Doctrine
of frustration
means those cases where the performance of contract has become
impossible to perform due to any unavoidable reason or condition. Under
the doctrine of frustration, a promisor is relieved of any liability under a contractual
agreement, in the event of a breach of contract, where a party to the agreement
is prevented from, or unable to, perform his/her obligations under the agreement,
due to some event which occurs, and which was outside of their sphere of
control.
Force majeure is present in common law as the
doctrine of frustration of contract. This doctrine says that a contract will
be frustrated if its fundamental purpose is destroyed. If this happens then
the parties to the contract will be discharged from their obligations to
perform the contract. Force majeure is some event which is unforeseen and
unstoppable and which renders the performance of the contract impossible.
The doctrine of frustration says that a contract’s performance will be rendered
impossible because of some intervening or supervening event after the contract
has been made. A lot of people while entering into contracts incorporate these
force majeure clauses to be relieved from performance of all or part of their
obligations on the happening of certain specified events beyond the control of
the parties.
The Covid 19 is one
such force majeure situation where contracts have become impossible to
perform.
The doctrine of frustration of contract law was initially defined by two points, namely:
1- The doctrine was to be permitted where it was raised as a defense to the non performing party due to impossibility to perform as per the agreement; and
2- The parties were entitled to insert provisions as a contingency measure to provide for the occurrence of the same.
The object of the
doctrine of frustration is to find a satisfactory way of allocating the risk of
supervening events. The doctrine does not prevent the parties from making
their own provision for this purpose. They can expressly provide that the risk
shall be borne by one of them, not by the other, or they can apportion it or
deal with it in any other way they like or let it lie where it falls.
The doctrine
of frustration is really an aspect or part of law of discharge of contract by
reason of supervening impossibility or illegality of the act agreed to be done.
To invoke the aid of frustration, the party who wants to establish that the contract has become frustrated, has to establish the following conditions:
1- That the performance of the Contract has become impossible.
2- That the impossibility is not on account of some event which the promisor could not prevent or anticipate.
3- And that the impossibility is not self induced by the promisor or due to his negligence.
It was clarified in the
landmark English case, Taylor v Caldwell [QB (1863) 3 B&S
826], where Blackburn, J laid
down that the above “rule is only
applicable when the contract is positive and absolute, and not subject to any
condition either express or implied.” An implied condition would be read
into contract when the performance becomes impossible from the perishing of the
thing without default of the contractor. In this Lord Summer said that “the doctrine of frustration is really a
device by which the rules as to absolute contracts are reconciled with the
special exceptions which justice demands.”
It was further held “where
the contract was entered into for the use of the musical hall for concert
purpose, but before the day of the concert, the hall was destroyed by fire,
held that performance becomes impossible.” This was because the very thing
on which the contract depended on ceased to exist. Thus it was held that for
the doctrine of frustration it must be so that the nature of contract is such
that it would not operate if a thing ceased to exist.
The doctrine of frustration comes into play
when the contract becomes impossible on account of circumstances beyond the
control of the parties or a change in the circumstances makes the
performance of the contract impossible. It
is settled law that the causes of frustration must not have occurred because of
default of either party.
In
understanding the substance of a contract it is necessary to ascertain from the
surrounding circumstances whether an indefinite period of time was in
contemplation or whether the parties have contemplated some limit to the
indefinite period.
The
sanctity of contract is the foundation of the law of contract and the doctrine
of impossibility has not displaced this principle but merely enabled the court
to enforce such a contract in an equitable manner. It releases a party from its obligation to perform a contract where
performance has become impossible as a result of event out of the control of
the party.
In Govindbhai
Govardhanbhai Patel v/s Gulam Abbas Mulla Allibhai, AIR 1954 SC 44, the
Court held the meaning of the expression “impossible of performance” as used in
Section 56 means the parties shall be excused if substantially the whole
contract becomes impossible of performance or in other words impracticable by
some cause for which neither was responsible.
Further, the word
“impossible” has not been used 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 event or 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.
Ref: Supreme Court: Ganga Retreat &
Towers Ltd. & Anr vs State of Rajasthan & Ors (2003) 12 SCC 91, Supreme
Court: Energy Watchdog vs Central Electricity Regulatory Commission (2017) 14
SCC 80
In a
Supreme Court case Dhanrajmal Gobindran v Shamji Kalidas AIR 1961 SC 1285, the Court
said force majeure is a term of wide import and includes act of God, war,
insurrection, riot, civil commotion, strike, earthquake, tide, storm, flood,
explosion, fire break down of machinery, etc.
The
question arises that ‘What will happen in a situation when force majeure clause in a contract is not provided for and the
performance of the contract becomes impossible because of supervening
impossibility?’
In an
English case of Paradine v Jane [KB (1647) Aleyn 26 it was pointed out that
subsequent happening should not affect a contract already made. It was held
that- “when the party by his own contract
creates a duty, he is bound to make it good, if he may, notwithstanding any
accident by inevitably necessity, because he might have provided against it by
his contract.”
Wherever the reference is made to “force majeure”, the
intention is to save the performing party from the consequences of anything
over which he has no control. (Ref: Supreme
Court: Dhanrajamal Gobindram vs Shamji Kalidas And Co. AIR 1961 SC 1285)
In Easun
Engg. Co. Ltd. v Fertilizers & Chemicals Travancore Ltd. (AIR 1991 Mad
158), Easun Co. failed to supply 2/3rd of transformers on
account of price increase in transformer oil. The contract also provided for
liquidated damages for any delay in the supply of goods and that such damages
would not be applicable in case of delay caused due to force majeure viz due to
strikes, war, revolution, civil commotion, epidemics, accidents, fire, wind,
flood, because of any law/proclamation/ordinance/ regulation of Government, an
act of God, or any other cause beyond the control of the parties.
Easun
contended that they were prevented from supplying, due to force majeure conditions namely, strikes, power cut and phenomenal
increase in the cost of the transformer oil (a 400% increase) due to war
conditions in the Middle East and the Government of India’s Ordinance imposing higher
excise duties. The Arbitrator came to the conclusion that Easun was justified
in asking for variation of price in transformer oil, in view of the aforesaid
force majeure conditions. Further, the contract itself provided that liquidated
damaged will not be applicable in case of delay caused due to force majeure
conditions.
Therefore,
in ascertaining the meaning of the contract and its application to the actual
occurrences, the court has to decide, not what the parties actually intended
but what as reasonable men they should have intended.
Further, in Ganga Saran v. Firm Ram
Charan Ram Gopal AIR 1952 SC 9, the Supreme Court held that for the
application of the doctrine of frustration, courts in India
must look primarily at the law as embodied in (the second part of) Section
32 and Section 56 of the Contract Act, 1872, as amended
(Contract Act):
Section 32 (second
part) of the Contract Act pertains to contract being discharged by its own
internal forces- that is, where such impossibility was within their
contemplation, at the time of entering into the contract. Then, such
dissolution of contract, would be governed by Section 32.
Section 56 of the
Contract Act pertains to contract being discharged by an external force or
outside impact or a supervening impossibility- that is, such impossibility was
never within the contemplation of the parties, at the time of entering into the
contract. Then, such dissolution of contract, would be governed by Section 56.
Satisfying
all these essentials, a court can refuse or entertain any suit as to specific performance
under Section 56 of Indian Contract Act, 1872.
In
Supreme Court case, Energy Watchdog v
Central Electricity Regulatory Commission (2017) 14 SCC 80, the Gujrat Urjaa Vikas Nigam Limited (GUVNL) issued a public notice
inviting proposal for supply of power. Later, Haryana Utilities also initiated
a similar bidding process. Adani Enterprises was selected as the successful
bidder for 1000 MW of power by GUVNL and a power purchase Agreement was signed
between Adani Enterprises and GUVNL. Haryana Utilities also selected Adani Enterprises
for 1424 MW and entered into a power purchase Agreement.
Change in laws took place in Indonesia, which increased
the export price of the coal from Indonesia, instead of the price that was
prevalent in the last 40 years. Adani Enterprises filed a petition under
Central Regulatory Electricity Commission seeking relief to discharge them from
the performance of the contract on account of frustration. Central Regulatory
Electricity Commission refuse and Adani Enterprises went to the Supreme Court.
It was held that “neither was the fundamental basis of contract dislodged, nor was any frustrating
event except for the rise in price of coal pointed out. Alternative modes of
performance were available, even though at a higher price. Therefore this does
not led to the Contract, as a whole being frustrated.”
SUSHILA RAM Advocate with Team Members
Chief Consultant
The Indian Lawyer & Allied Services