Contracts - Doctrine Of Frustration k1c5h

DOCTRINE OF FRUSTRATION (Project towards the partial fulfilment of the assessment in the subject of Contract Law)

SUBMITTED BY:

SUBMITTED

TO : HARSH SALGIA (1271) RANANJAY TALWAR (1284) SEMESTER I B.B.A., LL.B (HONS.)

DR. NIDHI GUPTA FACULTY OF LAW NLU, JODHPUR

NATIONAL LAW UNIVERSITY, JODHPUR SUMMER SESSION (JULY-NOVEMBER 2015)

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TABLE OF CONTENTS Table of contents

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Scope of the Project 3 I. Introduction 4 II. Concept of Frustration of Contract5 III. Specific grounds of frustration IV. Effects of Frustration V. Force majeure

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VII. Conclusion

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Bibliography 16

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SCOPE OF THE PROJECT

This research intends to look at the provisions which have been laid down to deal with the status of the contract when the performance of the contract becomes impossible or unlawful and reasons and grounds which deals with the frustration of contract. This work shows comparative study of doctrine of status. This project also looks upon the various other provisions which come into effect due to frustration of contract.

I. Introduction What is frustration of contract? This question can be replied by putting attention and searching reply of the question. What frustration is? In order to fully comprehend the concept of contract, it may be said that contractual obligation is fully and truly founded on the consent of the parties consensus ad idem that is meeting of the minds agreeing to the same thing in the same sense. Under the law, unforeseen or unforeseeable supervening events make the performance of the contract impossible for no fault of the party concerned, in such conditions contract may be frustrated. Frustration is by operation of law. It results in automatic involuntary extinction of the contract relieving both parties of their liabilities form the point of time of occurrence of that event. A party faced with an external occurrence or event that may make its performance under a contract impractical, onerous or even impossible might seek to argue that the contract has been frustrated. Under English law, frustration will result in the contract being terminated so that the parties are excused from further performance. However, in order for a contract to be frustrated, the event in question must be unforeseen, it must have occurred without the fault of either party to the contract and it must either make the contract’s performance impossible or it must destroy the fundamental purpose of the contract. The contract must also not contain a provision dealing with the supervening event; otherwise there can be no frustration on the basis that the contract has already allocated risk in of that occurrence. The doctrine of frustration is present in S. 56 of the Indian Contract Act 1852. 1 It says that any act which was to be performed after the contract is made becomes unlawful or impossible to perform, and which the promisor could not prevent, then such an act which becomes impossible or unlawful will become void. The Supreme Court pointed out that the doctrine of frustration could not be availed by the defendant when the non-performance of the contract was attributable to his own decision. The doctrine of frustration comes into play when a contract becomes impossible of performance, after it is made, on of circumstances beyond the control of the parties 1

Pollock & Mulla, The Indian Contract Act, 1872, p. 868 (Lexis Nexis 14th ed. 2014)

or the change in circumstances makes the performance of the contract impossible. The Court can give relief on the ground of subsequent impossibility if it finds that the whole purpose or the basis of the contract has frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was not contemplated by the parties at the date of the contract.

II. CONCEPT OF FRUSTRATION OF CONTRACT The doctrine of discharge from liability by frustration has been explained in various wayssometimes by speaking of the disappearance of a foundation which the parties assumed to be at the basis of their contract, sometimes as deduced from a rule arising, from impossibility of performance, and sometimes as flowing from the inference of an implied term. In Indian Contract Act the word frustration in not mentioned Section 56 provides that "A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.” Frustration in English law

Before the enactment of the Law Reform (Frustrated Contracts) Act, 1943, the principles of English Law were those as laid down in the Krell v. Henry.2 At common law, the contract is automatically brought to an end at the time of the frustrating event. Various theories have been put forth to explain the basis of the doctrine of frustration by courts in England. The main theories are: 1. Implied Term Theory: This theory implies that the contract is discharged because the parties can be taken to have impliedly provided that in the events which have subsequently happened, the contract would come to an end.3 2. Theory of Disappearance of the Foundation of the Contract: This theory implies that the contract is discharged because the foundation of the contract has gone by destruction of the subject-matter.

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Krell v. Henry, (1903) 2 KB 740: (1900-3) All ER Rep 20 (CA) https://bharatchugh.wordpress.com/tag/section-56-in-the-indian-contract-act/ (visited 07 october.2015)

3. Theory of Just and Reasonable Result: This theory states that it is the law that in particular circumstances, the contract shall come to an end. 4. Radical change in obligation: This theory states that the frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. If a contract is made, and for whatever reason it later becomes impossible to for one party to perform their obligations, then we need to think about frustration. Be careful to note that frustration is about subsequent impossibility; if a contract was impossible to perform right from the outset, then the issue is one of mistake and not frustration! You should first establish whether or not the particular situation in question has been expressly provided for in the contract. Such a provision is called a force majeure clause. For example, a contract for the sale of some goods being imported by sea might say, “in the event of the cargo being lost at sea, this is what happens…”. 4 A force majeure clause is only valid if the provision is full and complete – that is, it has to be specific about what risk is being provided for. If there isn’t a force majeure clause, then we need to look at the three sorts of frustration established in case law: 

Supervening illegality. Since the contract was made, a new law has made it illegal to carry it out! The best example is Avery v Bowden5 in which a ship was supposed to pick up some cargo at Odessa. With the outbreak of the Crimean War, the government made it illegal to load cargo at an enemy port, so the ship couldn’t perform its contract

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without breaking the law. The contract was therefore frustrated. Further performance rendered impossible. Two key reasons: Destruction of the subject matter: e.g. I agree to sell you my house, but then my

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house burns down. The non-availability of a party, due to death, illness, or other exceptional circumstances. E.g. you hire a famous band to play at a party, but the lead singer is taken ill and can’t perform.6

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http://www.ebcwebster.com (visited 07 october,2015) 1856 AC 450 6 http://www.lexisnexis.com (visited 07 october,2015) 5

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The nature of the contractual obligations becomes significantly different from what

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was agreed: Government intervention of some sort, which makes it unreasonable for the parties

 

to carry on with the contract. There are some points to be careful of here: A contract isn’t frustrated just because it’s become more difficult or expensive to perform. That’s a risk that you take when you enter into a contract. We’re looking for

 

some sort of physical impossibility. The supervening event must be beyond the control of both parties. The event must be unforeseeable by both parties.

Frustration in Indian Law

According to Section 56 of the Indian Contract Act, 1872, “An agreement to do an act impossible in itself is void” e.g., an agreement to discover treasure by magic. Contract to do act afterwards becoming impossible or unlawful: A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Compensation for loss through non-performance of act known to be impossible or unlawful: Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise." In Satyabrata Ghose v. Mugneeram Bangur & Co. 7 the Supreme Court held that the doctrine of frustration is an aspect and part of the 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, 1872. Supervening impossibility or illegality refers to the intrusion or occurrence of an unexpected event or change of circumstances beyond the contemplation of the parties; such event or change of circumstances must be so fundamental as to be regarded by law as striking at the root of contract as a whole or the basis of the contract no longer exists.

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AIR 1954 SC 44

Frustration may be defined as the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both striking at the core of the agreement, and as entirely beyond what was contemplated by the parties when they entered into the agreement. If an event which could not be foreseen by both parties supervenes, frustration would apply. Impossibility of Performance amounts to Frustration It cannot be disputed that when a thing is beyond the human control it cannot be expected from the party which had undertaken to do the work to suffer the consequences of not proceeding with the contract work and in such a situation both the parties are relieved from their contractual responsibilities.8 The word "impossible" in Section 56 of the Indian Contract Act, 1872 has not been used in the sense of physical or literal impossibility. The performance of an act may not be literally impossible, but it may be impracticable and unless from the point of view of the object and which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, The essential principles on which the doctrine of frustration is based is the impossibility, or, rather, the impracticability in law or fact of the performance of a contract brought about by an unforeseen or unforeseeable sweeping change in the circumstances intervening after the contract was made. In other words, while the contract was properly entered into in the context of certain circumstances which existed at the time it fell to be made, the situation becomes so radically changed subsequently that the very foundation which subsisted underneath the contract as it were gets shaken, nay, the change of circumstances is so fundamental that it strikes at the very root of the contract, then the principle of frustration steps in and the parties are excused from or relieved of the responsibility of performing the contract which otherwise lay upon them.9 Commercial Hardship

The alteration of circumstances must be "such as to upset altogether the purpose of the contract. Some delay or some change is very common in all human affairs, and it cannot be supposed that any bargain has been made on the tacit condition that such a thing will not 8 9

http://www.manupatraarticles.com (visited 13 Sept. 2014) http://www.ezinearticles.com (visited 05 october, 2015)

happen in any degree". This makes the court rather cautious in discharging parties from their contract. An illustration is Sachindra Nath v Gopal Chandra10,A situation like this has often been described as one of commercial hardship, which may make the performance unprofitable or more expensive or dilatory, but is not sufficient to excuse performance, for it does "not bring about a fundamentally different situation such as to frustrate the venture". Such cases may not fall within the purview of Section 56 and this is amply shown by the Privy Council decision in Harnandrai Fulchand v Pragdas11 by a contract in writing the plaintiffs bought of the defendants a number of dhotis to be manufactured by specified mills and to be delivered as and when the same may be received from the mills. The sellers delivered only part of the goods owing to the mills failing to perform their contract with the defendants as they were engaged in fulfilling certain Government contracts. The defendants pleaded frustration. It was held that the bargain was not frustrated, as the stipulation as to delivery did not make delivery by the mills a condition precedent.

III. Specific grounds of frustration

“The principle of frustration of contract, or of impossibility of performance is applicable to a greater variety of contracts. It is therefore, not possible to lay down an exhaustive list of situations in which the doctrine is going to be applied so as to excuse performance. Yet the following grounds of frustration have become well established. Destruction of subject Matter

The doctrine of impossibility applies with full force “where the actual and specific subject matter of the contract has ceased to exist”. On this point in India there was a recent case of Supreme Court of India Markfed Vanaspati & Allied Industries v. Union of India 12 in this case the Supreme Court held that Force Majeure clause can be invoked when it pertains to the contractual obligation that has purportedly become impossible of performance. While in

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AIR 1949 Cal 240 AIR 1923 PC 54(2): (1922-23) 5 IA 9 12 AIR 2007 SCC 679 11

English law Taylor v. Coldwell13 case is the best example of the frustration of contract on the ground of “destruction of subject matter”.

Death or Incapacity of party

The whole contract is based on the assumption of the continuance of life, and on the conditions which existed at the time. That assumption is made by both; it is really the foundation of the contract. In this regard there was a famous English case Robinson v. Davison,14 there was a contract between the pianists and sponsor that she play piano at a concert. On the morning of the day she informed the plaintiff that she was too ill to attend the concert that result plaintiff lost a sum of money. The plaintiff’s action for breach of contract failed. The court said that under the circumstances she was not merely excused from playing, but she was also not at liberty to play, if she was unfit to do so. Government, istrative or Legislative Intervention A contract will be dissolved when legislative or istrative intervention has so directly operated upon the fulfilment of the contract for a specific work as to transform the contemplated conditions of performance. In the case of Naihati Jute Mills v. Khyaliram Jagannath15 the fact of the case is that the buyer applied for licence of import but the rules had been changed and to obtain a licence he must show that he had used an equal quantity of Indian jute. Thus the buyer failed to supply the licence and was sued for breach. He pleaded frustration caused by the change in Government policy. But he was held liable. SHELAT J pointed out that if the government had completely forbidden imports, section 56 would have applied.16 But the policy of the government was that the licensing authority would scrutinize the case of the each applicant on its own merits. Intervention of War

Intervention of war or warlike conditions in the performance of a contract has often created difficult question. for instance the enclosure of Suez canal following the Anglo-French war 13

Taylor v. Caldwell, (1863) 3 B&S 826: 122ER 309 1871 LR 6 15 AIR 1968 SC 522 16 Supra note 1 at 901 14

with Egypt interrupted the performance of many contracts that time. The case Tsakioglou &Co Ltd v. Noblee & Thorl GMBH 17 deals with that situation, in it the contract between the parties was held frustrated on the basis of intervention of war due to implied of the contract. In Indian scenario, in a case before the Patna High Court A.F. Ferguson v. Lalit Mohan Ghose18 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 the money paid by him under the policy.

IV. Effects of Frustration

“It is well settled that if and when there is frustration the dissolution of the contract occurs automatically. It does not depend, as rescission of a contract does, on the ground of repudiation or breach, or on the choice or election of either party. Frustration should not be Self Induced

Explaining the principle that frustration should not be self induced, Lord WRIGHT said in Maritime National Fish Ltd v. Ocean Trawlers Ltd19 in this case the appellants hired the respondents trawler, called “St. Cuthbert” to be employed in fishing industry only. Both parties knew that the trawler could be used for that purpose only under a licence from the Canadian government. The appellants were using five trawlers and, therefore, applied for five licences. Only three were granted and the government asked the appellants to name three trawlers and they named trawlers other than the St. Cuthbert. They then repudiated the charter and pleaded frustration in response to the respondent’s action for the hire. The Judicial Committee of the Privy Council held that the frustration in this case was the result of the appellants own choice of excluding the respondents ship from the licence and, therefore they were not discharged from the contract.20 17

1962 AC 93: (1961) 2 All ER 179: (1961) 2 WLR 633 AIR 1954 PAT 596 19 1935 AC 524 20 http://www.manupatrafast.in (visited 06 october. 2015) 18

Frustration operates Automatically

Frustration operates automatically to discharge the contract irrespective of the individuals concerned, their temperaments and failings, their interest and circumstances. 21 The legal effect of frustration does not depend on their intention or their opinions, or even knowledge, as to the event. The belief, knowledge and intention of the parties are evidence, but evidence only on which the court has to form its conclusion whether the changed circumstances destroyed altogether the basis of the adventure and its underlying object. 22 In the case of Bombay Dyeing & Mfg v State of Bombay23 in this case Supreme Court has laid down that frustration puts an end to the liability to perform the contract. It does not exterminate the contract for all purposes. Act of God

The act of god is one of the important effects in the doctrine of frustration. The act of god we find in the law of tort but now we are discussing the expression in doctrine of frustration. Sir EDWARD COKE was the first who used the expression Act of God in the law. According to him the act of god means storms, lightning or etc are the part of Act of God and the most important point is that which is the intervention could not happen by the human being. In this regard there was a famous case called Shelley’s case, in this case the hon’ble court held that Act of God means storms, lightning or etc are act of god as they could not happen by the intervention of man.

V. Force majeure

A force majeure clause relieves one or both parties from liability to perform contract obligations when performance is prevented by an event or circumstance beyond the parties’ control. Typical force majeure events may include fire, flood, civil unrest or terrorist attack. Force majeure is a term used to describe a "superior force" event. The purpose of a force 21

Lord LOREBURN, in Davis Contractors v. Fareham Urban Distt Council, 1956 AC 696 MUKHERJEA J in Satyabrata Ghose, AIR 1954 SC 44 23 AIR 1958 SC 328 22

majeure clause is two-fold: it allocates risk and puts the parties on notice of events that may suspend or excuse service. Force majeure is present in common law as the doctrine of frustration of contract. This doctrine says that a contract will be frustrated if its fundamental purpose is destroyed. If this happens then the parties to the contract will be discharged from their obligations to perform the contract. Force majeure is some event which is unforeseen and unstoppable and which renders the performance of the contract impossible. The doctrine of frustration says that a contract’s performance will be rendered impossible because of some intervening or supervening event after the contract has been made. A lot of people while entering into contracts incorporate these force majeure clauses to be relieved from performance of all or part of their obligations on the happening of certain specified events beyond the control of the parties.24 The requirements of Force-Majeure are: 

It must proceed from a cause not brought about by the defaulting party’s default.

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The cause must be inevitable and unforeseeable.

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The cause must make execution of the contract wholly impossible. A party faced with an external occurrence or event that may make its performance under a contract impractical, onerous or even impossible might seek to argue that the contract has been frustrated. Under English law, frustration will result in the contract being terminated so that the parties are excused from further performance. 25 However, in order for a contract to be frustrated, the event in question must be unforeseen, it must have occurred without the fault of either party to the contract and it must either make the contract’s performance impossible or it must destroy the fundamental purpose of the contract. The contract must also not contain a provision dealing with the supervening event; otherwise there can be no frustration on the basis that the contract has already allocated risk in of that occurrence.26 The effect of both force majeure and the doctrine of frustration is that it leads to discharge of contract between the parties thus relieving them of their obligations under the contracts. Due to the apprehension that courts may not apply the concept of frustration of contract, parties 24

http://www.legalservicesindia.com/article/article/force-majeure-clauses-&-doctrine-of-frustration-of-contract1211-1.html (visited 07 october. 2015) 25 http://www.vccircle.com/byinvitation/2009/01/07/force-majeure-and-terrorism (visited 7 october. 2015) 26 Supra note 1 at 884

incorporate force majeure clauses in their contracts thus specifically providing for relief from any liability in case of an event which may render of performance of the contract impossible.

VII. Conclusion

The Doctrine of frustation says that if the performance of the promises becomes impossible to perform by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible, and the contract is deemed to be frustrated. And the obligation of the performance loses its validity. This means parties will not be liable to compensate any further for non-performance. This provision contains many other provision and tests to check that frustration has genuinely taken place or not. The object of the doctrine of frustration is to find a satisfactory way of allocating the risk of supervening events. The doctrine does not prevent the parties from making their own provision for this purpose. They can expressly provide that the risk shall be borne by one of them, not by the other, or they can apportion it or deal with it in any other way they like or let it lie where it falls. In the view of the provisions of section 56, the Indian law on the doctrine of frustration looks in a better position than English law. It is significant to note that fear of the misuse of the principle of supervening impossibility by any dishonest party has duly been taken care of in paragraph 3 of Section 56 which obliges the person, who with due knowledge or presumed knowledge of impossibility of performance of the agreement makes any innocent person enter into the agreement and thus suffer loss, to pay compensation to such innocent person in spite of the fact that such agreement is otherwise void. This type of structural arrangement is not found under the English law. The Indian courts have developed it by process of interpretation. The role played by Supreme Court placed it on a comparatively clear foundation through its remarkable judicial craftsmanship. Thus, the law has crystallized itself into a clear form and whatever ambiguity there had been in past has been settled substantially in the application of the doctrine.

BIBLIOGRAPHY BOOKS: Pollak and Mulla, The Indian Contract Act, 1872, (Lexis Nexis India, 14 ed. 2013) Joseph Chitty , Chitty on Contracts, (Sweet & Maxwell, 28th ed. 2001 revised) Jack Beatson, Andrew Burrows, John Cartwright, Anson’s Law of Contract, (Oxford University Press-New Delhi, 29th ed. 2010) Akhileshwar Pathak, Contract Law in India, (Oxford University Press-New Delhi, 2011) Avatar Singh, Contract and Specific Relief Act, (Eastern Book Company, 11th ed. 2013) G.H. Treitel, The Law of Contract, (Oxford University of Press, Edition: VI 2006) S.S. Ujjannavar, Cases and Materials on Contract, 1983

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