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Frustration of Contracts: The Indian Perspective

1. Reference In The Indian Contracts Act

a. Doctrine of Initial Impossibility- Section 56 first lays down the simple principle that an agreement to do an act impossible in itself is void. For example, an agreement to discover a treasure by magic, being impossible of performance, is void.

b. Doctrine of Subsequent Impossibility-The second paragraph of Section 56 lays down the effect of subsequent impossibility of performance. Sometimes the performance of a contract is quite possible when it is made by the parties. But some event subsequently happens which renders its renders its performance impossible or unlawful. In either case the contract becomes void. Where, for example after making a contract of marriage, one of the parties goes mad, or where the contract is made for the import of goods and the import is thereafter forbidden by the Government, or where the singer contracts to sing and becomes too ill to do so, the contract in each case becomes void.[1]

Section 56 of the Indian Contract Act- Agreement to do impossible act-An agreement to 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 promise did not know, to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such promise sustains through the non-performance of the promise.

2. Frustration of Contract

As described in the Law Reform (Frustrated Contracts) Act 1943,of the United Kingdom. A contract may be frustrated where there exists a change in circumstances, after the contract was made, which is not the fault of either of the parties, which renders the contract either impossible to perform or deprives the contract of its commercial purpose. Where a contract is found to be frustrated, each party is discharged from future obligations under the contract and neither party may sue for breach. The compensation of the loss has also to be described by such contract. In the case of Taylor v/s Caldwell [2]the performance of the contract becomes physically impossible because of the disappearance of the subject-matter. But the principle is not confined to physical impossibilities. It extends also to cases where the performance of the contract is physically impossible, but the object the parties had in mind has failed to materialize. The well-known case of Krell v. Henry[3]is the one which illustrates this.

Thus the doctrine of frustration comes into play in two types of situations-
First: where the performance is physically cut off and second: where the object has failed.
The Supreme Court of India has held that Section 56 will apply in both kinds of frustrations.

Supreme Court in the case of Satyabrata Ghose v. Mugneeram Bangur & Co [4].observed “This much is clear that the word ‘impossible’ has not been used here in the sense of physical or literal impossibility. The performance of the 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 promises to do.”

3. Specific Grounds of Frustration

The principle of frustration of contract, or of impossibility of performance 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 is going to be applied so as to excuse performance. The law upon the matter is undoubtedly in process of evolution.[5]Yet the following grounds of frustration have become well- established.

a. Destruction of the subject matter-
The doctrine of impossibilities applies with full force “where the actual and specific subject-matter of the contracts has ceased to exist”[6]. A decision under Section 56 is that of the Madras High Court in V.L. Narasu v. P.S.V.Iyer[7]where a contract to exhibit a film in a cinema hall was held to have become impossible of performance when on account of heavy rains the rear wall of the hall collapsed killing three persons and its license was cancelled until the building was reconstructed to the satisfaction of the chief engineer. The owner was under no liability to reconstruct and it took him some time, by that time the film would have lost its appeal.

b. Change of circumstances-A contract will frustrate “where circumstances arise which make the performance of the contract impossible in the manner and at the time contemplated. Just Kapur of the Punjab and Haryana High Court inPameshwari Das Mehra v. Ram Chand Om Prakash[8] explained the principle thus: It is clear that if there is entirely unanticipated change of circumstances the question will have to be considered whetherthis change of circumstances has affected the performance of the contract to such an extent as to make it virtually impossible or extremely difficult or hazardous. If that be the case, the change of circumstances not having been brought about by the fault of either party, the courts will not enforce the contract.

c. Non-occurrence of contemplated events-
Sometimes 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. In the case of Herne Bay Steam Boat Co. v. Hutton[9]which also arose from the postponement of the coronation. The Royal Naval Review was proposed to be held on the occasion. The defendant chartered a steamboat for two to take out a party of paying passengers for the purpose of viewing the naval review and for a day’s cruise around the fleet. But the review was cancelled and the defendant had no use of ship. Yet he was held liable to pay the unpaid balance of the hire less the profit which the plaintiff had made by the use of ship in the ordinary course.

d. Death or incapacity of the party-
A party to a contract is excused from performance if it depends upon the existence of a given person, if that person or becomes too ill to perform. Thus, where the nature or terms of a contract require personal performance by the promisor, his death or incapacity puts an end to the contract. Robinson v. Davison[10]is the well-known authority.

There was a contract between the plaintiff and defendant’s wife, who was an eminent pianist that she should play the piano at a concert to be given by the plaintiff on a specified day. On the morning of the day in question she became too ill to attend the concert. The concert had to be postponed and the 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 also not at liberty to play, if she was unfit to do so. The contract was clearly subject to her well-being enough to perform: “The whole contract clearly subject to the assumptions 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 fails, the whole contract must fail. Here the foundation was wanting for there was on Mrs. Davison’s part an entire and total incapacity to do the contracted for.”

e. Government, administration or legislation intervention-
A contract will be dissolved when legislative or “administrative intervention has so directly operated upon the fulfillment of the contract for a specific work as to transform the contemplated conditions for a specific work as to transform the contemplated conditions of performance.” Thus, where a vendor of land could not execute the sale-deed because he ceased to be the owner by operation of law, it was held that contract had become impossible of performance.[11]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 be discharged. This has been held by the Supreme Court in Naihati Jute Mills Ltd v. Khyaliram Jagannath.[12]There was an agreement to purchase raw jute from the East Pakistan.

The buyer was to supply the import licence within November, failing which it was to be supplied within December at the pain of a little more price and if he failed in December he was to pay the difference between the contract and market prices. The buyer applied for a licence which was refused because he had stock in his mill which was sufficient for two months. He applied again. He was advised this time that 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 Just. Shelat pointed out that if the Government had completely forbidden imports, Section 56 would have applied. But the policy of government was that the licensing authority would scrutinise the case of the Government was that the licensing authority would scrutinize the case of each applicant on its own merit.

f. Intervention of war-Intervention of war or warlike conditions in the performance of a contract has often created difficult questions. The closure of the Suez Canal following the Anglo-French war with Egypt, for instance, interrupted the performance of many contracts. One such case is Tsakiroglou & Co Ltd v Noblee Thorl G m b H[13]. 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 appellants' 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, 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, and there was not, therefore, frustration of the contract. If the intervention of war is due to the delay caused by the negligence of a party, the principle of frustration cannot be relied upon. 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.

g. Application of leases-In India the question was considered by the Supreme Court inRaja Dhruv Dev Chand v Raja Harmohinder Singh[14]where SHAH J at once 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 an 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. In a case before the Allahabad High Court, the shops of premises which were leased out collapsed owing to their dilapidated condition and heavy rain, requiring new construction, which was not taken to be a frustration of the lease. Where a shop held under a lease was demolished by the Municipal Corporation, it was the lessee who was held to be entitled to the vacant site as also the materials recovered from the debris and he was entitled to be restored to possession for that purpose as against the lessor who had evicted him.

On the other hand, 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.

Where the property leased is not destroyed or rendered substantially and permanently unfit, the lessee cannot avoid the lease because he does not or is unable to use the land for purposes for which it is let out to him. In the subsequent case of Sushila Devi v Hari Singh[15]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.

The Jammu and Kashmir High Court allowed inHari Singh v DewaniVidyawati[16]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.

4. Effects of Frustration

a. 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 Ltd[17], that the essence of 'frustration' is that it should not be due to the act or election of the parties. Frustration should arise without blame or fault on either side. Reliance cannot be placed on a self-induced frustration. The facts were: The appellants hired the respondents' trawler, called 'the St Cuthberf 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 using five trawlers and, therefore, applied for five licenses. Only three were granted and the Government asked the appellants to name the three trawlers and they named trawlers other than the St Cuthbert. 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 thatthe frustration in this case was the result of the appellants' own choice of excluding the respondents' ship from the license and, therefore, they were not discharged from the contract. In another similar case, the contract was to export 1500 tons of sugar beet pulp pellets with a further option for the same quantity. The sellers obtained an export license for 3000. They also contracted with another buyer to supply him 1500. But the Government refused to grant any further license.

They shipped the whole agreed quantity to the first buyer. They were now left with the export license for 1500 only, but were under two obligations, one to supply 1500 to the first buyer under the option given to him and other under the contract with the second buyer for the same quantity. As a face-saving device they apportioned the supply between the two buyers giving about half to either. The second buyer sued for breach of contract. The suppliers pleaded frustration. They were held liable. The Court of Appeal found no legal authority justifying the proposition that where a seller has a legal commitment to A and a non-legal commitment to B and he can honour the obligation to A or to B but not to both, he is justified in partially honouring both obligations.

The court referred to the principle stated in the American Uniform Commercial Code that in such a situation the seller may allocate supplies in any manner which is reasonable and fair, but found no basis for importing the principle into English law. There is, however, an English authority to the effect that if the seller had been under a legal duty, he would have been justified in making fair apportionment. The court said that when a supplier has many contracts to fulfill, but only has enough of the goods to fulfill one of them, then, if he reasonably appropriates what he has to that one, he can rely on force maejeure as to others.

Thus there is no principle of law preventing one party to a contract taking advantage of its own acts to defeat the other's rights unless the party is in breach of duty in so acting. Thus where the defendant company having the right to do so and lawfully exercising that right, sold its subsidiary with the result that the employees’ stock options lapsed, the defendant was held not liable for the lapse because it was under no duty not to sell its subsidiary.

b. Frustration operates automatically-Frustration operates automatically to discharge the contract "irrespective of the individuals concerned, their temperaments and failings, their interest and circumstances'. "The legal effect of frustration does not depend on their intention or their opinions, or even knowledge, as to the event." This is particularly true of Indian law as Section 56 of the Contract Act lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. A subsequent case, however, shows that in certain circumstances frustration may be waived by one party and then the other will be bound by the contract.

In H.R.&. S Sainsbury Ltd v Street[18]: There was the sale of 275 tons (5% more or less) of feed barley to be grown on seller's land. The crop amounted to only 140 tons. The seller resold it to another and contended that he had the right to do so because the contract had ended by frustration. But he was held liable for breach of contract. There was frustration only to the extent of crop failure. The buyer could waive it and claim delivery of whatever little crop the seller's land had produced. The 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. For example, 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.

c. Adjustment of Rights (Restitution)-The rights of the parties are adjusted under Section 65.Obligation of person who has received advantage under void agreement or contract that becomes void.- When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation to it, to the person from whom he received it.

a. Discovered to be void.-The first part of the section is concerned with an agreement which never amounted to a contract, it being void ab initio. But the parties discovered this at a later stage. "The word 'discovered' connotes the pre-existence of that which is discovered." This will cover cases of "initial mistake". Where, for example, money is paid for the sale of goods, which, unknown to the parties, have already perished at the time, the money is refundable. The principle will apply whether the agreement is void by reason of law or by reason of fact.

Thus, for example, where a minor gave a shop under a partnership to the defendant, the agreement being void, it was held that he could recover back the shop. Consideration given on a promissory note which was not enforceable for inadequacy of stamps, was held to be refundable. Money paid under a contract with a municipality not executed in the manner laid down by the Municipal Act, was held to be refundable.

Payment made in advance to a contractor under a contract which is not in accordance with Article 299(1) of the Constitution relating to Government contracts has been allowed to be recovered back under this section. Where a Government officer purchased goods on credit without having the authority to do so and they were received for official purposes, the price was held to be recoverable.

Payment received by a person for purported sale of land which he had no right to sell, had to be returned by him to the other party. Taxes realized by a contractor under the authority of State were held to be refundable to the taxpayers when it turned out that the levy itself was invalid. Money paid to a person for purchasing his right to reversion, which is not transferable, being merely an expectancy was held by the Privy Council to be refundable with 6% interest from the date of suit. The principle has also been held to apply to cases where a contract is void by reason of "unlawful object", but the parties were not aware of it.

Where the Orissa High Court found that the plaintiff who advanced money to the defendant for supply of paddy was not aware on the date of the agreement that it was in violation of law, his suit for refund of money was allowed. A lady Advocate acting as an Assistant District Counsel on the request of the District Magistrate was allowed to recover her remuneration for the working period even if the appointment was discovered to be void under Section 24(2) of the Criminal Procedure Code, 1973.

b. Quantum merit claims.- Claims under the well-known English law doctrine of quantum merit have been allowed by the courts under this section. The Supreme Court observed inState of Madras v Dunkerley & Co[19]that claim for quantum merit is a claim for damages for breach of contract. The value of the material used or supplied is a factor which furnishes a basis for assessing the amount of compensation. The claim is not for price of goods sold and delivered but for damages. That is also the position under Section 65.

In another case reasonable compensation was awarded on the implication of a contract. It will not displace an express stipulation on the point. In a subsequent case, the Supreme Court explained the requirements of the claim. The original contract must be so discharged by the opposite party that the plaintiff is entitled to treat himself as free from the obligation of further performance and he must have elected to do so. The remedy is not available to the party who breaks the contract even though he might have partly performed it.

The remedy is restitutory, it is a recompense for the value of the work done by the plaintiff in order to restore him to the position which he would have been in if the contract had never been entered into. In this respect it is different from a claim for damages which is a compensatory remedy.

The court accordingly did not allow the claim of a contractor for extra payment on the ground that he had to procure the raw material from a longer distance than that represented in the tender documents. The material was in fact available within the stated distance, but its removal required permission of Cantonment Authorities which the contractor could not manage to get. Explaining the nature of justice that Section 65 strives for,

The Supreme Court has observed:
We do not have the slightest doubt that net profits realized by the company as result of its various business activities can never be the measure of compensation to be awarded under Section 65. It is not as if Section 65 works in one direction only. If one party to the contract is asked to disgorge the advantage received by him under a void contract, the other party may ask him to restore the advantage received by him. The restoration of the advantage and the payment of compensation have necessarily to be mutual.

InGovindram Seksaria v Edward Radbore[20]the Privy Council pointed out that the result of Section 65 was that each of the parties became bound to restore to the other any advantage which the restoring party had received under the contract. As a result of the contract being void, the State could at the most recover from the contractor the value of the rough stone excavated from the quarries. But then it would have to make good to the company the expenditure incurred by it in quarrying operations and extraction of the rough stone. The contract was for the grant of a quarry. It was found to be mistaken about the income tax laws prevailing in the area.

c. Becomes void.-The second type of situation covered by Section 65 is where a valid contract is made in the beginning, but it subsequently becomes either unlawful or impossible of performance. Any benefits which have passed under the contract from one party to the other must be restored. This is subject to the expenses which have already been incurred by the other party in the performance of the contract.

English Law The principles of English law before the Law Reform (Frustrated Contracts) Act, 1943, were those laid down in the two coronation cases, one of them is Krell v Henry where the court held that the rent which had been paid before the contract to hire premises became void by reason of the postponement of the procession was not refundable and the outstanding rent was not recoverable. The courts left the parties where they were.

They also did not like to disturb the rights which the parties had acquired before the contract became void of this the illustration is Chandler v Webster. The plaintiff sued for refund of the rent which he had paid in advance and the landlord counter-claimed for the balance which was due, ROMER LJ stated the principle and said Applying this to the facts here, as soon as it was ascertained that the procession, through no fault of either of the parties, could not take place, they were immediately free from any subsequent obligation under the contract, but the contract could not be considered as rescinded ah initio.

That being so, many legal rights previously accrued to either of the parties remained, and could not be disturbed, and one of those rights was the right of the defendant to be paid £ 141.15 s. The hardship that this principle is likely to cause was to a certain extent mitigated by the House of Lords inFibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd. Lord RUSSELL OF KlLLOWEN at once observed that Chandler v Webster was wrongly decided. Their Lordships accordingly allowed the £ 1,000 to be recovered which were paid in advance for purchasing a machinery and the performance having been rendered illegal by the intervention of war.

His Lordship continued : The money paid was recoverable, as having been paid for a consideration which had failed. The rule that on frustration the loss lies where it falls cannot apply in respect of the moneys paid in advance when the consideration moving from the payee for the payment has wholly failed, so as to deprive the payer of his right to recover moneys so paid as moneys received to his use; but the rule will, unless altered by legislation, apply in all other respects. The expected legislation came within a year. Now the rights of parties whose contract has ended by frustration are adjusted under the provisions of the Law Reform (Frustrated Contracts) Act, 1943.

The main provisions of the Act are as follows:
AH sums of money which have been paid under a frustrated contract shall be refundable and those which are still payable cease to be payable. If any party has incurred expenses before the time of discharge in the performance of the contract, the court may, if it thinks just to do so, allow him to deduct such expenses from the refundable deposit or allow him to recover. The same principle will apply to any benefits received other than money. In estimating the amount of expenses the court may take into account the reasonable overhead expenses and the work or services personally performed by the party. Benefits received under an insurance policy are not to be taken into account unless there is an express obligation to insure.

5. Cases When Frustration Does Not Happen

There have been many instances when the contract has not been frustrated even when it has fulfilled the conditions of a contract to be frustrated.
Those conditions are-
a. Difficulty in performance-The House of Lords has held that where the parties can still perform their main obligation despite the fact that the subject-matter has gone out of their hands, frustration may not follow. There occur situations when due to change in certain external circumstances the contract becomes difficult to perform but it has still not become impossible to perform. When due to rains the construction work was stopped for three days that does not renders the contract difficult, it can still be performed and completed before deadline by engaging more workers or increasing the hours of work.

b. Failure of third party-Business contract or rather any contract involves not just the contracting parties but rather many auxiliaries which work in the background of those parties which are referred to as the third parties. The contract of the main contracting parties depends on those third parties which generally supply raw material to the contracting parties. Sometimes the contract is not performed by the main contracting parties because of the fault of those third parties, but that does not renders the contract as frustrated because the contracting parties were not at fault.

Conclusion

Difference Between Impossibility And Frustration

Frustration or impracticability occurs when a performance would be deemed impractical because of an unforeseen event. Impossibility occurs when a party is not able to complete a contract because of an event that happens after the contract is executed. The main difference is that frustration means a contract cannot be performed because of an extreme burden to the contracting party, while impossibility means the contract cannot physically be performed.

There are only certain events where frustration and impossibility can be applied. Usually, these terms apply when there a risk involved in the performance of a contract, making it impossible or frustrated through no fault of the parties involved or the courts. When this occurs, the parties are released from their obligation to perform the contract automatically.

End-Notes

[1] Taylor v. Caldwell,3 B&S 826: 122 ER 309.
[2] Krell v. Henry,(1903) 2 KB 740 (CA).
[3] Satyabharata Ghose v. Mugneeram Bangur,AIR (1954) SC 44.
[4] A.L. Corbin,Recent Developments in Contracts,(1937) 50 Harvard Law Review 549, 465-66.
[5] Ibid (2).
[6] V.L. Narasu v. P.S.V. IyerAIR 1953 Mad 300.
[7] Pameshwari Das Mehra v. Ram Chand Om PrakashAIR 1952 34,38.
[8] Herne Bay Steam Boat Co. Ltd. v. Hutton(1903) 2 KB 683 (CA).
[9] (1871) LR 6 Exch 269: 40 LJ Ex 172
[10] Rozan Mian v. Tahera Begum, (2007)12 SCC 175.
[11] Naihati Jute Mills Ltd. v. Khyaliram JagannathAIR 1968 SC 528; (1968) 1 SCR 821,830.
[12] isTsakiroglou & Co Ltd v. Noblee Thorl G m b H1962 (AC) 63.
[13] Raja Dhruv Dev Chand v Raja Harmohinder Singh1968 AIR 1024, 1968 SCR (3) 339.
[14] Sushila Devi v Hari Singh1971 AIR 1756, 1971 SCR 671.
[15] Hari Singh v DewaniVidyawatiAIR 1960 J&K 91.
[16] Maritime National Fish Ltd v Ocean Trawlers Ltd.AIR 1935 PC 128.
[17] H.R.&. S Sainsbury Ltd v Street[1970 H. No. 10887].
[18] State of Madras v Dunkerley & Co1958 AIR 560, 1959 SCR 379.
[19] Govindram Seksaria v Edward Radbore(1948) 50 BOMLR 561

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