AUTHOR’S NAME – Akshay Kumar Sirohi, LL.B, (Comp.).
INSTITUTION NAME – Dr. Bhimrao Ambedkar University, Agra.
The doctrine of frustration in contracts is defined in Section 56[i] this is a legal concept that comes into play when something unexpected happens, making it really tough or even impossible for people to keep their promises in a contract.[ii] Imagine two parties agreeing to do something like deliver goods or provide a service in a contract. But then, a crazy situation arises that neither of them could have seen coming, like a natural disaster or a law change that makes the deal illegal.[iii] In such cases, frustration allows them both to say, “Hey, this isn’t fair or possible anymore,” and it can help cancel the contract, so no one trying to do the impossible or unfair. To use frustration, a few important conditions must be met. First, there needs to be a real and valid contract in place.[iv] Second, the unexpected event can’t be any party’s fault, and it must make the contract way different from what you agreed upon. Third, there shouldn’t be any other solutions in the contract for dealing with this kind of situation. Frustration is like a safety valve in the legal system that helps keep contracts fair when the unexpected happens.
THE KEY ELEMENT OF DOCTRINE OF FRUSTRATION:
- Existence of a Valid Contract.This is the starting point. Frustration can only be considered in the context of a legally binding contract, where both parties have agreed to specific terms and obligations. It can’t be applied to casual agreements or vague understandings.[v]
- Unforeseen Event.Frustration comes into play when something extraordinary happens that neither party could have predicted or prepared for when they signed the contract. It’s like a sudden and severe roadblock that wasn’t on anyone’s radar when the contract was made.[vi]
- Fundamental Change.The unexpected event must fundamentally alter the nature of the contract. This means that the situation becomes so different from what was initially agreed upon that it’s almost impossible or extremely unfair to continue as planned.
- No Fault of Either Party. Frustration won’t apply if one of the parties caused or contributed to the problem. It’s meant to protect people from situations that are genuinely beyond their control.[vii]
- No Alternative Provisions.If the contract already has provisions that address the specific unexpected situation, frustration typically won’t come into play. For example, if a contract has a “force majeure” clause that covers unexpected events like natural disasters, then that clause would be used instead of frustration.[viii]
TYPES OF EVENTS LEADING TO FRUSTRATION:
Events that lead to frustration in contracts are unexpected things that make it really hard or even impossible to stick to the contract. Here are some simple explanations of the types of events that can cause frustration:[ix]
- Natural Disasters:Things like earthquakes, floods, or wildfires can make it impossible to carry out a contract.[x]
- Legal Changes:Sometimes, laws can change in ways that make your contract illegal. If one party has a contract to sell a product, but a new law bans that product, it can frustrate the contract.
- Key Person’s Death or Illness:If a contract depends on a specific person’s skills or knowledge, and they unexpectedly pass away or become seriously ill, the contract may become impossible to fulfill.
- Supply Chain Disruptions:Contracts often rely on getting materials or goods on time. If something disrupts the supply chain, like a strike at a factory, it can frustrate the contract.
- War or Civil Unrest:In extreme situations like war or widespread civil unrest, contracts may become impossible to carry out safely, leading to frustration.
LIMITS OF FRUSTRATION:
While frustration can help in many situations, there are limits to when it can be used:
- Predictable Risks:If the risk of the unexpected event was something that could have been predicted or was part of the normal risks in that type of contract, frustration might not apply.
- Contract Provisions:If the contract already has specific provisions (like a “force majeure” clause) that deal with unexpected events, those provisions usually take precedence over frustration. So, if the contract says what happens in case of a natural disaster that rule would apply instead.[xi]
EXCEPTIONS TO FRUSTRATION:
There are also some situations where frustration might not help, even if there’s an unexpected event:
- Insurance:If the Party has insurance that covers the kind of event that frustrated the contract, it might have to turn to insurance rather than using frustration.
- Negligence or Fault:If any party were somehow responsible for causing the frustrating event, frustration might not apply. For instance, if it is supposed to maintain equipment, and it broke because didn’t take care of it, frustration might not work in its favor.
- Risk Allocation:Sometimes, the contract specifically assigns the risk of certain events to one party or the other. If that’s the case, frustration might not change those agreed-upon responsibilities.
- Taylor v. Caldwell (1862).[xii] In Taylor v. Caldwell, there was a contract for renting a music hall for concerts and events. However, before the events could take place, the music hall was destroyed by a fire. The people who rented the hall (Taylor) were understandably upset and wanted compensation because they couldn’t use it anymore. But the court decided that because the hall was destroyed and it wasn’t anyone’s fault, the contract was canceled. In simple terms, when something unexpected and out of anyone’s control, like a fire, makes it impossible to carry out a contract, the law can step in and say, “Okay, this contract is off the table.”[xiii]
- Krell v. Henry (1903).[xiv] Krell agreed to rent a room from Mr. Henry to watch the King’s coronation parade in London. They made this deal because it was a special event, and the room had a perfect view of the parade. However, when the King got sick, the parade was canceled. Mr. Krell didn’t want the room anymore because the main reason for renting it was gone. But Mr. Henry insisted on payment. The court in Krell v. Henry decided that Mr. Krell didn’t have to pay for the room because the main purpose of the contract (watching the parade) couldn’t happen due to the unexpected cancellation.[xv]
MITIGATION AND ALTERNATIVE SOLUTIONS:[xvi]
When parties face the prospect of frustration, there are practical steps they can take to mitigate its effects:
- Renegotiate Terms:If possible, consider renegotiating the contract terms to accommodate the changed circumstances. Parties can agree on new timelines, deliverables, or conditions.
- Seek Extensions:Request extensions for performance if there’s a reasonable expectation that the frustrating event will be resolved soon. Extensions can provide additional time for parties to fulfill their obligations.
- Alternative Performance:Explore alternative ways to fulfill the contract. In cases where a key element is no longer available, parties might consider substitutes or alternative solutions to meet the contract’s objectives.
PRACTICAL ADVICE FOR PARTIES:
To protect themselves from frustration-related risks, businesses and individuals should consider the following:
- Include Force Majeure Clauses:Contracts should incorporate well-drafted force majeure clauses that explicitly detail how unforeseen events will be managed and which party bears the risk in such situations.
- Insurance:Consider insurance policies that cover contract frustration due to unforeseen events. Such coverage can provide financial protection and peace of mind.
The Doctrine of Frustration in contracts is like a safety valve for unexpected events. It comes into play when something unforeseen, like a natural disaster or a sudden illness, makes it impossible to carry out a contract. When frustration occurs, the contract is cancelled, and both parties are free from their obligations. It’s as if the contract never existed. However, this doctrine has its limits; it doesn’t apply if the event was foreseeable or if there are special clauses in the contract that deal with such situations. In these cases, parties may need to renegotiate or find alternative ways to fulfill their agreement. Understanding this concept is crucial for anyone involved in contracts, ensuring fairness in challenging circumstances.
[i] Indian Contract Act, 1872, Sec. 56, No. 9, Acts of Parliament, 1872 (India).
[ii] Preeti.walia1809, Legal Service India, https://www.legalserviceindia.com/legal/article-1929-an-overview-of-section-56-of-the-indian-contract-act.html ( last visited September 10, 2023)
[iii] Indian Contract Act, 1872, Sec. 56, No. 9, Acts of Parliament, 1872 (India).
[iv] law.nyu., https://www.law.nyu.edu/sites/default/files/ECM_PRO_063763.pdf, (last visited Aug. 21, 2023).
[v] Rishabh Soni, Monesh Mehndiratta, Doctrine of frustration, ipleaders, (Aug. 27, 2023, 9:29 AM) https://blog.ipleaders.in/doctrine-of-frustration/
[vii] Jean-François Manzoni and Jean-Louis Barsoux, The Set-Up-To-Fail SyndromeDoctrine of frustration, hbr, (Aug. 27, 2023, 9:29 AM), https://hbr.org/1998/03/the-set-up-to-fail-syndrome.
[ix] Jean-François Manzoni and Jean-Louis Barsoux, The Set-Up-To-Fail Syndrome Doctrine of frustration, hbr, (Aug. 27, 2023, 9:29 AM), https://hbr.org/1998/03/the-set-up-to-fail-syndrome.
[xi] Swarnendu Chatterjee* and Arushi Bhagotra**, Dealing with the Notions of Hardship and Force Majeure in International Commercial Contracts: Tackling Unforeseen Events in a Changing World, (Aug. 27, 2023, 9:29 AM), https://www.scconline.com/blog/post/2021/08/08/force-majeure/
[xii] Taylor v. Caldwell (1862).
[xiv] Krell v. Henry (1903)
[xvi] nasa.gov, https://climate.nasa.gov/solutions/adaptation-mitigation/#:~:text=Mitigation%20%E2%80%93%20reducing%20climate%20change%20%E2%80%93%20involves,these%20gases%20(such%20as%20the, (last visited Aug. 21, 2023).