Open Access Research Article
“A CRITICAL ANALYSIS OF THE DOCTRINE OF FRUSTRATION UNDER THE INDIAN CONTRACTS ACT, 1872”
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Article Details
“A CRITICAL
ANALYSIS OF THE DOCTRINE OF FRUSTRATION UNDER THE INDIAN CONTRACTS ACT, 1872”
AUTHORED BY - GOURI SHRIVASTAVA
ABSTRACT
The execution of contractual duties may be hampered by unanticipated supervening circumstances, resulting in contractual uncertainty. The theory
of frustration lays the path for an
equitable outcome to such an unpleasant incident that occurred without the
contractual parties' fault. Based on
fairness and equitable principles, the doctrine fills the vacuum in a contract
about supervening occurrences. Given the significant consequences for the obligatory and binding character of a legal
contract, it is essential to examine the criteria that lead the courts in determining its applicability. Unlike common law, the idea of frustration is specifically
included into Indian contract law under Section 56 of the Contract Act.
However, English law has had a
significant impact on the formation of this concept in India. This study seeks to restate the law of frustration as
it applies in India. The author of the paper has made an attempt to analyse and understand the origins of Doctrine of
Frustration, grounds on which this doctrine
can and cannot be applied and the
aftermath of this doctrine.
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CHAPTER-1
Introduction to
the Doctrine of
Frustration of Contracts
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A contract is an agreement between two or more parties that creates
legally enforceable or otherwise recognised responsibilities. Unforeseen or supervening events,
i.e., occurrences that are unexpected or cannot be predicted in advance by either of the parties
and eventually release
the parties from their contractual duties, may have an impact on the
execution of these obligations. The
concept of frustration is a "doctrine" of a specific situation of
contract discharge due to an
inability to execute it. The term frustration is not defined under the Indian Contract Act of 1872 (the "Contract
Act"). The frustration of purpose, as defined by Black's Law Dictionary, is "the theory that
if a party's primary purpose is significantly thwarted by unforeseen changing circumstances, that party's responsibilities are discharged and the contract
is deemed ended." In India,
courts are more nuanced:
“The phrase ‘contract frustration' is an elliptical term. The wider and
more correct phrase is "frustration
of the adventure or of the business or practical aim of the contract."
This concept is a tool for reconciling the norm of absolute contracts with a specific
exception that is required in certain circumstances in the interest of
justice. The theory falls under the ambit of Section 56 of the Contract Act since it dissolves the contract due to
the supervening impossibility or illegality of the agreed-upon act. A contract
is also considered frustrated under Section 32 when the condition on which the contract is
based is not met or cannot be met due to impossibility (paragraph 1 and 2 of section 32, respectively). Nonetheless,
the theory is connected with section 56 in Indian
law. Section 32 only applies
when contracts are discharged and parties are relieved
of their duties in accordance with the provisions of the relevant contract.
Section 56 applies when contracts are discharged and parties are relieved of their duties
as a consequence of subsequent impossibility caused by external forces and causes.
When analyzing the doctrine's
legal implications, the courts have used the phrases "frustration"
and "impossibility to
perform" interchangeably. 7 To establish whether the intervening incident
rendered the performance “impossible”
under section 56, it is necessary to set out several considerations used by the courts, including the recently
created “multifactorial approach.” Courts in India and England have recognised a variety of reasons that may or may
not render a contract unenforceable.
The question of whether the supervening event is a frustrating event is one of degree, that is, how significantly the
supervening event has harmed performance. This paper mainly focuses on doing an in-depth analysis of the Doctrine of
Frustration of Contracts in India and
having a different perspective on this important topic.
RESEARCH OBJECTIVES:
v To
analyze the inception
and origins of Doctrine
of Frustration.
v To
study the grounds on which the Doctrine of Frustration can and cannot be invoked.
v To study the aftereffects or
aftermath of the Doctrine of Frustration in the legal context.
RESEARCH QUESTIONS:
v What
are the origins of the Doctrine of
Frustration?
v Can
commercial difficulty be deemed as
impossibility?
v What
are the conditions required to invoke the Doctrine of Frustration?
v What
are the grounds on which the Doctrine cannot be invoked?
RESEARCH METHODOLOGY:
The author in this research project has referred to secondary sources of
data like journal articles, research papers
and case laws. Though the author has also referred to primary sources of information such as books, the
major part of the data of this research paper comes from secondary sources.
The author has done critical
thinking and has analyzed the case laws on
different parameters. Therefore, the research methodology used in this paper is
analytical. Primary sources of data could not be used due
to lack of time.
HYPOTHESIS:
“Commercial Difficulty in the Doctrine
of Frustration may be deemed
as impossibility”
REVIEW OF LITERATURE:
v M. P. Ram Mohan, Promode Murugavelu, Gaurav Ray and Kritika
Parakh (2020): Doctrine of Frustration under Section 56 of the
Indian Contracts Act[1]
The performance of obligations under a contract may be hindered by
unexpected supervening events,
leading to contractual uncertainties. The doctrine of frustration paves the way for a just consequence of such an unfortunate event,
which has happened
without any fault of the contracting parties. The doctrine fills the void
in a contract regarding supervening
events, based on principles of fairness and equity. Considering the large implications on the obligatory
and binding nature of a valid contract, it becomes important
to analyse the factors that guide the courts to determine its application.
Unlike common law, the Indian Contract law explicitly incorporates the doctrine of frustration under section 56
of the Contract Act. However, the evolution of
this doctrine in India has been greatly influenced by English law. This
paper attempts to restate
the law on the doctrine
of frustration as applicable in India.
v S.S Rana and
Co. Advocates (2017), “India: Frustration of Contracts”[2]
This paper authored
by S.S Rana and others
studies in detail
the concept of the Doctrine
of Frustration and its implications. The
doctrine of frustration comes into play when a
contract becomes impossible of performance, after it was made, on account of circumstances
beyond the control of parties. Contracts entered into between parties impose contractual obligations on both the parties for the performance of such contract. However, many times unforeseen or unforeseeable supervening
events occur which make the performance of the contracts impossible due to no fault of either party.
In such cases, the contract is said to be frustrated. Frustration of
contract results in involuntary extinction
of the contractual obligations of both parties and consequently, the parties are relieved
from their rights and liabilities.
v Varun Singh, “Frustration of Contracts: The Indian
Perspective”[3]
This paper written by Varun Singh analyses the doctrine of frustration
from the Indian perspective with
the help of Indian and International case laws. The doctrine comes within the purview of section 56 of the
Contract Act as it discharges the contract by
reason of supervening impossibility or illegality of the act agreed to be done. A contract
is also frustrated under section 32 when the condition, on which the contract is contingent,
is not fulfilled or cannot be fulfilled because of impossibility (paragraph 1 and 2 of section 32, respectively).
Nevertheless, the doctrine under Indian law is
associated with section 56. As section 32 only applies when contracts
are discharged and parties absolved
of their obligations as per terms already contained in the relevant contract. Section 56 applies
when contracts are discharged and parties absolved
of their obligations as a result
of subsequent impossibility due to outside forces
and factors.
v
Aditya Mehta, Arjun Sreenivas
and Sameer Bindra (2020), “Frustration (of Contracts) in the
times of SARS Cov. 2[4]
This article authored
by Aditya Mehta, Arjun Sreenivas
and Sameer Bindra on Frustration of Contracts throws light on the
impossibility to perform contracts at the time
of difficult situation such as the Covid-19 Pandemic. On March 11, 2020, the World Health Organization (WHO) declared the novel coronavirus disease a pandemic.
On the same day, the Government of India imposed visa and other travel
restrictions. Soon thereafter, many
states in India declared a ‘lockdown’, an emergency measure [under the Epidemic Diseases Act, 1897 and
the Disaster Management Act, 2005 (“Disaster Management Act”)] to prevent and contain the spread of SARS-CoV-2, and also
issued prohibitory orders under Section 144 of the Code of Criminal Procedure, 1973. A stricter lockdown was then imposed
by the Central Government, which will presently remain in effect till May 3, 2020.
During the lockdown, whilst certain
commercial activities have been classified as essential and are permitted to
continue operations, subject to
following preventive measures (including social distancing), several
others remain stalled and suspended.
v G.M. Sen (1972): Doctrine
of Frustration in the Law of Contracts[5]
The performance of obligations under a contract may be hindered by
unexpected supervening events,
leading to contractual uncertainties. The doctrine of frustration paves the way for a just consequence of such an unfortunate event,
which has happened
without any fault of the contracting parties. The doctrine fills the
void in a contract regarding
supervening events, based on principles of fairness and equity. Considering the large implications on the obligatory
and binding nature of a valid contract, it becomes important
to analyse the factors that guide the courts to determine its application.
Unlike common law, the Indian Contract law explicitly incorporates the doctrine of frustration under section 56
of the Contract Act. However, the evolution of
this doctrine in India has been greatly influenced by English law. This
paper attempts to restate
the law on the doctrine
of frustration as applicable in India.
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CHAPTER-2
The Origin of the Doctrine of Frustration
|
This chapter starts the research analysis of the paper. The section of
the study introduces the reader with the origins
of the Doctrine of Frustration that analyses the Objective 1
of the paper
i.e., Analyzing the Inception
and Origins of the Doctrine
of Frustration.
The doctrine's origins may be traced back to a Queen's Bench decision in
the case of Taylor v Caldwel[6]l in
England in 1863.
Prior to this decision, the rule governing
commercial obligations in both Roman Law and Common Law was
highly strict. Unforeseen occurrences that made the performance impossible or more onerous were not accepted as
a justification for non- performance.
As the theory has evolved, “loss of object,” “radical change in the
obligation,” “implied condition,” and
the necessity to find a “just and reasonable” remedy have become recognised reasons for excusing contract
performance, as detailed below.
Prior to Caldwell, it was assumed that the parties might have included
such provisions in their contract
if they so desired. This notion of “absolute contracts” was reinforced in the
well- known case of Paradine v Jane[7],
in which a lessee was held obliged to pay rent arrears even though he was evicted as a foreign enemy.
According to the rationale, “when the party by his own contract establishes an obligation upon himself, he is obligated
to make it good, if he may, notwithstanding
any accident by inescapable necessity, because he may have guarded against it by
his contract.”
Caldwell softened the rigour of Common Law. In one example, an opera
house was hired for concert purposes,
but it was destroyed by fire before the event. In this case, Blackburn J developed the theory of "implied
condition" or "implied term," holding that "in contracts in which the performance is dependent on the
perpetuation of a specified person or group of
people, a criterion is implicit that the unlikelihood of performance
emerging from the human or thing's perishing will henceforth excuse the performance."
The courts implemented this implicit condition from the start
since the parties
had agreed to it, although unconsciously, when they signed
the contract. This idea was heavily criticized since the suggested requirement was nothing more than a court-created
fiction. The argument to the implicit condition
hypothesis was based on the parties' intentional nature of risk in not integrating any conceivable intervening conditions in their contract, implying
that no matter of an exemption clause could ever arise. In National Carriers Ltd v Panalpina (Northern)
Ltd[8], the House of Lords dismissed the implicit
requirement argument, stating that “the problem of the implicit term hypothesis is just that it produces
once more the dark shape of the overbearing spectator encroaching on the parties at the time of agreement.” The growth of the theory through the aforementioned ideas demonstrates the courts' efforts
to provide a more pragmatic
solution to the management of performance inability. Without delving into the merits,
the Law Reform (Frustrated Contracts) Act 1943 defined many of the
rights and obligations of parties to
frustrated contracts in the United Kingdom. This Act was passed in response to
the historic decision of Fibrosa Spolka Akcyjna v Fairbairn Lawson
Combe Barbour Ltd[9],
in which the House of Lords
overturned Chandler v Webster and determined that advance payment was recoverable if the payee had acquired nothing before
the frustrating occurrence.
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Analyzing the Doctrine of Frustration under the Indian Contract Act, 1872
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The concept of frustration is well established in India under section 56
of the Contract Act, which eliminates
the need to rely on various theories to explain the doctrine's applicability.
It establishes a positive norm
pertaining to contract frustration and so does not allow the subject to be resolved by the parties'
intentions or the court's choice of theory to be used. The court grants
remedy under this provision on the basis of subsequent impossibility when it
discovers that the entire purpose or foundation of a
contract was thwarted by the intervention or occurrence of an unforeseen
event or change of opinion outside the control
of the parties.
·
Section 56 of the Indian Contract Act stipulates that a commitment
to perform an act that
becomes impractical or illegal
is null and void.The
renowned and pivotal judgement of Satyabrata
Ghose v Mugneeram Bangur and Co.[10] provides a comprehensive interpretation of the provision. In this case, the respondent firm agreed to sell the
plaintiff a parcel of property after it had been developed by building
roads and drainage. However, a section
of the scheme's territory was requisitioned for military uses.
While applying the concept, the Supreme Court
determined that the requisitioning of the region had not significantly
hampered the fulfilment of the
contract overall, and thus the contract wouldn't become impossible within
the ambit of Section 56.
·
The word "impossible" has not been used in the sense of literal or physical impossibility. The completion of an act may not be
literally impossible, but it may be impractical
and ineffective in light of the aim and objectives that the parties had in mind. As a result, if an unfavourable occurrence or change
in circumstances completely upends the backbone upon which parties based their agreement,
it is quite likely that the offeror will find it difficult to
do the deed that he pledged to perform.
The question here is how far the unmistakable deviation from the
rule of literal interpretation can be reconciled with the design of section
56. The second
paragraph of Section 56 addresses two conditions: (I) impossible; (ii) illegality as a result
of an incident that the promisor
could not avert.
While the second criterion clearly
states that the illegality must emerge from an occurrence within the control of, and as a result of the fault of, the parties, the first criterion does not.
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CHAPTER-3
Grounds on
which Frustration of Contracts can
be invoked
|
This chapter serves the Objective 2 of the research project i.e.,
understanding the grounds on which frustration can and cannot be invoked.
Physical destruction of the subject matter, loss of the object,
subsequent illegality to execute, delay,
death or incapacity of a party in a contract requiring physical performance,
and so forth are among the reasons
that bring the requirements of section 56 into play. An incident may be affected by one or more of these
variables. The following are among the most widespread and important factors pertaining to frustration of contracts:
1.
When the Contract's Subject Matter is Physically Destroyed
The destruction of the specified subject matter required for the
contract's execution will declare the
contract null and void. This category also includes the seminal case Caldwell, which established the concept in the United
Kingdom. This element
is heavily weighted
in instances where the
industrial premises where the equipment was to be put is set afire, or when a wall of the theatre collapses due to severe rain and the contract
is rendered null and void. Even when the subject matter is not
totally destroyed but is greatly damaged, the
contract can be terminated.
It was determined in one example that even if the cargo of dates was sold on the market for other
uses, it lost its commercial character when it sunk and was contaminated by
water and sewage. As a result, the
cargo owner's obliged to pay the freight was discharged. The items destroyed must be exactly the
subject matter of the contract; hence, if the contract was not limited
to those specific
products, it may not be dismissed. A contract of agency to sell
products made by defendant was not null and void whenever the facility
destroyed because of the fact that
the contract was not limited to products produced by defendant at that specific plant.
2.
Legal Changes that Lead to Subsequent Illegality
It is assumed that the parties are willing to contract in accordance with
the law in effect at the time of
making the contract. Nevertheless, a change in the legislation or in the legal situation
influencing a contract
and preventing the contract's execution is a well-established cause for frustration under Section 56. Unless expressly
specified in the contract, the term "law" may include foreign
law. The Supreme
Court ruled in Energy Watchdog
that, unless the contract states otherwise, “this would be true as a general
statement of law if performance of a contract is to be done in
a foreign country, what law would be relevant
would be foreign law,” and that if the performance has become illegal
under foreign law, the contract will be discharged. To discharge the contract, the change in the law must be such
that it strikes at the heart of the contract
rather than just suspending performance under it.
The Supreme Court's decision prohibiting stone crushing activities may
have caused such a change in
legislation, and while the contract required the provider to supply crushed stones from its own stone crusher, the
change in legal status rendered it impossible to furnish crushed stones.
The Government's Import Control Order of 1955 included a positive restriction prohibiting the sale of
imported products, making it impossible for appellant to provide chicory of a certain variety to the respondents.
Furthermore, any government restriction order
that makes performance illegal
will render the contract null and void.
3.
Loss of Object
As previously stated,
the term "impossible" in section 56 of the Act does not refer
to actual or literal impossibility. The actual
execution of a contract may be feasible if it has become obsolete in relation to the goal and purpose of the parties
due to an unfavourable event or change in circumstances. The seminal case of Krell v Henry
illustrates this; despite
the fact that the room could be leased, the court
deemed the contract null and void since the objective of leasing the space (viewing the
coronation parade) was lost.
As a result, the contract's object or purpose may also be lost due to the
non-occurrence of an expected event or
the absence of a condition of things.
A contract in which the purchaser's
intention was to sell the products on his own terms to a person of his choosing was thwarted by an order issued by the
General Manager authorizing the district officer to propose the
person/persons to whom the plaintiff had
to sell the items.
However, the court would not accept a party’s plea for impossibility of
contract if, even after the
supervening event, the main objective of the contract does not sound redundant and there is still a chance of performing the
contract with the original or the main intent of the parties albeit
not literally in accordance with the
language.
4.
Inability to Perform the Contract due to Death, Delay or Incapacity
Contracts are also frustrated as a result of delays and laches. Though
determining whether a contract has
been frustrated by an occurrence or change in circumstances that creates an unanticipated delay in its execution is
sometimes challenging. The delay must be so significant
and of such a kind that it completely disrupts the basis of the contract and
the economic aim that the parties had
in mind. Such a delay must be so unusual in terms of its source, consequences, or predicted length
that it could not have been reasonably anticipated at the time
of contracting.
When the delay is over, fulfilling the duties will not achieve the goal
that both parties to the contract
had in mind when they entered into the deal. Such a delay will drastically alter
the conditions, making
it difficult for the parties
to fulfil their
initial responsibilities. There
can be no frustration if the delay was within the business risks assumed
by the parties and did not frustrate the commercial objective
of the contract. In one example, a delay in cargo
shipment did not disappoint the charter-party because
such a delay was explicitly anticipated in the contract's conditions.
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Grounds on which Frustration of Contracts cannot be
invoked
|
The doctrine's applicability is constrained by contractual restrictions
as well as the ideals of fairness
and justice. It is not used in instances when the causes do not amount to contract dissatisfaction, as described below.
1.
Risks that are Foreseeable or Inherent
A contract may openly or implicitly include
some inherent or predictable hazards
that must be addressed when applying the concept.
Its applicability cannot be attempted in instances where the parties have or should have recognized the danger of
a supervening event occurring because
such risk has been voluntarily accepted by the parties. Certain hazards are thought to be inherent in contracting.
In one example, a common carrier was required
to secure the protection of cargo against all external factors, save
acts of God or state adversaries.
The big issue is whether
the contract includes
a provision for such occurrences. Only when the supervening occurrence is one that
any person of ordinary intelligence would view as likely to occur,
or the contingency is one that the parties might
fairly be understood to have foreseen as a real possibility, would foreseeability support
the assumption of risk- assumption. Similarly, the contract's
design is important in deciding whether the omission to include a provision for unanticipated circumstances means that the risk should
be shared by both
parties.
2.
When the Performance of the Contract
Becomes Onerous
In the process of conducting the performance, a party might encounter unexpected occurrences,
such as an abnormal rise or decrease in prices, a rapid depreciation of the currency, any unforeseen impediment to
execution, and so on. However, these do not, on their own, undo the deal that has been struck. The Supreme Court
has stated that courts do not have the broad
authority to release
a party from obligation simply
because performance of the contract has become onerous due to
an unexpected change of events. The contract
ceases to bind only when a review
of the terms of the contract in light of the circumstances that existed at the time it was created reveals that they never
committed to be bound in a fundamentally
different scenario that had unexpectedly developed. As a result, a contract is not discharged simply because it is difficult
or onerous to fulfil. The difficulty mentioned
in section 56 is more than just a commercial impossibility. Any economic
circumstance, regardless of its gravity
or impact, cannot be equated
with impossible. There is no implication of “commercial” impossibility.
Treitel underlined that a simple price increase that makes the contract
more expensive to fulfil does not
constitute a "hindrance." For example, in a contract, the phrase
"hinders delivery" should
not just refer to a price increase, but to a severe impediment to the contract's overall performance. The
burdensomeness of the doctrine is not a required element; the actual criteria is the difficulty of fulfilment.
The reduction in payment makes the
contract more onerous, but not impractical or impossible. M/s Alopi Parshad & Sons Ltd v Union of India[11], a frequently cited
Supreme Court decision, ruled that the execution of a contract is never discharged just
because it becomes onerous to one of the parties. In this instance, the court denied the rate augmentation request
on the grounds that performance at the contract's reduced rates
was not practicable owing to the continuing of
World War II hostilities.
3.
Self-created Frustration or Frustration that might have been avoided
A party is exempted from non-performance
if it can demonstrate that “(1) the
non- performance was caused by a
hindrance beyond its control, (2) the hindrance could not have been reasonably predicted at the time
of contract, and (3) it could not avoid or overcome
the impediment or its consequences. A party is not permitted to rely on its
own fault to absolve itself of contractual obligation.”
The burden of demonstrating that the dissatisfaction was self-inflicted
falls on the party that asserts it. A
party is not needed to establish affirmatively that the occurrence was not caused by him. In one occasion, the charter-party
performance was rendered impossible due to a severe explosion
in the boiler of the rented ship. The ship's owners were not obliged
to establish their innocence, but the side asserting self-inflicted
frustration bore the burden of evidence.
4.
Executed Contract
When an obligation that has yet to be completed becomes impossible or
impractical to perform, the theory of frustration comes into play. The concept
can only apply to executory
contracts, not completed contracts or transactions that resulted in a demise
in praesenti. To illustrate,
a division bench of the Delhi High Court used the example of a merchant purchasing items from a manufacturer and
delivering agreed-upon amounts with partial payment.
If the market was saturated with cheaper imported products as a result of the change
in import policy,
the retailer could
not allege frustration, forcing the Court to lower
the price and release him from the responsibility to pay the remainder of the sale consideration
to the wholesaler. A completed conveyance is distinct from an executory contract, and a completed transfer cannot
be nullified by subsequent occurrences. Section 56 applies to a lease agreement but not to the lease deed
because the lease deed is a completed
transfer. The lease deed takes the place of the lease agreement as soon as it
is completed.
5.
hen the Foundation has not been significantly damaged
As it has been established, the theory of impossibility, which is founded
on justice and common sense, cannot
be used to undermine the sanctity of contract. In one case, the Supreme Court ruled that if the leased
property is not significantly destroyed or rendered permanently unsuitable, the lessee cannot avoid the lease on the
grounds that he is unable to utilise
the land for the purposes
for which it was let to him. In another
case, the Supreme
Court ruled that the contract
is not null and void if there
is still time to reapply
for approval. To maintain the defense of impossibility, considerable damage of the contract's foundation is required. This concept does not provide relief if a party
fails to demonstrate how two moderate cyclones damaged the fundamentals of the contract.
The above-explained elements
contributing to and not amounting
to frustration are fundamentally
covered by Indian law on the theory of contract. As previously stated, this concept
applies when the contract is silent on the implications of an unforeseen incident. A provision dealing with the repercussions of
any occurrence that may impede performance may be included
in a contract.
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CHAPTER-4
Aftermath of the Doctrine of Frustration and Observations of
the Study
|
Chapter 4 of the research project studies the aftermath or the
aftereffects of the doctrine of Frustration and thus serves the Objective 3 and the Hypothesis of the of the study.
It is a well-established legal concept that if a contract is frustrated,
the principle of restitution under Section
65 of the Contract Act[12] applies,
and the consideration received must be restored. Any party who has benefited from a
frustrated or void agreement or contract is obligated to return it to the person from whom he benefited. In addition, any
consideration, part-payment, or
earnest money received in advance for the execution of the contract that has
now become void must be returned. For
example, when a building contract was terminated due to a limitation, the Supreme Court ordered a return of the deposit
plus interest. Similarly, when the property was transferred to the state
with the passage of the Calcutta Thika Tenancy Act in 1949[13], the
Supreme Court ordered a return of the consideration already paid, plus
interest. If a party spent
expenditures that it was not required to incur under the contract, it is not
entitled to reimbursement for those expenses. After the above study on the Doctrine
of Frustration, the author
draws a number of
observations that have been stated below:
Commercial Difficulty should not be deemed as Impossibility
·
For
example, when a construction contract was cancelled owing to a restriction, the Supreme Court ordered the deposit plus
interest to be returned. Similarly, when the
property was handed to the state under the Calcutta Thika Tenancy Act in 1949, the Supreme Court ordered a refund of the consideration already
paid, plus interest. If a party incurred
expenses that were not required under the contract, that party is not entitled
to repayment for such
expenses.
·
A
key consideration is the nature of the intervening event, as well as the
parties' reasonable and objectively ascertainable
projections of future performance under the new conditions.
·
Because
the subject-matter of the doctrine of frustration is contract, and contracts
are about risk allocation, and risk
allocation and assumption is not simply a matter of express or implied provision, but may also depend on less easily
defined matters such as “the contemplation of the parties,” application of the
doctrine can be difficult.
·
In such cases, the radically different test is critical: it informs us that the doctrine should
not be invoked lightly; that a single incident of expense, delay, or
onerousness is insufficient; and that there
must be a break in identity between
the contract as provided for and
contemplated and its performance in the
new circumstances.
It is apparent that there is a high bar for demonstrating that a contract
has been breached. To (a) avoid going down
this road and (b) be able to establish a case for contract dissatisfaction, if necessary, it is critical
to be as proactive and careful as possible from the start.
The current crisis
is exceptional, and while firms in many industries may benefit from relaxation
of some duties, this cannot be assumed on an inter-party contractual level because
parties on the receiving end of force
majeure or frustration invocations would also be adversely harmed.
[Hypothesis Analysis: By analyzing and studying the
above points, it can be inferred that
the hypothesis we assumed in the beginning of the study is proved wrong as commercial difficulty cannot be deemed as impossibility.]
Suggestions and Recommendations
|
Suggestions and Recommendations
|
There are some
steps that can be taken in order to avoid the delay or difficulty in performing the contractual obligations. These steps
and recommendations have been given below in this section of the paper.
v If
the performance issues are still in their early stages,
consider contacting the counterparty and starting without
prejudice talks for an extension
of time for performance of obligations, suspension of obligations,
or even contract revision.
v Notify the counterparty in writing of
any circumstances that may prohibit you from
executing your duties under the contract or cause them to be delayed.
Set out the circumstances in full and indicate that these issues
(arising from the outbreak of SARS- CoV-2 or the actions taken in response
to it) are preventing you from fulfilling your
duties, rather than any
other ancillary considerations.
v Ensure that all available measures
toward performance have been taken and continue to be taken, as well as that all viable alternatives have been
considered. Include these in your
contact with the counterparty, and if no other forms of performance exist, indicate
this as well.
v Provide frequent updates to the
counterparty in the manner described above to ensure that the record is
clear in terms of diligence and
mitigation on your part.
v If
there are any additional contract
duties that can still be completed remotely
(submission of reports and accounts, backend technical assistance, etc.),
ensure that such responsibilities are met.
v If
your company is unable to operate in India during
the shutdown time and the contract demands delivery of products or execution
of services during this period or soon thereafter,
this obviously may not be achievable. If
the above-mentioned without prejudice conversations were unsuccessful, you might write to the counterparty formally seeking an extension of time for
completing your contractual duties, as well as a waiver/relaxation of the liquidated damages clause (if applicable) in such a circumstance. If your requests are
denied and you want to argue that the contract is rendered null and void due to impossibility of performance, the fact that you made such requests and were denied may place you in
a stronger position to defend your position
and demonstrate
impossibility.
v Examine the contract's dispute
resolution process as well as the controlling legislation (if any). Arbitration must be called in
line with the arbitration clause and/or the Arbitration and Conciliation Act, 1996,[14]
or other institutional norms that have been defined
in the contract if arbitration is the dispute resolution method. If there is no arbitration provision and the case qualifies as a business
dispute under the Commercial
Courts Act, 2015[15], pre-institution mediation must be completed before any proceedings may be filed, unless urgent interim relief is requested.
v Examine your insurance arrangements
(if any), to see if such scenarios are covered by your policy (such as business interruption insurance). If such
events are covered, insurance claims must be
filed on time and in accordance with the policy's criteria.
v If it is financially feasible,
consider renegotiating the contract conditions. This can be accomplished by modifying the contract to
add, delete, or change terms/clauses (such as
time for performance or fees), therefore eliminating the risk of contract
frustration. Contract amendments are often carried out by completing a signed addendum.
|
CHAPTER-5
Conclusion of the Study
|
The doctrine of frustration as mentioned under Section 56 of the Indian Contract Act,[16] offers
a way out for a party where performance has become impossible due to any supervening circumstance that is not their fault. Under certain
altered conditions, the application of the concept
calls into doubt
the sanctity of the contract. English courts developed numerous theories to justify the doctrine's application under specific situations, but Indian law, by codifying this concept in section 56, eliminated the necessity for developing and applying theories to justify the doctrine's use. This Paper discusses in detail the factors and situations that courts examine
when evaluating the application or non-applicability of Section 56. Situations in which the subject matter of the contract has been destroyed; performance has become illegal; the reason for entering into the contract
has been lost; performance has been excessively delayed; or the performer has died or is incapable
of performing are examples of factors that would attract
the provisions of section 56. While there have been several instances of Indian courts incorrectly applying
section 56 to cases of contingent contract,
if the factors and circumstances amounting to contract
frustration are dealt with in a contract, such a contract
should attract the provisions of Section 32[17] rather than Section
56. However, if the contract's provisions did not anticipate the degree of the factor and circumstances that really interfere
with the execution
of the relevant contract, then such intervening factors and circumstances may discharge the contract despite
the express clause under Section 56. By including well- drafted and precisely stated
clauses in the contract, such as a force majeure
clause, the contracting parties can avoid the realm of uncertainty induced
by any future occurrence. Such clauses may distribute the risks of any unforeseen incident among the parties. However,
the scope of such a provision will decide whether
it includes the supervening event;
otherwise, Section 56 may be required. The clause's interpretation to establish its scope is primarily driven
by business and market practices. The restricted application of both the doctrine and provisions such as force majeure clauses
favours the enforcement of rights and duties under a contract, which is critical to preserving the confidence of
contract parties.
While the theory of frustration has its roots in common
law, its formulation in section 56 and evolution under Indian law is notable and consistent.
BIBLIOGRAPHY
Details of Work Cited
Acts/Statutes
1. Calcutta Thika Tenancy Act, 1949
2. Arbitration and Conciliation Act, 1996
3. Commercial Courts Act, 2015
Articles and Research Papers
1. M. P. Ram Mohan, Promode Murugavelu,
Gaurav Ray and Kritika Parakh (2020): Doctrine of Frustration under Section 56 of the Indian
Contracts Act, 187
2. S.S
Rana and Co. Advocates (2017),
“India: Frustration of Contracts”
3.
Varun Singh,
“Frustration of Contracts: The Indian Perspective”
4.
Aditya Mehta, Arjun Sreenivas
and Sameer Bindra (2020), “Frustration (of Contracts) in the times
of SARS Cov. 2
5. G.M.
Sen (1972): Doctrine
of Frustration in the Law of
Contracts
Case Laws
1. M/s Alopi Parshad & Sons Ltd v Union of India (1960) 2 SCR 793
2. Fibrosa Spolka Akcyjna
v Fairbairn Lawson
Combe Barbour Ltd [1942] 2 All ER 122
3. Satyabrata Ghose v Mugneeram Bangur and Co Satyabrata (n 1) [9]
4. Taylor v Caldwel [1863] 3 B&S
826
5. Paradine v Jane [1647] EWHC KB J5
6. National Carriers Ltd v
Panalpina (Northern) Ltd [1981] 1 All ER 161
Sections
1. Section 56 of the Indian Contracts Act, 1872
2. Section 32 of the Indian Contracts
Act, 1872
3. Section 65 of the Indian Contract Act, 187
[1] M. P. Ram Mohan, Promode Murugavelu, Gaurav Ray and
Kritika Parakh (2020) : Doctrine of Frustration under Section 56 of the Indian
Contracts Act, 1872
[2] S.S Rana and Co. Advocates (2017),
“India: Frustration of Contracts
[3] Varun Singh, “Frustration of Contracts: The Indian
Perspective”
[4] Aditya Mehta, Arjun Sreenivas and Sameer Bindra
(2020), “Frustration (of Contracts) in the times of SARS Cov. 2
[5] G.M. Sen (1972): Doctrine of Frustration in the Law
of Contracts
[6] Taylor v Caldwel [1863] 3 B&S 826
[7] Paradine v Jane [1647] EWHC KB J5
[8] National Carriers Ltd v Panalpina (Northern) Ltd
[1981] 1 All ER 161
[9] Fibrosa Spolka Akcyjna v Fairbairn
Lawson Combe Barbour Ltd [1942] 2 All ER 122
[10] Satyabrata Ghose v Mugneeram Bangur and Co Satyabrata
(n 1) [9]
[11] M/s Alopi Parshad & Sons Ltd v Union of India
(1960) 2 SCR 793
[12] Section 65 of the Indian Contract
Act, 1872
[13] Calcutta Thika Tenancy Act, 1949
[14] Arbitration and Conciliation Act,
1996
[15] Commercial Courts Act, 2015
[16] Section 56 of the Indian Contracts
Act, 1872
[17] Section 32 of the Indian Contracts Act, 1872
Article Information
“A CRITICAL ANALYSIS OF THE DOCTRINE OF FRUSTRATION UNDER THE INDIAN CONTRACTS ACT, 1872”
Authors: GOURI SHRIVASTAVA
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/09/18
- Issue 7
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International Journal for Legal Research and Analysis
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