A CRITICAL APPRAISAL OF THE DOCTRINE OF FRUSTRATION OF CONTRACT

This article was written by Arnav Shastri, a student of Symbiosis Law School, Pune.

 INTRODUCTION TO THE DOCTRINE OF FRUSTRATION

It has been said as in the case of the doctrine of frustration that,

“It is clear that any civilized system of law is bound to provide remedies for cases of what has been called unjust enrichment or unjust benefit, that is to prevent a man from retaining the money of or some benefit derived from another which it is against conscience that he should keep.” – Lord Wright (Fibrosa Case[1]).

Frustration is defined as any act or a condition that takes place or evolves in the time span of the contract but outside of the contract itself which renders it impossible to perform. After the completion of the contract, there is a possibility that unforeseeable events that are beyond their control may occur which leads to the frustration or “not happening” (in a layman’s term) of the purpose of the agreement between them. It may lead to circumstances that make the contract impossible, very difficult, or in some cases even illegal to perform.

BRIEF HISTORY

The origin of the ‘Doctrine of Frustration’ as many other laws has been from the Roman laws. It was part of the Roman contract law which ended the obligations of innocent parties where the ‘thing is destroyed without the debtor’s act or default’, and the purpose of the contract had been “ceased to be attainable”. The doctrine was applied in Roman time to save people from liabilities to pay in the circumstance of an unfortunate and inevitable event. For Example, if a lord had to supply workers under a contract but one of the workers died a day before setting out.

In the English case of Taylor vs. Cardwell[2], 1863 it was held that when an opera house, which was rented for holding concerts, was destroyed by fire, as a result, the contract stood frustrated. This was because the very thing on which the contract depended ceased to exist. Therefore, it was held that for the doctrine of frustration it must be so that the nature of contract should be such that it would not operate if a thing ceased to exist.

In Paradine vs. Jane[3], it was again held that in the common rule of contract a man was bound to perform the obligation, which he had undertaken, and an excused could not be taken by the mere fact that performance of the event had subsequently become impossible; because the party could expressly provide in their agreement, upon fulfillment of a condition or occurrence of an event, either one or both of them would be discharged of a part or all of their obligations under the contract. This was the concept of  ‘absolute contract’.

After various incidences where people had been excused on the failure of performance of a contract, the Doctrine was named in England in a rent case of Krell vs. Henry[4] in 1903, when an Englishman named Krell leased his apartment in London to C.S Henry to be used for viewing a royal procession, which subsequently got canceled and Henry refused to pay Krell the balance of the rent. Krell sued, but the English court held against him on the ground that the purpose of the contract between them was “frustrated”. The court thought if the cancellation of the royal procession had been foreseeable by Krell and Henry they would not have entered into the agreement. It was contended that the King’s procession was the foundation upon which the contract was to be executed. The same English law extended this principle beyond cases where the subject issues of the contract were destroyed leaving the performance impossible, to cases where the impossibility of performance follows the cessation of an “express condition or state of things” [5]essential to the contract.

As for the Indian Contract Act, 1872 and the provisions that cover Frustration as a doctrine. The Doctrine of Frustration is covered under Section 56 of the Contracts Act.

SECTION 56 OF THE INDIAN CONTRACTS ACT, 1872.

This section deals with the heading of the Agreement to do an impossible act. It states that an agreement that deals in a contract being impossible to perform is void in itself.

Further, the Section defines itself and also talks about the compensation that is to be provided in case of non-completion of a contract.

“Contract to do act afterward 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.”[6]

Illustration:  A contract to carry cargo for B at a foreign port. A‘s Government declares war against the country in which the port is situated after the contract has been signed. As soon as the country declared war the contract was impossible to perform and hence leaving it void.

IMPLEMENTATION OF THE DOCTRINE

  The doctrine of frustration of contract in section 56 says that the allocation and determination of the risk is not a matter to express but may also be dependent on easily defined matters like “contemplation of parties”, the application of this doctrine is not an easy one. The doctrine should not be invoked lightly anywhere at any point. A mere incident of delay or increase in expense may not be the only conditions enough to invoke the doctrine and there has to be an identifiable change in the circumstances in which the contract has been executed before and after the complexity that arose that is the fundamental basis of the contract remains the same.

The principle stated above was used in the case of Energy Watchdog v CERC in 2017.[7] The Supreme Court faced the issue of whether a coal price surge in Indonesia which took place when an existing law was changed by the government could be cited as a force majeure event by certain power-generating companies that had their primary sources of coal from Indonesia. The Supreme Court was of the opinion if the fundamental basis of the contract remains the same and no frustrating event occurs, except for the fact that coal prices rose, it could not be held that a mere increase in prices constituted a force majeure event hence cannot seek protection for the frustration of a contract as well. “Mere incidence of expense or delay or onerous not sufficient to invoke the doctrine of frustration”[8]

In the case Satyabrata Ghose v. Mugneeram Bangur & Co[9]. the Supreme Court observed that various arguments have been published regarding the juridical basis of the doctrine of frustration yet the essential idea upon which the doctrine is based is that of the impossibility of performance of the contract. The case displayed how an event has to be unforeseeable to invoke the frustration of the contract. The case was of the facts that, when a war or a situation of international aggression prevailed during the 1950s and the defense contended to set up that the Government requisitioned a piece of land for military use, the developer, on the other hand, had planned development on the same piece of land, the Court was of the view that war situation was prevailing at the time of executing the contract and that such requisitioning by the Government was temporary in nature and did not result in total impossibility or frustration of contract.

 In fact, the impossibility of performance and frustration are often interchangeable expressions. The changed circumstances make the performance of the contract impossible and parties are absolved from the further performance of it as they did not promise to perform an impossibility.

The doctrine of frustration is applicable only where the frustrating event is outside the viewing of the contracting parties. It is not applicable to an express contract where the money is to be repaid in event of no-performance of the contract. In Ved Prakash Gupta v. Shishu Pal Singh[10], it was held that the time was not of the essence of the contract and the restriction on transfer was only temporary. There was no absolute ban on the performance of the contract during the period of 1st January 1973 to 31st March 1973. The transfer could be made with the permission of the competent authority. The contract in this very situation did not stand discharged. Since the defendant-appellant did not choose to obtain the necessary permission during the period within which he was under an obligation to perform the contract, hence the frustration of the contract could not be rendered in his favor.

The performance of a contract could have been possible if the contractor (in a contract of a building) was asked to carry out certain additional items of work even though on account of the said changes the work was materially changed outside the contemplation of the parties.

COMPENSATIONS UNDER THE PROVISION

Section 56 which deals with the clause of frustration also states the damages that should be provided on the non-completion of the contract.

“Compensation for loss through non-performance of an 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.”[11]

However, in Section 32 of the Contracts Act, the parties can decide what to follow in case an uncertain and unforeseeable event occurs. Under Section 65 of the Act there exists a clause the even enhances the strict nature of the doctrine of frustration (of contract) which states for the obligations that a party has gained an advantage under the void agreement/contract. This was showcased when an unsuccessful buyer contended and even was successful in getting the earnest money refunded in the case Revanasiddayya Vs. Gangamma Shashikala & ANR, 2017[12]

Act of God( vis major) in frustration of a contract and Force Majeure events.

“The act of God”, which stands for the converse of the act of man, is an inevitable accident exclusively due to natural causes without human intervention, and an accident so due is considered to be inevitable if it is such that it would be unreasonable, under all the circumstances of the case, to expect a person to foresee and prevent it, or to resist or avert its consequences.[13] It would be, however, incorrect to say that an act of God serves as an excuse for the breach of contract, because where it is an answer to a pleading of an alleged breach of contract that the thing is done, left undone, or left in a state that cannot be completed ever was so by the act of God, what is meant is that it was not within the contract. Hence it is necessary to distinguish between contracts that are absolute and those in which there is an implied covenant regarding the continuance of a particular state of things as the foundation of the contracts.

COVID-19 PANDEMIC AS AN ACT OF GOD

The center declared the Covid-19 pandemic as an act of God. The clause of Force majeure and Frustration comes into play when a potentially unforeseeable or uncontrollable event takes place. Section 56 of the Contract Act gives the parties an option to either explicitly mentions so as to what course of action would take place if the event does not occur or settle the dispute on a personal basis of arbitration. In the light of the Covid-19 pandemic and the months of prolonged lockdown, a number of contracts became impossible to perform. This implies that a lot of litigations will ensue between contracting parties where the clause was not explicitly written down. Even government contracts with a private party could come under the scanner of this clause. “Ministry of Finance issued a clarification to all central Government Ministries that any disruption caused in supply chains due to the spread of Coronavirus will be considered as a ‘natural calamity’ under extent Force Majeure clauses.”[14]

IS COVID-19 A ‘FRUSTRATING’ EVENT?

No specific case law precedent for COVID-19 appears to exist, so it is unclear whether the pandemic would be regarded by the courts as a frustrating occurrence.

Although the pandemic can be found to be a daunting occurrence because of the degree of damage this has caused. It should be noted that, because of foreseeability, parties who have entered into

contracts since the spread of COVID-19 began might be unable to claim dissatisfaction.

Even if the disease itself is not considered sufficient to frustrate a contract, the effects that flow from it, such as government curfews and shutdowns, are likely to be seen as sufficient to make it difficult to carry out a contract.[15]

In accordance with emergency power orders, many commercial entities were forced to close and thus commercial activity performance became impossible through no fault of their own.

Hence, we can infer from the above statements that yes if not the disease itself but the scenario that followed the pandemic is a ‘frustrating’ event.

FRUSTRATION IN THE LIGHT OF THE COVID-19 PANDEMIC

The frustration of a contract is a doctrine of the common law that parallels its nature to the principle of force majeure, but somewhat narrower in scope. It recognizes that an event may occur where there is no fault involved by the parties, which may make a party unable to carry out its obligations under a contract. Hurricanes, earthquakes, strikes and civil unrest, and now even pandemics have been found to be sufficient to frustrate the performance of a contract.

In the case Hepburn v Taylor,where a defendant sought to rely on the doctrine of frustration in his defense, the court was of the view that the circumstance rendering it impossible for a party to fulfill its contractual obligations must not be due to that party’s fault, and that frustration must not be self-induced.

Then, in the case Millennium Telecommunications Limited v Bahamas Telecommunications Company Ltd [16]2017, the court affirmed the principles that a frustrating event must be beyond the parties’ contemplation when the contract is agreed. The court also stated that the impediment should not be the fault of either party, so circumstances caused by negligence or oversight will not constitute frustration.

In the recent case of Standard Retail Pvt. Ltd. and Ors. v. M/s. G. S. Global Corp & Ors[17]., the Bombay High Court had the chance to deal with the plea which included Force Majeure and Frustration of contract due to Covid-19 pandemic as its base issue which was raised by a group of Indian Steel importers, who pleaded for an injunction on the encashment of ‘Letter of Credits’ in the favor of a South Korean exporter. In this case, the Force Majeure clause, although did stipulate ‘epidemics’ as one of the events of Force Majeure,  but only exempted the suppliers in case of a non-performance and not the importers. While the suppliers and exporters fulfilled their part of the contractual obligation, it was contended by the Importers that owing to the nation-wide lockdown and restrictions on travel, the imported goods could not be picked up and therefore, the contract with the supplier shall stand terminated on account of frustration and that Letters of Credit shall not be invoked. However, the court held that the force majeure clause does not apply to the importers and that Letter of Credit is a transaction totally independent and unconcerned with the underlying disputes.

The case of Halliburton Offshore Services Inc. v. Vedanta Ltd. and Anr.[18] before the Delhi High Court, the parties were supposedly involved in the integrated development of certain blocks in Rajasthan. The petitioner called on a stay on the invocation of bank guarantees for a period of one week from the lifting of the lockdown on the ground that the work would have been completed well within time if not for the lockdown due to the pandemic. The Court, after due deliberations, took a bit of a liberal turn and granted the party an ad-interim injunction to Halliburton Offshore Services Inc. noting that COVID-19 pandemic and lockdown amounted to prima facie Force Majeure events, beyond the comprehension of any party.

In the case of KJS Ahluwalia v State of Odisha and others [19]with JSW Steel as an intervener in December 2020. As claimed by the petitioner that JSW had to stop the mining since the contract could not be fulfilled due to frustration created by COVID-19 and also the subsequent lockdowns. Mr. Harish Salve, Senior Advocate referred to the judgment of the Supreme Court in Energy Watchdog v. Central Electricity Regulatory Commission, Mr. Salve contended that the Supreme Court, in that case, has clearly held that loss of profit or reduction in business., does not constitute to Force Majeure event. It was also held that Force Majeure is governed by Section 56 of the Contract Act, 1872, and can be claimed only in the event of the impossibility of performance/frustration of contract. Hence, this very recent case sets the ambit of the doctrine to be applicable.

CONCLUSION

Force Majeure and doctrine of frustration of contract have been continuously regarded as the exceptional defenses in events of complete impossibility in the performance of a contract. Going through the global view of non-performance of contracts during the past outbreaks – such as Ebola, SARS, etc. and the current COVID-19, we feel that the threshold to establish the defense of frustration of contract without error is very high, with no clear-cut straight formula

It is interesting to note several progressive steps taken by the Governments – such as the issuance of Force Majeure Certificates by the governments of Russia and China and inter-department advisory circulars in India to now identify Covid-19 pandemic under the ambit of ‘natural calamity’ in government contracts.[20] Such measures are being put forth to instill confidence and protect the interests of parties in hard times such a there.

There is no scope of doubt in the fact that contracts will be impacted by the pandemic and the current lock-down/ unlock situation. Nevertheless, in future times to come, we may witness varied interpretations of terms, clauses, and provisions of performance of contracts under these unforeseen circumstances coupled with notifications and directives by the Government in relation to this. The law relating to Force Majeure and Frustration of contract is likely to undergo a massive evolution in view of this pandemic which we will keep updating in the future.

REFERENCES

• Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd, [1942] UKHL 4
• Taylor vs. Cardwell, (1863) 3 B & S 826
• EWHC KB J5
• Krell vs. Henry [1903] 2 KB 740
• Arya A and Thapliyal A , 29 June 2015 in Mondaq’s, Doctrine of Frustration- Corporate Law available at, https://www.mondaq.com/india/contracts-and-commercial-law/407868/doctrine-of-frustration
• Section 56, Indian Contracts Act, 1872
• Energy Watchdog & Ors. v. Central Electricity Regulatory Commission & Ors., (2017) 14 SCC 80
• Dal Dalmia V., 11 March 2020 in Lexology’s The Doctrine of Frustration and Force Majeure: Covid 19,available at https://www.lexology.com/library/detail.aspx?g=d63bbf8d-64ec-4595-ab87-633934115ab0mia V
• Satyabrata Ghose Mugneeram Bangur & Co, AIR 1954 SC 44
• Ved Prakash Gupta v. Shishu Pal Singh, AIR 1984 All 288.
• Section 56, Indian Contract Act, 1872.
• Revanasiddayya Vs. Gangamma Shashikala & ANR, AIR 2017 SC 5682.
• Manupatra Section 56 Indian Contracts Act, Digest.
• Singh V. , May 2020 in Legal Service India’s, Frustration and Indian Perspective, available at, http://www.legalserviceindia.com/legal/article-626-frustration-of-contracts-the-indian-perspective.html
• Arya A and Thapliyal A , 29 June 2015 in Mondaq’s, Doctrine of Frustration- Corporate Law available at, https://www.mondaq.com/india/contracts-and-commercial-law/407868/doctrine-of-frustration
• Millennium Telecommunications Limited v Bahamas Telecommunications Company Ltd ,[2017] 1 BHS J. No. 88.
• . Standard Retail Pvt. Ltd. and Ors. v. M/s. G. S. Global Corp & Ors, 2020 SCC OnLine Bom 704.
• Halliburton Offshore Services Inc. v. Vedanta Ltd. and Anr, (2007) 6 SCC 470
• KJS Ahluwalia v State of Odisha and others , 2020 SCC OnLine Ori 916
• Jajoo A. and Ghandi S. 4 May 2020, in Mondaq’s A closer look at frustration of contracts in COVID-19 available at, https://www.mondaq.com/india/litigation-contracts-and-force-majeure/928048/a-closer-look-at-force-majeure-frustration-of-contract-and-impossibility-to-perform-contracts-during-the-covid-19-pandemic

[1] Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd, [1942] UKHL 4

[2] Taylor vs. Cardwell,  (1863) 3 B & S 826

[3]  EWHC KB J5

[4]  Krell vs. Henry [1903] 2 KB 740

[5] Arya A and Thapliyal A , 29 June 2015 in  Mondaq’s, Doctrine of Frustration- Corporate Law available at, https://www.mondaq.com/india/contracts-and-commercial-law/407868/doctrine-of-frustration

[6] Section 56, Indian Contracts Act, 1872

[7] Energy Watchdog & Ors. v. Central Electricity Regulatory Commission & Ors., (2017) 14 SCC 80

[8] Dal Dalmia V., 11 March 2020 in Lexology’s The Doctrine of Frustration and Force Majeure: Covid 19,available at https://www.lexology.com/library/detail.aspx?g=d63bbf8d-64ec-4595-ab87-633934115ab0mia V

[9] Satyabrata Ghose v. Mugneeram Bangur & Co, AIR 1954 SC 44

[10]Ved Prakash Gupta v. Shishu Pal Singh, AIR 1984 All 288.

[11] Section 56, Indian Contract Act, 1872.

[12] Revanasiddayya Vs. Gangamma Shashikala & ANR, AIR 2017 SC 5682.

[13] Manupatra Section 56 Indian Contracts Act, Digest.

[14] Singh V May, 2020 in Legal Service India’s, Frustration and Inidan Perspective, available at, http://www.legalserviceindia.com/legal/article-626-frustration-of-contracts-the-indian-perspective.html

[15] Arya A and Thapliyal A , 29 June 2015 in  Mondaq’s, Doctrine of Frustration- Corporate Law available at, https://www.mondaq.com/india/contracts-and-commercial-law/407868/doctrine-of-frustration

[16] Millennium Telecommunications Limited v Bahamas Telecommunications Company Ltd ,[2017] 1 BHS J. No. 88.

[17]. Standard Retail Pvt. Ltd. and Ors. v. M/s. G. S. Global Corp & Ors, 2020 SCC OnLine Bom 704

[18]Halliburton Offshore Services Inc. v. Vedanta Ltd. and Anr,  (2007) 6 SCC 470

[19]  KJS Ahluwalia v State of Odisha and others , 2020 SCC OnLine Ori 916

[20]Jajoo A. and Ghandi S. 4 May 2020, in Mondaq’s A closer look at frustration of contracts in COVID-19 available at, https://www.mondaq.com/india/litigation-contracts-and-force-majeure/928048/a-closer-look-at-force-majeure-frustration-of-contract-and-impossibility-to-perform-contracts-during-the-covid-19-pandemic