Frustration and impossibility of performance - Contract I

On this page

1. The text of section 56
2. Initial and supervening impossibility
3. The English cases
4. Satyabrata Ghose: section 56 is exhaustive
5. Energy Watchdog: force majeure and frustration
6. What does not frustrate a contract
7. Consequences: section 65
8. Problem
How this is examined

Cases checked to exist. Read the judgment before quoting a holding.

Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.

The one Indian point that wins marks. English courts built frustration out of implied terms and the “foundation of the contract”. In India the doctrine is statutory. After Satyabrata Ghose, an answer that relies only on English theories, without saying that section 56 is the governing and exhaustive rule, is incomplete.

1. The text of section 56

Section 56 of the Indian Contract Act, 1872 has three paragraphs:

Initial impossibility. An agreement to do an act impossible in itself is void.
Supervening impossibility. 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. 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, the promisor must compensate the promisee for any loss sustained through the non-performance.

The statutory illustrations:

A agrees with B to discover treasure by magic. The agreement is void (initial impossibility).
A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.
A contracts to marry B, being already married to C and forbidden by the law to which he is subject to practise polygamy. A must make compensation to B for the loss caused by the non-performance (third paragraph).
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.
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.

2. Initial and supervening impossibility

Initial impossibility exists at the date of the agreement. If both parties are unaware of it, the agreement is void (compare section 20, mutual mistake as to a matter of fact essential to the agreement). If only the promisor knew, he must compensate the promisee.

Supervening impossibility arises after a valid contract is made. This is frustration proper. The contract is valid when made and becomes void from the moment of the frustrating event. It is not void from the beginning, and rights that accrued before the event remain.

3. The English cases

Taylor v. Caldwell (1863). A music hall hired for a series of concerts was destroyed by fire before the first concert, without fault of either party. Both were excused. Blackburn J. read into the contract an implied condition that the parties would be excused if the hall ceased to exist.
Krell v. Henry (1903). Rooms in Pall Mall were hired for two days to watch the coronation procession of Edward VII. The procession was cancelled because the King fell ill. The hirer was excused: the procession was the foundation of the contract, though the contract did not mention it.
Herne Bay Steam Boat Co. v. Hutton (1903) is the contrast. A boat was hired to see the naval review and cruise round the fleet. The review was cancelled, but the fleet was still there and a cruise was possible. Not frustrated.
Davis Contractors v. Fareham UDC (1956). A builder took 22 months instead of 8 because of a shortage of labour. Not frustrated: frustration needs a change that makes performance radically different from what was undertaken, not merely more onerous.

4. Satyabrata Ghose: section 56 is exhaustive

In Satyabrata Ghose v. Mugneeram Bangur & Co., 1953 INSC 71, AIR 1954 SC 44, a company sold plots in a housing scheme in Calcutta and undertook to build roads and drains. Before the work was done, part of the land was requisitioned by the Government for military purposes during the Second World War. The company said the contract was frustrated. B.K. Mukherjea J. held:

Section 56 lays down a positive rule of law. In India the doctrine of frustration falls within section 56, and the English theories of implied term, foundation of the contract and so on are not to be imported, though English cases may help as illustrations.
“Impossible” in section 56 is not used in the sense of physical or literal impossibility. Performance may be impracticable and useless from the point of view of the object and purpose the parties had in view, and if an untoward event totally upsets the very foundation on which the parties contracted, the promisor is excused.
Cases where the contract itself provides for the event are governed by section 32 (contingent contracts), not section 56.
On the facts there was no frustration. The contract fixed no time limit for the development work, the requisition was temporary, and the company could finish the work after it ended.

5. Energy Watchdog: force majeure and frustration

In Energy Watchdog v. Central Electricity Regulatory Commission, 2017 INSC 338, (2017) 14 SCC 80, power generators had agreed to supply electricity at fixed tariffs using coal imported from Indonesia. A change in Indonesian law raised the price of the coal sharply, and the generators claimed relief under the force majeure clause and under section 56. The Court held:

Where the contract itself contains a force majeure clause, the matter is governed by the contract and section 32. Section 56 applies to events outside the contract.
A force majeure clause is construed narrowly. The clause here excused performance only if it was prevented or hindered, and the contract did not make performance depend on coal from one source at one price.
A rise in price, however steep, does not frustrate a contract. Performance had become more expensive, not impossible. Relief was denied on this ground (though the change in Indian law relating to domestic coal was treated separately under the change-in-law clause).

6. What does not frustrate a contract

Commercial hardship or rise in costs. Alopi Parshad & Sons v. Union of India, 1960 INSC 10, AIR 1960 SC 588: an agent supplying ghee to the army could not claim higher rates because wartime prices had risen. The Court said a contract is not frustrated merely because its performance has become onerous.
Strikes, lockouts and labour shortage, which are ordinary business risks unless the contract provides otherwise.
Failure of a third party on whom the promisor relied, such as a supplier.
Self-induced frustration. A party cannot rely on an event he brought about or could have prevented: Maritime National Fish v. Ocean Trawlers (1935, Privy Council), where the charterer chose to allot its limited fishing licences to other vessels.
Partial or temporary impossibility, where performance remains possible in substance or after a short delay, as in Satyabrata Ghose.

The recognised frustrating events are destruction of the subject matter, death or personal incapacity in personal contracts, a change of law or government action making performance illegal, outbreak of war with the other party's country, and the non-occurrence of an event that is the basis of the contract.

7. Consequences: section 65

When a contract becomes void under section 56, section 65 requires any person who has received an advantage under it to restore it or pay compensation. Advances paid must be refunded. The third paragraph of section 56 adds a separate claim for compensation where the promisor knew of the impossibility and the promisee did not.

Trap. Do not call frustration a breach. Neither party is at fault, and the contract ends automatically by law when the event occurs, without any election by either party. The remedy is restitution under section 65, not damages under section 73.

8. Problem

A hires B's community hall for his daughter's wedding on 10 December and pays Rs 50,000 in advance. On 5 December the hall is sealed by the municipal authority under a demolition order for structural danger. A asks for the money back. B says A must bear the loss.

Issue. Whether the contract is frustrated, and whether A can recover the advance.

Law. Section 56, second paragraph; Taylor v. Caldwell on unavailability of the subject matter; Satyabrata Ghose on the meaning of impossibility; section 65 on restitution.

Application. The hall was the subject matter of the contract and has become unavailable by an act of the authority which neither party could prevent. Performance on 10 December is impossible, and the purpose (a wedding on that date) cannot be achieved later. Unlike Satyabrata Ghose, time here was fixed and the delay is not short. The event is not self-induced, unless B knew of the structural danger and the pending order, in which case the third paragraph of section 56 would make him liable to compensate A as well.

Conclusion. The contract became void on 5 December. B must refund Rs 50,000 under section 65.

How this is examined

As a 10-mark essay: “Explain the doctrine of frustration” or “Discuss supervening impossibility under section 56”. Order: text of section 56, illustrations, English cases, Satyabrata Ghose, what does not frustrate, consequences under section 65. Energy Watchdog adds a current point on force majeure. As a short note: initial impossibility, self-induced frustration, or Krell v. Henry. Problems usually involve a hall destroyed or requisitioned, a performer falling ill, or a rise in prices.