Tazeen Ahmed......
, Intern at ubAdvocate
(Based on the YouTube video (LINK- https://youtu.be/BsNsPq-DjSM of
Jeevan Prakash, AOR, Supreme Court)
Note on Legal Way out of your Contractual Obligations
What is a contract?
A contract has been defined under Section 2 (h) of the Indian Contract Act,
1872 as : “An agreement enforceable by law.”
According to Salmond, “A contract is an agreement creating and defining
obligation between two or more persons by which rights are acquired by one or
more acts or forbearance on the part of others”.
A contract is thus, an agreement to create a legal relationship between two
competent parties created by an offer and its acceptance involving a lawful
consideration and free consent to achieve lawful objectives.
What is the nature of contractual obligation?
A contract bestows rights and duties upon the contracting parties. It requires
them to fulfill their reciprocal promises and binds them altogether to adhere to
its terms which were agreed upon. Any failure to perform a contract invites
legal action. However, the law of contract is very flexible and does provide
some safeguards in the interests of equity and justice.
Doctrine of Frustration
The doctrine of Frustration is a theory based on the maxim- Lex non cogit ad
Impossibilia (the law does not force the impossible). Thus, the doctrine regards
that every contract is impliedly conditional upon possibility. Subsequent
Impossibility of carrying out contractual obligations due to a supervening or
unforeseen circumstance ultimately results in frustration of such a contract.
3 Essential Conditions for Doctrine of Frustration:
1. Unforeseen situation or change in circumstances
2. Performance becomes impossible
3. Must not be your fault or self-induced
Note: To frustrate the contract, the clause of force majeure must not be
stipulated in the contract. Further, in Mugneeram Bangur &Co. v. Gurbachan
Singh1, it was stated, “In India , no express clause of Force Majeure is required
as is done by the courts in England”.
Force Majeure
Force Majeure refers to a clause included in contracts to omit liability for
unforeseen and unavoidable calamities that interrupt the regular course of
events and prevents parties from fulfilling their obligations. It is a French term,
literally meaning “greater force”. It can be used to absolve parties from their
liabilities in performing obligations.
Origin of the Doctrine
Taylor v Caldwell2(1861) led to the initiation and evolution of the doctrine of
frustration. In this case, claimant agreed to hire a musical hall, used for hosting
grand concerts and fetes. Unfortunately, before the event could be held by the
claimant, the hall caught fire and was devastated. Clearly, no party was at fault
yet the claimant sued the defendant for breach of contract. It was then that the
harshness of contractual obligations was brought to fore. In the words of
Murray, “frustration developed to alleviate harshness of absolute obligation
rule”. It was held that the defendants were freed from their obligations under the
doctrine of frustration as the performance in a burnt hall couldn’t be possibly
workable.
Justice Blackburn in this important dictum laid down when the doctrine could
be evoked: “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.”
Section 56 of Indian Contract Act:
“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.”
Supreme Court Decisions in Leading Case Laws
1
AIR 1965 SC 1523
2
ALL ER REP 24
1. In Ganga Saran v. Firm Ram Charan3, it was held that due to
subsequent event, if performance becomes onerous, the party would be
held responsible and cannot claim any benefit of section 56. Simply put,
you yourself are liable for your self-created problem.
2. In Satyabrata v. Mugneeram4, the scope of section 56 was reiterated and
examined. It was held that the English Law’s Doctrine of Frustration
couldn’t be as it is applied in the Indian context as it is largely guided by
common law judgments and based on implied inference, holding only
persuasive value. Moreover, it was stated unequivocally that agreements
containing force majeure clause wouldn’t get benefit under section 56. A
broad distinction was drawn between the English and Indian law on the
matter – while English law looks upon implied intention at the time of
agreement, Indian court looks upon change of circumstances while
determining frustration of the contract.
3. In Alopi Parshad & Sons Ltd v. The Union of India5 , it was restated
that turn of events cannot absolve a party from its obligations. The only
consideration, it was established, is whether parties never agreed to be
bound in a fundamentally different situation which had unexpectedly
emerged, in the light of the circumstances existing when it was made
4. In Naihati Jute Mills Ltd. V. Hyaliram Jagannath6 , the court
emphasized that change of circumstance is not merely enough to absolve
liability, it must be accompanied with impossibility of performance.
5. In Energy Watchdog v. CERC 7 , there was a power purchase agreement,
wherein the parties refused to pay highly inflated costs. The court held
that this doesn’t absolve them from their liability as when they submitted
their bids, this was a risk they knowingly took. Above that, force majeure
clause was also given in the contract, which disallowed them from
pursuing a course of action under section 56.
6. In M.P. Power Management Company v. Renew Clean Energy Pvt.
Ltd.8, it was held that time is an essential factor of a contract. As such, the
delay in commissioning the project due to unavoidable circumstances or
subsequent unforeseen reasons such as change of location of the project is
not a Force Majeure event. Delay can be considered and condoned
keeping in view other factors such as construction of the plant,
3
AIR 1952 SC 9
4
1954 AIR 44
5
1960 AIR 588
6
1968 (1) SCR 821
7
2017(14) SCC 80
8
Civil Appeal No. 3600 of 2018
investment of huge amount in purchasing the land and development of
the project.
Conclusion
A contract is a private legislation between the parties which not only binds
them, but also gives autonomy to parties in deciding the clauses to be inserted.
In a way, it makes the private parties their own “masters”, capable of deciding
in what circumstances to dissolve it and in what manner, and specifying each
party’s obligations. In case of any dispute, they can settle their matters through
the legal system. For instance, if it becomes impossible for a party to carry out
their obligations due to the pandemic, Section 56 can be invoked to their rescue.
However, it must be noted that if the duty merely becomes onerous, the fault
would be of the party and such a party would not be absolved from their
responsibility.
