NATIONAL LAW SCHOOL OF INDIA UNIVERSITY, NAGARBHAVI, BANGALORE
FRUSTRATION OF CONTRACT: A COMPARATIVE STUDY
COURSE TEACHER: PROF. G.V. AJJAPPA
SUBMITTED BY: RAJAT SOLANKI
LL.M. I YEAR (BUSINESS LAW)
TABLE OF CASES................................................................................. ......................... 3
INTRODUCTION .......................................................................................................... 4
FRUSTRATION OF CONTRACT.................................................................................... 6
FRUSTRATION OF CONTRACT IN ENGLISH LAW................................................. 11
FRUSTRATION OF CONTRACT IN INDIAN LAW.................................................... 12
TABLE OF CASES
Atkinson v Ritchie (1809) East 530
Davis Contractors Ltd. v. Fareham Urban District Council (1956) AC 696
Hirji Mulji v. Cheong Yue Steamship Co Ltd (1926) AC 497
Krell v. Henry (1903) 2 K.B. 740
Paradine v. Jane (1647) Aleyn 26
Satyabrata Ghose v. Mugneeram Bangur & Co AIR 1954 SC 44
Taylor v. Caldwell (1863) 3 B. & S. 826
Doctrine of frustration occupies a special place in the Law of Contract. This doctrine of frustration was evolved to mitigate the rigour of the common law’s insistence on literal performance of absolute promises. Under the doctrine of frustration a contract may be discharged if after its formation events occur making its performance impossible. The English Common Law historically holds the parties to their bargain, thus leaving them to make their own provisions for events outside of their controls, for circumstances which may make their obligations more burdensome and for instances which may render further performance of contract impossible. It was a general rule of the law of contract before 1863 that a person was absolutely bound to perform any obligation which had been undertaken by him and he could not claim to be excused by the mere fact that performance of obligation had subsequently become impossible, i.e., a person was bound to perform the obligation undertaken by him without claiming excuse of subsequently impossibility of performance of the obligation. In other words, where a man had undertaken an absolute positive obligation, then he could not say that he was relieved from the obligation on the ground of supervening events over which neither party had control rendered the performance impossible.
In 1647, the judges in Paradine v. Jane laid down rule as to absolute contracts, where Paradine sued Jane for rent due upon a lease. Jane pleaded that an alien enemy had invaded with army and entered upon the defendants’ possession and expelled him out of possession due to which he could not take the profits from the lease. The plea was that the rent was not due because the lessee had been deprived of the profits from which the rent should have come by the events which are beyond his control. The Court held that this was no excuse.
The judges laid down rule as to absolute contracts in the following words:
...when the party by his own contract creates a duty or charge upon himself, he is bound to make it good if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract.
This rule of absolute contracts works well where it would be reasonable to expect it to provide for the event having regard to the nature of the contract or the circumstances in which it was made.
The rule as to absolute contract implies that when the law casts a duty upon a man if he binds himself by contract absolutely to do a thing then he cannot escape liability for damages for proof that as events turned out performance is even impossible. The justification to the rule as to absolute contract is that a party to a contract can always guard against unforeseen circumstances by express stipulation, but if he voluntarily undertakes an absolute and unconditional obligation then he cannot complain merely because events turn out to his disadvantage.
It is because of the fact that the parties to the agreement could have expressly provided that upon the fulfilment of a condition or occurrence of an event both of them would be discharged of some or all of their obligations under the contract.
The rule as to absolute contracts has been accepted and applied in a number of cases. A modification of this rule came in Atkinson v Ritchie which was a case of supervening illegality, where the dispute was between the cargo-owner and the ship-owner of British ship for short delivery of cargo. The ship owner was held liable in damages when he sailed the ship away with only half cargo loaded upon a rumour of a hostile embargo being laid on all British ships. The Court denied availability to ship-owner of the way to escape from his contractual obligation on the pretext of threatening embargo.
FRUSTRATION OF CONTRACT
Frustration signifies a certain set of circumstances arising after the formation of the contract, the occurrence of which is due to no fault of either party and which render performance of the contract by one or both parties physically and commercially impossible. These set of circumstances are regarded as the release of the parties from any further obligations. Where the entire contract performance of a contract becomes substantially impossible without any fault on either side, the contract is prima facie dissolved by the doctrine of frustration.
Section 56 of the Indian Contract Act, 1872 incorporates the doctrine of frustration which relates to the performance of contracts and it purports to deal with one class of circumstances under which performance of a contract is excused on the ground of the contract becoming void. It reads as follows:
Agreement to do impossible act: An agreement to do an act impossible in itself is void.
Contract to do act afterwards becoming impossible or unlawful: A contract to do an act which, after a 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 be something which he knew or, with reasonable diligence, might have known, and which the promisee did not know to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such promisee sustains through the non-performance of the promise.
In Taylor v. Caldwell, the Court of Queen’s Bench formulated the general rule of discharge which is known as “Doctrine of Frustration”. In this case, Caldwell (defendant) agreed to let Taylor (plaintiff) have the use of the Surrey Gardens and Music Hall for the purpose of giving concerts on four designated days in the summer of 1861. The plaintiff had agreed to pay £100 each day. After the making of the agreement and six days before the first day on which the concert was to be given, the hall was destroyed by an accidental fire. The destruction was without any fault on either party and was so complete that in consequence of it no concert could be given as intended. The plaintiff brought an action against the defendant for damages for breach of the contract which plaintiff was unable to perform through no fault of his own. The defendant was held not liable to pay. Blackburn J. delivering the judgment observed:
“The principle seems to us to be that, the contract in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing, shall excuse the performance.”
Thereafter this doctrine of frustration became a special tool by which the rules as to absolute contracts are reconciled with a special exception which justice demands as such.
The most evident ground which brings this doctrine into operation is the material destruction of the subject matter of the contract before performance falls due. In such cases the party cannot be said to have undertaken an absolute positive obligation. The obligation is subject to a condition implied by law that the parties contracted on the basis of the continued existence of the particular person or thing. After being established in Taylor v. Caldwell, the doctrine of frustration entered into a period of growth and the Courts showed preparedness to hold that the continuance of a contract was conditional upon the possibility of its performance. The doctrine of frustration was extended to cases in which performance became impossible otherwise than through the perishing of a specific thing and also to cases where performance did not become impossible at all but the commercial object, or purpose, of the contract was frustrated.
In Krell v. Henry, the plaintiff agreed to let a room to the defendant in Pall Mall for the days on which the processions planned for the coronation of King Edward VII were to take place. Both parties understood that the purpose of the letting was to view the coronation procession, but this was not expressly stated in the agreement. The procession was postponed owing to the illness of the king. The contract was frustrated when the processions were postponed. The performance of the contract was not physically impossible because the defendant could have used and paid for the flat on the days in question. The Court took the view that the procession was the foundation of the contract and that the effect of its cancellation was to discharge the parties from the further performance of their obligations. It was no longer possible to achieve the substantial purpose of the contract. Thus the frustration was not restricted to physical impossibility, but it also applied to the cases where the event which renders the contract incapable of performance is the cessation or non-existence of an express condition or state of things, going to the root of the contract, and essential to its performance.
The essence of frustration is found in Krell v. Henry where every individual condition could be performed. There was no impossibility of performance and both the parties could do exactly what they had in terms contracted to do. But the basis of the contract went because the achievement of its main purpose was frustrated. This is considered to be true frustration as opposed to discharge by impossibility of performance.
In Davis Contractors Ltd. v. Fareham Urban District Council, Lord Radcliffe said 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. There must be a change in the significance of the obligation that the thing undertaken would be a different thing from that contracted for, if performed.
In Satyabrata Ghose v. Mugneeram Bangur & Co , 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.
Under the doctrine of frustration, the law excuses further performance where the contract is silent as to the position of the parties in the event of performance becoming impossible or only possible in a very different way from that originally contemplated. It operates to excuse from further performance where it appears from the nature of the contract and the surrounding circumstances that the parties have contracted on the basis that some fundamental thing or state of things will continue to exist, or that some particular person will continue to be available, or that some future event, which forms the basis of the contract, will take place.
Mulla has summarised the doctrine of frustration and its operation in following words: the doctrine of frustration was evolved to mitigate the rigidity of the common law’s persistence on literal performance of absolute promises. The main purpose of the doctrine of frustration was to give effect to the demands of justice as a measure to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances. This doctrine of frustration must be kept within narrow limits and ought not to be extended and is not to be invoked lightly since the effect of frustration is to kill the contract and discharge the parties from further liability under it. The essence of frustration is that it should not be due to the act or election of the party seeking to rely on it, frustration brings the contract to an end forthwith and automatically. The frustrating event must be some outside event or extraneous change of situation and it must take place without fault on the side of the party seeking to rely on it.
APPLICATIONS OF DOCTRINE OF FRUSTRATION
A contract may be frustrated if it becomes impossible to perform, or if its purpose is frustrated, or if performance becomes illegal. The doctrine of frustration of contract is applicable to a range of contracts. The few grounds are:
1. Destruction of the subject-matter: The most evident cause of impossibility is the destruction of the subject-matter of the contract. The doctrine of impossibility applies with full force where the actual and specific subject-matter of the contract has ceased to exist.
2. Non-occurrence of a particular event: The doctrine of frustration also applies to cases concerning the cancellation of an expected event. It is possible that the performance of a contract remains entirely possible, but owing to the non-occurrence of an event contemplated by both parties as the reason for the contract, the value of the performance is destroyed.
3. Death or Incapacity: Where performance of obligations under a contract for personal services is rendered impossible or radically different by the death or incapacitating illness of the promisor, the contract will be frustrated. A party to a contract is excused from performance if it depends upon the existence of a given person, if that person dies or becomes incapable to perform.
4. Change of circumstances: Where circumstances arise so as to make the performance of the contract impossible in the manner and at the time contemplated, the contract will be frustrated.
5. Legislative or Administrative Intervention: When legislative or administrative intervention has directly operated upon the fulfilment of the contract for a specific work as to transform the contemplated conditions of performance, the contract will be dissolved.
EFFECT OF DOCTRINE OF FRUSTRATION
1. Contract frustrated automatically: The rule established at common law is that the occurrence of the frustrating event brings the contract to an end forthwith and automatically. It is not required that the either party to the contract take steps to rescind the contract. The obligations of both the parties get terminated immediately on the happening of event.
2. Future obligations discharged: The effect of frustration at common law is to release both parties from any further performance of the contract. All obligations falling due for performance after the frustrating event occurred are discharged.
3. Accrued obligations remain: Legal rights or obligations already accrued and due, before the frustrating event occurred, are left undisturbed.
FRUSTRATION OF CONTRACT 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. 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.
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.
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.
The Law Reform (Frustrated Contracts) Act, 1943 enacted by the British Parliament now provides that all sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be payable. The act also provides that if the party, who has received the sum, has incurred expenses before the time of discharge in, or for the purpose of, the performance of the contract, the court may, if it consider it just to do so, having regard to all the circumstances of the cases allow him to retain, or, as the case may be recover the whole or any part of the sums so paid or payable. But he cannot recover or retain any thing in excess of the expenses so incurred by him. The fundamental principle underlying the Act is the prevention of unjust enrichment of either party to the contract at the other’s expense and not the apportionment of the loss caused by the frustrating event between the parties.
FRUSTRATION OF CONTRACT IN INDIAN LAW
The first paragraph of section 56 represents the same law as in England. The second paragraph has the effect of turning into general rule, the limited exceptions under the English Law. It enunciates the law relating to discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. Section 56 lays down the rule of positive law and does not leave that matter to be determined according to intention of the parties. It is not permissible to import the principles of English Law out of the statutory provisions. The different theories formulated in England do not concern Indian cases because of statutory provisions in the Indian Contract Act, 1872. The doctrine of frustration in India is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done.
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. Section 56 of the Indian Contract Act, 1872 does not deal with the cases in which an event, the parties took it for granted will never happen does happen and makes the performance of the contract impossible. If it be held that this section is exhaustive, no relief can be granted to any of the parties on the happening of such an event, but this would be against the very principle underlying the section. If the inability to perform the contract is due to the fault of one of the parties, he cannot successfully plead frustration. It is also true that if the parties expressly contract with reference to the occurrence of the supervening events, frustration is inapplicable. But there is another type of case outside these rules. The parties when they made the contract, may have foreseen the supervening event as probable, but may have made no express provision with respect to it. If such event occurs, frustration can be pleaded.
IMPOSSIBILITY OF PERFORMANCE AMOUNTS TO FRUSTRATION
A man can be expected to do what is humanly possible but he cannot be expected to do what is not physically possible. 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.
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, it can very well be said that the promisor finds it impossible to do the act which he promised to do. If the performance of a contract becomes impracticable or useless having regard to the object and purpose the parties had in view then it must be held that the performance of the contract has become impossible. But the supervening event should take away the basis of the contract and it should be of such a character that it strikes at the root of the contract. 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. Whether the contract has become impossible of performance can be determined with reference to the terms of the contract and the supervening circumstances. If the supervening circumstances are such which were within the contemplation of the parties at the time of the contract or which could reasonably be within their contemplation, it could take the case out of the purview.
The law relating to Frustration of Contract in India is covered statutorily better than that of the English law relating to Frustration of Contract because it is just possible that under the English law there is no concurrence among judges on the reasons behind the frustration of a given contract. But in India as the provisions are contained in well defined terms, the chances of conflicting opinions are minimal.
Under the Indian law, the doctrine of frustration is an aspect of the law of discharge of contract by reason of supervening impossibility or illegality of the contract to be done and hence comes within the purview of section 56 of the Indian Contract Act, 1872. Therefore, the position in effect is that in Indian law it is not necessary to have any resort to any legal fiction or legal theory for application of the doctrine of frustration. The courts in India appear to have understood the real purport of provisions of the Act and thus they are applying them correctly to actual-factual situations of contracts arising before them for decision.
The decisions of English courts possess only a persuasive value but they may be helpful in showing how the courts in United Kingdom have decided cases under circumstances similar to those which have come up before the Indian courts. Initially the Indian courts including Privy Council appear to hold the opinion that the law under section 56 is not exhaustive on the subject. However with the passage of time and their repeated dealings with the provisions of section 56, the courts appear to have changed their opinion.
In the view of the provisions of section 56, the Indian law on the doctrine of frustration seems to be comparatively on a more sound footing than the 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 vide paragraph three 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 crystallised itself into a clear form and whatever ambiguity there had been in past has been settled substantially in the application of the doctrine.
1. Anson’s Law of Contract, 28th edn, (ed J.Beatson), Oxford University Press, New York, 2002.
2. Cheshire, Fifoot & Furmston’s Law of Contract, 15th edn, (ed M.P. Furmston), Oxford University Press, New Delhi, 2007
3. Mulla, Indian Contract and Specific Relief Acts, 12th edn, (ed Nilima Bhadbhade),Vol.1, Butterworths India, New Delhi, 2001
4. S.S. Ujjannavar, Cases and Materials on Contract, 1983
5. Treitel, The Law of Contract, 12th edn, (ed Edwin Peel), Sweet & Maxwell Ltd., London, 2007
1. Journal of Indian Law Institute,Vol.37, No.4 (1995)
2. The Cambridge Law Journal, Vol. 24, No. 2 (Nov., 1966)
1. The Indian Contract Act, 1872
2. The Law Reform (Frustrated Contracts) Act, 1943
 Anson’s Law of Contract, 28th edn, (ed J.Beatson), Oxford University Press, New York, 2002, p. 530
 Treitel, The Law of Contract, 12th edn, (ed Edwin Peel), Sweet & Maxwell Ltd., London, 2007, p. 924
 http://www.docstoc.com/docs/23799980/The-Doctrine-of-Frustration accessed on September 1,2010
 Supra, n.1, p.531
 S.S. Ujjannavar, Cases and Materials on Contract, 1983, p. 413
 (1647) Aleyn 26
 Id, p. 27
 Supra, n.2, p. 925
 Cheshire, Fifoot & Furmston’s Law of Contract, 15th edn, (ed M.P. Furmston), Oxford University Press, New Delhi, 2007, p. 721
 Mulla, Indian Contract and Specific Relief Acts, 12th edn, (ed Nilima Bhadbhade),Vol.1, Butterworths India, New Delhi, 2001, p.1116
 (1809) East 530
 Supra, n.11, p.1114
 Journal of Indian Law Institute,Vol.37, No.4 (1995), p. 446
 Section 56, Indian Contract Act, 1872
 (1863) 3 B. & S. 826
 S.S. Ujjannavar, Cases and Materials on Contract, 1983, p. 413
 Supra, n.2, p. 926
 (1903) 2 K.B. 740
 Supra, n.10, p.723
 (1903) 2 K.B. 748
 The Cambridge Law Journal, Vol. 24, No. 2 (Nov., 1966), p.206
 (1956) AC 696
 AIR 1954 SC 44 at 47
 Supra, n.11, p. 1115
 Hirji Mulji v. Cheong Yue Steamship Co Ltd (1926) AC 497 at 505
 Supra, n.11, p.1118
 Supra, n.5, p. 433
 Supra, n.1, p.557
 Satyabrata Ghose v. Mugneeram Bangur & Co. (1954) SCR 310
 Supra, n.11, p. 1112
 Supra, n.14, p.455