DOCTRINE OF FRUSTATION

Article by - Shriyans Bansal, Institute of Law, Nirma University

The doctrine of frustration of contract deals with certain types of occurrences that make performance of a contract impossible, or fundamentally different in nature from what was originally provided for in the contract. This article discusses the evolution of this doctrine in both English and Indian law, its operation through landmark cases, and its capacity for application during exceptional circumstances, like a pandemic.

Introduction

The doctrine of frustration is an important legal remedy available to parties who cannot perform under the contract because of unforeseen circumstances. The doctrine has its origins in the common law of England, and has developed to sufficiently address multiple varied factual scenarios where the performance under a contract becomes impossible. Older legal authorities that give rise to the modern interpretation of the doctrine of frustration carved out their own applicable ambit during the recent COVID-19 pandemic, when people's lives and businesses were disrupted in unprecedented and largely unforeseeable ways. This article aims to explore the doctrine of frustration or impossibility of performance in contract law, specifically articulating the development of the doctrine, its application in foundational contracts, and its effects in the context of the pandemic.

The doctrine of frustration was first recognized as a general principle of contract law in Taylor v. Caldwell (1863) 3 B & S 826, where the court held that the contract was frustrated due to the destruction of the subject matter of the contract. This case led to the development of the notion that if performance under a contract became impossible after a contract had been entered into, the contract could be frustrated. This doctrine was further developed in Krell v. Henry [1903] 2 KB 740, which expanded the notion of frustration based on some unforeseen event rendering the principal purpose of the contract frustrated, and not merely impossible. In India, the doctrine of frustration is governed primarily by Section 56 of the Indian Contract Act (1872), which declares that a contract is void if the performance of the contract becomes impossible or unlawful after the contract is made. The common law doctrine of frustration has some analogous features to that of the statutory provision of Section 56, serving as a mechanism for consideration under the broader scope of contract law in India.

Application

The doctrine and its important principles have been clarified in a number of decided cases. Broadly summarized in Davis Contractors Ltd v. Fareham Urban District Council [1956] AC 696, the court found that although the principle of frustration exists, mere inconvenience or increase expense is not sufficient in itself to amount to frustration. The court also stated that frustration requires 'something radical'. Similarly, in The Super Servant Two [1990] 1 Lloyd's Rep 1, the court stated that the doctrine could not be claimed if a frustrating event was within the party's control. The court reiterated that the doctrine of frustration works to protect a party only if frustration occurs that is truly beyond the party's control.

With regards to the doctrine of frustration in India, the doctrine has been considered and addressed in a number of significant cases. In Satyabrata Ghose v. Mugneeram Bangur & Co. AIR 1954 SC 44, the Supreme Court clarified the doctrine of frustration applies where a party has engaged in performance but it has become fundamental to the nature of contract. For the principle of frustration to apply according to the court highlighted the contract must be fundamentally different to that which was agreed. The court reiterated this finding in Indian Oil Corporation Ltd. v. Amritsar Gas Service (1991) 1 SCC 533, where the court found mere inconvenience or increase cost does not amount to frustration. The matter of Energy Watchdog v. Central Electricity Regulatory Commission (2017) 14 SCC 80, considered the regulation changes and whether they would amount to frustration, and found that the doctrine did apply in circumstances where the contract was rendered fundamentally more difference as a result of the regulation change.

The COVID-19 pandemic and frustration

The period has presented a unique context for the application of the doctrine of frustration. Both businesses and individuals have encountered substantial disruption caused by lockdowns, travel restrictions, and other alterations as a result of the pandemic. In numerous jurisdictions, including India, parties have taken to court seeking to utilize the doctrine to avoid contractual obligations brought about by unforeseen events. A relevant case, although not Indian, is Moulin Global Eyecare Holdings Limited v HCS Holdings Limited [2022] EWCA Civ 3. This case is also useful to understand how courts in other jurisdictions have approached frustration based on a pandemic. The court considered whether the pandemic constituted a frustrating event and found that it did not satisfy the definition of frustration. The court's rationalization emphasized the care shown by courts before concluding that a pandemic or the consequences of a pandemic fundamentally altered the nature of the parties' contractual obligations. In the law of India, the distinction between frustration as provided in Section 56 and force majeure clauses has become significantly important. Many contracts do include provisions for force majeure as a particular contractual provision that might address unforeseen events like a pandemic. The considerations of the interpretational force majeure and enforceability became essential in the consideration of how to perform contractual obligations. There is notable care for courts to distinguish something frustration and enforceability of force majeure contractual terms. Force majeure clauses are a particular contractual provision that parties had the ability to negotiate, whereas frustration is a common law concept.

The application of the doctrine of frustration during the pandemic raised several conceptual issues. Overall courts have maintained an approach of strictness to require that an actual change in the nature of the parties' performance exist. This strictness is problematic, as the doctrine of frustration may not appeal to many of the diverse realities imposed by a pandemic. In other words, there may be substantial change imposed by a pandemic, but in strictness may not have the truth of radical change imposed on performance, inhibiting a court from applying the doctrine of frustration. The reliance on force majeure clauses is an important reminder that clear contractual terms are paramount for addressing unforeseen events like a pandemic. Reliance on force majeure clause represents the party’s capacity of an allocation of risk during negotiation akin to the common law doctrine of frustration. The pandemic has demonstrated that well-drafted force majeure clauses can offer more precise guidance than the doctrine of frustration, which operates under more stringent criteria. The pandemic has proven to us that clearly drafted force majeure clauses provide better guidance than the doctrine of frustration, which is limited to more narrow criteria. Moreover, the doctrine's ability to treat parties fairly and justly has been questioned during the pandemic. Even though the strict application of the doctrines criteria serve to assure the stability of the contract, it can have adverse results for parties deeply affected by a pandemic. Crafting a balance between the doctrines strict adherence to its elements and flexibility in unprecedented circumstances has been difficult.

Conclusion

The doctrine of frustration of contract is still an important element of contract law, providing relief where performance is impossible or fundamentally changed. The pandemic has pushed the boundaries of the doctrine and revealed some its limitations in relation to unprecedented events. The pandemic illustrates the need for adaptability in contract law, but emphasizes the need for clearly expressed contractual provisions and the importance of force majeure clauses or provisions. As legal systems grapple with the ongoing uncertainties surrounding crises, the frustration doctrine will evolve as it is needed to address new situations while recognizing the application of fairness and contract stability principles.