Volume 3, August 2018 ISSN 2581-5504

“Doctrine of Frustration of Contract”

Ayush Goyal
DES’s Shri Navalmal Firodia Law College,
Pune

I. INTRODUCTION:

Black’s Law Dictionary defines the term ‘contract’1: An agreement between two or more
parties, creating obligations that are enforceable or otherwise recognizable at law. Contracts
are voluntary agreements reached between individuals which have benefit for both the
parties. The contract happens through a communicative process between the individuals. In
almost all the cases, an agreement is formed when one person makes an offer, and the other
accepts it. Contract law is based on the principle that parties bargain to form agreements to
exchange goods and services and, in the case of a dispute; the courts have to give effect to it.
The contract makes provision for the discharge of a contract only where, after its formation, a
change of circumstances makes contractual performance illegal or impossible. In English
law, such a situation is provided for by the doctrine of frustration2. Originally this term was
confined to the discharge of maritime contracts by the ‘frustration of the adventure’, but now
it has been extended to cover all cases where an agreement has been terminated by
supervening events beyond the control of either party.

II. MEANING AND DEFINITION

Black’s Law Dictionary defines the term ‘frustration’3: the prevention or hindering of the
attainment of a goal, such as contractual performance. A valid contract becomes void if it
subsequently becomes illegal or its performance becomes impossible due to change in
subsequent events. The impossibility could be due to flood, fire, natural disaster, epidemics,
strike, riot, civil war, etc. The contract is said to be frustrated. It has accumulated a lot of
deadwood, particularly in the cross-referencing between Indian Law and Common Law. The
Indian courts have extensively referred to the common law judgments on impossibility.

1 th
Garner Black’s Law Dictionary, 9 Edition, p. 365.
2
See generally, Treitel, Frustration and Force Majeure (1994).
3 th
Garner Black’s Law Dictionary, 9 Edition, p. 740.
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A contract may be frustrated when something occurs after the formation of the contract which
renders it physically or commercially impossible to fulfill the contract or transforms the
obligation to perform a radically different obligation from that undertaken to perform while
executing the contract.

Force Majeure Clause:

Black’s Law Dictionary defines Force Majeure Clause4: A contractual provision allocating
the risk of loss if performance becomes impossible or impracticable, especially as a result of
an event or effect that the parties could not have anticipated or controlled. The development
in relation to frustration of contracts made the contracting parties mindful in stipulating terms
that could prevent frustration of the contract. The modality was to make express provisions
on all things which could frustrate a contract, like war, floods, and other natural calamities.
Once an express provision was made, the express provision would apply. However to require
a person to do something impossible or near impossible, even if expressly agreed, would be
struck down by the courts as void. The clause on impossibility in standard terms of the
contract is called force majeure clause. The stipulation makes it possible for the party to
extend the performance of contract as well as retain the option of terminating the contract.

III. DEVELPOMENT OF THE DOCTRINE IN THE ENGLISH LAW

Before 1863, it was a general rule of the law of contract that a person was absolutely bound
to perform any obligation which had been undertaken, and could not claimed to be excused
by the mere fact that performance had subsequently become impossible. The classic decision
on the rule as to absolute contracts first was highlighted in Paradine v. Jane. Where a lessee
who was sued for arrears of rent pleaded that he had been evicted and kept out of possession
by an alien enemy; such an event was beyond his control, and had deprived him of the profits
of the land from which he expected to receive the money to pay the rent. He was nevertheless
held liable on the ground that, “where the law creates a duty or charge and the party is
disabled to perform it and hath no remedy over, there the law will excuse him... but when the
party of his own contract creates a duty or charge upon himself, he is bound to make it good,
if he may, notwithstanding any accident by inevitable necessity, because he might have
provided against it by his contract.”5

4 th
Garner Black’s Law Dictionary, 9 Edition, p. 746
5
(1646) Aleyn 26 , available at https://saifdingankar.wordpress.com/
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However this approach proved too strict and potentially unjust even for the 19th century
courts. Who were in many respect strong supporters of the concept of freedom of contract,
taking the view that it was not for the court to interfere to remedy perceived injustice
resulting from a freely negotiated bargain.

The modern law has developed from the classic decision in Taylor v. Caldwell6. Where the
facts were that the defendants had agreed to permit the plaintiffs to use a music-hall for
concerts on four specified nights. After the contract was made, but before the first night
arrived, the hall was destroyed by fire. Blackburn J., held that the defendants were not liable
for damages since the doctrine of the sanctity of contracts applied only to a promise which
was positive and absolute, and not subject to any condition express or implied. It was held
that, “as subject to an implied condition that the parties shall be excused in case, before the
breach, performance becomes impossible from the perishing of the thing, without default of
the contractor… the principle seems to us to be that, in contracts in which the performance
depends on the continued existence of a given person or thing, a condition is implied that the
impossibility of performance arising from the perishing of the person or thing shall excuse
the performance. In none of these cases is the promise other than positive, nor is there any
express stipulation that the destruction of the person or thing shall excuse the performance;
but that excuse is by law implied.”

IV. SCOPE OF FRUSTRATION

The doctrine of frustration currently operates within rather narrow confines. This is so for
two principle reasons. The first is that the courts do not wish to allow a party to appeal to the
doctrine of frustration in an effort to escape from what has proved to be a bad bargain. As per
a prominent case7 ‘The frustration is not lightly to be invoked to relieve contracting parties of
the normal consequences of imprudent commercial bargains’.

The second is that parties to commercial contracts commonly make provision within their
contract for the impact which various possible catastrophic events may have on their
contractual obligations. Thus, force majeure clauses, hardship and intervener clauses are
frequently inserted into the commercial contracts. The effect of these clauses is to reduce the
practical significance of the doctrine of frustration because; where express provision has been

6
(1863) 3 B. & S.826, available at https://saifdingankar.wordpress.com
7
Pioneer Shipping Ltd v B.T.P. Tioxide Ltd. (The Nema) (1982) A.C. 724,752.
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made in the contract itself for the vent which has actually occurred, then the contract is not
frustrated.8 Therefore the wider the ambit of contractual clauses, the narrower is the practical
scope of the doctrine of frustration.

V. THE THEORETICAL BASIS OF DOCTRINE OF FRUSTRATION

Considerable judicial attention has been paid to the theoretical basis on which the doctrine of
discharge of a contract by frustration rests. This is because of a perceived need to explain
why a finding of frustration does not constitute a reallocation of risks nor permit an escape
from a bad bargain.9

The House of Lords in successive pronouncements have set forth a number of learned, but
often contradictory, opinions concerning this issue. A number of theories have been put
forward at various times. There is no general agreement on the appropriate test to be applied.
There are only briefly four principal tests or theories which have been advanced.10

(i) Implied Term:

The preponderance of judicial opinion at one time favored the view that frustration of a
contract depends upon the implication of a term. But this does not explain discharge where
the performance of the contract is made legally impossible by a change in the law or its
operations.11

A contract would therefore be frustrated if a term could be implied that, in the events that
subsequently happened, the contract would come to an end. The expression ‘an implied term’
is ambiguous. It may be used in a subjective sense. It may mean a term which the court reads
into the contract in order to give effect to what it regards as the parties real intention at the
time of contracting. The number of objections may be raised to such an implied term.
Particularly, it is difficult to see how the parties could be taken, even impliedly, to have
provided for something which never occurred to them12. Lord Wright said13, “It is not
possible, to my mind, to say that if they had thought of it, they would have said: ‘Well, if that

8
Joseph Constantine SS. Line ltd. v. Imperial Smelting Corp. ltd. (1942) A.C. 154, 163.
9
Pacific Phostates co. ltd. v. Empire transport (1920) LLR 189 at p 190.
10
In National carriers Ltd v. Panalpina (Northern) ltd. (1981) A.C. 675.
11
In the heyday of the implied contract theory legal impossibility was sometimes said to differ from other
categories of frustration: Joseph Constantine SS. Line ltd. v. Imperial Smelting Corp. ltd. (1942) A.C. 154, 163.
12
Davis Contractors ltd v. Fareham U.D.C (1956) A.C. 696.
13
Denny, Mott & Dickson Ltd. v. Fraser (James B.) & Co. ltd. (1944) A.C. 265.
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happens, all is over between us’. On the contrary, they would almost certainly on the one side
or the other have sought to introduce reservations or qualifications or compensations.”

The widespread use of force majeure clauses which specify what is to happen on the
occurrence of an event which affects one or both parties’ performance.

However, the implied term test has been subject to considerable criticism and was later
finally laid to rest in National Carriers Ltd v Panalpina (Northern) Ltd14. It was observed
that test was artificial since there could be a genuine common intention to terminate the
contract upon the occurrence of the event. Therefore, it was accepted that the meaning of the
contract must be taken to be, not what the parties did intent, but that which the parties, as fair
and reasonable men, would presumably have agreed upon if, having such possibility in view,
and they had made express provision as to their several rights and liabilities in the event of its
occurrence.

(ii) Just And Reasonable Result:

The discharge of a contract by frustration occurs not because of the actual or imputed will of
the parties but by operation of law. The doctrine of frustration is, as Lord Summer pointed
out, ‘a device, by which the rules as to absolute contracts are reconciled with a special
exception which justice demands’.15 The court exercises a positive function as it releases the
parties from further performance of obligations which they would otherwise be bound to
perform by declaring a contract to have been frustrated. The recognition of these facts led
certain of the judges to the conclusion that the basis of doctrine of frustration was the desire
of the courts to reach a just and reasonable result.16

(iii) Disappearance Of The Foundation Of The Contract:

The doctrine of frustration has also been based upon a theory of the disappearance of the
‘basis or the foundation of the contract’. There was requirement of some test which would
recognize that frustration did not depend on the intentions of the parties, but which would not
permit contracts to be too easily discharged. The first such test to be formulated was that of
the ‘disappearance of the foundation of the contract’. The question to be asked was whether
the events that had occurred were of a character and extent so sweeping as to cause the

14
(1981) A.C. 675, 693.
15
Hirji Mulji v. Cheong Yue S.S. Co. Ltd. (1926) A.C. 497, at p. 510.
16
Joseph Constantine SS. Line ltd. v. Imperial Smelting Corp. ltd. (1942) A.C. 154, at p. 186.
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foundation of the contract to disappear.17 The theory has been rejected by the House of Lords
in National Carriers Ltd v Panalpina (Northern) Ltd.18
(iv) Radical Change In The Obligation:
There is now general agreement that the appropriate test to apply to determine whether a
contract has been frustrated is that of a ‘radical change in the obligation’. In Davis
Contractors Ltd. v Fareham U.D.C., Lord Radcliffe said, “Frustration occurs whenever the
law recognizes that without default of either party a contractual obligation has become
incapable of being performed because the circumstances in which performance is called for
would render it a thing radically different from that which was undertaken by the contract.
Non haec in foedera veni19. It was not this that I promised to do…there must be…such a
change in the significance of the obligation that the thing undertaken would, if performed, be
a different thing from that contracted for.20”

This test has been adopted by the House of Lords in various cases and was reformulated by
Lord Simon in National Carriers Ltd v Panalpina (Northern) Ltd.21

This approach has sometimes been called the ‘construction’ theory, because it requires court
to construe the terms of contract in the light of its nature and the relevant surrounding
circumstances when it was made to determine the original obligation undertaken by the
parties. The court must then consider whether there would be radical change in that
obligation if performance were enforced in the circumstances which have subsequently
arisen. A mere rise in cost or expense will not suffice.

VI. THE TEST FOR FRUSTRATION

Although the existence of the doctrine of frustration is now firmly established, its juristic
basis remains rather uncertain. However in Lauritzen AS v Wijsmuller BV22, Bringham L.J
sets out five propositions which describe the essence of the doctrine of frustration. These
propositions he stated were “established by the highest authority” and were “not open to
questions.” The first proposition was that the doctrine of frustration has evolved “to mitigate

17
F.A. Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. ltd. (1916) 2 A.C. 397, at p 406.
18
(1981) A.C. 675.
19
It was not this, that I promised to do.
20
(1956) A.C. 696 at p. 729. This statement was explicitly approved by the House of Lords in In National
carriers Ltd v. Panalpina (Northern) ltd. (1981) A.C. 675.
21
(1981) A.C. 675.
22
(1990) 1 Lloyd’s Rep. 1.
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the rigour of the common law’s insistence on literal performance of absolute promises.” And
that its object was “to give effect to the demands of justice, to achieve a just and reasonable
result”. Secondly, Frustration operates to “kill the contract and discharge the parties from
further liability under it” and therefore it cannot be “lightly invoked” but must be kept within
“Very narrow limits and ought not to be extended.” Thirdly, Frustration brings a contract to
an end “forthwith, without more and automatically”. Fourthly, the essence of frustration is
that it should not be due to the act or election of the party seeking to rely on it. Finally,
Frustrating event must take place “without blame or fault on the side of the party seeking to
reply to it.”

VII. RISKS AND ITS INCIDENCE

Black’s Law Dictionary defines the term ‘risk’23: the uncertainty of a result, happening, or
loss, the chance of injury, damage or loss. The doctrine of frustration is principally concerned
with the incidence of risk − who must take risk of the happening of the supervening event?
The application of the doctrine must not cause a reallocation of risks; the object of the
application is to find a satisfactory way of allocating the risk of supervening events. It is the
duty of the courts to determine whether the contract, on its true construction, has made
provision for that risk.

(a) Express Provision:

Where the contract makes provision (that is full and complete provision, so intended) for a
given contingency, this will preclude the court from holding that the contract is frustrated.24

(b) Foreseen Events:

The question is whether events which were foreseen by the parties at the time of contracting
can be relied upon to establish frustration. It may be argued that the parties must be taken to
have assumed the risk of an event which was present in their minds at the time of contracting.
It is however depends upon the construction of contract, whether there is any express
provision in the contract that will be binding in case of happening of foreseen events, or
whether, in the absence of any express provision, the issue is left open so as to allow
incidence of risk to be determine by the law relating to frustration. For example in the case of

23 th
Garner Black’s Law Dictionary, 9 Edition, p. 1442.
24
Bank Line Ltd. v. Capel (A) & Co. (1919) A.C. 435 at p. 455; Joseph Constantine SS. Line ltd. v. Imperial
Smelting Corp. ltd. (1942) A.C. 154, at p. 163.
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W.J. Tatem Ltd v. Gamboa,25 the fact that seizure of the ship was within the contemplation of
the parties did not preclude the operation of frustration since the contract made no express
provision for the contingency.

(c) Prevention Of Performance In Manner Intended By One Party:

The question is whether a contract will be frustrated by an event which prevents performance
in a manner intended by one party alone. In Blackburn Bobbin Co. Ltd. v. Allen (T.W.) &
Sons Ltd.26

A agreed to sell and deliver to B.B. at Hull a quantity of Finnish birch timber. A found it
impossible to fulfill his contract because the outbreak of war cut off its source of supply from
Finland. B.B. was unaware of the fact that timber from Finland was normally shipped directly
form a Finnish port to England, and that timber merchant did not, in practice, holds stocks of
it in England.

The court of Appeal held that there was no frustration. The event that has happened was
merely that an event had occurred which rendered it practically impossible for defendants to
deliver and it had not been provided for in the contract. To free A from the liability, it would
have been shown that the continuance of the normal mode of shipping the timber from
Finland was a matter which both parties contemplated as necessary for the fulfillment of the
contract. Since this is not the case. A bored the risk.

(d) Delay:
Frequently, we have seen that, delay is caused due to happening of a subsequent event in the
performance of contract. Such delay brings financial loss to one of the parties. In commercial
transactions, one has to accept the risk of delay. The delay must be such as to render the
adventure absolutely nugatory.27 Delay must be such that it puts an end in a commercial sense
to the undertaking. On this point, Lord Roskill, in Pioneer Shipping Ltd. v. B.T.P. Tioxide
Ltd.,28 has provided guidance, “It is often necessary to wait upon events in order to see
whether the delay already suffered and the prospects of further delay from that cause will
make any ultimate performance of the relevant contractual obligations ‘radically
different’…from that which was undertaken by the contract. But, as has often been said,

25
(1939) 1 K.B. 132.
26
(1918) 2 K.B. 467.
27
Bensaude & Co. v. Thames and Mersey Marine Insurance Co. (1897) 1 Q.B. 29, per Lord Esher at p. 31.
28
(1982) A.C. 724 at p. 752.
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businessmen must not be required to await events too long. They are entitled to know where
they stand. Whether or not the delay is such as to bring about frustration must be a question
to be determined by an informed judgment based upon all the evidence of what has occurred
and what is likely thereafter to occur.”

It is for the tribunal to decide whether or not the contract has been frustrated. Even where
delay is prima facie sufficient, where both the parties are responsible for it, the rule that
reliance cannot be placed on a self-induced frustration will preclude discharge.29

VIII. EFFECTS OF FRUSTRATION

(i) Common Law
(a) Contract generally determined automatically:
Generally the contract is not merely dischargeable at the option of one or other of the parties.
The contract is brought to an end forthwith and automatically held in Hirji Mulji v Cheong
Yue Steamship Co. Ltd.30

(b) Future obligations discharged:

The effect of frustration at common law is to release both parties from any further
performance of contract. All obligations falling due for performance after the frustrating
event occurred are discharged held in Appleby v Myers.31

(c) Accrued obligations remain:

Legal rights or obligations already accrued and due, before the frustrating event occurred, are
left undisturbed held in Chandler v Webster.32

(ii) Law Reform (Frustrated Contracts) Act, 1943

(a) Underlying principle:

It has been stated that the fundamental principle underlying the Act is prevention of the
unjust enrichment of either party to the contract at the other’s expense and not the
apportionment of the loss caused by the frustrating event between the parties.33

(b) Expense incurred by payee:

29
Paal Wilson & Co. A/S v. Partenreederei Hannah Blumenthal (1983) 1 A.C. 854.
30
(1926) A.C. 497.
31
(1867) L.R. 2 C.P. 651.
32
(1904) 1 K.B. 493.
33
B.P. Exploration (Libya) Co. Ltd v. Hunt (No. 2) (1979) 1 W.L.R. 783.
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This Act gives to the court a discretionary power to allow the payee to set off against the sum
so paid or payable a sum not exceeding the value of any expenses which the payee has
incurred in or for the purpose of performing the contract before the frustration.34

(c) Arbitration:

There are very few reported decisions on the interpretation of the 1943 Act: most disputes
simply concern the amount of each party’s liability, and are referred to arbitration.35

IX. DEVELOPMENT OF THE LAW IN INDIA

The Indian contract act was written down in 1872. By that time, Taylor v. Caldwell36 case
was decided introducing the doctrine of frustration on the grounds of impossibility. The
principle that a contract which had become opposed to the law could not be enforced had
always existed. The two formed the basis for the following formulation of the principle in the
Indian contract act, 1872. Section 56 provides:

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.

This section provides for three situations. The initial impossibility is that an agreement to do
an impossible act is void. It applies to the case where the act was impossible at the time of
making of the agreement. The second situation relates to a contact that was lawful when
made. However, a subsequent changes in the law or events makes it unlawful to perform the
contract. The laws made by the state take precedence over contractual obligations. The third
situation is after a contract is made, the changes in the situation make it impossible to
perform the contract.

This provision codified the common law principle. However, the difference was this: once
the principle became a statutory provision, the Indian courts did not have to introduce the
conceptual basis of law. In contrast, the common law courts, based on the system of
precedence, could not escape from justifying the principle. The Indian courts had all along
34
Gamerco S.A. v. I.C.M. / Fair Warning (Agency) Ltd. (1995) 1 W.L.R. 1226.
35
Pioneer Shipping Ltd v. B.T.P. Tioxide Ltd. (1982) A.C. 724.
36
(1863) 3 B. & S.826.
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insisted that section 56 has provided a positive law, and thus the Indian courts, unlike the
British courts, need not go into intention of the parties. As the Supreme Court noted in
Naihati Jute Mills Limited v. Khyaliram Jagannath37, “The necessity of evolving one or the
other theory was due to the common law rule that courts have no power to absolve a party to
the contract from his obligation. On the one hand, they were anxious to preserve the sanctity
of contract while on the other the courts could not shut their eyes to the harshness of the
situation in cases where performance became impossible by causes which could not have
been foreseen and which beyond the control of the parties. Such a difficulty has, however not
to be faced by the courts in this country… so far as the courts in this country are concerned
they must look primarily to the law as embodied in section 32 and 56 of the Contract Act.”

In fact, the common law cases displayed a wide array of approaches and conflicting theories.
In no small measure, this made the Indian courts confine themselves to the statutory
provisions. The Supreme Court, referring to the common law cases concluded that, ”These
differences in the way of formulating legal theories really do not concern us so long as we
have a statutory provision contained in the Contract Act. In deciding cases in India, the only
doctrine that we have to go by is that of supervening impossibility or illegality as laid down
in the section 56 of the Indian Contract Act, 1872 taking the ‘impossible’ in its practical and
not literal sense. It must be borne in mind, however, that section 56 lays down a rule of
positive law and does not leave the matter to be determined according to the intention of the
parties.”

X. CONCLUSION

Frustration occurs whenever the law recognizes that without default of the either party a
contractual obligation has become incapable of being performed because the circumstances in
which performance is called for would render it a thing radically different from that which
was undertaken by the contract. The researcher is of the view that force majeure clauses help
the parties to avoid or lessen their obligations in case of happening of a supervening event
which is beyond their control. If force majeure clauses is not present in the contract then the
concept of frustration of contract as present in the common law and recognized by section 56
of the Indian Contract Act, 1872 would operate to save the parties from any liability because
of the non-performance of the contract.

37
AIR 1968 SC 522.
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