Introduction:
A contract is an agreement or a set of obligations that are to be fulfilled by the parties to the contract. In some situations, following the confirmation of the contract, an unforeseen situation may occur, which makes the performance of the contract impossible. The object of the contract has ceased to exist. This change in circumstances is not the result of any act of the parties but changes the essence of the duties, which are different from those originally envisaged by the parties.
Under section 7 of the Sale of Goods Act, 1930, a contract for the sale of specific goods is void if the goods in the absence of the knowledge of the seller have, at the time of making the contract, perished or become so spoiled as no longer an answer to the description in the contract.[1]
Section 56 of the Indian Contract Act, 1872 deals with the Doctrine of Frustration. As a general rule, parties to a contract form the contract with the intention to perform it. In case of a breach, the party who breaches is liable to pay compensation to the other party. Section 56, however, lays down an exception to this rule, which states that the performance of any action due to being performed after the making of the contract becomes unlawful and impossible in certain circumstances beyond the control of both parties. Frustration includes unforeseen events, events not within the scope of control of human, or impossible events.
Destruction of the Subject-Matter and the Non-Performance of Contract
The doctrine of frustration is based on the legal maxim lex non cogit ad impossibilia, which means that law does not compel what is impossible. Frustration means an act due to which the execution of the contract becomes impossible. Such an act must be one outside the contract and beyond the control of the parties. Destruction of the subject-matter of the contract renders it impossible for the parties to perform their part of the contract. As stated in section 7 of the Sales of Goods Act, the destruction must have been done in the absence of knowledge of the seller. ‘Perishing of goods’ in the section is not only limited to the complete destruction of goods, but it also includes situations where the goods have been stolen, or have been lost, or have become unmerchantable, i. e., they do not hold any commercial value.
In the case of Taylor v. Cardwell,[2] it was held that where an opera house rented for holding concerts was burned down in a fire, the contract stood frustrated. This was because the subject-matter of the contract, the very foundation of the contract on which it depended existed no longer. The opera house destroyed in fire directly implies the impossibility of performing the contract.
Historical Background and its Evolution Internationally
It isn’t something new to exclude the non-performance of a contract due to unforeseen circumstances from a liability. Similar to so many other laws, the doctrine of frustration also originated from the Roman laws. It was included in the Roman contract law and excluded innocent parties who had no control over the circumstance which destroyed an object or thing. This rendered the purpose of the contract to be unattainable without the debtor’s act or default.
In 1903, in England, the doctrine was named in the case of Henry v. Krell.[3] An Englishman Krell had leased his apartment in London to C.S. Henry for the purpose of viewing a royal procession which was eventually cancelled. On the cancellation of the event, Henry refused to pay Krell the balance of the rent. The English court held against Henry, however, on the ground that the purpose in between them was ‘frustrated’. The court stated that the parties would have never entered into the contract had they known of the cancellation of the procession. The procession laid the foundation of the contract. The English law thus extends the principle not only to cases where the subject-matter of the contract has been destroyed making the performance impossible, but also to cases where impossibility to perform arises because an ‘express condition or state of things’ essential to the contract ceases to exist.[4]
The American courts, in contrast to the English courts, have been slow in their adaption to the doctrine. They are of the opinion that the word ‘frustration’ does not particularly connote impossibility (of performing the contract) but rather the degree of difficulty of such performance. The circumstances make the performance so difficult that it shall be regarded as not possible in the eyes of the law. Thus, the term frustration will not often be found in this aspect of contract law in the US. The Courts of the United States refer to what is said to be an identical rule, as the ‘Doctrine of Impossibility of Performance,’ or of ‘Supervening Impossibility of Performance.’[5]
Force Majeure and Frustration of Contract at the time of COVID-19
Apart from the destructive effect that COVID-19 continues to inflict on human beings and countries worldwide, its outreach has also entered trade and industry. COVID-19 has resulted in lockdowns or limited movements in countries. The result of this is that the companies have been affected, and activities have been carried out restrictively. Consequently, contracts and commitments are also being updated to determine these impacts.
The term ‘force majeure’ has been described in the Black’s Law Dictionary as ‘an occurrence or impact that cannot be expected or regulated. It is a contractual requirement to delegate the risk of failure if performance becomes unlikely or impracticable, in particular as a consequence of an incident which the parties could not have expected or managed.’
The key difference between force majeure and the doctrine of frustration is the time of occurrence of unanticipated events. In frustration, circumstances arise subsequent to the making of the contract. In case of force majeure, parties to the contract identify an exhaustive list of events that may happen prior to the formation of the contract. A force majeure clause in the contract is then revoked on the happening of any such events. The consequence of such revocation would be that the parties shall be relieved from performing their respective obligations only for the period of continuation of that force majeure event. Upon its cessation, the parties shall resume their part of the performance of the contract.[6]
With the widespread disruption in industry, manufacturing, and transport, the stage seems set for India to see a flood of ‘force majeure’ invocations due to COVID-19. It is expected that over a period of time more and more Indian businesses will be able to invoke ‘force majeure’ clauses in their contracts, which could result in a spew of litigation, should the parties fail to come to a workable understanding. In such cases, the courts and arbitrators would, of course, have to determine and rule on the merits of each dispute, which will be based on the terms of the contract, the intention of the parties, and steps taken to resolve it.
Furthermore, in situations where the contract does not have a clear force majeure clause, there may be situations in which the parties may seek protection under Section 56 of the Contract Act and seek the frustration of a contract. The courts would then have to determine whether the contract has become impossible and whether the doctrine of frustration of the contract may be extended to that contract.
Judicial Interpretation of the Doctrine in India
In Satyabrata v. Mugneeram,[7] the Supreme Court noted that numerous theories had been put forward concerning the legal basis of the doctrine of frustration, but the basic principle on which the doctrine is based is that of the impossibility of the performance of the contract. In reality, the impossibility of performance and frustration are often synonymous expressions. The sense of the word ‘impossible’ has also been clarified by under section 56. The Supreme Court has made it clear that the applicability of the word impossible is distinct from that of the English Law. Here, it was not used in the sense of physical or abstract impossibility. The execution of an act can be impracticable and pointless from the point of view of the object and whether it forms the basis of the contract is legally to be determined by the courts.
It was also stated in Sushila Devi vs. Hari Singh[8] that the impossibility referred to in section 56 of the Contract Act is not limited to anything that is not humanly conceivable. As was the case with the lease of land, which, after the unfortunate partition, left the contested property to the Gujranwala side of Pakistan, the performance became unlikely.
In another case of the Supreme Court, Nirmala Anand vs. Advent Corporation Pvt. Ltd.,[9] the case concerned the lawsuit for the precise performance of the agreement for the purchase of a flat in a building on a plot of land leased by the municipality. The court held that unless the competent authorities had been moved and the appeal for consent or penalty had been denied once and for all and that denial had eventually become irresolutely binding and made impossible the performance of the contract, which resulted in frustration under section 56, the relief could not be refused for pointing out such obstacles.
Illustrations of Destruction of Subject-Matter Rendering the Performance of a Contract Impossible[10]
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.[11]
Where the tenanted premises comprised land and building, the court said that once the structure was completely destroyed, the tenancy ceased. No right was available to the tenant to apply for possession if the landlord re-constructed the premises.[12]
Conclusion
It can also be summed up by stating that ‘frustration’ happens when the law acknowledges that, without the fault of any party, a contractual obligation has become incapable of being carried out because the conditions under which the performance is provided for will make it fundamentally different from those of the contract.
According to frustration of the contract, where the presence of a particular object is required, either by contract terms or in the contemplation of the parties, for the fulfillment of the commitment in the Contract, the responsibility to fulfill the commitment is discharged if it is no longer in existence at the time of fulfillment. The Frustration of Contract excuses the promisor in some cases where the aims of the contract have been reversed by the circumstances following the termination of the agreements, and the performance is excused under that law even if there is no barrier to the actual performance of the contract.
It can therefore be said that frustration is, in the sense, unforeseen and unwanted dissolution of the contract due to the occurrence of certain accidents which make its output impossible. Destruction of the subject-matter of the contract of sale, or any other contract, renders the contract frustrated, and thus, impossible to perform.
References:
[1] Section 7, The Sale of Goods Act.
[2] (1863) 3 B.& S. 826.
[3] [1903] K.B. 740.
[4] Abhishek Arya & Arvind Thapliyal, Doctrine of Frustration, MONDAQ (29 June, 2015) https://www.mondaq.com/india/contracts-and-commercial-law/407868/doctrine-of-frustration#:~:text=The%20doctrine%20of%20frustration%20is,or%20unlawful%20will%20become%20void
[5] The Doctrine of Frustration as Applied to Contracts, https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=7850&context=penn_law_review
[6] Poorvi Sanjanwala & Kashmira Bakliwal, Force Majeure and Frustration of Contract in the Light of Covid-19, MONDAQ (16 May 2020), https://www.mondaq.com/india/litigation-contracts-and-force-majeure/934764/force-majeure-frustration-of-contract-in-light-of-covid-19?type=mondaqai&score=65
[7] AIR 1954 SC 44: 1954 SCR 310.
[8] AIR 1971 SC 1756: (1971) 2 SCC 288.
[9] AIR 2002 SC 2290.
[10] AVTAR SINGH, CONTRACT & SPECIFIC RELIEF (12th ed., 2018).
[11] Howell v. Couplan (1876) 1 QBD 258 (CA).
[12] West Bengal Khadi and Village Industries Board v. Sagore Banerjee, (2003) 1 ICC 991 (Cal.).
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