Law and You > Business Laws > Indian Contract Act, 1872 > Doctrine of Frustration (S. 56 of the Indian Contract Act, 1872)
In the Indian Contract Act, 1872 (ICA), the doctrine of frustration is covered under Section 56. This section deals with the doctrine of frustration, which essentially states that a contract becomes void when something occurs after the formation of the contract which renders it impossible to fulfill the contract, or which makes the performance of the contract illegal, or which transforms the contract into something radically different from what was originally contemplated by the parties. This section is important in understanding the legal consequences when unforeseen events make it impossible to fulfill contractual obligations. The concept of force majeure, though not explicitly defined in the ICA, closely intertwines with the doctrine of frustration.
The doctrine of frustration is a “doctrine” of special case of the discharge of contract by an impossibility to perform it. The Indian Contract Act, 1872 (“Contract Act) does not define the term frustration. The Black’s Law Dictionary defines frustration in relation to contracts as “the doctrine that if a party’s principal purpose is substantially frustrated by unanticipated changed circumstances, that party’s duties are discharged and the contract is considered terminated,” also termed as the frustration of purpose. The origin of the doctrine can be traced back to the Queen’s Bench judgment in the case of Taylor v Caldwell in 1863 in England. The doctrine of frustration has been well-codified in India under section 56 of the Contract Act, and this obviates the dependence on different theories to justify the application of the doctrine.
Agreement to do Impossible Act (S.56 ICA)
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 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.
Compensation for loss through non-performance of 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.
Examples:
(a) A agrees with B to discover treasure by magic. The agreement is void.
(b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.
(c) A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject to practise polygamy, A must make compensation to B for the loss caused to her by the non-performance of his promise.
(d) A contracts to take in cargo for B at a foreign port. A’s Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared.
(e) A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void
There exist three basic conditions that are needed to satisfy the doctrine under section 56:
- there must be a subsisting contract,
- some part of the contract is still to be performed and
- the performance has become impossible after the contract is entered into.
Physical impossibility is not a prerequisite. A radical change in the fundamental assumption, on the basis of which contract was entered into, is required to make the performance impracticable, illegal or impossible without the default of either of the parties. The determination of the degree of change in the obligation must be done by looking into the construction of the contract in the light of facts existing at the time of its formation.
In Satyabrata Ghose v Mugneeram Bangur and Co. case, where the defendant company promised to sell the plaintiff a plot of land after developing it by constructing the roads and drains. However, some portion of the area comprised in the scheme was requisitioned for military purposes. The Supreme Court, while applying the doctrine, held that the requisitioning of the area had not substantially prevented the performance of the contract as a whole and therefore, the contract had not become impossible within the meaning of section 56.
Factors amounting to the Frustration of Contract:
Physical destruction of the subject matter, loss of the object, subsequent illegality to perform, delay, death or incapacity of the party in a contract requiring personal performance, etc., are some of the factors that attract the provisions of section 56. Some of the most common and prominent factors are analysed below:
- The Subject Matter of the Contract is physically destroyed: The destruction of the specific subject matter essential for the performance of the contract will render the contract frustrated. If the subject matter is not completely destroyed, but immensely, even then the contract may be discharged. The things which are destroyed must specifically be the subject matter of the contract and therefore, if the contract was not restricted to those specific goods, then it may not be discharged.
- Legal Changes resulting in Subsequent Illegality: It is presumed that the parties intend to contract with reference to the law as existing at the time when the contract is made. However, a subsequent change in the law or in the legal position, affecting a contract and prohibiting the performance undertaken by the contract, is a well-recognized ground for frustration under section 56. To discharge the contract, the change in the law must be such as to strike at the basis of the contract and not merely to suspend the performance under it. The commencement of the Constitution of India also frustrated contracts which were in contravention to any article of the Constitution. Any legislation enacted by the Government which fundamentally changes the legal situation renders the performance illegal.
- Loss of Object: The performance of a contract may be possible to carry out physically but if it has become redundant having regard to the object and purpose of the parties, by an untoward event or change of circumstances, then it must be held that the contract is frustrated.
- Delay, Death or Incapacity to Perform: The delay has to be so great and of such a character that it would totally upset the basis of the bargain and commercial object which the parties had in view. Such delay must be abnormal in its cause, effects or expected duration so that it could not be reasonably contemplated at the time of contracting. If the delay was within the commercial risks undertaken by the parties and it does not frustrate the commercial purpose of the contract, there can be no frustration. Death or incapacity of a party, whose personal performance was required as per the contract, is a valid ground for the frustration of a contract.
Factors not amounting to the Frustration of Contract:
- Inherent or Foreseeable Risks: A contract may incorporate certain inherent or foreseeable risks, though not expressly, which are required to be considered while applying the doctrine. Its application cannot be sought in cases where the parties have or ought to have foreseen the risk of the happening of a supervening event because such risk is consciously accepted by the parties. Certain risks are deemed inherent to contracting.
- Performance becomes Burdensome or Onerous: In the course of carrying out the performance, a party may often face events which are not anticipated, eg, an abnormal rise or fall in prices, sudden depreciation of the currency, any unexpected obstacle to execution, etc. However, these do not by themselves get rid of the bargain that has been made.
- Self-induced Frustration or cases where the Frustration could be prevented: The real question is whether the frustrating event relied upon is truly an outside or extraneous change of situation or whether it is an event which the party (who is seeking the plea of frustration) had the means and opportunity to prevent, but nevertheless caused or permitted it to come about.
- Executed Contract:
- The Foundation is not Substantially Damaged:
Conclusion:
The doctrine of frustration of contract plays a crucial role in the legal landscape, providing a framework for addressing situations where unforeseen events significantly impact a party’s ability to fulfill their contractual obligations. At its core, this doctrine recognizes that contracts are based on mutual consent and an understanding of certain circumstances. When these circumstances change drastically—due to events like natural disasters, changes in law, or other unforeseen occurrences—the original purpose of the contract may become unattainable, leading to a situation where performance becomes impossible or fundamentally different from what was intended.
The doctrine serves several key purposes. First, it upholds the principles of fairness and justice by acknowledging that parties should not be held liable for obligations that have become impossible to fulfill due to circumstances beyond their control. This is particularly important in commercial relationships, where unexpected events can lead to significant financial and operational consequences. By allowing contracts to be set aside in such situations, the doctrine helps preserve the integrity of the contractual relationship and promotes equitable outcomes.
However, the application of the doctrine is not without limitations. Courts typically require a high threshold for establishing frustration, ensuring that it applies only to extreme cases. This prevents parties from easily evading their contractual responsibilities and maintains the sanctity of contracts. Parties must demonstrate that the frustrating event was truly unforeseen and that it fundamentally alters the nature of the contract. As a result, the doctrine does not apply to situations where parties could have foreseen the risk or where the contract provides for alternative methods of performance.
In conclusion, the doctrine of frustration of contract is essential for balancing the rigidity of contractual obligations with the realities of unforeseen circumstances. It encourages parties to engage in good faith negotiations while providing a safety net when genuine impossibility arises. By doing so, the doctrine not only protects parties from undue hardship but also fosters trust in contractual relationships, allowing for a more resilient and adaptable legal framework. As society and commerce evolve, the relevance of this doctrine will continue to be tested, ensuring its ongoing importance in contract law.