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Anshu Sharma
Delhi Metropolitan Education affiliated to Guru Gobind Singh Indraprastha University
Introduction to Contract Law
Contract law can be defined as a division of legal learning that concerns the relationships between individuals, institution and the state regarding contractual associations. It defines how and when these agreements shall be made and complied to, to ensure they are legal and reasonable. It is important to note that the primary goals of the contract law are to set up come general conditions that will make it easy for those who intend to make the contract to know what is expected of them. A valid contract has several key elements, these are: offer, acceptance, intention, consideration, capacity and legality of the contract. These components enable all the aspects of the relation to be defined and leave no room for ambiguity, which gives the agreement legal backing in case there is a need to enforce it.
Definition and Origin of the Doctrine of Frustration
The case of frustration comes into play where after formation of the contract, an event occurs rendering the contract impossibility to be performed or changes the nature of the contract drastically. This legal principle discharges the parties of their duties because the contract has become unfeasible or infeasible by the force of some events. This principle originates from the English common law and experienced major growth in the nineteenth century. Taylor v. Caldwell, 1863 is another major decision that was premised on conflagration, and it entailed that when a music hall was destroyed before a series of concerts could occur, the court prevented the execution of the contract as the subject matter had been destroyed. This case led to the prevention of frustration when in the contract turned out that some purpose became impossible to be performed. Since then, the doctrine has developed through different moments in legal precedents, defining the conditions under which it can be applied not to undermine essential contractual fairness once events beyond the contracting parties interfere with the contractual relationships.
Legal Framework for the Doctrine of Frustration
The origins of doctrine of frustration more or less depend on statutes as well as the common law. In India though the legal provision governing frustration is contained in Section 56 of the Indian Contract Act, 1872. To stress the importance of this section, an agreement to do an impossible act is void and if a contract performance is rendered impossible by the occurrence of an event, the contract becomes void. In other words, if an event occurs that cannot enable the contract to be performed, then the contract is simply terminated and both parties are then excused from performing the contract.
Nevertheless, it has to be mentioned that parallel to this general statute, the principles of common law also remain vital. Such principles have been developed with the help of different court decisions recognising that the contract can be discharged if the happening of a particular event transforms the nature of the agreement to an extent that it would be inequitable of the parties to go on with the agreement they entered into. Thus, statutory law in combination with common one forms the solid legal foundation in order to guarantee the contractual parties fair treatment in case if some extraordinary circumstances affect their fulfilment of the contract.
Circumstances Under Which a Contract is Considered Frustrated
Frustration is the doctrine under which an existing contract is said to be frustrated provided that, after the contract's formation, a condition makes it impossible to perform or alters the nature of the contractual obligations. This situation must be one that cannot be linked to the negligence or default of the parties in question. This frustration has to render the performance of the contract unlawful, physically impossible or commercially sterile and utterly distinct from the original contract that the parties entered into. The following conditions reveal the need to take into account probable risks and incorporate such provisions into the contracts: -
Natural Disasters - Occasionally the circumstances such as earthquake, floods or fire may bring about the destruction of the subject that is contractual, and this makes it impossible for the contract to be fulfilled.
For example, suppose the parties entered into a contract for the sale of a certain house, and the house gets burnt down, the contract is frustrated.
Death or Incapacity - Contracts for personal services are contracts where the intended performance is the service of the person himself, and it is common for the death or incapacity of the person to cause frustration of the contract.
For example, consider a situation when the artist is required to make a painting of an individual, and the artist dies, the contract cannot be fulfilled.
Changes in Law - If a new law or regulation has been passed and the satisfaction of the contract is made unlawful after the contract had been formed then the contract has been frustrated.
For example, production is contracted to deliver goods to a given country and after a law is passed which prohibits the exportation of the said goods and therefore the contract will be frustrated.
Economic Changes - A few circumstances leading to frustration are drastic economic changes that directly impact the contract and change its nature.
For example, if there is a contract entered into with a view of constructing a building and halfway through constructing the building, as a result of some economic changes everything used in constructing a building shoots up in price thus making it commercially impossible to complete the construction of the building then the contract might be regarded as having been frustrated.
Political Events - Other possible reasons for frustration include political vices which include wars, riots or actions by any government which affects the normal functioning of society in such a way that the contract cannot be performed.
For example, a contract under which an organization agrees to supply products to an area that is then rendered inaccessible by wars thus rendering the contract impossible to deliver will amount to frustrated contract.
Effects of Frustration on Contracts
When a contract is frustrated, this simply means that the parties cannot perform the contract or that some event has occurred that alters the relationship of the parties to the bargain very significantly. This has several important effects:
Consequences
Whenever a contract is frustrated, it is automatically discharged at the very instance the frustrating event occurs. The following are a few consequences aftereffects of frustration in contracts: -
Termination of Contract - When a contract is frustrated the contract cancels from the time of frustration of the contract, the parties are free from the contract and are not required to do anything as provided in the contract.
Discharge of Obligations - It also frees both parties from future performances, which are the basis of the contract. For instance, if there is a concert, that has been scheduled for a specific date to be conducted outside, these performers are not obliged to perform, and same for the event organizers who are not obliged to host the concert since they have been neutralized by the forces of nature.
Restitution - When one party has partially performed what they agreed to do under a contract before it was frustrated, they can be asked to bring back what they had done. The effects mean that they can recover the value of the contribution they have made in a particular course, program, or any delivery. For example, anticipation proceeds may have been made; the recipient of the payment may have to make a refund.
Rights and Obligations of Parties After Frustration
If a contract is frustrated, then the contractual terms are defeating which leads to an impossible situation for the intended performance of the contract. This alters the likelihood of claims being made and the roles and responsibilities of the parties concerned. Here are the rights and obligations of parties after frustration: -
No Further Performance i.e. Discharge From Future Duties - Where frustration occurs, both parties towards the contract are discharged from further performance upon the contract. In addition, they are not even expected to perform other tasks than those spelled out in the contract.
For instance, if a company was contracted to deliver goods to a buyer but due to a catastrophic event they lost their stock in the store, then they are a free from that obligation.
Pre-Frustration Obligations i.e. Handling Prior Responsibilities - There might be something that was supposed to be done prior to the inception of the frustrating event in question. A party may be required to restore the money or the service they used to draw the other party into the contract if they have already benefitted from it.
For instance, if the ownership of the goods said belongs to the buyer and he or she had already paid for the goods that can or cannot be delivered anymore because of the destruction of the warehouse, the seller has to refund the money.
No Fault Liability i.e. No Blame or Penalties - Frustration arises from an incident which neither party can be held responsible and certainly cannot be prevented. As such, any one party is not penalized or charged any damages to be met at any one point in the process.
For instance, since the event that disrupted the buyer’s business was a natural disaster, the company was not at fault and the buyer also does not have to incur costs associated with the contract terms being violated.
Restitution and Compensation Mechanisms
After a contract is frustrated, the law often requires some form of restitution to ensure fairness. These mechanisms purpose is to avoid emerging of the so-called unjust enrichment, which means that one party gains at the expense of the other. In this way, the law aims at restoring both the parties to the position they were at before entering into the contract as benefits should be returned and expenses should be compensated. These are:
Return of Benefits: If any of the parties to the contract has been paid or has received any other benefits before the frustrating event occurred, then many have to refund these. For instance, if one of the parties received an advance payment for services that could no longer be rendered then that party must return the payment made.
Reasonable Expenses: Sometimes the parties are allowed to recover reasonable expenses reasonably likely to be incurred in the fulfillment of the contract. For example, where a party has incurred costs in materials that are necessary for the performance of a contract the party is likely to seek recovery on those grounds.
Types of Frustrating Events
Frustration in contract law means that certain stipulations in a contact cannot be performed because of matters that are beyond human control. Here are the main types of frustrating events:
Natural calamities and Acts of God - These are the events that cannot be controlled or prevented and can happen anytime like earthquakes, floods, hurricanes, or other severe weather conditions. It should, however, be noted that in such events, the performance of the contract becomes im-possible.
For example, if a venue is destroyed by a flood, then an event cannot be held at the place hence frustrating the contract.
Changes in Law - Sometimes, new laws or new actions by the government can make the contractual provisions unlawful or impracticable. This means that when the law gets amended, the parties might not been able to perform their contractual duties without violating the law.
For example, a firm enters into a contract for the sale of a particular good, yet a new law is passed to deter the sale of the product by the firm. The contract become frustrated because the performance of the contract in question is now unlawful.
Unavailability or Destruction of the Subject Matter - The contract becomes frustrated if the particular thing that is the subject matter of a contract is destroyed or becomes unavailable then the formation of a contract can be prevented. This kind of frustration arises where the existence of something is the subject matter of the contract has special importance.
For example, a contract of lease of a particular building to use it for an office becomes frustrated if the building is burnt. Therefore, because of the physical aspect of the constructive condition, the contract cannot be performed since the specific building is unavailable.
Death or Incapacity of a Party in Personal Service Contracts - This happens where one of the parties to the contract delivers personal services; a condition that makes the contract unenforceable because of the death or permanent disability of the particular party. This is because the contract cannot be tendered by any other person or company other than the one that has entered the agreement with the other party.
For example, the painter is paid to create an art piece of an individual, but unfortunately, the individual dies without signing a painting. The contract is frustrated because no one else can deliver such a type of service as it was agreed.
Distinction Between Frustration and Force Majeure
Force majeure clauses are words included in a contract to enable the parties to the contract to be freed from their contractual duties in the event of occurrence of certain events beyond reasonable human control and, which is not as a result of the party’s negligence. These clauses are generally worded and include items like the actions of the elements such as earthquakes, floods, wars, strike, and other cases that are perceived as disruptions. In other words, A force majeure clause is intended to apportion risk and offer legal certainty as to how a contract will be performed if events beyond the parties’ control hinder the contract’s performance.
Considering certain fundamental differences between the two concepts, the doctrine of impracticability can be compared with the doctrine of frustration. While both force majeure and the doctrine of frustration address unforeseen events that hinder contractual performance, they operate differently and have distinct legal foundations: -
Origin and Application
- Force majeure simply being the common law doctrine one does not require it to be mentioned and agreed to by the parties in their contract as it is a part of the common law. It will indicate what events are covered and what impact they have on the obligations of the contract in case a force majeure clause is included in a contract.
- The doctrine of frustration on the other hand is an automatic legal excuse that applies even if the contract has no stipulation in respect of the same. It comes into operation where the event disrupts or alters the contractual relationship by making performance of the contract commercially impossible or totally different from what was envisaged.
Scope and Coverage
- It would also seem that force majeure clauses can be very particular and, therefore, narrow in scope or they can be more general and, as such, encompassing. They can incorporate the events that could be expected by the parties but still may be potentially disruptive.
- Frustration is generally more limited as an emotional response that is relatively short in duration as compared to anger. It comes in operation where the event frustrates the contractual arrangement, renders it unlawful, or where the objective of the contract ceases to exist. It should be something that neither of the parties could have foreseen and avoided in the operation of their business.
Effect on the Contract
- When a force majeure event happens, the most common impact is the failure to perform the contract on time, or rescheduling the time frame for the performance in some cases, the contract could be classified as being frustrated and terminated without legal consequences of this happening.
- This means that once a contract is frustrated then the performance of the contract is brought to an end and the parties are relieved of any further performance. The discharge by breach naturally discharges the contract’s obligations immediately and such parties cannot demand performance anymore.
How Force Majeure Clauses are Deployed to Manage Frustration Risks
The legal framework of force majeure clauses is a preventive measure in contracts on managing the risks in the occurrence of upheavals. By including a force majeure clause, parties can:
Clearly Define Unforeseen Events - When special circumstances which can be construed as force majeure are outlined then it is not difficult to determine which circumstances falls under force majeure. This clarity mitigates the probability that there will be disagreement on who took what risk and that it generates common knowledge of the uncertain outcomes.
Set Procedures for Handling Disruptions - Force majeure clauses normally set out the procedures that the parties should follow when a force majeure event happens, for instance, the time frame within which one party must notify the other party of the situation. This helps to avoid confusion, and in turn, avoid possible conflicts of interest since there is clear flow that is followed.
Allocate Risks and Responsibilities - In a force majeure contract clause, it becomes possible to make a clear determination of the negative effects of the event while also minimizing unfair shifts in liabilities to other parties.
Provide Flexibility and Continuity - The advantage of force majeure clauses is that it allows for the suspension of contractual duties, while the ground for suspension lasts; this is an advantage because the contract can continue as soon as the force majeure stops. This is often better than the kind of termination that frustration would bring because it lets parties maintain their business ties.
Landmark Cases
Satyabrata Ghose v. Mugneeram Bangur & Co. (1954)
The court upheld the frustration as the event must bring a complete change in the very nature of the contract and it becomes impossible to perform it. The court basically stated that frustration does not entail inconvenience or financial loss.
Taylor v. Caldwell (1863)
Although it deals with a typical British circumstance, it played a major role in the formation of current Indian contract law. Here, the court allowed the proposition that contracts maybe frustrated where the very thing on which performance of the contract rests, has been destroyed or has become us less by virtue of events which the parties could not reasonably have contemplated at the time the formed the contract.
Murlidhar Chiranjilal & Ors Vs Harishchandra Dwarkadas & Ors. (1962)
According to this case, the Supreme Court of India backed this frustration theory up by pointing out that frustration is where there is a significant change in the circumstances under which the parties were going to perform a contract and thus they became impossible to perform it. The court also stated that where owing to some wartime regulations the contract for sale of the property becomes impossible to perform in view of the requisition made by the government, frustration applies.
Alluri Narayana Murthy Raja v. District Collector, Vishakhapatnam
The court in this case stated that the application of Section 56 of the Contract Act was made as a lease holder’s contract for sand mining was prevented by the villagers.
Industrial Finance Corporation v Thletdc. Anr&Naonroasr
This case made it clear that the Doctrine of Frustration does not work where the events giving rise to the claim was not connected with the Nationalisation Act and there was no direct connection between the events which rendered the contract impossible.
Criticism and Limitations of the Doctrine of Frustration
Contract law could not work without the doctrine of frustration which helps to cope with the difficult situations; though the doctrine has some weaknesses and peculiarities. These are due to the very structure of conflict and the challenges of its properly implementation. Although the doctrine of frustration plays an important role in meeting the needs in the theory of contract, it is not exempted from weaknesses. For one, unpredictability is closely related to the principle that its applicability often requires overcoming high thresholds; these are remarkable issues of a limited scope, the judiciary’s general restraint in invoking the principle, and inconsistent interpretations of it. It is essential for the parties to understand these criticisms and limitations since it emphasizes the need to consider and include clauses that can counter every uncertain condition.
Common Criticisms of the Doctrine
The doctrine of frustration can be said unpredictable. There are no clearly defined criteria as to when a given event becomes frustrating and this often presents major problems for the parties in an effort to know if the doctrine will work or not in their favour. This uncertainty inevitably poses risks to the parties contractual rights as well as duties where the parties cannot be made certain of whether their obligations will be honoured or not. Further, the doctrine is deemed as being rigid in a way that where partial performance or other accommodation of the contract might be reasonable.
Limitations and Challenges in Its Application
The doctrine of frustration has an immense importance and many times invoked in the court the application of the said doctrine is not without its limitations and difficulties. The event that leads to frustration must be an event beyond the party’s expectations and the circumstances that surround it. This can be an issue which is a source of controversy in a claim between parties since they may hold different positions on whether or not the event was beyond reasonable foresight or if one of the parties should have prevented the risk.
Also, the change in circumstances must be such that it transforms the basic nature of the contractual relations removing entirely its ‘essential elements.’ The high threshold for this means that there are many circumstances where parties are rather deprived of protection by the events, they did not foresee yet they do not meet the requirements to be qualified as being protected by the doctrine of frustration.
Another important limitation relates to a very limited sphere of applicability of the doctrine. It doesn’t complete enumerate other forms of breach of a contract.
Judicial Reluctance and Varying Interpretations
Even the doctrine of frustration is faced with large problems which is judicial reluctance. Courts always give appropriate measures when deciding on a contract frustration since determining so can be equivalent to discharging of all parties duties. This reluctance is due to the fact that in societies, the need to maintain the principle of quantum and to discourage people to approach the courts as a means of escaping contractual obligations, to the extreme is very high. Due to the impression given by decisions made earlier, courts carefully analyse claims of frustration which can lead to different interpretations and results.
Finally, the fact that the doctrine has been applied in various jurisdictions and cases in a more or less consistent manner complicates it further. Because of this, what may be seen as an annoying incident in one court, may not justify a decision in another court a similar incident, making it hard to get a uniformity in decisions from various courts. This creates quite an issue in that the businesses that operate across the globe cannot be in a position to trust the interpretation of the doctrine to be the same across the various regions.
Conclusion
The Doctrine of Frustration is vital in contract law due to the effectiveness in answering questions where various events prevent the intentions of a contract from being fulfilled. It gives fair play by releasing parties from their obligations when a situation has radically changed. The doctrine has certain pros and cons like predictability issues, judiciary’s hesitance and elasticity of interpretations. These challenges show that the need to approach formulation of contracts with clauses that will negotiate the risks effectively is very important to any parties that want to engage in such contracts. It is crucial to grasp such matters of law as this doctrine in order to have reasonable and balanced contractual relations in the world that constantly evolves.
References
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