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An Overview of Section 56 of The Indian Contract Act

Agreement to do impossible act:

An agreement to do an act impossible in itself is void. —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 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.
Section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. (Naithati Jute Mills Ltd. V. Khyaliram Jagannath, AIR 1968 SC 522) (Para 7)

This section has three ingredients:

  1. It declares an agreement to do an act impossible in itself is void,
     
  2. It makes the contract to do an act void on account of the following events:
    · When the act becomes impossible to do after the contract is made, or
    · The act becomes unlawful by reason of some events which the promisor could not prevent.
     
  3. Paragraph 3 of this section postulates that where a person has promised to do something, which-
    a) He knew, or
    b) He, with reasonable diligence might have known to be impossible or unlawful, and

    Which promisee did not know to be impossible or unlawful, such promisor will be held liable to make compensation to the other party for any loss sustained through non-performance of the promise. (Alluri Narayana Raju v. Dist. Collector, Visakhapatnam Dist., A.I.R 2008 A.P. 264 at p.267) (Para 23)

To attract and apply Section 56, the following conditions must be filled:

  1. There should be a valid and subsisting contract between the parties,
  2. There must be some part of the contract yet to be performed,
  3. The contract after it is entered becomes impossible to be performed,
  4. The impossibility is by reason of some events which the promisor could not prevent, and
  5. The impossibility is not induced by the promisor or due to his negligence
    · (Industrial Finance Corporation of India Ltd. V. The Cannanore Spinning & Weaving Mills Ltd. and Ors, (2002) 5 SCC 54) (Para 42 and 43)
     
For example:
  1.  A had made a contract with the B for supplying certain goods at a place outside the State of Hyderabad when there was no restriction against the sending of goods outside that State. Later, such a restriction was imposed and the railway booking was closed and it remained so for a considerable time.
    HELD: that this supervening event had made the contract impossible and discharged the defendant from performing the contract.
    (Shree Krishen v. Gambhirmal, A.I.R. 1955 Hyd. 233) (Para 21)
     
  2. It has been held that where the performance of the contract is made impossible due to unexpected emergence of a fundamentally different situation which no party has foreseen and which happened in spite of that, the frustration of the contract occurs and the contractor is discharged from liability to compensate.
    (Dominion of India v. Bhikhraj Jaipuria, A.I.R. 1957 Pat, 586) (Para 85)

The frustration of Contract:

  • The term frustration of contract clearly, is not found in the Contract Act. The Doctrine of Frustration has been envisaged/introduced under Section 56 of the Contract Act.
     
  • If a contract becomes void because of the reasons stipulated in section 56 of the contract Act, in normal parlance it is called as the frustration of the contract.
     
  • The term frustration has been defined in the Black's Law Dictionary (9th Edition) as,  The prevention of the attainment of a goal such as contractual performance.
     
  • In relation to ‘contracts' the term has been described as the doctrine that if a party's main purpose is substantially frustrated by unpredictable/unforeseen change in circumstances, that party's duties are discharged and the contract is considered terminated.
     
  • Section 56; comprehensively deal with the doctrine of frustration. The principle underlying the section is that performance of a contract can be avoided if, on account of happening of an event, which is not the result of the action of either of the parties, the performance of the contract becomes impossible.
    (U.P. State Electricity Board v. Kanoria Chemical, AIR 1986 SC 156) (Para 41)
     
  • It was held that the essential idea upon which the doctrine of frustration is based is that of the impossibility of performance of the contract; in fact, impossibility and frustration are often used as interchangeable expressions.
     
  • The courts in India have held that the word impossibility used in Section 56 must be understood in a practical form and not in its literal sense.
    (Satyabrata Ghose v. Mugneeram Bangur and co., A.I.R 1954 S.C. 44) (Para 10 and 15)
     
  • It was observed that the impossibility contemplated by section 56 is not confined to something, which is not humanly possible.
    (Sushila Devi v. Hari Singh AIR 1971 SC 1756) (Para 11)
     
  • In another case, the SC held that unless the competent authorities have been moved and the application for consent or sanction has been rejected once and for all and such rejections made finally became irresolutely binding and rendered impossible the performance of the contract resulting in frustration as envisaged under section 56.
    (Nirmala Anand v. Advent Corporation Pvt. Ltd., AIR 2002 SC 2290) (Para 17)

Cases where Section 56 does not apply

Section 56 of the Contract Act, however, may not be applicable in the situation of:

  1. Self-induced frustration (impossibility is due to the default of the contracting party itself)
    (Ganga Saran v. Firm Ram Charan Ram Gopal, AIR 1952 SC 9), (Para 14) and
     
  2. Where in a contract, parties have expressly stipulated that the contract would stand despite such intervening circumstance.

Specific grounds of frustration:

The principle of impossibility/frustration of contract of performance is applicable to a great variety of contracts. The following grounds of frustration have become well established:

(1) Destruction of Subject-Matter
  • The doctrine of impossibility applies where the actual and specific subject matter of the contract has ceased to exist.
    For example:
    (a) A promise to let out a music hall was held to have frustrated on the destruction of the hall.
    (b) A contracted to sell a specified quantity of potatoes to be grown on his farms but failed to supply them as the crop was destroyed by a disease, it was held that performance had become impossible
     
  • Where the parties can still perform their main obligation despite the fact that the subject matter has gone out of their hand, frustration may not follow.
    For example:
    (a) An agency for dealing with the goods manufactured or sold by the principal was not frustrated when the principal's factory was destroyed, as the agent could still deal with the goods sold by the principal.

(2) Change in Circumstances
  • A contract will frustrate where circumstances arise which make the performance of the contract impossible
    For example:
    (a) A ship was rented to load cargo but an explosion occurred in the auxiliary boiler, which made it impossible to undertake the voyage at the scheduled time, the House of Lords held that frustration had, in fact, occurred in the circumstances. (Joseph Constantine SS Line Ltd v. Imperial Smelting Corp Ltd, [1942] AC 154)
     
  • Similarly, the contract may be declared as frustrated by the courts if the parties to an executory contract, which is not fully performed or fully executed face in the course of carrying it out with a turn of events, which they did not anticipate prior to the execution of the contract like the following:
    · a wholly abnormal rise or fall in price,
    · a sudden depreciation of the currency,
    · an unexpected obstacle to execution, or alike circumstances
     
For example:
  1. The Supreme Court laid down this principle in Alopi Parshad v Union of India (AIR 1960 SC 588) (Para 21)
Facts:
Plaintiffs were appointed by UOI to provide ghee for the army personnel in return for consideration as stipulated under contract. Then World War II started and after three years, the government in light of increased demand for ghee varied the original agreement by mutual consent under which the original price consideration was substituted by decreased price. After one year, plaintiffs demanded sale consideration of goods is enhanced in view of increasingly onerous discharge of their obligations followed by an assurance by the government that it might be entertained. The plaintiffs continued the supply but the ‘assurance' was never acted on.

Held:
  • When an agreement is altered mutually (S.62) then obligations as under original contract w.r.t. thereof are no longer required to be performed by the parties. In the present case, the effect of mutual alteration in original agreement w.r.t. price of goods supplied was that govt. was now bound to pay the agreed decreased price and not the price which was stipulated earlier in the original contract.
     
  • S.56 (Impossibility to perform): If consideration of the terms of the contract, in the light of the circumstances in which it was made, reveal that parties never agreed to be bound in a fundamentally different situation now expectantly emerged, the contract ceases to operate not because it is just and reasonable to qualify the terms but because on its true construction, it doesn't apply in that situation.
     
  • There is nothing in Indian law which justifies the view that a change of circumstances ‘completely outside the contemplation of parties' from the time when the contract was made will justify a Court to absolve a party from express terms thereof. A contract isn't frustrated merely because of change in circumstances. Therefore rather than ‘intention of the parties, as reasonable men', the focus should be on true interpretation of the contract.
     
  • Parties to an executory contract are often faced with the turn of events that they never contemplated of-a wholly abnormal rise or fall in prices, sudden depreciation of currency which can make the onus to discharge obligations more onerous but do not completely render them to be impossible to perform. In such circumstances, this change of events doesn't affect the bargain, which parties had made.
     
  • Contract was never rendered impossible or unlawful u/s 56 as it was duly performed by plaintiffs and they received remuneration by govt. expressly stipulated to be paid thereunder.
     
  • Escalation - marginal rise in price may be ignored. But when the prices increase out of all proportions than could have been reasonably expected by the parties and make performance so crushing to the contractor as to border virtually on impossibility, the law would have to offer relief to the contractor in terms of price revision.
For example:
The parties to a contract agreed that the investment of the contractor would be two crores and the offered rates were based upon and co-related to this understanding. When an agreement is based upon an agreed fact situation, and that situation ceases to exist, the agreement, to that extent, becomes irrelevant. The rates payable to the contractor were related to the investment of Rs 2 crores by the contractor.

Held: Once the rates became irrelevant on account of circumstances beyond the control of the contractor, it was open to him to make a claim for compensation.
The Supreme Court has recognized this in Tarapore & Co v Cochin Shipyard Ltd. (AIR 1984 SC 1072) (Para 35 and 38).

(3) Death or incapacity to perform

A party to a contract is excused from performance if it depends upon the existence of a given person or becomes too ill to perform.
For example:
  1. A contract to act at a theatre for six months in consideration of a sum, paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void. (Section 56 Illustration (e) from the Contract Act)

(4) Government or Legislative Intervention

A contract will be dissolved when legislative or administrative intervention has taken place.
For example:
  1. A contract was entered between the parties for purchase of a plot of land and the defendant company undertook to construct the roads and drains necessary for making the lands suitable for residential purpose. In 1943 a considerable portion of land was required by the State during the Second World War.

    · Held: The SC stated that the contract was not frustrated, as there was no time limit agreed to by the parties within which the construction work was to be finished. The delay caused in the performance due to the Government orders would not be so great and of such a character as to totally upset the basis of the bargain and commercial object that the parties had in view Because of this indefiniteness of time period, it could not be said that performance of the contract had become impossible.
    Satyabrata Ghose v Mugneeran Bangur &. Co. AIR 1954 SC 44 (Para 24 and 25)
     
  2. The SC held that the effect of an administrative intervention has to be viewed in the light of the terms of the contract, and, if the terms show that the parties have undertaken an absolute obligation regardless of administrative changes, they cannot claim to be discharged.

    Naihati Jute Mills Ltd v Khyaliram Jagannath AIR 1968 SC 522
    Where the intervention makes the performance unlawful, the courts will have no choice but to put an end to the contract.

    For example:
    The defendant had a license to import chicory for manufacturing coffee powder. The license was subject to the condition that he would use it only in his factory. He agreed to sell the whole shipload. Before the arrival of the ship, the sale of such imported goods was banned. The contract was accordingly held to have become void.
    This kind of situation was before the SC in Boothalinga Agencies v V T C Poriaswami Nadar AIR 1969 SC 110 (Para 8).

(5) Intervention of War

Contracts may also become impossible of performance owing to the prevalence of war conditions and such contracts are void.
For example:
  1. A contracts to take in cargo for B at a foreign port. A's Government afterwards declares war against the country in which the port is situated. The contract becomes void. (Section 56 illustration (d) of the Contract Act)
     
  2. In a case before the Patna High Court, 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 the Government of India closed its business and the disposal of pending policies was handed over to a firm of chartered accountants. The assured was allowed to recover the money paid under the policy.
    (A.F. Ferguson and Co. v. Lalit Mohan Ghosh, AIR 1954 Pat 596) (Para 52 and 53)

(6) Application to Leases

Section 56 has no application to completed lease, but it applies only to agreements to lease.

For example:
  1. The question was considered by the Supreme Court in Raja Dhruv Dev Chand v Raja Harmohinder Singh AIR 1968 SC 1024 (Para 10), where
    · SHAH J. observed that the courts in India have generally taken the view that Section 56 of the Contract Act is not applicable when the rights and obligations of the parties arise under a transfer of property under a lease. It was one of the cases arising out of the partition of the country into India and Pakistan. The lease in question was that of agricultural land for one year only. The rent was paid and the lessee was given possession. Before the land could be exploited for any crop, came partition, which left the land in Pakistan, and the parties migrated to India. The action was to recover the rent paid. But no such recovery was allowed.

    · SHAH J pointed out that completed transfers are completely outside the scope of Section 56.

    Where on account of an event beyond the parties' control, the lessor is not able to transfer possession to the lessee; the lessee would be entitled to take back his rent. Under a lease of land there is a transfer of right to enjoy that land. If any material part of the property be:
    # wholly destroyed or
    # rendered substantially and permanently unfit
    for the purpose for which it was let out, because of fire, tempest, floods, violence of any army or a mob, or other irresistible force, the lease may at the option of the lessee be avoided. This rule is incorporated in Section 108(c) of the Transfer of Property Act.
     
  2. In the subsequent case of Sushila Devi v Hari Singh AIR 1971 SC 1756 (Para 12) the Supreme Court held that an agreement of lease ended by frustration where before completing it the parties had to run away and could not go to Pakistan to give or take possession.
     
  3. The Jammu and Kashmir High Court allowed in Hari Singh v Dewani Vidyawati AIR 1960 J&K 91 (Para 41, 42, 43 and 44) the recovery of rent paid in advance under a lease, which could not be completed on account of partition. The recovery was allowed under Section 65 as benefits received under a contract, which became void.
It is also noteworthy to note that Section 65 of the Contract Act is in the context of the frustration of contract. Section 65 postulates that when an agreement is discovered to be void, such as in case of a contract getting frustrated, the person who has received any advantage under such agreement is ‘bound' to restore it or to make compensation for it, from whom he received it.

End-Notes:
  • http://uputd.gov.in/site/writereaddata/siteContent/indian-contract-act-1872.pdf
  • Naithati Jute Mills Ltd. V. Khyaliram Jagannath, AIR 1968 SC 522
  • Alluri Narayana Raju v. Dist. Collector, Visakhapatnam Dist., A.I.R 2008 A.P. 264 at p.267
  • Industrial Finance Corporation of India Ltd. V. The Cannanore Spinning & Weaving Mills Ltd. and Ors, (2002) 5 SCC 54)
  • Shree Krishen v. Gambhirmal, A.I.R. 1955 Hyd. 233
  • Dominion of India v. Bhikhraj Jaipuria, A.I.R. 1957 Pat, 586
  • U.P. State Electricity Board v. Kanoria Chemical, AIR 1986 SC 156
  • Satyabrata Ghose v. Mugneeram Bangur and co., A.I.R 1954 S.C. 44
  • Sushila Devi v. Hari Singh AIR 1971 SC 1756
  • Nirmala Anand v. Advent Corporation Pvt. Ltd., AIR 2002 SC 2290
  • Ganga Saran v. Firm Ram Charan Ram Gopal, AIR 1952 SC 9
  • Joseph Constantine SS Line Ltd v. Imperial Smelting Corp Ltd, [1942] AC 154
  • Alopi Parshad v Union of India (AIR 1960 SC 588
  • Tarapore & Co v Cochin Shipyard Ltd. (AIR 1984 SC 1072
  • Section 56 Illustration (e) from the Contract Act
  • Boothalinga Agencies v V T C Poriaswami Nadar AIR 1969 SC 110
  • Section 56 illustration (d) of the Contract Act
  • A.F. Ferguson and Co. v. Lalit Mohan Ghosh, AIR 1954 Pat 596
  • Raja Dhruv Dev Chand v Raja Harmohinder Singh AIR 1968 SC 1024
  • Section 108(c) of the Transfer of Property Act
  • Sushila Devi v Hari Singh AIR 1971 SC 1756
  • Hari Singh v Dewani Vidyawati AIR 1960 J&K 91
  • Section 65 of the Contract Act
Written By: Preeti Ahluwalia, Advocate

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