Certain types of agreements, e.g. export sales, shipping, building or engineering contracts, are particularly susceptible to disruption by unforeseen events. However, in the absence of any express provision by the parties, the doctrine of frustration is a legal recognition of the fact that parties use it as a mere excuse to evade their contractual obligations.
Understanding the doctrine of Frustration: A way of discharge of the Contract
The doctrine of frustration in relation to a contract can be understood to mean the termination of the contract on substantial destruction of its purpose due to unforeseen changes in circumstances, leading to a valid discharge of the parties from the performance of their duties. Frustration encompasses a situation, whereby without the default of the contracting parties, the performance of the contract gets affected due to various factors including, but not limited to, the destruction of the subject matter of the contract, death of the parties, imposition of government prohibitions or any other reason of a similar nature.
Discharge of a Contract
Discharge of a contract can be understood as relieving the parties from their obligations under the contract. A party can be discharged either by its performance or non-performance. But the question that arises is whether every non-performance of the contract leads to its discharge? Broadly, four methodologies can be adopted by the contracting parties leading to the discharge of the contract: Firstly, by making an agreement in the said regard;1 Secondly, by performance of the contract; Third, if the contract is breached and lastly, if any unforeseen event leads to frustration of contract around which the present article revolves. The doctrine of frustration is either expressed by the parties in the terms of the contract or is not contemplated by the parties during the time of entering into a contract. Under the former category, if the parties expressly provide for event of frustration, the consequences of such a frustrating event under the force majeure clause, eventually follow as per the terms of their contract. In such a case, since the contract expressly deals with the consequences of future events affecting the performance of the contract, the doctrine of frustration is not attracted.
The contract is also rendered impossible in performance if due to government or legislative interventions, the performance itself has been rendered invalid. Another factor is the change in circumstances, which too makes the performance of the contract impossible2. In such a case, the contract is only frustrated if the circumstances have rendered the performance of the contract impossible or extremely difficult because even despite of change in circumstances, if performance is still possible, contract will not be deemed to have been frustrated. Under Indian Law, Section 56 of the Indian Contract Act provides for the doctrine of frustration which envisages that the performance of the 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 impossible3.
Complexities involved in International Trade Contracts
In transactions relating to international trade, the doctrine of frustration gains significance since in domestic transactions, in cases of frustration of contract, the law and remedies available to the parties are clear and unambiguous unlike transactions in international trade whereby complexities are huge due to diverse economic and political influences governing the performance of the contract and unforeseen risks and burdens to which the parties to the contract are subject to.
In contracts related to international trade, often the problem is faced by the parties due to the transportation of goods beyond the territorial boundaries of a country. Due to long distance shipments of goods and services, parties are subjected to more risks due to frequent changes introduced by the respective governments of both the parties in relation to trade, meaning thereby that the circumstances prevailing at the time the parties entered into the contract might change at the time of the performance of the contract. This could be due to the regulations of various natures imposed by the concerned governments of respective states. There often arises a situation where the parties entering into the transaction are not known to each other due to which the probability of keeping faith in each other also does not arise4. Additionally, the other problem faced by the parties in international trade is concerning the resolution of disputes arising between the parties, choice of forum, the jurisdiction of the foreign court concerning the dispute etc. This adds to the trouble for the parties since in such cases, the application of foreign laws to the dispute, difficulty in proving the claim of the parties, excessive amount of cost involved and distrust of the impartibility of foreign judges further contribute to the hurdles.
Understanding the doctrine of frustration under various Jurisdictions English Statutes
Under the law of England, the Act which governed the doctrine of frustration is the Sale of Goods Aof ct, 1893 which provided that an agreement for the sale of goods shall be avoided on damage occurring to the goods without any party being at fault before the goods are delivered to the buyer. However, its application was limited in its scope. In other words, the application of this provision covered a limited area of frustration i.e. perishable goods and did not cover within its ambit goods of other description or the other unforeseen casualties, thereby limiting its scope and application. This shortcoming in the Act came to be rectified by the Law Reform (Frustrated Contracts) Act of 19435, which has a wider application and covers within its ambit all the other instances of frustration. It provides for the recovery of the down payments and other reasonable expenses including various other benefits incurred or exchanged by the parties in their contract. However, this Act cannot be considered to be complete it is left untouched in its realm the substantive rules of frustration as it only provides for the judicial relief once the contract has been frustrated6. Not only this, but it also failed to cover insurance and charter party contracts and due to these lacunas, the significance of this Act got reduced in international trade.
Does change in Jurisdiction change the Doctrine?
The principle of frustration is termed differently under different jurisdictions. English law envisages the doctrine as 'impossibility of performance' whereas American law provides for Uniform Commercial Code wherein due to commercial impartibility, the basic assumption under which the contract is entered into gets affected. Under the French system of law, the clause of 'Force Majeure' is triggered whereas in Germany, the expression Wegfall der Geschftsgrundslage, meaning 'disappearance of contractual basis or the collapse of the basis of transaction' finds place.
Though different terminologies have been adopted under various jurisdictions, the doctrine under all essentially remains the same. For instance, it can be termed as frustration of contract or impossibility of performance or impracticability or more so, the changed circumstances, the concept underlying all these terms remains the same7. Under various terminologies, it can be understood as 'if upon happening of an unforeseen event after the creation of a contract, the performance has been rendered impossible or has become exponentially difficult or impracticable to perform, the contract is said to have been frustrated. The issue that vitally remains the point of discussion in such cases is whether there can be non-compliance of the provisions of the contract expressed by the parties under its clear terms by overlooking the obligations of the parties envisaged in it.
Uniform Commercial Code of America
The Uniform Commercial Code is another statute which aims at the needs of international trade. It provides for the frustration of goods as an excuse by failure of presupposed conditions. It provides that a delay in performance or non-performance by the seller is excused under three conditions:
(a) when the parties have not contemplated any contingency in the nature of government restrictions, (b)when the parties have not assumed the probability of any contingency, and (c) when due to the contingency, the seller could not perform his obligations and thus has occurred impracticability8. Not only this, but it also provides for certain obligations to be imposed on the excused seller. These include (a) duty cast upon the seller to notify the buyer about the delay or non-delivery of the goods, (b) the duty to tender the commercially reasonable substitute to the buyer if available with the seller and (c) the obligation upon the seller to allocate the part of its production which had remained unaffected by the contingency between his buyers.
Other International Conventions
Other international conventions governing the doctrine of frustration include Uniform Law on the International Sale of Goods (ULIS) which was adopted during The Hague Conference in the year 1964.
It provides in Article 74 as "Where one of the parties has not performed one of his obligations, he shall not be liable for such non-performance if he can prove that it was due to circumstances which, according to the intention of the parties at the time of the conclusion of the contract, he was not bound to take into account or to avoid or to overcome; in the absence of any expression of the intention of the parties, regard shall be had to what reasonable persons in the same situation would have intended."
It can be analyzed that the UILS seems to have provided an excuse for not fulfilling the contract. Also, it did not cover within its sphere the duties on the part of the seller to notify the buyer about the delay in performance or non-performance of the contract or any possibility of alternative performance or adjustment of contractual obligations 9. Due to these inherent lacunae, it was not universally accepted and came to be rectified by United Nations Commission on International Trade (UNCITRAL) which in Article 65 stipulates that if the non-performance or the impediment results in the failure of the contract, the party cannot be held liable for performing the obligations on its part. Also, under Article 65(2), it stipulates that if the supplier of the seller is not able to perform his part of the obligations, in such a case, the seller can claim relief only if it is proved that the unforeseen event was not in the control of either of the parties.
UNICITRAL provides for the duty to notify the buyer and to tender him a reasonable commercial substitute wherever possible. The only thing it left untouched is the right of the parties to claim adjustment of their contractual obligations since the same was not covered.
Is the doctrine of frustration of universal application?
In international trade transactions, there is no universal rule of uniform application providing relief against frustration since each State has its own set of laws governing such problems. Though essentially the substantive meaning of the doctrine of frustration remains the same under various jurisdictions, the difference lies in the trade practices followed by each nation. Not only this, but each Court of law is also governed by its own statutory practice in accordance with its respective domestic statute. In England, Courts are inclined towards following the test of 'difference in performance' whereas in the United States, the principle of 'impracticability' finds its mention by the Courts10 and in France, the clause of 'force majeure' gains significance in the adjudication of the disputes. Though each judicial system is governed by the principle of justice, equity and fairness, such principles can never supersede the requirement of its own statute.
Footnotes
1. Paradine v. Jane (1647) EWHC KB J5.
2. Taylor v. Caldwell, WHC QB J1, (1863).
3. U.P State Electricity Board v. Kanoria Chemical, AIR 1986 SC 156.
4. J.C.T. Chuah, Law of International Trade, 125 (1st ed. Sweet and Maxwell: London), 2010.
5. John H. Jackson, The World Trading System: Law and Policy of International Economic Relations, 252 (2nd ed. MIT Press), 1977.
6. Law Reform (Frustrated Contracts) Act, 1943, 6 & 7 Geo. C. 40, pp. 1-3.
7. Id. P. 2-815(c).
8. [1958] 2 Lloyd's Rep. 169. <>9. Hari Shankar Singhania & Ors v. Gaur Hari Singhania & Ors, (2006) 4 SCC 658. INDIAN
10. Davis Contractors Ltd. v. Fareham Urban District Council, (1956) AC 696.
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.
