the subject matter of the contract was destroyed. In this case the defendants had agreed to permit the plaintiffs to use a music-hall for concerts on four specified nights. After the contract was made, but before the first night arrived, the hall was destroyed by fire. Blackburn J., giving the judgment of the Court of Queen's Bench, held that the defendants were not liable in damages, since the doctrine of the sanctity of contracts applied only to a promise which was positive and absolute, and not subject to any condition express or implied.
The learned judge employed the concept of an implied condition to introduce the doctrine of frustration into English law, since he said that it might appear from the nature of the contract that the parties must have known from the beginning that the fulfillment of the contract depended on the continued existence of a particular person or thing.
He held that the particular contract in question was to be construed as:
Subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing, without default of the contract.
Taylor vs Caldwell also points out that a contract may be frustrated by, destruction of only a part of the subject matter also. The contract related to the Surrey Gardens and Music Hall was discharged though, only the hall was destroyed, while the gardens still remained in use, as a place of entertainment. It is enough if the main purpose of the contract is defeated.
Therefore the principle evolved here is that, in cases where the performance depends upon the continued existence of a given person or a thing then a condition is implied that the impossibility of performance arising from perishing of that very person or thing shall excuse the performance of the contractual obligation. In words of J. Blackburn A condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.
However, it is to be noted, that, the partial destruction of the subject matter, which does not have this drastic effect will not frustrate the whole contract though, it may provide for one party with an excuse for performing in full or give the other party the option to rescind. The principle evolved in case of Taylor v. Caldwell was soon applied in other cases and was also accepted by the legislature in relation to agreements for the sale of goods.
b) Destruction of a Thing (other than the subject matter) BUT essential for the performance of the contract:
A contract may be frustrated in cases where, what is destroyed is not the subject matter of the contract but something which is essential for the performance of the contractual obligation. In case of Appleby v Myers case it was held that a contract to install machinery in a particular factory can be frustrated by the destruction of the factory, even though the subject matter of the contract here is the machinery. Now, as for answering to the question, that:
- What is essential for the performance of the contractual obligation of the contract?
But frustration cannot be pleaded if the event which made the performance of the contractual Obligation impossible existed already before the conclusion of the contract and, could have been covered by adding some appropriate clause to the contract.
(c) Unavailability of the subject matter or the thing essential for the performance of the contract:
A contract may also be frustrated if the thing or the person essential for its performance, though not ceasing to exist or suffering with a permanent incapacity becomes unavailable for that purpose. In other words, in a case where, a person or a thing essential for the performance of the contract becomes unavailable at the time fixed for the performance, as a result of some supervening event But becomes available later on then in such cases, this kind of temporary unavailability will most obviously frustrate the contract, if it is clear from the nature of the contract that, it was to be performed only at that particular time or within that specified time and, if the unavailability factor extended over the whole of that time.
It can be very well explained by the famous case Robinson vs Davidson. In this case the contract to play in a concert on a particular day was held to be frustrated by the illness of the performer on that very day.
A contract may even be discharged in cases where the subject matter to be obtained from a particular source becomes unavailable without the fault of the either party. To understand this, it can be categorized into following three groups:
- Cases where the contract expressly provides for the source.
- Cases where the contract contains no reference regarding the source but only one party contemplates its use.
- Cases where the contract makes no express provisions regarding the sources but both parties contemplate its use.
(d) When the method of performance becomes Impossible:
A contract may be held to be frustrated if the method of performing the contractual obligation becomes impossible. However, it is to be noted here that, ‘Where a contract provides for an attractive methods of performance, it is not frustrated if one or more of them become impossible, so long as, at least one method remains possible'. For example, if the contract is to deliver at X or Y, delivery must be made at X if delivery at Y becomes impossible. Similarly if the contract is to ship from X or Y shipment must be made from X is shipment from Y becomes impossible as held in the Furness Bridge case.
(e) Death of the party:
Certain personal contracts, such as contracts of employment apprenticeship or agency etc., are discharged by the death of either party. Even a commercial contract may involve reliance by one party on the personal skill of the other, in which case, the death of that party can discharge the contract. The same rules apply, where a party is permanently incapacitated from performing such a contract. In Jackson vs Union Marine Insurance Co. Ltd.16 the Court held the contract to write a book is frustrated by the supervening insanity of the author.
(f) War:
After the parties have entered into the contract and the war breaks out then:
- What is the effect on the performance of the contract?
- Whether the contract itself would be regarded illegal by the unexpected event (war) or it is only indirectly affected?
In this case the following statement of facts was given by Lord Reid:
The appellants agreed to sell to the respondents three hundred tons of Sudan groundnuts c.i.f. Hamburg. The usual and normal route at the date of the contract was via Suez Canal Shipment was to be in November/December, 1956, but on November 2, 1956, the Canal was closed to traffic and it was not reopened until the following April. It is stated that the appellants could have transported the goods via the Cape of Good Hope. The appellants refused to ship goods via the Cape. The question now is whether by reason of the closing of the Suez route, the contract had been ended by frustration.
The appellant's argument was that, it was an implied term of the contract that shipment should be via Suez. But it was held that such a term could not be implied. The customary or usual route via the Suez Canal being closed, the appellants were bound [by the Sale of Goods Act. 1893, Section 32(2)] to ship the groundnuts by a reasonable and practical route and, though the appellants might be put to greater expense by shipping the groundnuts via the Cape of Good Hope, that did not render the contract fundamentally or radically different, therefore, there was not any frustration of the contracts in the sense perceived.
However, if there are more than one ways of performing a contract and the war cuts off only one of them, the party is still bound to perform by the other way, however inconvenient or expensive it may be. This appears from the decision of the Privy Council in Twentsche Overseas Trading Co. Ltd. vs Uganda Sugar Factory Ltd.
Indian Interpretation in Gambhirmar vs Indian Bank Ltd, it was held that, if the intervention of a war is due to the delay caused by the negligence of a party the principle of frustration cannot be relied upon.
In yet another Laid Mohan Ghose case the Patna High Court held that, the further 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 firm of chartered accountants. The assured was accordingly allowed to recover the money paid by him under the policy. In another Calcutta case, a contract of carriage by river was intercepted by the enemy seizing the boat along with cargo, during the hostilities between India and Pakistan. The court allowed the carrier the plea of impossibility.
Therefore the trend observed is that the doctrine of frustration will not be applied where performance is actually prevented, as it was seen in number of charter party cases in which ships were trapped for a long time after the outbreak of hostilities in 1980. But there is a marked reluctance, to hold the contracts frustrated where the performance has become merely more difficult or less advantageous for one party.
The Suez Canal cases also rejected the argument that the greater expense caused to the party prejudiced by the closure of the canal was a ground of frustration. In words of Lord Simon:An increase of expense is not a ground frustration.
(g) Strike:
In French law it is said that a strike is not, in jurisprudential principle, a case of frustration and the same view is accepted in India as well.
A promisor may not be absolved of his duty to carry out his promise (of performance) merely because there is a strike by the workmen employed in the performance of the contract.
According to Williston:
Whether a strike will result in impossibility of performance or not would depend upon various other factors of the contract .
If the strike renders the performance impossible in any circumstances, the doctrine of frustration can be invoked for excusing the contractual obligation.
(h) Export and Import Prohibitions:
Apart from the case of war, a contract may be frustrated because subsequent to its conclusion, if the government has prohibited its performance, e.g. by placing an embargo on the exportation or importation of the goods sold.
However, great care should be applied in applying frustration in such cases because not every governmental prohibition has the effect of rendering the contract illegal. Sometimes the effect is merely to suspend and postpone the performance of the contract, it is always necessary to relate the prohibition to the terms of the contract, especially those governing the time of performance. The prohibition operates as a frustrating event only if; it is final and extends to the whole time, still available for the performance of the contract.
It these conditions are not satisfied, a party would be well advised to wait until the time of performance has expired, before treating the contract as frustrated because, the prohibition may be removed in time to allow the performance. If the government prohibition extends beyond the stipulated time for performance, it is normally safe to assume, that the contract is frustrated because, there is an implied condition in every contract that its performance shall be legal at the date when the contract is to be performed.
The rule, that a subsequent government prohibition operates as a frustrating event only if it oversees the whole of the contract period, applies likewise ,if the prohibition does not come into operation at once and, exporters are allowed a time of grace during which they may perform existing contracts.
In RO SST Smyth & Co. Ltd the contract provided for the shipment of horse beans from a Sicilian port c.i.f. Glasgow during October and November 1951. By an Italian regulation dated October 20, 1951, the exportation was prohibited as and from November 1, 1951, except under special license.
The sellers failed to ship, and the buyers claimed the damage. It was held by Justice Devlin that they were entitled to succeed.
The prohibition did not operate as a frustrating event; it merely reduced the time of shipment from two months to one month and, after the issue of the Italian regulation the sellers had still 10 day's grace within which they could have affected the shipment. If the prohibition of export had been instantaneous, it would have operated as a frustrating event, and the same would have been the case, if the sellers could have proved that they had no shipping facilities during the remaining 10 days.
Further, sometimes the government prohibition may allow exporters to perform at least some of the contracts into which they have entered into. It may thus leave the loopholes. It may, e.g. allow the exporters who have goods already on lighters or have begun to load them on the vessels, to fulfill their contracts. In these cases, an exporter who wishes to plead the frustration has the heavy burden of proving that, he could not avail himself of one of these loopholes.
(i) Change of Circumstances:
Frustration of the contract also occurs, if there is a material alteration in the conditions of the contract or if there is a fundamental change in circumstance (after the formation of contract but before the conclusion) and the change is so fundamental that, if the contract still remains (i.e. if the performance continues) then, it would result in a new and altogether different contract which is entirely different from that, as originally concluded by the parties. To hold the parties to such a contract would mean substitution of a different contract than what was originally agreed to or contemplated for.
It is however, easy to ascertain whether the contract is frustrated or not but it is difficult to ascertain the cases, where the performance is possible and where the fundamentally different situation has arisen unexpectedly.
The English courts have shown that the courts consider the principle of Sanctity of Contracts as infinitely of higher importance than the requirements of commercial convenience. Also, that they are not inclined to accept a contract as frustrated where the contract is capable of its performance.
The contract is declared frustrated only when the change in circumstance or change of the conditions is so fundamental so as to render the performance impossible or, if possible than the performance would result in something different from that contemplated for.
For example, in a contract for supply of goods, if the performance is delayed inordinately for reasons beyond the control of the parties and consequently the prices which were fixed in relation to the then existing conditions of labor and costs of raw material are entirely outdated, it may well be argued that the spine (Foundation) of the contract has gone in this category fall cases, in which the contract is aimed at the execution of a particular object and which has been defeated by the occurrence of the supervening events.
Normally an event, which was within the contemplation of the parties when they entered into the contract, does not operate as a frustrating event, even though they did not expect or consider it probable that it would happen; but in exceptional cases the doctrine has been applied where the parties were aware of the possibility that, the frustrating event might occur but still omitted to provide for that eventuality.
In Metropolitan Water Board vs Dick Kerr and Co. it was held that, the contract was frustrated since it was likely that there would be total change in conditions by the time, the restriction might be lifted.
However, at times it is difficult to contend successfully that the alteration in the condition or the change in the circumstance would be so fundamental that it would results in frustration of the contract for example in popular known cases of Suez-Canal.
In this case, the Suez Canal was closed November 2, 1956, as a result of Military operations between Egypt and Israel. The exporters in East Africa had sold certain goods for shipment in specified European destinations.
The contract was made before the date of closure of the Suez Canal but it had to be performed after that date i.e. when the Suez Canal closed. Now, when the date of the performance of contract came, the canal was closed, hence, the shipment was not possible.
However, it was possible to ship the goods (via Cape of Good Hope) to their destination. This route was no doubt longer and caused considerable additional expenditure. It became clear from it that the additional expense was of such a magnitude that the contract would not have gained. Hence the contract was frustrated on this ground.
The question that arose here was:
Whether the necessity to ship via the alternate route (i.e. via Cape of Good Hope) constituted a radical difference in the character of the seller's obligation or not?
To this, the House of Lords answered in negative. The court held that .the sellers were under a duty to send the goods by a reasonable and practicable route when the usual route via the Suez Canal was not available. In the present case, the alternate route was available i.e. via Cape of Good Hope.
In the Court of Appeal Harman L.J. stated that the general attitude of the English courts to the issues of frustration is given in the following expression:
Frustration is a doctrine only too often invoked by a party to a contract who finds performance difficult or unprofitable, but it is very rarely relied upon with success.
It is, in fact, a kind of last ditch, and, as Lord Radcliffe says in his speech in the most recent case, it is a conclusion which should be reached rarely and with reluctance.
Frustration of Venture
English Law was first to introduce the doctrine of frustration in the landmark case of Taylor v. Caldwell .It was later applied to the cases where, the commercial venture envisaged by the parties was frustrated without the destruction of the subject matter of the contract. It first appeared in 1874, in case of Jackson v. Union Marine Insurance Co. Ltd. In this case a ship was required to proceed from Liverpool to Newport to load a cargo for San Francisco. On the first day, out from Liverpool the ship ran aground, and it took six weeks to refloat her, and another six months to complete repairs.
The jury was asked whether the time necessary for getting the ship off and repairing her so as to be a cargo-carrying ship was so long as to put an end in a commercial sense to the commercial speculation entered upon by the ship owner and the charterers. The jury answered in the affirmative, and the Court of Exchequer Chamber held that the charter party ended upon the mishap. Bram well B. said that the jury had found that a voyage undertaken, after the ship was sufficiently repaired would have been a different voyage... different as a different adventure...
It must be noted here that the principle of frustration is not only confined to physical impossibilities. It also extends to cases where the performance of the contract becomes physically possible, and the object that the parties had in mind failed to materialize.
The well-known coronation cases Krell v. Henry is the one that illustrates this:
In it the defendant agreed to hire from the plaintiff a flat for June 26 and 27, on which days it had been announced that the coronation procession would pass along that place. A part of the rent was paid in advance.
But the procession having been cancelled owing to the King's illness, the defendant refused to pay the balance. It was held that, the real object of the contract, as recognized by both the contracting parties, was to have a view of the coronation procession. The foundation of the contract here was- taking place of the procession and, the object of the contract was frustrated by not happening of the coronation. Hence, the plaintiff was not entitled to recover the balance of the rent.
Thus the Doctrine of Frustration comes into play in two types of conditions:Where the performance is physically cut off. And Where the object has failed to materialize.
Provisions And Codification Of Law In Indian Legal System
A. Provisions In Indian Legal System:
The Supreme Court of India has held that section 56 of the Indian Contract Act, 1872 (which covers frustration) is to be applicable to both kinds of frustration i.e.
- Section 56 is applicable to cases where the frustration occurs because the performance is physically cut off.
- Section 56 is applicable to cases where the frustration is a result of the object has failed to materialize.
In Satyabrata Ghose vs Mugneeram Bangur Justice Mukherjee of Supreme Court of India observed that:
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 It can concluded here that the concept of Frustration of venture was first introduced in English Law to cover situations where the physical subject matter of the contract was destroyed or had perished as in Taylor v. Caldwell but, it was quickly extended to cases where, without any such physical destruction, the commercial venture envisaged by the parties was frustrated.
It should be kept in mind that English writers in their compilations have discussed the above mentioned doctrine under other titles like:
- Frustration of Purpose or Object, Frustration of Venture or Adventure,
- Frustration of Business Venture and Frustration of Commercial or Practical
Purpose of the Contract but all of them contain the common purport.
When the performance of a contract becomes impossible, the very purpose which the parties had in mind gets frustrated. If the performance of the contractual obligation becomes impossible on account of a supervening event, the promisor is excused from the performance of the contract. This is known as the Doctrine of Frustration under the common law and is covered under Section-56 of the Indian Contract Act, 1872. This doctrine is based on the maxim ‘Lex non cogit ad impossibilia' i.e. is - the law does not compel to do something which is impossible.
In words of Justice Krishna Iyyer quoting Anson in Union of Indian vs Domoni and Co. held:
Most legal system makes provision for the discharge of contract where subsequent its formation, a change of circumstances senders the contract legally or physically impossible of performance. And indeed it is a part of statutory aw of India.
In Indian Legal System there is a codification regarding the law in all its facts under sections 32 to 36, section 56 and 65 in Indian Contract Act 1872.Section 32 to section 36 deals with contingent contracts. Discussion:
Section 32, Section 33, Section 34, Section 35 and Section 36.
In section 32 it is postulated that if the contingent event becomes impossible, the contract is void.
Section 33 of the contract Act of India speaks of enforcement of contingent contracts i.e. contingent on event not happening.
Section 34 of the Indian Contract Act refers to cases where event on which a contract is contingent is deemed impossible, if it is the future conduct of a living person.
Section 35 of the Indian Contract Act, 1872, deals with contracts becoming void which are contingent on happening of a specified event with in a fixed time. It also advents as to when the contracts may be enforced which are contingent on specified events not happening within the fixed time.
Section 36 of the contract Act of India (1872) postulates that in a contingent contract to do anything or not to do anything, if an impossible or unexpected event or if a supervening event happens, are void, irrespective of the fact whether the impossibility, of the event is known to the parties to the contract or not, at the time of formation of the contract.
Section 56 of the Indian Contract Act (1872) Says that:
An agreement to do an act impossible in itself is void. A Contract to do 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 where one person has promised to do something which he knew, or with reasonable diligence might have known, add which the promisor did not know, to be impossible or unlawful, such promisor must make compensation to such promisor for any loss which such promise sustain through the nonperformance of the promise.
C. Operation under Indian Legal System:
In Indian legal system, Doctrine of Frustration [under provisions of section 56 of the contract Act of India (1872)] operates in two ways:
- When the performance of the contract becomes impossible.
- When the performance of the contract becomes unlawful.
Section- 65 Section 65 of the Indian Contract Act, 1872 says that, when an agreement in discovered to be void or when the contract becomes void, any person who has received any advantage under such an agreement or contract, is bound to restore it or, in other words the person who received the advantage must make a compensation for it (the advantage received) to the person for whom he received it.
It can be concluded here that the Doctrine of Frustration is exhaustively codified in Indian legal system.
D. Self Induced Frustration:
A party cannot rely on self-induced frustration, that is, frustration due to one's own conduct or due to the conduct of those for whom one stands responsible. The principle of frustration is that- should not be self-induced as explained in Maritime National Fish Ltd v Ocean Trawlers Ltd. In this, it was explained that:
The essence of frustration is that it should not be due to the act or election of the party.
The facts of the case were:
The appellants hired the respondents' trawler, called the St. Cuthbert to be employed in fishing industry only. Both parties knew that the trawler could be used for that purpose only under a license from the Canadian government. The appellants were fishing five trawlers and, therefore applied for five licenses. Only three were granted and, the Government asked the appellants to name three trawlers and they named the trawlers. They then repudiated the charter and pleaded frustration in response to the respondents action for the hire.
The judicial Committee of the Privy Council held that the frustration in this case was the result of the appellant's own choice of excluding the respondent's ship from the license and, therefore, they were not discharged from the contract.
In yet another case Bank line v Arthur Capel & Co. Lord Summer had observed that:
I think it is now well-settled that the principle of frustration of an adventure assumed that the frustration arises without blame or fault on either side. Reliance cannot be placed on a self-induced frustration.
View taken by Indian Legal System the Indian courts have taken the view that if the event which made the performance of the contract impossible, happened because of the fault of the promisor, then it is undoubtedly a case of self-Induced frustration and the promisor will be liable in such a case the Supreme Court in Boothalingam Agencies vs V.T.C. Periasamy held:
In other words, the doctrine of frustration of contract, cannot apply where.
The event which is alleged to have frustrated the contract arises from the act or election of the party-We hold that this principle cannot be applied to the present case for there was no choice or election left , to the appellant to supply chicory other than under the terms of the contract. On the other hand, there was a positive prohibition imposed by the license upon the appellant not to sell imported chicory to any other party but he was permitted to utilize it only for consumption as raw material in his own factory.
The essence of self-induced frustration is, that the act or omission which results in frustration, must be something deliberate and intentional. Frustration is not ‘self-induced', if what is shown is merely passive negligence. It should be of such a character, that it might' tie fairly inferred there from, that the promisor has no intention of performing the contract and has in effect repudiated it.
The principle of frustration of a contract assumes that, the frustration arises without blame, as fault on either side. Reliance cannot be placed on self-induced frustration. But it may give the other party to the contract the option to treat the contract as repudiated. Where, antecedent to frustration, the promisor is not only diligent in obtaining the permit, but even withdraw his application for permit the prior conduct on his part would enable the other party to repudiate the contract (under section 39). This constitutes a case of self-induced frustration.
Therefore the conclusion drawn is that, a party cannot rely on the self-induced Frustration, that is, a frustration due to one's own conduct or due to the conduct of those for whom one is responsible. The doctrine therefore, does not protect a party whose own breach of contract actually results in frustrating event nor does it protect him if the breach is only one of the factors, leading to the frustration. The onus of proving that the frustration is self-induced is not the party who alleges it in the case.
LEGAL EFFECTS AND JUDICIAL INTERPRETATIONS UNDER INDIAN LEGAL SYSTEM:
The most obvious legal effect of the doctrine of frustration is the discharge of the contractual liability of the contract. The legal effect of the frustration does not depend on the intention or opinion or, even the knowledge of the parties to the contract regarding the event. The belief, knowledge and intention of the parties, however, are evidences on which court is required to from its conclusion that whether the changed circumstances altogether destroyed the very basis of the contract or not.
Therefore it can be said that, frustration operates automatically to discharge the contract irrespective of the intention or interest of the parties concerned and also irrespective of the circumstances.
The Indian Law under Section 56 of the Indian Contract Act, 1872 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties.
It has been exhaustively explained by the Supreme Court in Satyabrata Ghosh vs Mugneeram & Co.Justice B. K. Mukherjee in his case observed that: Satyabrata Ghosh v. Mugneeram & Co. AIR 1954 SC 44.
The doctrine of frustration is really an aspect or part of law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of Section 56 of the Indian Contract Act.
‘Frustration' puts an end to the liability to perform the contract and 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.
The other legal effect which emerges out is the Adjustment of the rights of the parties and the rights of the parties are adjusted under section 65 of the Indian Contract Act (1872).
Conclusion:
Therefore, it can be summed up by saying that ‘Frustration' occurs when the law recognizes that without the fault of either party, a contractual obligation has become incapable 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.
According to Frustration of Contract, where existence of a specific thing is, either by terms of contract or in contemplation of parties necessary for the performance of a promise in the contract, the duty to perform the promise is discharged if, the thing is no longer in existence at time for performance. And the Frustration of Purpose excuses a promisor in certain situations, when the objectives of contract have been defeated by circumstances arising after formation of agreements, and the performance is excused under this rule even though there is no impediment to the actual performance.
Therefore it can be said that Frustration is in the sense, unforeseen and unexpected dissolution of the contract due to the occurrence of some accidents which makes its performance impossible.
In other words, Frustration means, the dissolution of the contract due to impossibility of performance of the contractual obligation, which happens unexpectedly.
‘Frustration' therefore refers to an unexpected dissolution of the contract due to impossibility of performance of the contractual obligation of the contract. And the same view is adopted by the English Courts as well as the Indian Courts. Doctrine of Frustration has been discussed under various heads by the English as well as Indian writers such as - Impossibility, Supervening Impossibility, Discharge by Subsequent Impossibility and Discharge by operation of Law.
Therefore from the discussion of the Doctrine of Frustration it is evident that, in English Law and in the Legal System of India, the difficulty in performance of contractual obligation or making it more expensive, does not naturally changes the nature of the contract and also does not make it a completely new contract. The occurrence of unexpected events like fall of value of currency, high price of raw materials, scarcity of some goods, which extraordinary increases the extend of contractual obligations and restrain the contracting parties to get the commercial profit which they had anticipated at time of the formation of contract however, is not sufficient, to excuse the performance and define frustration.
The conclusion drawn here is that although the ‘Doctrine of Frustration' is very near to the rule of altered conditions or the change in Circumstances but it is not exactly like it. The Doctrine of Frustration relates to the effect of the event or events which prevents the performance purpose of the contract while the rule of altered conditions or the change in Circumstances relates to or discusses the change of fundamental condition of the contract, which forms the very base of the contract.
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