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Frustration Of Contracts: Impossibility, Legal Changes, And The Impact On Contractual Obligations

It is presumed by the law that if the law is created for the regulation of any group of people of that aspect of society are supposed to follow the law. Similarly, when the Law of Contract is created to regulate commercial transactions, people are expected to follow the law.

However, there is always an equal probability of people not following that law, intentionally or unintentionally. If people do not fulfil their liabilities, the law in itself has remedies. But, at certain times, it may happen that due to external circumstances which are in nobody's control, the parties to the contract may not be able to fulfil the liabilities.

Under such circumstances, it would be grievously unjust to impose any sort of penalty on either of the parties since nobody is at fault, and everyone would have fulfilled their liabilities reasonably had the circumstances frustrating the contract impossible not happened. Hence, in order to avoid such circumstances, the lawmakers had drafted a separate provision to 'frustrate' such contracts under Section 56 of the Indian Contract Act, 1872.

Section 56 of ICA, 1872[1] is divided into 3 parts:

  • Part (i) talks about an act that is already impossible.
  • Part (ii) talks about such acts, which later become impossible to do.
  • Part (iii) talks about Compensation for not performing such acts which were already known to be impossible, and parties still entered into the contract.

This whole concept can be classified as - Initial Impossibility and Subsequent Impossibility in the performance of the contract. A contract that cannot be performed at the time it is created is often void from the start, while a later impossibility ends a legitimate contract at the time it becomes impossible to do, and any further performance is excused. The latter refers to situations that interfere with the practical intent of the contract by striking at its foundation and making it physically or figuratively impossible as well.

It was held in Satyabrata Ghose v. Mugneeram Bangur & Co.,[2]:
"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 that 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 found it impossible to do the act which he promised to do."

Now, many instances can turn an initially possible-seeming contract into an impossible act.

Some of them include:
  1. Destruction of Subject Matter
  2. Death or Incapacity of the Party
  3. Intervention of Wars
  4. Change in Laws, or other governmental interventions
  5. Non-Occurrence of Contemplated Event
  6. Changes in Circumstances
  7. Delay in Time where Time is an Essence of Contract, etc.

One instance that can make an act impossible is 'Subsequent Changes in Law'. For example � An act which was legal yesterday when A and B entered into a contract to do a future act is declared illegal today. This frustrates the contract as the parties cannot perform their obligation now, as the object of the contract is declared illegal now. It is presumed that every person in the territory of the country knows the laws of the land, but it is impractical to presume that everyone or anyone would know the amendments or the new laws that the government would want to introduce in the future.

However, if the subsequent laws demarcate such an act as illegal, then and then only it would come under the ambit of 'Frustration of Contract' since only then the cat becomes impossible in a true sense. However, if an act does not become illegal and impossible with, say, greater liabilities or hardships on the part of one party, such change in the law would not become a ground for frustration, as the act is still a legal or a possible act, but just with greater hardship. Such 'Changes in Law' does not render the very act's performance impossible.

For example: In the latest case of South East Asia Marine Engineering Constructions Ltd. v. Oil India Limited,[3] wherein the initial term of the contract was only for two years; however, it was subsequently extended by mutual consent for two further terms of one year each before eventually expiring. High-Speed Diesel (HSD), one of the materials required to carry out the drilling operations, saw an increase in price during the term of the contract.

The argument made by the appellant was that the Respondent became obligated to pay for the increase in their costs since the price of HSD, a necessary component for carrying out the contract, increased. However, the court dismissed the appeal and upheld the order of the Arbitral Tribunal.

The Court held that commercial hardships could not be the ground for frustration of the contract as long as it does not render the performance of the act as impossible. This was also highlighted in Energy Watchdog v. CERC.[4] In order to mitigate such commercial hardships, the parties can, while contracting, draft a force majeur clause in the contract. It was also held that �

"Allocation and assumption of risk is not simply a matter of express or implied provision but may also depend on less easily defined matters such as "the contemplation of the parties", the application of doctrine can often be a difficult one. In such circumstances, test of "radically different" is important : that doctrine of frustration is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between contract as provided for and contemplated and its performance in the new circumstances."[5]

Hence, as long as there is any change in the law which renders the performance of that act impossible, the contract can be frustrated. But if the change in law does not render the act to be performed as impossible, and just comes up with more hardship (say, commercial hardship), the contract may not be frustrated merely on this ground.

  1. Section 56, Indian Contracts Act 1872.
  2. Satyabrata Ghose v. Mugneeram Bangur & Co., [1954] SCR 310.
  3. South East Asia Marine Engineering Constructions Ltd. v. Oil India Limited, 2020 SCC OnLine SC 451.
  4. Energy Watchdog v. CERC, (2017) 14 SCC 80.
  5. Supra.

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