The Coronavirus (COVID-19) Pandemic has triggered a state of uncertainty world-over, the likes of which have never been experienced before. Declarations of nation-wide lockdowns cutting across continents and the lack of a vaccination or cure at the moment have led to a situation which is extremely volatile and uncertain. One certainty is that the out-break of the Pandemic shall pleaded as a ground for discharge, for scores of commercial contracts. And jurisprudence surrounding discharge of contracts by frustration shall be significantly discussed, maybe even reconsidered, and further developed by the Courts. Already, parties are approaching the Courts in an attempt to mitigate the adverse impact of the pandemic on their obligations and interests under their respective contracts.[1] The question thus arises as to when a plea of frustration can lie. And what are the crucial factors in determining whether a contract stands frustrated. This article discusses the law surrounding discharge of contracts by frustration, along with various tests applied by Courts in India, while determining whether a contract stands discharged by frustration.

1. WHAT IS THE DOCTRINE OF FRUSTRATION?

Prior to the evolution of this doctrine, Courts in England were inclined to hold that a party was bound to perform its obligations under a contract and it could not be excused by the fact that performance of the contract had become impossible. A need was therefore felt, to afford protection to a party where compelling it to perform its obligation – in view of the changed circumstances which were not within its control – would result in grave injustice. Accordingly, the doctrine of frustration was developed[2], taking different hues and colours through a lengthy string of judicial pronouncements over the years.

Frustration can be described as an event, occurrence or, change in circumstances, which has taken place due to no fault of either party and – which is so fundamental and different from the circumstances existing at the time of making the contract that – it has struck at the root of the contract, and is beyond what the parties had in mind at the time of making the contract. 

In India, the doctrine of frustration is embodied in Sections 32 and 56 of the Indian Contract Act, 1872[3] (“Contract Act”).

Section 32 of the Contract Act provides that where parties to a contract have agreed to do or not do anything if an uncertain future event happens, then the contract cannot be legally enforced until such uncertain future event has happened. Further, if the uncertain future event becomes impossible, the contract becomes void.

Section 56 of the Contract Act provides that an agreement to do an impossible act is void. It further states that if the parties have agreed to do something – which after the contract is made – becomes impossible on account of some event which could not be prevented by the promisor or, becomes unlawful, then the Contract is rendered void. Further, if at the time of making the contract, the promisor either knew or, might have known with reasonable diligence – that the performance was impossible or unlawful – he must compensate the promisee towards any loss that is caused by such non-performance.

What emerges is that the Contract Act affords protection to both parties in cases where the parties have agreed to do something – the performance of which – is or has been rendered impossible or unlawful. Further, the law provides a means of compensating the party who has suffered a loss on account of non-performance by the other party who knew or might have reasonably known, of the impossibility of such performance or the unlawfulness of the same.

The nature of the ‘impossibility’ contemplated in Sections 32 and 56 of the Contract Act is therefore crucial in determining and understanding the applicability of the doctrine of frustration.

2. NOT JUST LITERAL OR PHYSICAL IMPOSSIBILITY:

The meaning of impossibility has been explained by the Hon’ble Supreme Court of India in Satyabrata Ghose vs. Mugneeram Bangur and Co. & Anr.[4] In this case, a dispute arose with respect to performance of a contract for the sale of land – the Defendant contended that performance was rendered frustrated due to (temporary) requisition orders having been passed qua theland in question – The Court, after having considered the terms of the agreement and surrounding circumstances, namely that there was no definite time limit for performance of the contract and, the requisition orders were applicable only temporarily, held that the object and purpose of the agreement had not been fundamentally been affected and hence the performance could not be said to have become impossible.

The Court laid down the position in the following terms: “The word ‘impossible’ has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view; and if an untoward change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do”. It necessary that the changed circumstances, make the performance of the contract impossible, in which case, the parties are absolved from further performance “as they did not promise to perform an impossibility.”

Now there might be cases, in which the contract itself contains a term, whether express or implied, that on the happening of a particular event, the contract would stand discharged. When such a term is contained in the contract itself, the relationship of the parties and the consequences that flow from such happening, would be governed only by the mechanism provided under the Agreement itself, as provided under section 32 of the Contract Act.

Section 56, on the other hand, deals with frustration on account of reasons which the parties did not contemplate and therefore failed to provide for, under the terms of the contract. In such cases, the Court can grant a relief if the object or purpose which formed the basis of the contract stood frustrated by the occurrence of an unexpected change or occurrence i.e. a supervening impossibility which was beyond the contemplation of the parties on date on which their contract came into existence.

For a contract to stand discharged by frustration in terms of Section 56, it is therefore necessary that the change in circumstances is so fundamental that it has struck at the root of the contract.

3. FRUSTRATION NOT A TOOL TO AVOID A BAD BARGAIN:

Another significant facet of the doctrine of frustration is that, it cannot be invoked solely because – on account of changed circumstances – the performance of a contract has been rendered more burdensome on one of the parties. This principle was enunciated in the Supreme Court’s judgment in Alopi Prashad vs. Union of India[5]. In this case, a party who had undertaken to supply goods at a specified rate, pleaded frustration and sought an enhancement over the previously agreed rates due to changes in circumstances i.e. the out-break of a war leading to an increase in the price of goods agreed to be supplied.

The Court held that (on account of the change in circumstances), “Performance of the contract had not become impossible or unlawful; the contract was in fact performed by the Agents, and they have received renumeration expressly stipulated to be paid therein. The Indian Contract Act does not enable a party to a contract to ignore the express covenants thereof, and to claim payment of consideration for performance of the contract at rates different from the stipulated rates, on some vague plea of equity.”

Crucially, it was highlighted that, “The parties to an executory contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate- a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like. Yet this does not in itself affect the bargain they have made. If, on the other hand, a consideration of the terms of the contract , in the light of the circumstances existing when it was made, shows that they never intended to be bound in a fundamentally different situation which had now emerged, the contract ceases to bind at the point – not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation.”

Again, in The Naihati Jute Mills Ltd. vs. Khyaliram Jagannath [6],the Appellant had agreed inter alia to obtain a certain license by a stipulated date – it further agreed to pay damages to the Respondent, if it failed to do so– the Appellant was unable to procure the license and damages were claimed by the Respondent. The Appellant resisted the claim on the ground that owing to an intervening cause i.e. a change in government policy, which the parties could not foresee at the time of contracting,  the contract stood frustrated and was to be treated as void.

The Court, rejecting this contention and having regard to the circumstances highlighted that, “where a party to a contract, had taken upon himself absolutely, the burden of doing a certain thing by a particular stipulated time, failing which, he would pay damages, the defence of impossibility of performance or that of the contract being void, could not be resorted to.”

This principle has also been upheld and reaffirmed by the Supreme Court in a relatively recent decision passed in Energy Watchdog vs. Central Electricity Regulatory Commission & Ors.[7] (“Energy Watchdog”) wherein the rise in the price of coal was pleaded as a ground for frustration, thereby entitling the appellant to grant of compensatory tariff. The Court held: “neither was the fundamental basis of the contract dislodged nor was any frustrating event, except for a rise in the price of coal, excluded by clause 12.4, pointed out. Alternative modes of performance were available, albeit at a higher price. This does not lead to the contract, as a whole, being frustrated.”

4. FRUSTRATION CANNOT BE PLEADED WHEN THERE EXIST ALTERNATIVE MODES OF PERFORMANCE:

In Energy Watchdog, it was also held that “applying the doctrine of frustration must always be within narrow limits”. In holding so, the Court further explained that a force majeure clause will not normally be construed to apply where the contract provides for an alternative mode of performance. That is to say – a more onerous method of performance would not by itself – amount to a frustrating event. Thus, in cases where the fundamental basis of the agreement remains unaltered and an alternative mode of performance is still available, but at a higher cost to the performing party, the same does not lead to the contract, as a whole, being frustrated.

5. FRUSTRATION IN EXECUTED CONTRACTS:

In Raja Dhruv Dev Chand vs Raja Harmohinder Singh & Another[8],while deciding the question of whether the doctrine of frustration would apply to leases, the Supreme Court held, “There is a clear distinction between a completed conveyance and an executory contract and events which discharge a contract do not invalidate a concluded transfer.” It further held that, “where the property leased is not destroyed or substantially and permanently unfit, the lessee cannot avoid the lease because he does not or is unable to use the land for purposes for which it is let to him.”

In its subsequent decision in Sushila Devi & Anr. Vs. Hari Singh & Ors.[9], while deciding the question of whether the doctrine of frustration would apply in case of ‘an agreement to lease’, the Supreme Court – reiterated the principle laid down in the above decision – but held in the circumstances of the case at hand that, “the object of the agreement became impossible because of supervening events”.

Accordingly, it would not be out of place to state that the nature of the contract viz. whether the contract is an executory one or, an executed one – would be relevant inter alia in determining whether the contract stands discharged by frustration.

6. CONCLUDING REMARKS:

Given the importance placed on examining whether or not the object of a contract can still be attained and, the significance of ascertaining what the true construction of an agreement is – the determination of whether a contract stands discharged by frustration would depend on the exact nature of the contract and the terms contained therein. There are, however, certain key elements and pointers that the parties would do well to consider:

• If a contract contains either an express or implied term, prescribing it’s discharge upon the happening of a certain event, the relationship of the parties and the consequences that flow from the happening of such event, shall be strictly as per the terms of the contract.
• It is necessary to ascertain whether the event or occurrence is such that it renders the object of the contract obsolete.
• A mere delay shall not be considered as striking at the root of the contract, unless of course, time was of utmost essence to the contract. Naturally, in cases where time is not of absolute or strict essence, a delay resulting in a temporary suspension of performance would not render the contract frustrated.
• The existence of alternate modes of performance would ordinarily negate a plea of frustration.
• The doctrine of frustration does not come to a defendant’s aid when the non-performance of a contract is attributable to the defendant’s own default.
• A mere commercial difficulty triggered by the event or occurrence, for instance, rise in the prices of raw materials, would not result in frustration.
• Lastly, the doctrine of frustration is ordinarily applicable only to executory contracts and not executed ones.

As things turn out, not every contract shall necessarily stand discharged by frustration.

DISCLAIMER: This article is solely for informational purposes and shall not be deemed to be a substitute for legal advice. This article does not establish an attorney-client relationship and is not intended to be an advertisement or any form of solicitation. The Chambers of Advocate Aman Vijay Dutta disclaim any liability or responsibility towards any person acting or abstaining from acting in any manner, on the basis the above. Any use or reproduction of this article, whether in whole or part, shall only be after giving due and proper reference.

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[1] See order dated April 8, 2020 passed by the High Court of Judicature at Bombay, in Commercial Arbitration Petitions (L) Nos. 404-408 of 2020 & Order dated April 20, 2020 passed by the High Court of Delhi, in O.M.P. (I) (COMM) & I.A. 3697/ 2020.

[2] Pollock & Mulla, The Indian Contract Act, 1872, 14^th edn. p. 872-873 (ed. Nilima Bhadbhade) – Paraphrased.

[3] AIR 1952 SC 9

[4] AIR 1954 SC 44

[5] AIR 1960 SC 588

[6] AIR 1968 SC 522

[7] Judgment dated April 11, 2017 passed in Civil Appeals 5399-5400 of 2016

[8] AIR 1968 SC 1024

[9] AIR 1971 SC 1756