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Is Doctrine Of Frustration Itself Is Frustrated By Judicial Interpretations

The fundamental rule of contract law holds that both parties to a contract must fulfil their contractual duties, and in the event of a breach, the violating party must pay the other for the losses incurred. This criterion is breached only in the case of the doctrine of frustration. This doctrine relieves a party from performing its duties under a contract, where such contract has become incapable of being performed, in the manner that it was supposed to be performed.

Usually when a contract is breached, the court orders specific performance of the contract or directs the defaulting party to pay damages to the aggrieved party. Frustration renders such defaulting party absolved of that breach, because of circumstances that made the contract unable of execution.

The word "frustration" is not defined under the Indian Contract Act of 1872. But the notion of frustration can be figured from sec 56 of the act. But Frustration can either arise under Section 32 or Section 56 of the Indian Contract Act. An impossibility that was within the contemplation of the parties comes under section 32 but a supervening impossibility, which could have never been imagined by the parties, comes under the purview of section 56.

The supreme Court in one of its first post-independence decisions Ganga Saran v. Firm Ram Charan clearly laid down that:
The concept of frustration in India has two elements: Section 32 and Section 56.4 Further, it differentiated between the two by observing that while an impossibility under section 32 is an internal force of the contract, the impossibility is external in nature under section 56. The Indian courts however, seemed to have forgotten this distinction in subsequent cases and have ignored section 32 while interpreting the law of frustration.

Analysis
In the case of Satyabrata Ghose v Mugneeram Bangur & Co, the plaintiff had purchased a plot of land from the defendant company but the contract did not specify the time within which the roads were to be completed. Later on,a considerable portion of the land was requisitioned by the government for military purposes during world war and the plaintiff sued the company for breach of contract.

The test of impossibility to result in frustration has to be of such a nature, that the contract is incapable of being performed in the reasonable foreseeable future. In this case, the impossibility was a temporary impossibility since the war would end in the near future, and thus the contract was capable of being performed at a later stage. However, instead of concisely interpreting that delay did not make performance of a contract impossible, the court delved into expanding the meaning of 'Impossibility' under section 56.

The statutory illustrations of section 56 suggest that the legislature did not intend to extend the application of 'impossible' beyond its literal meaning. But the court gave a lengthy and complicated judgment expanding the scope of impossibility beyond its literal meaning to include impracticability, various English case laws and explanations of excuses based on implied terms - only to abandon them and hold that the contract was not frustrated. Moreover, while looking for an implied condition in the contract, the court made no mention of section 32.

In Sushila Devi and Anr v. Hari Singha case, the landowner entered into an agreement for agricultural use of a land located in PoK, but the court held that this was not a temporary impossibility and would lead to frustration of the contract.6 The express term in the contract specified that the lease was for agricultural purposes and when that purpose itself became impossible, the contract should have been frustrated under section 32. But the court only referred to section 56 while giving the judgment.

When the purchase price of a product was raised due to war, it was no longer economically viable for the seller to sell the products at the agreed upon price. If one looks at the situation practically, it seems fair that the contract be deemed void otherwise the product will be sold at a loss. But in the Alopi Parshad & Sons, Ltd. v. Union of India case, court stated that mere commercially onerous obligations imposed on a party do not frustrate the contract.

In this case, the court held that the application of Section 56 is not based on whether it is just and reasonable to excuse the promisor, but depends on the true construction of law in the circumstances of the case.7 Similarly in Naihati Jute Mills Ltd. v. Khyaliram Jagannath case, the court held that a party should not be absolved solely on the basis of its obligation becoming arduous.8

However, while the courts have sometimes ignored the role of section 32 in interpreting frustration, it cannot be said that they have given entirely erroneous judgment. At the same time, there is a need to educate the legal professionals of the interplay between these sections. The overlapping of section 32 and 56 often leads to confusion. In the case of Durga Dev Bhagat v. JB Advani & co. ltd, the court recognised an implied term in the contract which became impossible by virtue of a supervening event.

The purchase of oil for the purpose of export was an implied condition in the contract, making it a contingent contract based on the export. At the same time, one might argue that it was not a contingent contract since the parties had not made the sale depending on the government of India allowing export. The ban on export was a supervening impossibility since none of the parties had anticipated it.

If in this contract, the parties had made the performance of the contract absolute, notwithstanding the export regulations, the seller would have been liable to pay damages for breach of contract. Hence, it is possible that a supervening impossibility under section 56 becomes a contingent impossibility under section 32 if it is mentioned in the contract.

The mentioning of a supervening event in a contract proves that the parties in question had anticipated such a situation and have provided a solution for the same. For example, a contract may state that it will not be performed in case of a hurricane, or it may state that the contract is valid notwithstanding a hurricane. Mostly, when a specific impossibility is looked at within the meaning of section 32, then the judges refer to the contract - does it require the party to be liable or does it absolve the party?

Predominantly, in the classic Energy watchdog case, the parties anticipated of the impossibility, prior to the contract, and dealt with in the terms of the contract, seizing it from otherwise being a supervening impossibility. The question was whether an elevation of coal price would make the performance of the contract impossible. Change in cost of fuel was excluded from the power purchase agreement entered by the parties, under the clause of force majeure exclusions.

Even though the change in price of coal was unexpected since the rates had not been changed in the preceding forty years, the terms of the contract made the performance absolute notwithstanding such a change. Since the parties had deliberately taken this risk when they had bid for the contract, the doctrine of frustration was not applied.

Though the contract had become onerous, the performance was not impossible at a higher price. Moreover, the court clarified that since there was a specific clause addressing force majeure, Section 56 did not have any application in the case. Similar was the case of Alopi parshad .

It is also worth noting that when a party is absolved from its liability in case of a supervening impossibility incorporated in section 32, then although the contract will be frustrated, it will become void under section 32 and not 56. As discussed in this article, there are instances of Indian courts erroneously applying section 56 to the cases of contingent contracts but irrespective of the fact that performance of a contract has become impossible due to supervening event, if the impossibility had been contemplated by the parties under the terms of the contract, the contract will be frustrated under section 32.

Thus, the principles that are applied for the purpose of discharge of obligation of parties in case of section 32 will still be governed by the contract, but in the case of section 56, the discharge will be as per the provisions of the law.

Conclusion
It will not be entirely untrue if one says that the principles of frustration are being frustrated by the judicial interpretations. Although the courts have tried to dissect and explain the law of frustration, there is still some lack of certainity amongst the legal fraternity based on the incorrect faith that frustration is only governed by section 56.

The Supreme Court of India has addressed section 56 a number of times. However, some of these judgments have expressed contradictory understandings of the foundation of frustration since this section had been mistakenly invoked instead of section 32. It is important to remember that section 56 applies only when an event occurs unexpectedly under the terms of the contract.

The difference between these two concepts, to some extent, is the very nature of impossibility that will emanate from the application of the relevant provision. Under section 32 there is impossibility of a contingent term and under section 56 the impossibility is of a promissory term. In order for frustration to be applied, there should be a complete disconnect between what the parties wanted to be performed under the contract and what is capable of being performed in that present situation.

Although there is still a want of clarity, landmark judgments such as the Energy watchdog case, have made the position in law more comprehensible. A contract is rendered void under Section 32 only if the event rendering it impossible is catered to by the terms of the contract itself. It is very equally possible that such a contract is held to be valid if the terms suggest it. The doctrine of frustration under Section 56 is broad and applies to supervene acts beyond the terms of the contract.

But, if parties have contractually made a supervening impossibility into a foreseable event under section 32, and made the obligations absolute notwithstanding that impossibility, then section 56 cannot be enforced. After a thorough analysis of various cases, it can be concluded that mentioning certain impossibilities in the terms of a contract is a double-edged sword, which might sometimes work in the party's favour, and at other times, have the opposite effect.

End-Notes:
  • Section 32, Indian Contract Act, 1872
  • Section 56, Indian Contract Act, 1872.
  • Ganga Saran v. Firm Ram Charan AIR 1952 SC 9
  • Satyabrata Ghose v. Mugneeram Bangur & Co. AIR 1954 SC 44
  • Sushila Devi and Anr v. Hari Singh AIR 1971 SC 1756
  • Alopi Parshad & Sons, Ltd. v. Union of India AIR 1960 SC 588
  • Naihati Jute Mills Ltd. v. Khyaliram Jagannath AIR 1968 SC 522
  • Durga Devi Bhagat v. JB Advani & Co. Ltd. 76 CWN 528
  • Energy Watchdog and Ors. v. Central Electricty Regulatory Commission & Ors. (2017) 14 SCC 80
  • Naihati Jute Mills Ltd. v. Hyaliram Jagannath 1968 (1) SCR 821

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