Impossibility of Performance and Frustration of Contract

Introduction:

A contract put an onus on the parties to the contract to perform, completion of which completes the contract, failing which makes the said party liable for breach of contract. However, there is a possibility of happening of uncertain and unpredictable events that makes it impossible to bring off the obligation and complete the contract but this does not make the ground for breach of contract and provides a good defence against it.

The impacts of non-performance of contract due to impracticality of performance is a place in Indian Contract Act, 1872. Section 56 talks about the agreement to do an impossible act as void and section 65 puts an obligation on the person who achieved a profit out of a void agreement. Section 56 to section 65 of the Act covers the entire provisions of Frustration. Impossibility and frustration are often used as interchangeable expressions.[1] The doctrine of frustration has surfaced as one of the most common issues that have arrived to deal with failed contracts in the law of contracts.

The Doctrine of Frustration: An Inception

In Roman Contract Law, when the purpose of the contract is destroyed or unattainable then the parties to the contract are discharged. The doctrine of frustration owes its origin to the concept of Roman Contract Law.

The doctrine of Frustration was also inspired by the rigid law of England where the defendant does not get the defence in the case of breach of an obligation that arrived due to the impossibility of performance under the contract. This rigid rule of England was highlighted in the case of Paradine vs Jane[2]. In this case, the acquittal was not rewarded to the respondent. The facts are – Paradine sued Jane for his due rent. He put up his argument that the German Prince had took over the area where the property was situated therefore he could not use the property to make profits. He had planned to pay all the rent out of the profits he received if he had used the property. But his defence was not held valid as according to English rule, the obligation under the contract was absolute with no exception whatsoever. Though the ground of defence taken by the defendant was reasonable and strong, the Judge held that the responsibility under the contract is honoured under all outcomes.

This rigidity was unreasonable and unfair and needed a remedy and hence the doctrine of frustration in the Indian Contract Act came up as an exception to the English rule of Contracts. Section 56 of the Indian Contract Act states that-

“An agreement to do an act impossible in itself is void. Contract to do an act afterwards becoming impossible or unlawful: A contract to do an act that after the contract is made becomes impossible or, because of some event that the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.¹

Compensation for loss through non-performance of an act known to be impossible or unlawful: Where one person has promised to be 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.”

The provision if applied In the case of Paradine vs Jane, the defendant will get the defence as per the doctrine of frustration and the event cancellation that lead to the impossibility of completion of the contract. For example- If A contracts with B to act in the theatre of B for six months and for that, B gives an amount as advance to A. On several occasions, A becomes too sick that he is unable to perform. Therefore, the contract on such occasions becomes void.

 The modern concept of Frustration stated in the case of Horlock vs Beal[3] is as follows if a contract is entered into, and by a supervening cause that is beyond the control of either party, its performance has become impossible, the contract will not remain binding on either party.

On that account, neither party is bound to fulfil the contract in uncertain and unfortunate situations that make the performance of the contract impossible.

The extent of Doctrine of Frustration

Breach of contract brings up the blame on the defendant to compensate the loss suffered by the plaintiff. If in any case the plaintiff brings up a charge of breach of contract on the defendant and it is found that the impossibility to execute the contract compelled the defendant from performing the contract, then the defendant will be held free and the plaintiff will have to return all the benefits (if any) he has gained from the said contract. It is to be noted here that the impossibility to perform must not be self-created. For example- A and B made an agreement that A will provide B with 50% of profit gained from the show if B provides his theatre to A. A gave some advance to B. If unfortunately, the theatre catches the fire night before the event, the contract will become void and B will be entitled to return the advance amount paid by A back to him. Here if B induced to fire by himself for retaining the advance payment by A, B will be at fault to pay the compensation for all the loss suffered by A and B will not get the defence of the said doctrine

The impossibility of performance can be of below-mentioned types:

1. Initial Impossibility

As stated initially, the contract binds the parties to it to perform the specific tasks failing which lead to a breach of contract. If any contract made for an impossible event or object then it will be the case of initial impossibility. For example- P, a married man who promises Q to marry her knowing that it is an impossible event, would be liable for compensation to Q.

2. Subsequent Impossibility

If the contract made in good faith and motive to fulfil it initially but due to some unusual and unforeseen situations it becomes impossible to complete the contractual obligations. Such impossibilities are subsequent impossibilities. For example- A, an Indian and B, a Chinese made an agreement that A will send 5000 units of Charcoal container in consideration of Rs. 20, 00,000. B paid half of the amount as an advance and before completion of the object, the war situations were created between the countries that stopped the import and export from each other leading to the contract between A and B as void due to subsequent impossibility.

However, the doctrine of frustration is valid only in two cases:

1. When the motive of contract has become impossible to perform; or
2. When an event has occurred making the performance of the contract to be impossible afar the control of parties.

For the application of section 56, there shall be:

• A valid contract.
• Any part of the contract that is yet to complete.
• The accomplishment of that part becomes impossible due to any of the above-mentioned two cases.

Below mentioned are some conditions (non-exhaustive) that provide the grounds of frustration:

1. Death or incapacity of the party

The contract becomes void if one of the parties dies or is incapable to perform his obligations due to illness or some other genuine reason and the other party cannot sue him on the grounds of breach of contract. This was held in the case of Robinson vs Davison.[4]

2. Governmental or legislative intervention

If at the time of entering into a contract, it was a valid contract and subsequently becomes impossible due to any legislation or rule passed by the government. In the case of Man Singh vs Khazan Singh[5], the contract to sell the trees was held impossible due to an order by the State government to forbid the cutting of trees in that area. The contract was frustrated due to the governmental intervention.

3. Non-occurrence of the event

If the event for which the contract is made is cancelled or postponed then it will make ground for the frustration of the contract. In the case of Krell vs Henry[6], a room was booked especially to see the king’s coronation process but the coronation process postponed and the contract became frustrated.

4. Destruction of subject matter

If the core subject matter of any contract is destroyed then there is no direct possibility of completion of that contract. This situation was seen in a famous case Taylor vs Caldwell.[7] The contract was made in this case to lease out a music hall on a specified date for an event. Unfortunately, the music hall caught fire a night before the show destroying the subject matter of the contract, and hence, the contract was frustrated.

5. Bad weather conditions that prevent the happening of an event

If A purchased the tickets from B to watch a cricket match in the stadium but because of bad weather conditions the match cancelled, the contract between A and B become frustrated.

The conditions in which defence of frustration cannot be taken are below (non-exhaustive):

1. When one of the parties to the contract causes the impossibility.
2. When the impossibility was foreseeable.
3. When a party has agreed expressly or impliedly to an event leading to frustration of contract.
4. When the frustrating event already existed but the parties were negligent.

If the contract is frustrated and the party to the contract had suffered loss, he can take the help of section 65 of the Indian Contract Act that states that when the agreement becomes void or voidable, any person who has received any advantage from the other party is bound to restore it or to make compensation, to the person from whom he has received it.  

The case of Sushila Devi vs Hari Singh [8]enlarged the scope of Doctrine of Frustration. In this case, the dispute arose due to the partition of India and Pakistan. The property on lease became a part of Pakistan, making the terms of the agreement impossible. The contract was frustrated. The court stated that “Impossibility” under section 56 should not be restricted to human-made situations.

COVID-19 Repercussion on Contracts

COVID 19 has affected the whole world due to which the world is facing an unprecedented period of precariousness. It undoubtedly had and will continue to have, bad effects on the economy and the performance of contracts. Many contracts become risky, difficult or even impossible to fulfil. Resultantly, more and more contracts have become and will become frustrated as the case may be. It shall be noted here that not all the contracts will become frustrated by the reason of pandemic. One more point to consider is whether the whole contract is frustrated or it has become impossible to secure the benefits envisaged by the contract. The contract may be frustrated depending on whether the whole basis of the contract has been destroyed, so as it makes the performance something different from what was expected.

Conclusion

The impossibility of a contract leads to its frustration. It acts as an exception of breach of contract and the guilty party need not pay the compensation. The party can escape only if there happened subsequent impossibility. If any party has gained anything from the contract frustrated, he must return it or compensate it to the party from whom he has gained. The contract if frustrated comes at the initial point of the unsigned contract.

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References:

[1] Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd. [1916] 2 A.C. 397, 403

[2] 1647 (82) ER 897: 1647 Alyen 26.

[3] [1916] 1 AC 486 at [525-526]

[4] Supreme Court of North Carolina (Dec 1, 1826).

[5] AIR 1961 Raj 277

[6] 72 LJKB 794; 52 WR 246

[7] 122 Eng. Rep. 309 (1863).

[8]  1971 AIR 1756, 1971 SCR 671