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Dr.
Doctrine of Frustration in Indian and English Context
By: Siddhant Shanker Pandey B.A. LL.B.(Hons.)
INDEX
1.
List of Cases Referred ………………………………...………………...…..3
2.
Introduction …………………………………………..…………………..…4
3.
Doctrine of Frustration in England ………………..……………………....5
4.
Doctrine of Frustration in India ………………………………………..…12
5.
Similarities & Differences …………………………………………….……19
6.
Suggestions ……………………………………………………………….…21
7.
Bibliography ………………………………………………………………..23
2
LIST OF CASES REFERRED 1.
Paradine v. Jane, 82 ER 897
2.
Taylor v. Caldwell, 122 ER 309
3.
Krell v. Henry, (1903) 2 KB 740
4.
Maritime National Fish Ltd v Ocean Trawlers Ltd, (1935) AC 524
5.
Davis Contractors Ltd v. Fareham Urban Distt Council, (1956) AC 696 715
6.
H R & S Sainsbury Ltd v Street, (1972) 1 WLR 834
7.
Howell v. Coupland, (1876) 1 QBD 258
8.
Joseph Constantine Line Ltd v. Imperial Smelting Corpn, (1941) 2 All ER 165 (HL)
9.
Krell v. Henry, (1903) 2 KB 740
10.
Berne Bay Steam Boat Co v Hutton, (1903) 2 KB 683
1.
Robinson v. Davison, (1871) LR 6 Exch 269
2.
Metropolitan Water Board v. Dick Kerr & Co Ltd., (1981) AC 119
3. Tsakiroglou & Co Ltd v Noblee Thorl GMBH, (1962) AC 93 4.
Chandler v. Webster, (1904) 1 KB 493
5.
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe, (1943) AC 32
6.
Satyabrata Ghose v Mugneeram Bangur & Co, AIR 1954 SC 44
7.
Sushila Devi v. Hari Singh, AIR 1971SC 1956
8.
Naihati Jute Mills Ltd v. Khyaliram Jagannath, AIR 1968 SC 522
19.
V.L. Narasu v. P.S.V. Iyer, AIR 1953 Mad 300
20.
Pameshwari Das Mehra v. Ram Chand Om Prakash, AIR 1952 Punj 34
21. Tcimpore & Co v Cochin Shipyard Ltd, AIR 1984 SC 1072 22. Union of India v. Chanan Shah Mahesh Das, AIR 1955 Pepsu 51 23. Easun Engg Co Ltd v. Fertilizers and Chemicals Travancore Ltd., AIR 1991 Mad 158 24. Naihati Jute Mills Ltd v. Khyaliram Jagannath, AIR 1968 SC 522 25. Twentsch Overseas Trading Co Ltd v Uganda Sugar Factory Ltd., AIR 1945 PC 144
3
INTRODUCTION The concept "frustration of the contract" means "the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the agreement, and as entirely beyond what was contemplated by the parties when they entered into the contract". Frustration means that a contract has ceased to bind the parties because the common basis on which by mutual understanding it was based has failed. The occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the agreement, and as entirely beyond what was contemplated by the parties when they entered into the contract results in frustration of contract. The alteration of circumstances must be such as to upset altogether the purpose of the contract. Some delay or some change is very common in all human affairs but inordinate changes may result in complete change in the performance of contract. Under such circumstances the parties are relieved from their obligations of the performance of the contract. A party faced with an external occurrence or event that may make its performance under a contract impractical, onerous or even impossible might seek to argue that the contract has been frustrated. Under English law, frustration will result in the contract being terminated so that the parties are excused from further performance. However, in order for a contract to be frustrated, the event in question must be unforeseen, it must have occurred without the fault of either party to the contract and it must either make the contract’s performance impossible or it must destroy the fundamental purpose of the contract. The contract must also not contain a provision dealing with the supervening event; otherwise there can be no frustration on the basis that the contract has already allocated risk in of that occurrence. In India under Sec. 56 of the Indian Contract Act 1872 the doctrine of frustration is incorporated. It says that any act which was to be performed after the contract is made becomes unlawful or impossible to perform, and which the promisor could not prevent, then such an act which becomes impossible or unlawful will become void.
4
DOCTRINE OF FRUSTRATION IN ENGLAND England is a common law country. There most of the laws are unwritten. The laws of England are developed by the courts. The “Doctrine of Frustration” was developed by the subsequent cases decided by the court. In the first well-known English case of Paradine v Jane1 it was pointed out that subsequent happenings should not affect a contract already made. There the defendant had taken an estate on lease from the plaintiffs. The defendant was dispossessed of it by alien enemies for some time and, therefore, refused to pay the rent for the period of dispossession. It was held that "when the party by his own contract creates a duty, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract; though the land be surrounded or gained by the sea, or made barren by wildfire, yet the lessor will have his whole rent”. In the subsequent case of Taylor v Caldwell2 , it was held that the above "rule is only applicable when the contract is positive and absolute, and not subject to any condition either express or implied". In this case the defendants had agreed to let the plaintiffs the use of their music hall between certain dates for the purpose of holding a concert there. But before the first day on which a concert was to be given, the hall was destroyed by fire without the fault of either party. The plaintiffs sued the defendants for their loss. It was, held that the contract was not absolute, as its performance depended upon the continued existence of the hall. It was, therefore, "subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible by the perishing of thing without default of the contractor”. Thus this cases laid down the foundation of “Doctrine of Frustration” in England. The doctrine was also extended to the cases where the performance of the contract is physically possible, but the object of the parties had in mind has failed to materialize. This was held in the case of Krell v Henry3 . In this case the defendant agreed to hire from the plaintiff a flat for June 26 and 27, on which days it had been announced that the coronation procession would
along that place. A part of the rent was paid in advance. But the
procession having been cancelled owing to the King's illness, the defendant refused to pay the 1 2 3
Paradine v. Jane, 82 ER 897 Taylor v. Caldwell, 122 ER 309 Krell v. Henry, (1903) 2 KB 740
5
balance. It was held that the real object of the contract, as recognized by both contracting parties, was to have a view of the coronation procession. The taking place of the procession was, therefore, the foundation of the contract. The object of the contract was frustrated by nonhappening of the coronation and the plaintiff was not entitled to recover the balance of the rent. Thus the doctrine of frustration comes into play in two types of situation, first, where the performance is physically cut off, and, second, where the object has failed.
Essentials of Frustration The courts have through its decisions has identified the following essentials that sholud be presented in cases of frustration. 1. Frustration Should not be Self-induced The conditions that lead to the impossibility of the performance of the contract should not be created by the parties themselves. This was held in Maritime National Fish Ltd v Ocean Trawlers Ltd4, 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 that the 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. Thus if the parties have created such circumstances under which the contract is impossible to perform then it will not be deemed to be frustrated. 2. Frustration Operates Automatically Frustration operates automatically to discharge the contract "irrespective of the individuals concerned, their temperaments and failings, their interest and circumstances”. This was held in 4 Maritime National Fish Ltd v Ocean Trawlers Ltd, (1935) AC 524 6
Davis Contractors Ltd v. Fareham Urban Distt Council 5 . In this case Davis Contractors agreed with Fareham UDC to build 78 houses over eight months for £92,425. It ended up taking 22 months, because Davis was short of labour and materials. It cost £115,223. Davis submitted the contract was frustrated, void, and therefore they were entitled to quantum meruit for the value of work done. The House of Lords held that although the performance of the contract had become more onerous it was not frustrated. In H R & S Sainsbury Ltd v Street6 it was held that in certain circumstances frustration may be waived by one party and then the other will be bound by the contract. In this case there was the sale of 275 tons 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.
Specific grounds of Frustration: The courts have come up with certain conditions under which the the parties to a contract can show that the contract has been frustrated. 1. Destruction of Subject-Matter The doctrine of impossibility applies with full force "where the actual and specific subject-matter of the contract has ceased to exist". In Howell v. Coupland7 the contract was held to be frustrated due to the destruction of the subject matter forming the essence of the contract. In this case the defendant contracted to sell a specified quantity of potatoes to be grown on his farm, but failed to supply them as the crop was destroyed by a disease. The Court of Appeal said: suppose the potatoes were fully grown at the time of the contract, and afterwards the disease had come and destroyed them. According to the authorities it is clear that the performance would have been excused and thus it makes no difference that the potatoes were in existence or not. Here there was agreement to sell and buy two hundred tons out of a crop to be grown on a specific land, that is an agreement to sell what may be called specific things. 5 Davis Contractors Ltd v. Fareham Urban Distt Council, (1956) AC 696 715 6 H R & S Sainsbury Ltd v Street, (1972) 1 WLR 834 7
Howell v. Coupland, (1876) 1 QBD 258
7
Therefore, neither party is liable if performance becomes impossible. Thus in the above case where the essence of the contract is the sale and purchase of potatoes grown on specific land. The destruction of such crop resulted in frustration of the contract. 2. 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". In Joseph Constantine Line Ltd. v. Imperial Smelting Corpn. 8, it was held that due to the the changes in the circumstances the contract is frustrated. In August 1936, the appellants, who were the owners of a steamship the Kingswood, chartered the ship to the respondents for a voyage with a cargo of ores and concentrates from Port Pirie in South Australia to Europe. On January 3, 1937 while she was anchored in the roads at Port Pirie, and before she became ‘an arrived ship’, there was an explosion of extreme violence in the neighbourhood of her auxiliary boiler, which caused significant damage to the steamer. Following this accident the appellants gave notice to the respondents to the effect that she could not perform the charter party. The respondents claim damages from the appellants under allegation that the latter have broken the charter party by failing to load a cargo. The appellants sought the defence in that the contract was ‘frustrated’ by the destructive consequences of the explosion on the Kingswood. It was held by House of Lords that the contract will frustrate where circumstances arise which make the performance of the contract impossible in the manner and the time contemplated and in this case the destruction of ship Kingswood resulted in the change of circumstances as the performance of the contract was impossible in the time contemplated. 3. Non-occurrence of Contemplated Event Sometimes the performance of a contract remains entirely possible, but owing to the nonoccurrence of an event contemplated by both parties as the reason for the contract, the value of the performance is destroyed. In Krell v Henry9 there was a contract to hire a room to view a proposed coronation procession was held to have frustrated when the procession was postponed. It was held that contract has frustrated. But in Berne Bay Steam Boat Co v Hutton10 which also arose from the postponement of the coronation the contract was held to be not frustrated. In this case the Royal Naval Review 8 9
Joseph Constantine Line Ltd v. Imperial Smelting Corpn, (1941) 2 All ER 165 (HL) Krell v. Henry, (1903) 2 KB 740 1010 Berne Bay Steam Boat Co v Hutton, (1903) 2 KB 683
8
was proposed to be held on the occasion. The defendant chartered a steamboat for two days "to take out a party of paying engers for the purpose of viewing the naval review and for a day's cruise round the fleet". But the contract was held to be not frustrated because the occurrence of the naval review was not the foundation of the contract. 4. Death or Incapacity of Party "A party to a contract is excused from performance if it depends upon the existence of a given person, if that person perishes" or becomes too ill to perform. Robinson v Davison11 is the wellknown illustration of this point. There was a contract between the plaintiff and the 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 informed the plaintiff that she was too ill to attend the concert. The concert had to be postponed and the plaintiff lost a sum of money. The plaintiffs action for breach of contract failed. The court said that under the circumstances she was not merely excused from playing, but she was also not at liberty to play, if she was unfit to do so. The contract was clearly subject to the condition of her being well enough to perform. Thus the incapacity leads to the frustration of the contract. 5. Government or Legislative Intervention A contract will be dissolved when legislative or istrative intervention has so directly operated upon the fulfillment of the contract for a specific work as to transform the contemplated conditions of performance. A well-known English authority is Metropolitan Water Board v Dick Ken & Co Ltd12. By a contract made in July 1914, a firm of contractors contracted with a Water Board to construct a reservior to be completed within six months. But by a notice issued under the Defence of the Realm Act, the contractors were required to cease work on their contract and they stopped the work accordingly. They claimed that the effect of the notice was to put an end to the contract. The House of Lords held that the interruption created by the prohibition was of such a character and duration as to make the contract when resumed a different contract from the contract when broken off, and that the contract had ceased to be operative. Thus the intervention by the government was held to make the contract frustrated. 6. Intervention of War:
11 Robinson v. Davison, (1871) LR 6 Exch 269 12 Metropolitan Water Board v. Dick Kerr & Co Ltd., (1981) AC 119
9
In Tsakiroglou & Co Ltd v Noblee Thorl GMBH 13 it was held that the intervention by war in the contract does not result in the frustration of the contract. In that case 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. Thus if out of many possible ways a single route in hindered by the war then this do not result in the frustration of the contract. But if the intervention of war leads to complete closure of all the possible ways then it will amount to frustration of contract.
Adjustment of Rights: Once it is adjudged that the contract has been frustrated then the rights and obligations of the parties need to be determined. The rights of the parties under frustrated contract was first decided in
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. The same was followed in Chandler v. Webster14. In this case 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. The court formed the following 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 13 Tsakiroglou & Co Ltd v Noblee Thorl GMBH, (1962) AC 93 14 Chandler v. Webster, (1904) 1 KB 493 10
obligation under the contract, but the contract could not be considered as rescinded ab 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. These principles caused hardships. These principles were overruled in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe15. In this case their Lordships 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. It was held that the money paid was recoverable, as having been paid for a consideration which had failed. Presently the rights of the parties under frustrated contracts are determined by Law Reform (Frustrated Contracts) Act, 1943. The main provisions of the Act is that all 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 the reasonable overhead expenses and the work or services personally performed by the party.
15 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe, (1943) AC 32
11
DOCTRINE OF FRUSTRATION IN INDIA In India the doctrine of frustration is itself incorporated in the Indian Contract Act,1872 under sec. 56 which states: 56. Agreement to do impossible act.—An agreement to do 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 promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non- performance of the promise. Illustrations (a) A agrees with B to discover treasure by magic. The agreement is void. (b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void. 12
(c) A contracts to marry B, being already married to C and being forbidden by the law to which he is subject to practice polygamy. A must make compensation to B for the loss caused to her by the non-performance of the promise. (d) A contracts to take in cargo for B at a foreign port. A's Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared. (e) A contracts to act at the theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void. In India the doctrine of frustration is incorporated in black and white then also since changing times there are some situations under which the court has to come up with new interpretations and applications of the law. In Satyabrata Ghose v Mugneeram Bangur & Co 16 it was held that the word 'impossible’ has not been used here 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 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 promised to do.
Essentials of Frustration: There are two basic essentials that need to be present in the cases of frustration: 1. Frustration should not be self induced It was held in Sushila Devi v. Hari Singh17 that it is a well settled principle that the principle of frustration of an adventure assumes that the frustration arises without blame or fault on either side. Reliance cannot be placed on a self induced frustration.
2. Frustration Operates Automatically The legal effect of frustration does not depend on their intention or their opinions, or even knowledge, as to the event. Section 56 of the Contract Act lays down a rule of
16 Satyabrata Ghose v Mugneeram Bangur & Co, AIR 1954 SC 44 17 Sushila Devi v. Hari Singh, AIR 1971SC 1956 13
positive law and does not leave the matter to be determined according to the intention of the parties. In Naihati Jute Mills Ltd v. Khyaliram Jagannath18
held that that frustration
it was
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.
Specific grounds for Frustration: The act tells that what is effect of impossibility of performing a contract but it is silent then under what circumstances the contract will be frustrated. The courts have come up with the following grounds that determine whether the contract has frustrated or not : 1. Destruction of Subject-Matter The courts in India have made the test of destruction of subject-matter to determine whether the contract has been rendered impossible to be performed. In V.L. Narasu v. P.S.V. Iyer19 it was held that the contract had frustrated due to the destruction of the subject-matter. In this case there was a contract to exhibit a film in a cinema hall. On of heavy rains the rear wall of the hall collapsed killing three persons, and its licence was cancelled until the building was reconstructed to the satisfaction of the chief engineer. The court held that the owner was under no liability to reconstruct the hall and even if he did reconstruct and it took him about some time, by that time the film would have lost its appeal. Thus the destruction of the cinema hall premises resulted in the destruction of the subject-matter of the contract that was the essence of the contract and hence the contract has frustrated. 2. Change of Circumstances When the change of circumstances has affected the performance of the contract to such an extent as to make it virtually impossible or even extremely difficult or hazardous then the contract is deemed to be frustrated. In Pameshwari Das Mehra v. Ram Chand Om Prakash20 : A contracted to supply to B certain classes and quantities of American piece-goods. The contract was c.i.f. Karachi. The goods arrived there after some delay. B refused to accept on the ground that both the qualities and quantities offered for delivery were not according to the particular contract. A called upon B to refer the dispute to the nominated arbitrator who was residing at Karachi. Then came partition which made it impossible for non-Muslims to go to Karachi. The court held that the contract was not frustrated as it was not necessary to Karachi for arbitration proceedings, so the changed circumstances did not have a material effect on the contract. 18 Naihati Jute Mills Ltd v. Khyaliram Jagannath, AIR 1968 SC 522 19 V.L. Narasu v. P.S.V. Iyer, AIR 1953 Mad 300 20 Pameshwari Das Mehra v. Ram Chand Om Prakash, AIR 1952 Punj 34 14
Marginal price rise may be ignored. But when prices escalate out of all proportion than could have been reasonably expected by the parties and make performance so crushing to the contractor as to border virtually on impossibility, the law would have to offer relief to the contractor in of price revision. The Supreme Court has recognized this in Tarapore & Co v Cochin Shipyard Ltd21. In this case there is no room for doubt that the parties agreed that the investment of the contractor (for import of equipment and know-how, in foreign exchange) would be two crores and the tendered rates were predicated upon and co-related to this understanding. When an agreement is predicated upon an agreed fact situation, and that situation ceases to exist, the agreement, to that extent, becomes irrelevant. The rates payable to the contractor were related to the investment of Rs 2 crore by the contractor. Once the rates became irrelevant on of circumstances beyond the control of the contractor, it was open to him to make a claim for compensation. In Easun Engg Co Ltd v. Fertilizers and Chemicals Travancore Ltd. 22, it was held that the contract had frustrated as there was 400 percent rise in the prices of the transformers to be delivered under contract. Thus the courts have recognized that under cases where there is abnormal rise in price then the contract is deemed frustrated and if it is performed the extra claim for compensation due to changed circumstances can be claimed. If the change in circumstances to occur in future is known beforehand then such circumstances will not lead the contract to be frustrated. In Union of India v. Chanan Shah Mahesh Das 23 a railway company accepted goods for transport and happened to convey them to a wrong destination, which on of partition fell in Pakistan and the railways could not bring them back into India. They were not permitted to plead frustration to their liability to pay for the loss of the goods as the dates of partition were known beforehand. 3. Non-Occurrence of Contemplated Event Resulting in Failure of Object If such events occur that make the principle purpose of the to be achieve, then the contracted is said to be frustrated. In Satyabrata Ghose v Mugneeram Bangur & Co24 it was held that the word 'impossible’ has not been used here 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 from the point of view of the object and purpose which the parties had 21 Tcimpore & Co v Cochin Shipyard Ltd, AIR 1984 SC 1072 22
Easun Engg Co Ltd v. Fertilizers and Chemicals Travancore Ltd., AIR 1991 Mad 158
23 Union of India v. Chanan Shah Mahesh Das, AIR 1955 Pepsu 51 24 Satyabrata Ghose v Mugneeram Bangur & Co, AIR 1954 SC 44 15
in view. Each party enters into the contract for the fulfillment of a specific objective. But if the event happens that make the realization of such object impossible then the contract is frustrated. 4. Death or Incapacity The death or incapacity of the party to the contract makes the contract frustrated unless it appears from the intention of the contract that the performance of the contract was not dependent upon the personal ability of the promisor. If the contract demands the personal ability of the promisor then the death or incapacity of the promisor makes the contract frustrated. As per illustration (b) of sec 56 of India Contract Act (b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void. The lunatic person is barred from marriage. He is incapable of marrying. Thus, going of A mad had made him incapable and the contract has frustrated due to the incapacity of the party. 5. Government, istrative or Legislative Intervention The intervention by the government authorities has been considered a good ground for the frustration of the contract. But there are various exceptions made to this rule by the Indian courts. In Satyabrata Ghose v Mugneeram Bangur & Co, it was held that an intervention of a temporary nature which does not uproot the foundation of the contract will not have the dissolving effect. In this case the defendant company started a scheme for the development of a tract of land into a housing colony. The plaintiff was granted a plot on payment of earnest money. The company undertook to construct the roads and drains necessary for making the lands suitable for building and residential purposes and as soon as they were completed, the purchaser was to be called upon to complete the conveyance by payment of the balance of the purchase money. But before anything could be done, a considerable portion of the land was requisitioned by the State during the Second World War for military purposes. The court held that the contract had not frustrated because of the reason the time was not the essence of the contract. Thus, the government intervention do not result in
the substantial changes for which the
contract was entered and it could be still be performed. In Naihati Jute Mills Ltd v. Khyaliram Jagannath25
it was held that the effect of an istrative intervention has
to be viewed in the light of the of the contract, and, if the show that the parties have undertaken an absolute obligation regardless of istrative changes, they cannot claim to be 25
Naihati Jute Mills Ltd v. Khyaliram Jagannath, AIR 1968 SC 522
16
discharged. In this case there was an agreement to purchase raw jute to be imported from East Pakistan (now Bangladesh). 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 sufficient for two months. He applied again. He was advised this time that the rules have been changed and to obtain a license he must show that he has used an equal quantity of Indian jute. Thus the buyer failed to supply the license and was sued for breach. He pleaded frustration caused by the change in Government policy. The court held that contract had not frustrated. If the Government had completely forbidden imports, Section 56 would have applied. But the Government policy only was that the licensing authority would scrutinise the case of each applicant on its own merit. Where the intervention makes the performance unlawful, the courts will have no choice but to put an end to the contract. Thus when the performance of contract has not substantially be rendered impossible by the government policies it will not be considered to be frustrated.
6. Intervention of War 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 inconvenienent or expensive. This was held in Twentsch Overseas Trading Co Ltd v Uganda Sugar Factory Ltd.26
In this case the appellants
claimed that the rails specified under the contract were to be rails manufactured by a German firm and by that firm only. On this they based their claim to be excused from their failure to deliver the goods because to do so would have involved a dealing with alien enemies due to the outbreak of World War II and hence the performance of the contract became impossible and illegal. Their Lordships held that it was not open to the supplier to invoke the doctrine of frustration. There was nothing in the contract which called for the rails to be obtained from only. The reference to "Krupps" did not indicate a source of supply, but merely a specification of the rails. There were many other sources of supply, and the contract left the supplier with a free hand in the matter. Thus there was different ways to perform the contract and hence the contract has not frustrated. But if the war interferes with all the possible ways of the performance of contract then the contract is frustrated.
Adjustment of Rights Once it is ascertained that the performance of the contract has become impossible then the rights 26
Twentsch Overseas Trading Co Ltd v Uganda Sugar Factory Ltd., AIR 1945 PC 144
17
and obligations of the parties are determined by Sec. 65 of the Indian Contract Act which states as follows: 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. Illustrations
(a) A pays B 1,000 rupees in consideration of B's promising to marry C, A's daughter. C is dead at the time of the promise, The agreement is void but B must repay A the 1,000 rupees. (b) A contracts with B to deliver to him 250 maunds of rice before the first of May. A delivers 130 maunds only before that day, and none after. B retains the 130 maunds after the first of May. He is bound to pay A for them. (c) A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two night in every week during the next two months, and B engages to pay her hundred rupees for each night's performance. On the sixth night, A willfully absents herself from the theatre, and B, in consequence, rescinds the contract. B must pay A for the five nights on which she had sung. (d) A contracts to sing for B at a concert for 1,000 rupees, which are paid in advance. A too ill to sing. A is not bound to make compensation to B for the loss of the profits which B would have made if A had been able to sing, but must refund to B the 1,000 rupees paid in advance.
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 ed 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. Thus the parties under frustrated contract are bound to restore back the benefits if any received under such a contract.
18
SIMILARITIES AND DIFFERENCES England and India both have adopted the doctrine of frustration. India has borrowed a lot of concept from the English law and has gone further to make some changes to suit the Indian condition. The major similarities and differences between the doctrine of frustration in England and India are as follows:
Similarities: 1.
Both in England and in India the doctrine of frustration apply not only when there is physical impossibility but also when there is the failure of core object of the contract.
2.
The destruction of subject-matter renders the contract frustrated in both the countries.
3.
The change in circumstances that makes it impossible to perform the contract in the time and manner contemplated is recognized as ground of frustration in both countries.
4.
The intervention by the government, istrative and legislative bodies is a ground of frustration of contract in England and in India.
5.
The intervention of war in performance of contract makes the contract frustrated, if there is no alternative option open, both in England and in India.
6.
In England and in India, once the contract is frustrated then the parties are discharged from 19
obligations under the contract and they have no liability to perform anymore in of the contract. 7.
Both countries have recognized the principle that the frustration should not be self induced and it operates automatically.
Differences: 1.
In England the doctrine of frustration has been developed by the courts. In India the doctrine of frustration is followed as it is mentioned in para 2 of section 56 Contract Act,1872.
2.
The non-occurrence of a contemplated event is covered under doctrine of frustration in England while in India such cases are not deemed as frustrated so as to cover it under section 56 but are covered under Sec. 32 of Contract Act, which deals with contingent contract.
3.
In England if there is change in prices of the goods to be supplied under the contract, the party is bound to perform the contract even if the prices rise high. In India, if the prices rise too much then the contract should be revised for the price as held in Tarapore & Co v Cochin Shipyard Ltd. But if there is too much of price increases then the contract is frustrated as held in Easun Engg Co Ltd v. Fertilizers and Chemicals Travancore Ltd.
4.
The intervention of government amounts to frustration of contract in England. But in India if the government intervention is for a small period of time and the time is of no essence to the contract then the contract is not deemed to be frustrated as held in Satyabrata Ghose v Mugneeram Bangur & Co.
5.
In England the intervention of istrative authorities render contract frustrated. But, in India, if by the construction of the contract it is seen that parties have taken absolute obligation to perform the contract even after the istrative action then it is not frustrated by such istrative interference as held in Naihati Jute Mills Ltd v. Khyaliram Jagannath.
6.
In England, the party incurring any expenses before the discharge in the performance of contract can recover such expenses. But, in India only the advantage gained under a frustrated contract can be recovered and no expenses which he had made for the performance of the contract.
20
SUGGESTIONS The Indian law on frustration is better than in England. It is written in black and white without any ambiguity. The Indian courts have expanded the doctrine by discovering the situations under which the contract becomes impossible to perform hence come within the purview of frustration. But, as the time is fast moving there needs few changes in the existing Indian Contract Act, 1872, so as to address the problems of the changing society more effectively and to secure justice. Second part of section 56 deals with the doctrine of frustration. It states that 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.
21
The plain reading of the section suggests the impossibility in physical . But, the word impossibility has not been used here 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 from the point of view of the object and purpose which the parties had in view, and if an untoward incident or change of circumstances totally upset the very foundation upon which the parties rested their bargain, it can be very well be said that the promisor finds it impossible to do the act which he promised to do. So, to make more clarity words substantially or physically or literally be added before word impossible in para 2 of section 56. Moreover, a plain reading of the section makes that the acts which subsequently becomes unlawful will make the contract void. The term unlawful means an act done against the law. So there needs to be a clear and definite meaning of term “unlawful”. So after second part of Section 56 following words be inserted: The term “unlawful” covers all such acts as is defined in Section 23 of the Act. One more problem associated with the existing contract law is regarding commercial hardship. For example, A entered into a contract with B to sell him 100 kgs of rice at Rs. 50 per kg. Suppose the market price rose to Rs. 52. Then such minute changes are being expected to be foreseen by the individuals to the contract. But suppose the prise rose to Rs. 150 per kg then it will be unjust to hold A still bound by the contract to sell at Rs. 50. This is an unexpected change that has occurred. Though such a contract has not frustrated because it is still possible to perform the contract and the basic object for which the contract was entered into has also not failed. Under the existing doctrine of frustration in India covered under Sec 56 para 2, A will be bound to perform the obligation under the contract. This will though maintain the sanctity of the contract but will result in gross injustice to A. To counter such situation a new section 56A should be inserted as follows: 56A. Commercial hardship resulting in frustration of contract.- If the situation changes that cannot be foreseen by any of the party and it results in the commercial hardship resulting in unjust to one of the party, then if the court thinks fit may declare the contract as void. So, when the court thinks that the changes in circumstances will result in unjust to one party then the contract should be deemed to be frustrated. The rights of the parties under frustrated contract are adjusted by section 65 of the Indian 22
Contract Act. But it sometimes leads to unjust to the other party. For example, B agreed to hire from the A a flat for June 26 and 27, on which days it had been announced that the King’s coronation procession would along that place. A part of the rent was paid in advance. A made certain repairs in flat so as to make it proper for B’s stay. But the procession was cancelled owing to the King's illness. Thus as the real object of the contract has failed, and due to substantial impossibility there was frustration of the contract. So as per section 65 of the Indian contract act B can recover the whole of the advance paid to A. But, this is unjust as A has done something i.e. repairs, to perform the contract though it did not resulted in any advantage to B. To counter such situation new section 65A should be inserted, borrowing from the Law Reform (Frustrated Contract) Act of England as follows: 65A. Rights of the Party under contract that becomes void who incurred expenses.- 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. So, the Indian Law on frustration is better than the English Law. But few changes in the Indian Law to bring out more clarity in the performance of the contract can surely bring up more improvements in the application of the doctrine of frustration.
BIBLIOGRAPHY
1.
Avtar Singh, Contract and Specific Relief Act (11th ed. 2013)
2.
R. K. Bangia, The Indian Contract Act (12th ed. 2006)
3.
Chitty, The Law of Contracts Volume I (29th ed. 2004)
4.
Ewan McKendrick, Contract Law Text, Cases, Material (3rd ed. 2008)
5.
G. H. Treitel, The Law of Contract (11th ed. 2003) 23
6.
SCC online
7.
Lexis-Nexis
24
Doctrine of Frustration in Indian and English Context
By: Siddhant Shanker Pandey B.A. LL.B.(Hons.)
INDEX
1.
List of Cases Referred ………………………………...………………...…..3
2.
Introduction …………………………………………..…………………..…4
3.
Doctrine of Frustration in England ………………..……………………....5
4.
Doctrine of Frustration in India ………………………………………..…12
5.
Similarities & Differences …………………………………………….……19
6.
Suggestions ……………………………………………………………….…21
7.
Bibliography ………………………………………………………………..23
2
LIST OF CASES REFERRED 1.
Paradine v. Jane, 82 ER 897
2.
Taylor v. Caldwell, 122 ER 309
3.
Krell v. Henry, (1903) 2 KB 740
4.
Maritime National Fish Ltd v Ocean Trawlers Ltd, (1935) AC 524
5.
Davis Contractors Ltd v. Fareham Urban Distt Council, (1956) AC 696 715
6.
H R & S Sainsbury Ltd v Street, (1972) 1 WLR 834
7.
Howell v. Coupland, (1876) 1 QBD 258
8.
Joseph Constantine Line Ltd v. Imperial Smelting Corpn, (1941) 2 All ER 165 (HL)
9.
Krell v. Henry, (1903) 2 KB 740
10.
Berne Bay Steam Boat Co v Hutton, (1903) 2 KB 683
1.
Robinson v. Davison, (1871) LR 6 Exch 269
2.
Metropolitan Water Board v. Dick Kerr & Co Ltd., (1981) AC 119
3. Tsakiroglou & Co Ltd v Noblee Thorl GMBH, (1962) AC 93 4.
Chandler v. Webster, (1904) 1 KB 493
5.
Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe, (1943) AC 32
6.
Satyabrata Ghose v Mugneeram Bangur & Co, AIR 1954 SC 44
7.
Sushila Devi v. Hari Singh, AIR 1971SC 1956
8.
Naihati Jute Mills Ltd v. Khyaliram Jagannath, AIR 1968 SC 522
19.
V.L. Narasu v. P.S.V. Iyer, AIR 1953 Mad 300
20.
Pameshwari Das Mehra v. Ram Chand Om Prakash, AIR 1952 Punj 34
21. Tcimpore & Co v Cochin Shipyard Ltd, AIR 1984 SC 1072 22. Union of India v. Chanan Shah Mahesh Das, AIR 1955 Pepsu 51 23. Easun Engg Co Ltd v. Fertilizers and Chemicals Travancore Ltd., AIR 1991 Mad 158 24. Naihati Jute Mills Ltd v. Khyaliram Jagannath, AIR 1968 SC 522 25. Twentsch Overseas Trading Co Ltd v Uganda Sugar Factory Ltd., AIR 1945 PC 144
3
INTRODUCTION The concept "frustration of the contract" means "the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the agreement, and as entirely beyond what was contemplated by the parties when they entered into the contract". Frustration means that a contract has ceased to bind the parties because the common basis on which by mutual understanding it was based has failed. The occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the agreement, and as entirely beyond what was contemplated by the parties when they entered into the contract results in frustration of contract. The alteration of circumstances must be such as to upset altogether the purpose of the contract. Some delay or some change is very common in all human affairs but inordinate changes may result in complete change in the performance of contract. Under such circumstances the parties are relieved from their obligations of the performance of the contract. A party faced with an external occurrence or event that may make its performance under a contract impractical, onerous or even impossible might seek to argue that the contract has been frustrated. Under English law, frustration will result in the contract being terminated so that the parties are excused from further performance. However, in order for a contract to be frustrated, the event in question must be unforeseen, it must have occurred without the fault of either party to the contract and it must either make the contract’s performance impossible or it must destroy the fundamental purpose of the contract. The contract must also not contain a provision dealing with the supervening event; otherwise there can be no frustration on the basis that the contract has already allocated risk in of that occurrence. In India under Sec. 56 of the Indian Contract Act 1872 the doctrine of frustration is incorporated. It says that any act which was to be performed after the contract is made becomes unlawful or impossible to perform, and which the promisor could not prevent, then such an act which becomes impossible or unlawful will become void.
4
DOCTRINE OF FRUSTRATION IN ENGLAND England is a common law country. There most of the laws are unwritten. The laws of England are developed by the courts. The “Doctrine of Frustration” was developed by the subsequent cases decided by the court. In the first well-known English case of Paradine v Jane1 it was pointed out that subsequent happenings should not affect a contract already made. There the defendant had taken an estate on lease from the plaintiffs. The defendant was dispossessed of it by alien enemies for some time and, therefore, refused to pay the rent for the period of dispossession. It was held that "when the party by his own contract creates a duty, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract; though the land be surrounded or gained by the sea, or made barren by wildfire, yet the lessor will have his whole rent”. In the subsequent case of Taylor v Caldwell2 , it was held that the above "rule is only applicable when the contract is positive and absolute, and not subject to any condition either express or implied". In this case the defendants had agreed to let the plaintiffs the use of their music hall between certain dates for the purpose of holding a concert there. But before the first day on which a concert was to be given, the hall was destroyed by fire without the fault of either party. The plaintiffs sued the defendants for their loss. It was, held that the contract was not absolute, as its performance depended upon the continued existence of the hall. It was, therefore, "subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible by the perishing of thing without default of the contractor”. Thus this cases laid down the foundation of “Doctrine of Frustration” in England. The doctrine was also extended to the cases where the performance of the contract is physically possible, but the object of the parties had in mind has failed to materialize. This was held in the case of Krell v Henry3 . In this case the defendant agreed to hire from the plaintiff a flat for June 26 and 27, on which days it had been announced that the coronation procession would
along that place. A part of the rent was paid in advance. But the
procession having been cancelled owing to the King's illness, the defendant refused to pay the 1 2 3
Paradine v. Jane, 82 ER 897 Taylor v. Caldwell, 122 ER 309 Krell v. Henry, (1903) 2 KB 740
5
balance. It was held that the real object of the contract, as recognized by both contracting parties, was to have a view of the coronation procession. The taking place of the procession was, therefore, the foundation of the contract. The object of the contract was frustrated by nonhappening of the coronation and the plaintiff was not entitled to recover the balance of the rent. Thus the doctrine of frustration comes into play in two types of situation, first, where the performance is physically cut off, and, second, where the object has failed.
Essentials of Frustration The courts have through its decisions has identified the following essentials that sholud be presented in cases of frustration. 1. Frustration Should not be Self-induced The conditions that lead to the impossibility of the performance of the contract should not be created by the parties themselves. This was held in Maritime National Fish Ltd v Ocean Trawlers Ltd4, 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 that the 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. Thus if the parties have created such circumstances under which the contract is impossible to perform then it will not be deemed to be frustrated. 2. Frustration Operates Automatically Frustration operates automatically to discharge the contract "irrespective of the individuals concerned, their temperaments and failings, their interest and circumstances”. This was held in 4 Maritime National Fish Ltd v Ocean Trawlers Ltd, (1935) AC 524 6
Davis Contractors Ltd v. Fareham Urban Distt Council 5 . In this case Davis Contractors agreed with Fareham UDC to build 78 houses over eight months for £92,425. It ended up taking 22 months, because Davis was short of labour and materials. It cost £115,223. Davis submitted the contract was frustrated, void, and therefore they were entitled to quantum meruit for the value of work done. The House of Lords held that although the performance of the contract had become more onerous it was not frustrated. In H R & S Sainsbury Ltd v Street6 it was held that in certain circumstances frustration may be waived by one party and then the other will be bound by the contract. In this case there was the sale of 275 tons 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.
Specific grounds of Frustration: The courts have come up with certain conditions under which the the parties to a contract can show that the contract has been frustrated. 1. Destruction of Subject-Matter The doctrine of impossibility applies with full force "where the actual and specific subject-matter of the contract has ceased to exist". In Howell v. Coupland7 the contract was held to be frustrated due to the destruction of the subject matter forming the essence of the contract. In this case the defendant contracted to sell a specified quantity of potatoes to be grown on his farm, but failed to supply them as the crop was destroyed by a disease. The Court of Appeal said: suppose the potatoes were fully grown at the time of the contract, and afterwards the disease had come and destroyed them. According to the authorities it is clear that the performance would have been excused and thus it makes no difference that the potatoes were in existence or not. Here there was agreement to sell and buy two hundred tons out of a crop to be grown on a specific land, that is an agreement to sell what may be called specific things. 5 Davis Contractors Ltd v. Fareham Urban Distt Council, (1956) AC 696 715 6 H R & S Sainsbury Ltd v Street, (1972) 1 WLR 834 7
Howell v. Coupland, (1876) 1 QBD 258
7
Therefore, neither party is liable if performance becomes impossible. Thus in the above case where the essence of the contract is the sale and purchase of potatoes grown on specific land. The destruction of such crop resulted in frustration of the contract. 2. 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". In Joseph Constantine Line Ltd. v. Imperial Smelting Corpn. 8, it was held that due to the the changes in the circumstances the contract is frustrated. In August 1936, the appellants, who were the owners of a steamship the Kingswood, chartered the ship to the respondents for a voyage with a cargo of ores and concentrates from Port Pirie in South Australia to Europe. On January 3, 1937 while she was anchored in the roads at Port Pirie, and before she became ‘an arrived ship’, there was an explosion of extreme violence in the neighbourhood of her auxiliary boiler, which caused significant damage to the steamer. Following this accident the appellants gave notice to the respondents to the effect that she could not perform the charter party. The respondents claim damages from the appellants under allegation that the latter have broken the charter party by failing to load a cargo. The appellants sought the defence in that the contract was ‘frustrated’ by the destructive consequences of the explosion on the Kingswood. It was held by House of Lords that the contract will frustrate where circumstances arise which make the performance of the contract impossible in the manner and the time contemplated and in this case the destruction of ship Kingswood resulted in the change of circumstances as the performance of the contract was impossible in the time contemplated. 3. Non-occurrence of Contemplated Event Sometimes the performance of a contract remains entirely possible, but owing to the nonoccurrence of an event contemplated by both parties as the reason for the contract, the value of the performance is destroyed. In Krell v Henry9 there was a contract to hire a room to view a proposed coronation procession was held to have frustrated when the procession was postponed. It was held that contract has frustrated. But in Berne Bay Steam Boat Co v Hutton10 which also arose from the postponement of the coronation the contract was held to be not frustrated. In this case the Royal Naval Review 8 9
Joseph Constantine Line Ltd v. Imperial Smelting Corpn, (1941) 2 All ER 165 (HL) Krell v. Henry, (1903) 2 KB 740 1010 Berne Bay Steam Boat Co v Hutton, (1903) 2 KB 683
8
was proposed to be held on the occasion. The defendant chartered a steamboat for two days "to take out a party of paying engers for the purpose of viewing the naval review and for a day's cruise round the fleet". But the contract was held to be not frustrated because the occurrence of the naval review was not the foundation of the contract. 4. Death or Incapacity of Party "A party to a contract is excused from performance if it depends upon the existence of a given person, if that person perishes" or becomes too ill to perform. Robinson v Davison11 is the wellknown illustration of this point. There was a contract between the plaintiff and the 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 informed the plaintiff that she was too ill to attend the concert. The concert had to be postponed and the plaintiff lost a sum of money. The plaintiffs action for breach of contract failed. The court said that under the circumstances she was not merely excused from playing, but she was also not at liberty to play, if she was unfit to do so. The contract was clearly subject to the condition of her being well enough to perform. Thus the incapacity leads to the frustration of the contract. 5. Government or Legislative Intervention A contract will be dissolved when legislative or istrative intervention has so directly operated upon the fulfillment of the contract for a specific work as to transform the contemplated conditions of performance. A well-known English authority is Metropolitan Water Board v Dick Ken & Co Ltd12. By a contract made in July 1914, a firm of contractors contracted with a Water Board to construct a reservior to be completed within six months. But by a notice issued under the Defence of the Realm Act, the contractors were required to cease work on their contract and they stopped the work accordingly. They claimed that the effect of the notice was to put an end to the contract. The House of Lords held that the interruption created by the prohibition was of such a character and duration as to make the contract when resumed a different contract from the contract when broken off, and that the contract had ceased to be operative. Thus the intervention by the government was held to make the contract frustrated. 6. Intervention of War:
11 Robinson v. Davison, (1871) LR 6 Exch 269 12 Metropolitan Water Board v. Dick Kerr & Co Ltd., (1981) AC 119
9
In Tsakiroglou & Co Ltd v Noblee Thorl GMBH 13 it was held that the intervention by war in the contract does not result in the frustration of the contract. In that case 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. Thus if out of many possible ways a single route in hindered by the war then this do not result in the frustration of the contract. But if the intervention of war leads to complete closure of all the possible ways then it will amount to frustration of contract.
Adjustment of Rights: Once it is adjudged that the contract has been frustrated then the rights and obligations of the parties need to be determined. The rights of the parties under frustrated contract was first decided in
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. The same was followed in Chandler v. Webster14. In this case 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. The court formed the following 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 13 Tsakiroglou & Co Ltd v Noblee Thorl GMBH, (1962) AC 93 14 Chandler v. Webster, (1904) 1 KB 493 10
obligation under the contract, but the contract could not be considered as rescinded ab 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. These principles caused hardships. These principles were overruled in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe15. In this case their Lordships 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. It was held that the money paid was recoverable, as having been paid for a consideration which had failed. Presently the rights of the parties under frustrated contracts are determined by Law Reform (Frustrated Contracts) Act, 1943. The main provisions of the Act is that all 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 the reasonable overhead expenses and the work or services personally performed by the party.
15 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe, (1943) AC 32
11
DOCTRINE OF FRUSTRATION IN INDIA In India the doctrine of frustration is itself incorporated in the Indian Contract Act,1872 under sec. 56 which states: 56. Agreement to do impossible act.—An agreement to do 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 promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non- performance of the promise. Illustrations (a) A agrees with B to discover treasure by magic. The agreement is void. (b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void. 12
(c) A contracts to marry B, being already married to C and being forbidden by the law to which he is subject to practice polygamy. A must make compensation to B for the loss caused to her by the non-performance of the promise. (d) A contracts to take in cargo for B at a foreign port. A's Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared. (e) A contracts to act at the theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void. In India the doctrine of frustration is incorporated in black and white then also since changing times there are some situations under which the court has to come up with new interpretations and applications of the law. In Satyabrata Ghose v Mugneeram Bangur & Co 16 it was held that the word 'impossible’ has not been used here 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 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 promised to do.
Essentials of Frustration: There are two basic essentials that need to be present in the cases of frustration: 1. Frustration should not be self induced It was held in Sushila Devi v. Hari Singh17 that it is a well settled principle that the principle of frustration of an adventure assumes that the frustration arises without blame or fault on either side. Reliance cannot be placed on a self induced frustration.
2. Frustration Operates Automatically The legal effect of frustration does not depend on their intention or their opinions, or even knowledge, as to the event. Section 56 of the Contract Act lays down a rule of
16 Satyabrata Ghose v Mugneeram Bangur & Co, AIR 1954 SC 44 17 Sushila Devi v. Hari Singh, AIR 1971SC 1956 13
positive law and does not leave the matter to be determined according to the intention of the parties. In Naihati Jute Mills Ltd v. Khyaliram Jagannath18
held that that frustration
it was
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.
Specific grounds for Frustration: The act tells that what is effect of impossibility of performing a contract but it is silent then under what circumstances the contract will be frustrated. The courts have come up with the following grounds that determine whether the contract has frustrated or not : 1. Destruction of Subject-Matter The courts in India have made the test of destruction of subject-matter to determine whether the contract has been rendered impossible to be performed. In V.L. Narasu v. P.S.V. Iyer19 it was held that the contract had frustrated due to the destruction of the subject-matter. In this case there was a contract to exhibit a film in a cinema hall. On of heavy rains the rear wall of the hall collapsed killing three persons, and its licence was cancelled until the building was reconstructed to the satisfaction of the chief engineer. The court held that the owner was under no liability to reconstruct the hall and even if he did reconstruct and it took him about some time, by that time the film would have lost its appeal. Thus the destruction of the cinema hall premises resulted in the destruction of the subject-matter of the contract that was the essence of the contract and hence the contract has frustrated. 2. Change of Circumstances When the change of circumstances has affected the performance of the contract to such an extent as to make it virtually impossible or even extremely difficult or hazardous then the contract is deemed to be frustrated. In Pameshwari Das Mehra v. Ram Chand Om Prakash20 : A contracted to supply to B certain classes and quantities of American piece-goods. The contract was c.i.f. Karachi. The goods arrived there after some delay. B refused to accept on the ground that both the qualities and quantities offered for delivery were not according to the particular contract. A called upon B to refer the dispute to the nominated arbitrator who was residing at Karachi. Then came partition which made it impossible for non-Muslims to go to Karachi. The court held that the contract was not frustrated as it was not necessary to Karachi for arbitration proceedings, so the changed circumstances did not have a material effect on the contract. 18 Naihati Jute Mills Ltd v. Khyaliram Jagannath, AIR 1968 SC 522 19 V.L. Narasu v. P.S.V. Iyer, AIR 1953 Mad 300 20 Pameshwari Das Mehra v. Ram Chand Om Prakash, AIR 1952 Punj 34 14
Marginal price rise may be ignored. But when prices escalate out of all proportion than could have been reasonably expected by the parties and make performance so crushing to the contractor as to border virtually on impossibility, the law would have to offer relief to the contractor in of price revision. The Supreme Court has recognized this in Tarapore & Co v Cochin Shipyard Ltd21. In this case there is no room for doubt that the parties agreed that the investment of the contractor (for import of equipment and know-how, in foreign exchange) would be two crores and the tendered rates were predicated upon and co-related to this understanding. When an agreement is predicated upon an agreed fact situation, and that situation ceases to exist, the agreement, to that extent, becomes irrelevant. The rates payable to the contractor were related to the investment of Rs 2 crore by the contractor. Once the rates became irrelevant on of circumstances beyond the control of the contractor, it was open to him to make a claim for compensation. In Easun Engg Co Ltd v. Fertilizers and Chemicals Travancore Ltd. 22, it was held that the contract had frustrated as there was 400 percent rise in the prices of the transformers to be delivered under contract. Thus the courts have recognized that under cases where there is abnormal rise in price then the contract is deemed frustrated and if it is performed the extra claim for compensation due to changed circumstances can be claimed. If the change in circumstances to occur in future is known beforehand then such circumstances will not lead the contract to be frustrated. In Union of India v. Chanan Shah Mahesh Das 23 a railway company accepted goods for transport and happened to convey them to a wrong destination, which on of partition fell in Pakistan and the railways could not bring them back into India. They were not permitted to plead frustration to their liability to pay for the loss of the goods as the dates of partition were known beforehand. 3. Non-Occurrence of Contemplated Event Resulting in Failure of Object If such events occur that make the principle purpose of the to be achieve, then the contracted is said to be frustrated. In Satyabrata Ghose v Mugneeram Bangur & Co24 it was held that the word 'impossible’ has not been used here 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 from the point of view of the object and purpose which the parties had 21 Tcimpore & Co v Cochin Shipyard Ltd, AIR 1984 SC 1072 22
Easun Engg Co Ltd v. Fertilizers and Chemicals Travancore Ltd., AIR 1991 Mad 158
23 Union of India v. Chanan Shah Mahesh Das, AIR 1955 Pepsu 51 24 Satyabrata Ghose v Mugneeram Bangur & Co, AIR 1954 SC 44 15
in view. Each party enters into the contract for the fulfillment of a specific objective. But if the event happens that make the realization of such object impossible then the contract is frustrated. 4. Death or Incapacity The death or incapacity of the party to the contract makes the contract frustrated unless it appears from the intention of the contract that the performance of the contract was not dependent upon the personal ability of the promisor. If the contract demands the personal ability of the promisor then the death or incapacity of the promisor makes the contract frustrated. As per illustration (b) of sec 56 of India Contract Act (b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void. The lunatic person is barred from marriage. He is incapable of marrying. Thus, going of A mad had made him incapable and the contract has frustrated due to the incapacity of the party. 5. Government, istrative or Legislative Intervention The intervention by the government authorities has been considered a good ground for the frustration of the contract. But there are various exceptions made to this rule by the Indian courts. In Satyabrata Ghose v Mugneeram Bangur & Co, it was held that an intervention of a temporary nature which does not uproot the foundation of the contract will not have the dissolving effect. In this case the defendant company started a scheme for the development of a tract of land into a housing colony. The plaintiff was granted a plot on payment of earnest money. The company undertook to construct the roads and drains necessary for making the lands suitable for building and residential purposes and as soon as they were completed, the purchaser was to be called upon to complete the conveyance by payment of the balance of the purchase money. But before anything could be done, a considerable portion of the land was requisitioned by the State during the Second World War for military purposes. The court held that the contract had not frustrated because of the reason the time was not the essence of the contract. Thus, the government intervention do not result in
the substantial changes for which the
contract was entered and it could be still be performed. In Naihati Jute Mills Ltd v. Khyaliram Jagannath25
it was held that the effect of an istrative intervention has
to be viewed in the light of the of the contract, and, if the show that the parties have undertaken an absolute obligation regardless of istrative changes, they cannot claim to be 25
Naihati Jute Mills Ltd v. Khyaliram Jagannath, AIR 1968 SC 522
16
discharged. In this case there was an agreement to purchase raw jute to be imported from East Pakistan (now Bangladesh). 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 sufficient for two months. He applied again. He was advised this time that the rules have been changed and to obtain a license he must show that he has used an equal quantity of Indian jute. Thus the buyer failed to supply the license and was sued for breach. He pleaded frustration caused by the change in Government policy. The court held that contract had not frustrated. If the Government had completely forbidden imports, Section 56 would have applied. But the Government policy only was that the licensing authority would scrutinise the case of each applicant on its own merit. Where the intervention makes the performance unlawful, the courts will have no choice but to put an end to the contract. Thus when the performance of contract has not substantially be rendered impossible by the government policies it will not be considered to be frustrated.
6. Intervention of War 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 inconvenienent or expensive. This was held in Twentsch Overseas Trading Co Ltd v Uganda Sugar Factory Ltd.26
In this case the appellants
claimed that the rails specified under the contract were to be rails manufactured by a German firm and by that firm only. On this they based their claim to be excused from their failure to deliver the goods because to do so would have involved a dealing with alien enemies due to the outbreak of World War II and hence the performance of the contract became impossible and illegal. Their Lordships held that it was not open to the supplier to invoke the doctrine of frustration. There was nothing in the contract which called for the rails to be obtained from only. The reference to "Krupps" did not indicate a source of supply, but merely a specification of the rails. There were many other sources of supply, and the contract left the supplier with a free hand in the matter. Thus there was different ways to perform the contract and hence the contract has not frustrated. But if the war interferes with all the possible ways of the performance of contract then the contract is frustrated.
Adjustment of Rights Once it is ascertained that the performance of the contract has become impossible then the rights 26
Twentsch Overseas Trading Co Ltd v Uganda Sugar Factory Ltd., AIR 1945 PC 144
17
and obligations of the parties are determined by Sec. 65 of the Indian Contract Act which states as follows: 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. Illustrations
(a) A pays B 1,000 rupees in consideration of B's promising to marry C, A's daughter. C is dead at the time of the promise, The agreement is void but B must repay A the 1,000 rupees. (b) A contracts with B to deliver to him 250 maunds of rice before the first of May. A delivers 130 maunds only before that day, and none after. B retains the 130 maunds after the first of May. He is bound to pay A for them. (c) A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for two night in every week during the next two months, and B engages to pay her hundred rupees for each night's performance. On the sixth night, A willfully absents herself from the theatre, and B, in consequence, rescinds the contract. B must pay A for the five nights on which she had sung. (d) A contracts to sing for B at a concert for 1,000 rupees, which are paid in advance. A too ill to sing. A is not bound to make compensation to B for the loss of the profits which B would have made if A had been able to sing, but must refund to B the 1,000 rupees paid in advance.
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 ed 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. Thus the parties under frustrated contract are bound to restore back the benefits if any received under such a contract.
18
SIMILARITIES AND DIFFERENCES England and India both have adopted the doctrine of frustration. India has borrowed a lot of concept from the English law and has gone further to make some changes to suit the Indian condition. The major similarities and differences between the doctrine of frustration in England and India are as follows:
Similarities: 1.
Both in England and in India the doctrine of frustration apply not only when there is physical impossibility but also when there is the failure of core object of the contract.
2.
The destruction of subject-matter renders the contract frustrated in both the countries.
3.
The change in circumstances that makes it impossible to perform the contract in the time and manner contemplated is recognized as ground of frustration in both countries.
4.
The intervention by the government, istrative and legislative bodies is a ground of frustration of contract in England and in India.
5.
The intervention of war in performance of contract makes the contract frustrated, if there is no alternative option open, both in England and in India.
6.
In England and in India, once the contract is frustrated then the parties are discharged from 19
obligations under the contract and they have no liability to perform anymore in of the contract. 7.
Both countries have recognized the principle that the frustration should not be self induced and it operates automatically.
Differences: 1.
In England the doctrine of frustration has been developed by the courts. In India the doctrine of frustration is followed as it is mentioned in para 2 of section 56 Contract Act,1872.
2.
The non-occurrence of a contemplated event is covered under doctrine of frustration in England while in India such cases are not deemed as frustrated so as to cover it under section 56 but are covered under Sec. 32 of Contract Act, which deals with contingent contract.
3.
In England if there is change in prices of the goods to be supplied under the contract, the party is bound to perform the contract even if the prices rise high. In India, if the prices rise too much then the contract should be revised for the price as held in Tarapore & Co v Cochin Shipyard Ltd. But if there is too much of price increases then the contract is frustrated as held in Easun Engg Co Ltd v. Fertilizers and Chemicals Travancore Ltd.
4.
The intervention of government amounts to frustration of contract in England. But in India if the government intervention is for a small period of time and the time is of no essence to the contract then the contract is not deemed to be frustrated as held in Satyabrata Ghose v Mugneeram Bangur & Co.
5.
In England the intervention of istrative authorities render contract frustrated. But, in India, if by the construction of the contract it is seen that parties have taken absolute obligation to perform the contract even after the istrative action then it is not frustrated by such istrative interference as held in Naihati Jute Mills Ltd v. Khyaliram Jagannath.
6.
In England, the party incurring any expenses before the discharge in the performance of contract can recover such expenses. But, in India only the advantage gained under a frustrated contract can be recovered and no expenses which he had made for the performance of the contract.
20
SUGGESTIONS The Indian law on frustration is better than in England. It is written in black and white without any ambiguity. The Indian courts have expanded the doctrine by discovering the situations under which the contract becomes impossible to perform hence come within the purview of frustration. But, as the time is fast moving there needs few changes in the existing Indian Contract Act, 1872, so as to address the problems of the changing society more effectively and to secure justice. Second part of section 56 deals with the doctrine of frustration. It states that 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.
21
The plain reading of the section suggests the impossibility in physical . But, the word impossibility has not been used here 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 from the point of view of the object and purpose which the parties had in view, and if an untoward incident or change of circumstances totally upset the very foundation upon which the parties rested their bargain, it can be very well be said that the promisor finds it impossible to do the act which he promised to do. So, to make more clarity words substantially or physically or literally be added before word impossible in para 2 of section 56. Moreover, a plain reading of the section makes that the acts which subsequently becomes unlawful will make the contract void. The term unlawful means an act done against the law. So there needs to be a clear and definite meaning of term “unlawful”. So after second part of Section 56 following words be inserted: The term “unlawful” covers all such acts as is defined in Section 23 of the Act. One more problem associated with the existing contract law is regarding commercial hardship. For example, A entered into a contract with B to sell him 100 kgs of rice at Rs. 50 per kg. Suppose the market price rose to Rs. 52. Then such minute changes are being expected to be foreseen by the individuals to the contract. But suppose the prise rose to Rs. 150 per kg then it will be unjust to hold A still bound by the contract to sell at Rs. 50. This is an unexpected change that has occurred. Though such a contract has not frustrated because it is still possible to perform the contract and the basic object for which the contract was entered into has also not failed. Under the existing doctrine of frustration in India covered under Sec 56 para 2, A will be bound to perform the obligation under the contract. This will though maintain the sanctity of the contract but will result in gross injustice to A. To counter such situation a new section 56A should be inserted as follows: 56A. Commercial hardship resulting in frustration of contract.- If the situation changes that cannot be foreseen by any of the party and it results in the commercial hardship resulting in unjust to one of the party, then if the court thinks fit may declare the contract as void. So, when the court thinks that the changes in circumstances will result in unjust to one party then the contract should be deemed to be frustrated. The rights of the parties under frustrated contract are adjusted by section 65 of the Indian 22
Contract Act. But it sometimes leads to unjust to the other party. For example, B agreed to hire from the A a flat for June 26 and 27, on which days it had been announced that the King’s coronation procession would along that place. A part of the rent was paid in advance. A made certain repairs in flat so as to make it proper for B’s stay. But the procession was cancelled owing to the King's illness. Thus as the real object of the contract has failed, and due to substantial impossibility there was frustration of the contract. So as per section 65 of the Indian contract act B can recover the whole of the advance paid to A. But, this is unjust as A has done something i.e. repairs, to perform the contract though it did not resulted in any advantage to B. To counter such situation new section 65A should be inserted, borrowing from the Law Reform (Frustrated Contract) Act of England as follows: 65A. Rights of the Party under contract that becomes void who incurred expenses.- 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. So, the Indian Law on frustration is better than the English Law. But few changes in the Indian Law to bring out more clarity in the performance of the contract can surely bring up more improvements in the application of the doctrine of frustration.
BIBLIOGRAPHY
1.
Avtar Singh, Contract and Specific Relief Act (11th ed. 2013)
2.
R. K. Bangia, The Indian Contract Act (12th ed. 2006)
3.
Chitty, The Law of Contracts Volume I (29th ed. 2004)
4.
Ewan McKendrick, Contract Law Text, Cases, Material (3rd ed. 2008)
5.
G. H. Treitel, The Law of Contract (11th ed. 2003) 23
6.
SCC online
7.
Lexis-Nexis
24
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