Doctrine of Frustration Under Indian Contract Act

The Indian Contract Act, 1872 specifies the conditions under which the parties can be discharged of their contractual liabilities, one such condition is doctrine of frustration.

The doctrine of frustration is an English Common Law doctrine which has been incorporated under Section 56 of the Indian Contract Act, 1872 and hence given the statutory recognition. According to this doctrine, if the performance of a contract becomes impossible due to supervening impossibility then the promisor is excused from the performance of contract.

The following case is pioneer in deciding the nature and extent of impossibility which could discharge the parties from the performance of the contract.

Bench

Justice Mukherjee, B.K.

Issues

Whether the contract becomes frustrated under the Section 56 of ICA?
Whether the English law of frustration apply in India?

Judgment

The court’s verdict emphasized that the term ‘impossibility‘ should not be taken in a strict literal sense. Rather, it should entail supervening events that fundamentally undermine the essence of the agreement. Given the parties’ awareness of the prevailing wartime conditions and the absence of a designated timeframe for contract fulfillment, the contract in question was not rendered void due to frustration under Section 56 of the Indian Contract Act, 1872.

Facts

The respondent’s company was the proprietor of an extensive parcel of land in Calcutta, initiating a residential development scheme. This involved dividing the land into distinct plots and engaging in agreements with potential buyers for plot sales. A nominal earnest money sum was received upon each sale, and the company took on the task of essential road and drain construction for the residential project. The finalized plots were to be transferred to purchasers after construction completion and payment of the outstanding balance. Bejoy Krishna Roy entered into an agreement with the company, initially providing an earnest deposit of Rs. 101. Subsequently, he designated Satyabrata Ghose as the land’s nominee.

The agreement was formalized during a wartime period, and the land that formed the core of the contract was requisitioned for military use. In response, the company regarded the agreement as terminated due to impossibility and extended the options of refunding the earnest money or recommencing construction efforts post the war’s conclusion. Rejecting both choices, the appellant contested the matter through legal proceedings.

Analysis

The Section 56 of the Indian Contract Act, 1872 states that the contract to do an impossible act is void and it further states that a contract which afterwards becomes impossible due to the events which promisor could not prevent renders the contract void and eventually discharges the parties from the liabilities. However, the term impossible has not been defined under the Act.

The Supreme Court of India in the present case explained the doctrine of frustration and decided the nature and extent of the term “impossibility”. The Court said “the essential idea upon which the doctrine of frustration is based is that of ‘impossibility of performance of the contract.’ In fact, impossibility and frustration are often used as interchangeable expressions. The changed circumstances make the performance of contract impossible and the parties are absolved from the future performance of it, as they did not promise to perform impossibility. 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 and hence comes within the purview of Section 56 of the Indian Contract Act, 1872.” In other words, the Court said the ‘impossibility of performance’ should not be interpreted literally i.e. impossible to perform as it might include events like strike, commercial hardships etc.; rather the term impossibility should be a given a wider meaning and shall include events of such a nature which destroys the very foundation of the agreement. The impossibility should be of such a nature that it renders the contract ‘impracticable’ and even though if performed, it would be substantially ‘useless’ in view of its object and purpose.

In the present case, the Court denied to apply Section 56 to the case due to following reasons:

Firstly, the contract was entered during the war times so parties had the knowledge of ongoing situations.
Secondly, the contract did not specify any time of performance so during war times it is logical that the performance of contract could be delayed.

Therefore, the court broaden the concept of ‘impossibility’ and protected the interest of promisee as the promisor was disabled to use the defence of “doctrine of frustration” according to his whims and fancies so to be discharge of liabilities.