As Lord Sumner remarked in the case Bank Line v. Capel,”
the doctrine of frustration ought not to be extended but to cases that really fall within the rule it must be applied as a matter of course even under novel circumstances”.
The courts have to apply the rule carefully to change of circumstances which make the performance of the contract impossible.
In Joseph Constantine Steamship Line Ltd. v. Imperial Smelting Corporation Ltd. [(1942) AC 154], a ship was chartered to load a cargo. But on the day before she could have proceeded to her berth an explosion occurred in the auxillary boiler. It was impossible for her to undertake the voyage at the stated time. The House of Lords held that frustration had taken place by the change of circumstances.
Though every change of circumstances cannot become frustration as held in many cases especially regarding abnormal
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rises or falls in prices, or a sudden depreciation of currency, or revision of prices, yet when the new circumstances are extreme, a court may have to come to a conclusion of frustration. This happened in Essan Engineering Co. Ltd. v. Fertilizers and Chemicals (Travancore) Ltd. [AIR 1991 Mad. 158], where certain transformers were to be supplied on a firm basis at certain prices. Owing to a war there was a 40% escalation of prices.
The court held the contract ended.
However, there are changes of circumstances which may create commercial hardship but cannot be recognised by courts as frustrating and discharging a contract. A good illustration occurred in Davis Contractors Ltd. v. Fareham Urban District Council [(1956) AC 696 HL]. There was a contract to build certain houses for the council for a fixed price to be completed within eight months. Bad weather and labour strikes intervened. It was completed in twenty two months at a cost much more than contract price. The contractor claimed the original contract was discharged by frustration by change of circumstances. He claimed payment on a quantum meruit action of the actual cost for the work done. The House of Lords did not agree. Lord Radcliffe explaining the law of frustration said that it occurs when the law recognises a contract becomes impossible because without fault of either party change in circumstances render performance of a thing radically different from that undertaken. This must be decided from the terms and conditions read in the light of the surrounding circumstances and on the other hand the events which have occurred. It is not hardship or material loss itself which calls the principle of frustration into play.
The Supreme Court of India recognised the same principle in Alopi Parshad & Sons Ltd. v. Union of India [(1960) 2 SCR 793], P acting as agents to the Government of India purchased ghee for the army. P was to be paid on cost basis for the work.
The work was in progress. Second World War intervened. The rates fixed in peace time were totally altered by the war time conditions. The agents demanded revision of rates. They received no replies. They kept up the supplies. The Government terminated the contract in 1945. The agents claimed payment at enhanced rates. They did not succeed. The Supreme Court said “there is no general liberty for the courts to absolve a party from liability to perform the contract merely because on account of an uncontemplated turn of events the performance may become onerous”.
Courts have taken the view that the alteration of circumstances must be such as to upset altogether the purpose of the contract.
As Lord Loreburn said in the Anglo Mexican Co. case some delay or some change is very common in all human affairs. So commercial hardship will not by itself support frustration and excuse performance. In Sachindra Nath v. Gopal Chandra [AIR 1949 Cal 240], P let certain premises to D for a restaurant at a higher rent as British troops were stationed in Calcutta. A clause in the contract stated it will be in force so long as the British troops remain in the city. D agreed to pay the higher rent. After some months, the locality was declared out of bounds for the British troops. Henderson J. at the Calcutta High Court
held that the situation like this is one of commercial hardship and did not frustrate the contract.
The Madras High Court followed the same principle in Samuel Fitz & Co. v. Standard Cotton Co. [AIR 1945 Mad 291], D placed orders with P for supply of tapestries of a certain kind stating they intended to sell them in Australia. But the Australian Government prohibited the import of such goods. D lost the market and therefore cancelled the orders. P sued for breach.
Horwill J. held that it was not possible to say that the foundation of the contract was that the goods should be resold in Australia.
As Lord Simonds said in the Fareham Urban District Council case, “disappointed expectations do not lead to frustrated contracts”.
4.4 LIMITATIONS OF THE DOCTRINE OF FRUSTRATION
There are the following limits to the doctrine of frustration apart from the constraints imposed by the courts in particular classes of cases:
Firstly, according to English law as the doctrine of implied term was based on the presumed intention of the parties (see Anglo Mexican Co case) no term can be implied which would be inconsistent with any express terms of the contract. As Viscount Simon L.C. stated in Constantine S.S. Line v. Imperial Smelting Corporation [(1942) A.C. 163], “there can be no discharge by supervening impossibility if the express terms of the contract bind the parties to performance not withstanding that the supervening event may occur”.
Secondly, according to English law doctrine of implied term, the presumed intention must be common to both the parties.
The principle was illustrated in Blackburn Bobbin Co. v. Allen [(1918) 1 K.B. 540]. There was a contract for the sale and delivery at Hull of Finnish Birch Timber. The War broke out.
The vendor intended to ship the timber from a Finnish port to Hull. The buyer was unaware that Finnish timber had to be got only like this as timber merchants in England did hold stocks.
The out break of the War made it impossible for the vendor to perform the contract. What had happened was an unforeseen event but not provided for in the contract. It was held for the contract to be dissolved there must have been a failure of a basis which was in the intention of both the parties which was not so in this case.
There must be a failure of something which was the basis of the contract in the minds of both the parties but not in the mind of only one of the parties. This was also demonstrated clearly in Twentsche Overseas Trading Co. Ltd v. Uganda Sugar Factory Ltd. [AIR 1945 PC 144].
Thirdly, and most important of all, it is well established that the doctrine of frustration cannot be applied where the frustration is self-induced. If the event alleged to frustrate a contract arises from an act or election of a party, the doctrine cannot be applied.
In Maritime National Fish Ltd. v. Ocean Travelers Ltd.
[(1935) AC 524 (PC)], A hired R’s trawler, the “St. Cuthbert”
to be employed in the fishing industry. Both parties knew that
169 the trawler could be used only under a licence from the Canadian
Government. A was using five trawlers. They therefore applied for five licences. The Canadian Government granted three licences and asked to A to name three trawlers. A named three trawlers other than “St.Cuthbert”. When R sued for hire A repudiated the charter and pleaded frustration. But the Privy Council held that the frustration in this case was self-induced.
It was the result of A’s own choice of excluding R’s trawler from the licences. Therefore, A was not discharged from the contract.
However, self-induced frustration can come into play only where the act of a party amounts to a breach of duty owed to the other party under the contract. If such an act were not intentional but merely negligent, it is unlikely to be construed as a self-induced frustration. Anson, the authority on contract, thinks so, and the dicta of Lord Russell in the Constantine S.S. Line case that the default might range “to the thoughtlessness of a primadonna who sits in a draught and loses her voice”, only confirms this qualification.
Fourthly, the English law may be said to be still not finally settled on the application of the doctrine of frustration to leases.
In the leading case Cricklewood Property and Investment Trust v. Leighton’s Investment Trust [(1945) AC 221], the House of Lords, on the facts of the case, held frustration cannot arise in the lease which was for 99 years. A building lease was executed for 99 years. More rent was payable after the erection of certain buildings. But under the Defence Regulations the building operations could not be continued. The lessors sued for rent. The lessees pleaded that the lease had been frustrated.
But the House of Lords unanimoulsy held that as the lease had still more than 90 years to run and the interruption may cover only a small part of that period, there had been no frustration in this case. Lord Russell pointed out that a lease is more than a contract. It vests an estate in the land for the lessee. The contract obligations are only incidental to the relation of landlord and tenant. Even if some of them become impossible the lease would remain. But Viscount Simon L.C also said that because a lease is more than a contract and amounts to an estate it cannot be said it can never end prematurely by frustration. He gave examples of a complete natural calamity or a permanent legislative preclusion making any operation of the lease unlawful.
So the English law will allow frustration of a lease only in very exceptional cases. Such a view was reiterated in National Carriers Ltd v. Panalpina (Northern) Ltd. [(1981) 2 WLR 45 HL], A warehouse was demised to D for ten years. The premises were not to be used for any other purpose except as warehouse without consent of the lessors. The only access by vehicles was by one street. The local authority closed the street because of the dangerous condition of an old Victorian warehouse opposite to the one under demise. The period between the closure and opening of the street after the demolition of the old warehouse was likely to be twenty months. During such period the warehouse under demise was useless for D. D refused to pay any further rent and claimed the lease as
frustrated. But D was held liable. According to the House of Lords, the nature of the transaction and the duration after the interruption did not significantly damage the contract and the lease to apply the doctrine of frustration.
The law is the same in India. In Raja Dhruv Dev Chand v.
Raja Harmohiner Singh [AIR 1968 SC 1024], there was a lease of agricultural land for one year. The rent was paid and the lessee was given possession. Before any crops could be raised the partition of the country left the land in Pakistan. The parties migrated to India. The action was to recover the rent paid. The Supreme Court took the view that S.56 of the Contract Act is not applicable to rights and obligations of parties under a transfer of property under a lease. They said completed transfers are outside the scope of S.56. No recovery was allowed.
However, where the demise has not taken place but there is only an agreement the principle of frustration can be applied.
Thus in Sushila Devi v. Hari Singh [(1971) 2 SCC 288], there was an agreement to lease but the parties could not go to Pakistan to give or take possession because of partition. The Supreme Court held that the agreement came within the scope S.56 and there was frustration of contract.
4.5 CONSEQUENCES OF FRUSTRATION
English law : The question arose in some of the coronation cases (See Krell v. Heury) as to what are the remaining rights of parties once there is frustration. It was decidecd in Chandler v. Webster [(1904) 1 KB 493] that on frustraton any loss must lie where it has fallen. In this case where the rent of the rooms was payable in advance and £ 100 had been paid on account of it was held that not only could it not be recovered back but the balance due £ 141 sh 15 must also be paid. The reason given by Romer L.J. was that the contract could not be considered void ab initio. This line of decisions caused hardship.
But the House of Lords in the leading case of Fibrosa Spolka Akeysna v. Fairbairn Lawson Combe Barbour Ltd [(1943) AC 32] overruled Chandler v. Webster and the line of decisions. English sellers agreed to make and deliver certain machinery to Polish buyers, part of the price to be paid in advance. £ 1000 was paid. Performance became impossible as the Second World War broke out and Germany occupied Poland. It was held the contract was frustrated and discharged by War. Lord Russell of Killowen thought Chandler v.
Webster was wrongly decided. It was held that because of total failure of consideration on a contract that had ceased to exist, the action by the sellers for the recovery of the advance sum paid was not an action on the contract, as supposed in Chandler v. Webster. It was an action in quasi-contract and the money was recoverable. Lord Simon drew a distinction between a promise being consideration in the law of formation of contract and in the law of discharge of contract by failure of consideration and quasi-contract. The performance of the promise being the consideration that has failed.
Even after the decision in Fibrosa’s case, the law was considered unsatisfactory regarding the adjustment of rights of parties of frustrated contracts. The party prepaid may have incurred expenses or be left with goods of no value.
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Therefore, the Law Reform (Frustrated Contracts) Act of 1943 was passed. The Act provides that where a contract has become impossible of performance or otherwise frustrated and the parties are discharged from further performance:
(a) all sums paid or payable to any party before the discharge shall if paid be recoverable as money had and received for the use of the party who has so paid, or if payable cease to be so payable,
(b) but if the party who has received such payment or to whom payable, has incurred expenses before the discharge the Court may allow him to retain or recover the whole or part of it considers just,
(c) where a party has obtained a valuable benefit other than money, before the discharge, the other party may recover such sum not exceeding the value of the benefit, as the court considers just,
(d) the Act will not apply if there is an agreement to the contrary, (e) the Act does not apply to freight paid in advance under a voyage charter party which is not recoverable by custom even if the completion of voyage is frustrated.
Indian law : The position reached in English law after the decision in Fibrosa’s case and the above Act of 1943, is already secured in the Indian Law by s.65 of the Contract Act.
According to S.65 when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.
Illustration ‘d’ to S.65 explains the position. A contracts to sing for B at a concert for Rupees thousand which is paid in advance. A is too ill to sing. A is bound to compensate B for loss of profits at the concert. But A must refund to B the advance of Rupees thousand.
S.65 covers agreements which never amounted to contracts being void ab initio but discovered to be so at a later stage.
This wll cover benefits passed under a contract found void by initial mutual mistake. Indian decisions have consistently held that the intention of S.65 is to prevent a party to a void agreement to retain benefits received under it. S.65 will also cover contracts
becoming void, that is, valid at inception but subsequently becoming void.
The principle has been applied by the Indian courts even in cases where a contract is void by reason of “unlawful object”
unknown to the parties and therefore the parties are not in pari delicto that is not equally at fault. In effect, both are not at fault.
Indian law also allows under S.65 actions on Quantum Meruit which is a well settled quasi contractual claim. Quantum Meruit literally means “as much as earned”. The principle of quantum meruit is well illustrated in Craven Ellis v.Cannon Ltd [(1936) 2 K.B. 403], CE was employed as managing director in a company. After three months, it was discovered that the directors were not qualified to appoint him. Held, CE could recover remuneration for the services rendered by him. A claim on quantum meruit allowed in Indian law under S.65 is a remedy of restitution. It is not a compensatory remedy for damages. It is available only to a party who himself has not discharged the contract by breach but who may have partly performed or passed benefits to the other party which party has now put an end to the contract and therefore the first mentioned party has elected to be no longer bound for futher performance.
The Supreme Court has explained the correct application of S.65 in State of Rajasthan v. Associated Stone Industries [(1985) 1 SCC 575], By stating that it is not as if S.65 works in one direction only. Any restoration of advantage and payment of any compensation, if any, have necessarily to be mutual. It approved the decision of the Privy Council in Govindram Seksaria v. Edward Radbone [AIR 1948 PC 56]. that the result of S.65 was that each of the parties was bound to restore to the other any advantage which the restoring party had received under the contract. The facts in the Supreme Court case were as follows : There was a contract for the grant of a quarry by the state to the other party. It was found to be void because the parties were mistaken about the application of income tax laws in the area. The Supreme Court said the state could recover from the contractor the value of the rough stone excavated but make good the expenses incurred in the quarring operations. The net profits realised by the company could not be the measure of compensation under S.65.
171 STATUTORY LAW: INDIAN CONTRACT ACT 1872
(EXTRACTS)
31. “Contingent contract” defined. — A “Contingent contract” is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.
32. Enforcement of contracts contingent on an event