India: Frustration Of Contract

Last Updated: 8 December 2017
Article by S.S. Rana & Co. Advocates

The doctrine of frustration comes into play when a contract becomes impossible of performance, after it was made, on account of circumstances beyond the control of parties.1

The Concept of Frustration:

Contracts entered into between parties impose contractual obligations on both the parties for the performance of such contract. However, many times unforeseen or unforeseeable supervening events occur which make the performance of the contracts impossible due to no fault of either party. In such cases, the contract is said to be frustrated. Frustration of contract results in involuntary extinction of the contractual obligations of both parties and consequently, the parties are relieved from their rights and liabilities.

Genesis of Frustration of contract:

The doctrine of frustration was initially used by the English Courts in 1863 in the case of Taylor vs. Cardwell2. In this case, an opera house, which was rented for holding concerts, was destroyed by fire. The Court held that the contract was frustrated because the very thing on which the contract depended on ceased to exist.

The doctrine of frustration was named in England in the case of Krell vs. Henry in 1903, wherein the Plaintiff Krell leased his apartment in London to the Defendant C.S Henry to be used for viewing a royal procession. However, the procession got cancelled and the Defendant refused to pay the Plaintiff the balance of the rent. The Court held that the procession was the foundation of the contract, and that the Defendant was excused from performance because his purpose for entering into the contract was frustrated.

Doctrine of Frustration under the India Contract Act, 1872:

The Indian Contract Act, 1872, (hereinafter referred to as the "Act") does not specifically define frustration of contract. However, the doctrine is envisaged in Section 56 of the Act, which states that an agreement to do an act impossible in itself is void. Further, a contract to do an act which, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Hence, frustration is the happening of an act outside the contract and such act makes the completion of a contract impossible. After the parties have concluded a contract, events beyond their control may occur which frustrate the purpose of their agreement, or render it very difficult or impossible, or as even illegal, to perform.

Frustration of contract can be established upon the fulfillment of the following conditions;

  • Existence of a valid contract between parties
  • The contract is yet to be performed
  • The performance of the contract becomes impossible or unlawful
  • The impossibility to perform is caused by an event which is beyond the control of both the parties.

Factors of Frustration of Contract:

1. Impossibility of performance:

Doctrine of Frustration of contract arises from the impossibility to do an act. But the principle is not confined to physical impossibilities. It was held in the case of Satyabrata Ghose vs. Mugneeram Bangurn & Co & Anr3, that 'impossible' has not been used in Section 56 of the Act 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, 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. Therefore, if the object of the contract is lost, the contract is frustrated.

2. Change of Circumstances:

Courts declare frustration of a contract on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement. The changed circumstances make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform an impossibility.4

3. Loss of object

The impossibility contemplated by Section 56 of the Act is not confined to something which is not humanly possible, as held in the case of Sushila Devi vs. Hari Singh.5 The Court stated that if the performance of a contract becomes impracticable or useless having regard to the object and purpose of the parties, then it must be held that the performance of the contract became impossible. But the supervening events should take away the very basis of the contract and it should be of such a character that it strikes at the root of the contract. As it was a case of lease of property, which after the unfortunate partition of India and Pakistan, the property in dispute which was situated in India, went onto the side of Pakistan, hence, making the terms of the agreement impossible.

Conclusion:

Frustration of a contract makes the contract void, and discharges the parties of the contractual obligations. However, Section 65 of the Act states that when an agreement has become void, 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. The issue arises whether this section also applies to contracts rendered void by frustration. Frustration of a contract occurs without the fault or control of either party, and therefore, a party should not be made to compensate in such event. However, not providing adequate compensation may also cause loss to the other party. Therefore, it is hoped that the Indian judiciary sheds some light into such issues and provide a suitable remedy for cases of frustration of contracts.

Footnotes

1. Satyabrata Ghose vs Mugneeram Bangur& Co & Anr (AIR 1954 SC 44)

2. (1863) 3 B.& S. 826

3. (AIR 1954 SC 44)

4. Satyabrata Ghose versus Mugneeram Bangur& Co & Anr (AIR 1954 SC 44)

5. AIR 1971 SC 1756: (1971) 2 SCC 288

For further information please contact at S.S Rana & Co. email: info@ssrana.in or call at (+91- 11 30562000). Our website can be accessed at www.ssrana.in

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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