Doctrine Of Frustration

Juristic Basis of the Doctrine

The origin of the doctrine of frustration is traced to the principle of absolute liability which formed the basis of contracts. A general rule is that the parties to a contract founded in vinculum juris – a legal tie, are obliged to fulfill their obligations and therefore, in the case of a breach of contract, the party breaching the contract is liable to compensate for the loss suffered by the affected party. However, as the mercantile world progressed, Shylock’s approach of “one’s pound of flesh” in Merchant of Venice, lost its flavour. An exception to the rule sprung up as the doctrine of frustration for relieving the breacher of any liability that might arise under the contract.

The juristic basis of the doctrine of frustration has its foundation in several theories^[1]. The right to avoid contract is read as an implied term of the contract on a presumption that parties couldn’t have intended to perform the contract if cannot be performed physically or legally. The disappearance of the foundation of the contract due to the changed circumstances; disappearance of the subject matter of the contract; or radical change in the obligations to be performed, is the second theory applied^[2]. But, this is closely related to the theory of implied terms. Since the parties cannot be intended to have undertaken to do something if the foundation of the contract has disappeared. The next theory is the power or obligation of the court to deliver justice by finding a just and reasonable solution if the contract is ambushed by the impossibility of performance^[3].

Frustrating Events

The frustrating events and or the grounds for the impossibility in performance of the contract that render the contract void are not exhaustive. Some of the grounds are death or incapacity of a party; legislative intervention; destruction of the subject matter of the contract; or the changed circumstances. The death of a party in a personal contract undoubtedly ends the contract. The legal intervention exposing the performance of the contract to unlawfulness is not a difficult proposition. The ground of destruction of the subject matter including deterioration and unavailability has been the subject of interpretation. The fourth ground, namely, the changed circumstances have more issues. Even though it's not specifically acknowledged^[4], it's applied as part of the third one - the destruction of the subject matter of the contract.

The frustration and force majeure appear same, but they differ. If the frustration occurs due to a frustrating event that is beyond the control of man, it is a force majeure such as a flood or epidemic. However, the doctrine of frustration which is larger in its sweep includes the frustrating events that are beyond the control of man like floods and epidemics and man-made events like war. But, the editors of the classic on Indian Contract law say, “war, inundation (flood) and epidemics are cases of force majeure”^[5].

Judicial Response to Frustration

Digging into the legal history, we go back to the 17^th century. The theory of absolute liability was accepted by the court in the Paradine case^[6]. In this case, a person was sued for arrears of rent. However, he argued that he was evicted and kept out of possession of the land which was beyond his control. Because of this, he pleaded that he couldn’t receive the profits from the land and he couldn’t therefore pay the rent. However, he was still held liable for not paying rent due to the theory of absolute liability. How sad?

To rectify the theory of absolute liability, the doctrine of frustration sneaked into the court in Atkinson's case^[7]. In this case, the defendant British ship was relieved from the breach of contract for failing to upload cargo at St. Petersburg in Russia, since it was found impossible to upload cargo due to the frustrating event of an outbreak of war. After decades, in Taylor’s case^[8], the defendants were discharged from their liabilities mentioned in the contract because the court found that it was impossible and incapable of being performed due to the fire which destroyed the subject matter of the contract, namely, concert hall and garden. Blackburn J reasoned that the rule of absolute liability only applied to positive, definite contracts, not to those in which there was an express or implied condition underlying the contract. He reasoned that the continued existence of the music hall in Surrey Gardens was an implied condition essential for the fulfilment of the contract. The destruction of the music hall was the fault of neither party and rendered the performance of the contract by either party impossible. Blackburn J cited the civil code of France and the Roman law for the proposition that when the existence of a particular thing is essential to a contract, and the thing is destroyed by no fault of the party, the parties are freed from the obligation to deliver the thing.

The extension of the frustration doctrine to commercial contracts poses more challenges. In Krell’s case^[9], there was a contract to hire a flat for the coronation of King Edward VII but the coronation was cancelled. The court extended the frustration doctrine from the foundation to the purpose of the contract and held that the plaintiff could not claim the rent because the coronation was cancelled which was the purpose of the contract.

The unlawfulness in the performance of the contract is a frustrating event. Nobody should be compelled to perform a contract if the performance exposes the performer to illegality. The contract which is against the public policy is illegal and void.

Indian Contract Act, 1872

Now let's look into the common law of contract as codified under the Indian Contract Act of 1872. Even though the Act does not use the expression frustration, Section 56 has incorporated the doctrine in three parts. Firstly, the section declares that an “agreement” to do an impossible act is “itself void”. Secondly, though the second part of the section is not happily worded, declares that the contractual act, which after the “contract” is made becomes impossible to perform due to some event that the promisor couldn’t prevent from happening or because the performance of the act would be unlawful, the contract is void. Thirdly, the section declares that the compensation is payable for the breach of contract by the promisor if the promisor had known or might have known by the exercise of his due diligence, but if the promisor did not know, then the promisor must pay compensation for non-performance of his promise. The first part uses the word “agreement” which is wider than the term “contract” used in the second part of the section^[10]. The agreement includes all bilateral acts that create rights, transfer rights or extinguish rights. However, the contract is an agreement that creates rights in personam. If this test is applied, the second part of Section 56 applies only to contracts that create only the rights in personam and the first of the section part applies to all other agreements. If so, it follows that the contracts attract the doctrine of frustration only if the contractual act, which after the “contract” is made becomes impossible to perform due to some event that the promisor couldn’t prevent from happening or because the performance of the act would be unlawful. However, the agreements attract the doctrine of frustration irrespective of the fact whether the event disables or hinders the performance of an agreed act or whether doing an agreed act exposes to unlawfulness arising from law made before or after the agreement. The third part of the section talks about the remedy of compensation payable to the injured promisor. The section consciously doesn’t use the words agreement or contract and therefore, it applies to both. However, the payment of compensation shouldn’t arise normally if the agreement or contract is void. The intention of the legislature is to pay compensation only to such a class of injured.

If the question of impossibility is a part of the contract as a condition, what follows has been dealt with by the Act of 1972. Instead of being chased by the doctrine of frustration on the happening of impossibility, the contracting parties may choose to have this as a part of the contract itself by anticipating the likely impossible event. There shouldn’t be any impediment to the freedom of contracting parties. However, the event shouldn’t be an uncertain future event. If the future event is uncertain, it may partake in the character of a wagering contract.

Section 29 and Section 30 of the Act of 1872 bar uncertain contracts and wagering contracts respectively. However, Section 32 of the Act of 1872, while prohibiting the enforcement of the conditional contract (defined in Section 31) until the contingent or future event has happened, declares in the second part that “If the event becomes impossible, such contracts become void”. This is a repetition of the rule stated in the first part of the second part of Section 56. However, the courts have said that, if the Contract itself stipulates that the performance of the contract is subject to frustration or force majeure, then the issue should be dealt with by Sec 32^[11]. But, if the frustrating event occurs de hors the contract, then the case falls under Sec 56. But, it's not clear what difference it makes in the final outcome.

The Act of 1872 doesn’t prohibit contracting out of either Section 56 or Section 32. The parties to the contract may anticipate the frustrating event and stipulate the manner in which that should be dealt with. In such cases, the parties will be dealt with as provided in the contract. Similarly, the parties may contract out of the frustration doctrine by expressly stating that strict or absolute liability applies and under no circumstances, the promiser shall plead impossibility of performance. The contract may even stipulate that the promisee shall be entitled to X amount as compensation from the promiser for the non-performance of the contract due to a frustrating event.

The third part of Sec 56 that obliges payment of compensation is not clear on its application. If the contract is void, why compensation be paid? However, the wording of the Act implies that the promisor is liable to pay if he knew the impossibility of the act which he expected to perform but he still entered into the agreement, then the liability to pay arises.

As we have already discussed, if frustration occurs due to a frustrating event that is beyond the control of man, it is a force majeure such as a flood or epidemic. However, there is no general law that the contract becomes void on account of force majeure. The doctrine of force majeure therefore applies if it is a part of the contract. Where the contract does not have a clause on force majeure, the parties that want discharge from the contract may have to invoke either Sec 32 or Sec 56 and take discharge by proving frustration^[12].

21st-century society has become more interactive. Economic activities have been expanding. Consumerism has been on the rise. The market economy has been promoting free bargains. Globalization policy adopted by most nation-states has phenomenally increased trade and commerce. The Internet has replaced the once mighty pen. The pandemic due to the virality of the virus is a reality. Next, Artificial Intelligence is likely to substitute humans as performers. The possibility of the impossibility of the performance of the contract is expected to increase. Robustness in the application of the doctrine of frustration is all the more necessary.

The author is a Senior Advocate, Supreme Court of India. This article is the edited version of Online lecture delivered by the author on 08.09.2023: BEYOND LAW CLC

[1] See, FA Tamplin Steamship Co vs Anglo Mexican Petroleum Products: (1916) 2 AC 396 @ 403