Frustration of Contracts – The Indian Counterpart

With India inheriting its present legal system, several English principles of contract have been incorporated in Indian law. The evolution of the doctrine of frustration of contracts in both jurisdictions have had convergences, before settling into a parallel current. 

Historically, the cause and effect of frustrated contracts were examined in England since Paradine v Jane (1646) Aleyn 26. English courts initially in Atkinson v Ritchie (1809) 10 East 530, and later more definitely in Taylor v Caldwell (1863) 3 B. &S. 826, have held that a physical impossibility preventing performance shall discharge the contract between parties. 

It was in this backdrop that the Indian Contract Act came into force in the year 1872. The act is still in force today and incorporates the common law doctrine of frustration through Section 56. The section recognises the happening of supervening events which would make the performance of a contract impossible or unlawful, and such events would render the contract void. However, the act does not define the word ‘impossible’ and therefore, the term has evolved through judicial interpretation. This saddles courts and arbitrators with the responsibility of deciphering whether a contract has become impossible to perform in each case, making it imperative to examine the meaning Indian Courts assign to the word ’impossible.’

Shortly after the enactment of the Indian Contract Act 1872, the High Court of Bombay in the case of Goculdas Madhavji v Narsu Yenkuji (1889) ILR 13 Bom 630 was confronted with one such event which did not render the contract physically impossible to perform (such as in Taylor v Caldwell). In this case, a portion of hilly land was rented by the defendant for carrying out quarrying work. At the time of the parties entering into the contract, the defendant had a license from the authorities permitting him to carry on such quarrying work. This license expired during the contract, and the grant of a fresh license was refused by the Municipal Commissioner citing disturbance to homes nearby. The judge of the small causes court held that as the work of quarrying was no longer permissible on the land, this had rendered the contract between parties void. On appeal, Sir Charles Sergeant, the then Chief Justice of the Bombay High Court, while upholding the finding perhaps pre-empted what would be laid down 14years later by the Kings Bench in Krell v Henry [1903] 2 K.B. 740 – that the term impossibility does not merely stem from physical destruction of the subject matter of the contract. This particular contract did not contain an agreement to quarry, but it was held only reasonable to suppose that the parties entered into the contract on the assumption that quarrying would continue to be permitted by the authorities. This is perhaps one of the rare judgments in Indian jurisprudence which delves into the question of intention of parties in making of the contract. 

Since Goculdas Madhavji, the interpretation of what makes a contract impossible to perform has undergone judicial evolution and charted its own course beyond English theories of frustration. This was expressly discussed by a three-judge bench of the Supreme Court of India in Satyabhrata Ghose v Mugneeram Bangur & Co. [1954] SCR 339 where the court dissected the meaning of the word ‘impossible’ to not merely mean 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 of the parties. The judgment went on to draw a comparison between the various legal theories of frustration in English law and distinguished the Indian Contract Act from the same by stating that Section 56 lays down a positive law and did not leave the question of frustration of a contract to be determined according to the intention of the parties.

Interestingly, Satyabhrata Ghose goes further and sets out the one conspicuous difference in English and Indian jurisdictions that arises when we deal with contracts for sale of land. England recognises a principle of equity ownership in land which may pass to the prospective purchaser on certain conditions, and the seller would then hold the same in trust for the purchaser. In India, this concept is entirely avoided.

Indian Courts have held Section 56 to be exhaustive, and therefore, English theories on frustration of contracts cannot be of direct assistance though they have persuasive value. This is due to the reasoning of Indian courts that English jurisprudence ascribes to a view that a change of circumstances completely outside the contemplation of parties at time would justify the court departing from express terms of a contract. 

However, both jurisdictions converge on the point that a contract would stand frustrated on the happening of an unforeseen supervening event, and not an event which is foreseen, for which a remedy is provided for in the contract itself. Thus, the inclusion of a force majeure clause in a contract may limit or shut out the doctrine of frustration. Similarly, the Indian Contract Act strikes a balance between an absolute contract and doctrine of frustration by providing for two distinct eventualities. Parties are free to make express provisions in their contracts for events that may occur and agree on the consequences and/or obligations arising from them. Such clauses operate as contingent clauses and are governed by Section 32 of the Indian Contract Act. 

Today, English law through the Law Reform (Frustrated Contracts) Acts, 1943 provides for limited consequences that ensue once a contract is frustrated. In Indian law, a contract when impossible to perform renders a contract void. The consequences are provided for under Section 65 (which also remains unamended since 1872) of the Indian Contract Act, where any advantage accrued to a party under a void contract must be returned. 

Closer to recent times, the Supreme Court in the case of Energy Watchdogs v Central Electricity Regulatory Commission & Ors 2017 (14) SCC 80 through RF Nariman J. was confronted with the issue of an effect of a change in a foreign law and whether such change would frustrate the contract. Due to a change in Indonesian law, the price of import of coal rose astronomically and one of the parties sought for the contract to be declared impossible to perform. The court held that the doctrine of frustration would not apply as it was not a condition of the contract between parties that coal to be used was to be procured only from Indonesia at a particular price. A contract is not frustrated simply because it had become more onerous to perform. To this extent, the judgment falls in line with the English judgment of Tsakiroglou & Co. Ltd v Noblee Thorl GmbH 1962 AC 93, which has also been referred to in Energy Watchdogs. 

In closer view, the principles of frustration of a contract in both jurisdictions remain the same, what differs is only the approach that English and Indian courts take in examining the impact of such events. One could compare the difference in the process to that of making tea with a supervening ingredient of sugar. In England, courts may examine the intention of parties to the contract before the event, akin to one first tasting the tea and then adding sugar to finally drink it. In India, courts look only at the aftereffects of the event on the performance of the contract, akin to first adding the sugar to the tea and only then drinking it. 

The effect in both jurisdictions however remains the same – sweet tea, and a frustrated contract. 

Section 56 of the Indian Contract Act, 1872:

’56. Agreement to do impossible act.— An agreement to do an act impossible in itself is void.
Contract to do 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.’

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