Doctrine of Frustration under Law of Contract | Indian Contract Act, 1872

A contract is ordinarily binding upon the parties and must be performed according to its terms. However, circumstances may arise after the formation of a contract which make its performance impossible or unlawful, or which fundamentally destroy the basis upon which the parties entered into the contract. In such cases, the law may discharge the parties from further performance.

This principle is commonly known as the Doctrine of Frustration. Under Indian law, the doctrine is principally embodied in Section 56 of the Indian Contract Act, 1872, which deals with agreements to do impossible acts and contracts which subsequently become impossible or unlawful.

The doctrine is therefore not a separate rule of English law imported into India. The Supreme Court has repeatedly held that, in India, the law relating to frustration is governed by the statutory rule of supervening impossibility or illegality contained in Section 56.

Section 56 of the Indian Contract Act, 1872

Section 56 contains three distinct rules.

1. Agreement to do an act impossible in itself

An agreement to do an act which is impossible in itself is void.

Illustration:
A agrees with B to discover treasure by magic. The agreement is void.

This deals with initial impossibility, that is, impossibility existing at the time when the agreement is made.

2. Contract which subsequently becomes impossible or unlawful

Where a contract is capable of performance when it is made, but subsequently becomes impossible or, by reason of an event which the promisor could not prevent, becomes unlawful, the contract becomes void when the act becomes impossible or unlawful.

This is the statutory basis of supervening impossibility and, in appropriate cases, frustration.

Illustrations under Section 56 include:

• 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 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.

3. Compensation where impossibility or unlawfulness was known to the promisor

Where a person promises to do something which he knew, or which he might have known with reasonable diligence, to be impossible or unlawful, and the promisee did not know of the impossibility or unlawfulness, the promisor must compensate the promisee for the loss caused by the non-performance.

Illustration:
A contracts to marry B, being already married to C and being forbidden by the law applicable to him to practise polygamy. A must compensate B for the loss caused by the non-performance of his promise.

Thus, Section 56 covers both the voidness of an impossible agreement and the discharge of an existing contract by supervening impossibility or illegality, while also providing for compensation in the special case where the promisor knew, or ought to have known, of the initial impossibility or unlawfulness.

Meaning of Frustration

The expression “frustration” is generally used when a supervening event occurs which fundamentally changes the contractual situation and makes further performance impossible, unlawful, or incapable of achieving the essential purpose of the contract.

The Supreme Court in Satyabrata Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44 explained that the word “impossible” in Section 56 is not confined to physical or literal impossibility. An act may be practically impossible where an unforeseen event makes its performance impracticable and useless in relation to the object and purpose which the parties had in view. Where an unexpected event or change of circumstances completely upsets the foundation of the bargain, the case may fall within Section 56.

The doctrine is therefore concerned not merely with whether performance can physically be carried out, but with whether the supervening event has destroyed the fundamental basis of the contractual obligation.

Initial Impossibility and Supervening Impossibility

Initial Impossibility

Initial impossibility exists at the time when the agreement is made. Where the act agreed to be performed is impossible in itself, the agreement is void under the first paragraph of Section 56.

Example:
A agrees with B to discover treasure by magic. The agreement is void.

The impossibility may be known or unknown to the parties. Where the promisor alone knows, or ought with reasonable diligence to know, of the impossibility while the promisee does not, the third paragraph of Section 56 may additionally require compensation for the resulting loss.

Supervening Impossibility

Supervening impossibility arises where the contract was valid and capable of performance when made, but a subsequent event makes performance impossible or unlawful. The contract becomes void when the impossibility or unlawfulness occurs.

Examples:

• A and B agree to marry, but before the marriage A becomes insane.
• A agrees to take cargo to a foreign port, but subsequently war is declared between the relevant countries.
• A undertakes personal performance under a contract but subsequently becomes incapable of performing it.

The expression “supervening impossibility” should, therefore, not be understood as limited to literal physical impossibility. It includes the wider statutory concept recognised by the Supreme Court in Satyabrata Ghose.

Essentials of the Doctrine of Frustration

For the doctrine of frustration under Section 56 to apply, the following principles are important:

1. There must be a valid subsisting contract - The doctrine of frustration ordinarily concerns a contract which was valid and capable of performance when entered into.
2. There must be a supervening event - The event must occur after the formation of the contract and must fundamentally affect its performance.
3. The event must be beyond the control of the party seeking discharge - A party cannot ordinarily rely upon frustration where the alleged frustrating event is the result of his own act, election, default or fault.
4. Performance must become impossible, unlawful or fundamentally different - The expression “impossible” is understood in a practical rather than merely literal sense. The event must go beyond ordinary difficulty or inconvenience and must affect the very foundation of the bargain.
5. The event must not merely make performance more onerous - An increase in cost, reduction in profit, commercial inconvenience or financial hardship does not ordinarily amount to frustration.
6. The doctrine operates by operation of law - Once the requirements of Section 56 are satisfied, the contract becomes void by operation of law. The discharge does not depend upon the discretion of either party.

Grounds of Frustration

The doctrine may apply in different circumstances depending upon the nature of the contract and the supervening event.

1. Destruction or Disappearance of the Subject Matter

Where the continued existence of a specific thing is fundamental to the performance of the contract, its destruction may make performance impossible.

• For example, if a contract depends upon the use of a particular building and the building is destroyed before performance, the foundation of the contractual obligation may disappear.

The principle is illustrated by the well-known decision in Taylor v. Caldwell, where the destruction of a music hall by fire prevented the contemplated performance. Although this is an English authority, it is useful only as an illustration of the principle; in India the governing rule is Section 56.

The same principle may apply where the specific subject matter remains physically in existence but has ceased to be available for the contractual purpose.

2. Change of Circumstances

A subsequent change of circumstances may frustrate a contract where it fundamentally alters the situation contemplated by the parties and destroys the basis of the bargain. However, every change of circumstances does not amount to frustration. The question is whether the change is so fundamental that the performance contemplated by the contract has ceased to be the performance which the parties originally undertook.

Case: Satyabrata Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44

The defendant company had undertaken a development scheme for residential plots. Before the development could be completed, a substantial portion of the land was requisitioned by the Government during the Second World War. The company contended that the contract had become impossible of performance.

The Supreme Court rejected the plea of frustration. The requisition was temporary, there was no definite time-limit for completion of the development work, and the supervening circumstances did not destroy the fundamental basis of the transaction. The Court held that “impossible” in Section 56 does not mean only physical or literal impossibility. Nevertheless, the change in circumstances must be of such a character that it totally upsets the foundation upon which the parties rested their bargain.

Thus, A temporary interruption or delay will not ordinarily frustrate a contract unless its duration or effect is such that the fundamental purpose of the contract is destroyed.

Case: Easun Engineering Co. Ltd. v. Fertilizers & Chemicals Travancore Ltd., AIR 1991 Mad 158.

In this case, a contract for the supply of power transformers could not be fully performed because the price of a raw material used in manufacturing the transformers rose by four hundred per cent, following a war in the Middle East. The Madras High Court held that this did not frustrate the contract. The seller could still have performed, at a higher cost, and a mere increase in price or commercial hardship, however severe, is not, by itself, a ground of frustration. This case is a valuable pairing with Satyabrata Ghose, since the two together mark the boundary between a genuine supervening impossibility and a mere increase in the burden of performance.

3. Non-occurrence of a Contemplated Event

Sometimes performance remains physically possible, but the non-occurrence of an event which constituted the foundation of the transaction may destroy the very purpose for which the contract was made.  The important consideration is whether the event was fundamental to the contract, rather than merely an expectation or incidental purpose.

The principle is illustrated by the English case of Krell v. Henry, where a room was hired for the specific purpose of viewing a coronation procession and the procession was cancelled. The contractual purpose was therefore destroyed.

In contrast, in Herne Bay Steam Boat Co. v. Hutton, the cancellation of a naval review did not frustrate the entire contract because the charter had another substantial purpose, namely a cruise around the fleet.

4. Death or Incapacity in Contracts Requiring Personal Performance

Where personal performance is an essential feature of the contract, the death or incapacity of the promisor may make performance impossible. This is particularly applicable to contracts involving personal skill, ability or performance.

Examples:

• A agrees to sing at a concert but becomes incapable of singing.
• A agrees to perform as an artist but becomes physically incapable of doing so.
• A agrees to perform a particular personal service but dies before performance.

Section 56 itself provides the illustration of a person contracted to act at a theatre who becomes too ill to perform on particular occasions. The contract to act on those occasions becomes void.

5. Governmental or Legislative Intervention

A subsequent law, prohibition, governmental order, requisition or administrative action may make performance impossible or unlawful. However, governmental intervention does not automatically frustrate a contract. Its effect depends upon the nature of the intervention and the contractual obligations undertaken by the parties.

Case: Boothalinga Agencies v. V.T.C. Poriaswami Nadar, AIR 1969 SC 110

The case concerned a contract involving imported chicory. Before performance, the sale of the imported goods was prohibited.

The Supreme Court treated the statutory prohibition as rendering the contractual performance unlawful. The fact that substitute goods might have been available in the market did not require the promisor to supply goods of a different description where the contract related to specific goods.

The case illustrates that where a subsequent legal prohibition directly prevents the performance contemplated by the contract, Section 56 may apply.

Case: Naihati Jute Mills Ltd. v. Khyaliram Jagannath, AIR 1968 SC 522

The Supreme Court adopted a more cautious approach where the alleged frustration arose from a change in Government licensing policy. The contract required the buyer to obtain an import licence. The Government had not imposed an absolute prohibition on imports; rather, the licensing system required compliance with specified conditions.

The Court held that the buyer could not rely upon frustration because, on the terms of the contract, the buyer had undertaken the obligation to obtain the necessary licence. A party may assume such a risk by contract and remain bound by it.

The case establishes an important principle; Where the contract itself allocates the risk of obtaining a licence or permit to a particular party, that party cannot ordinarily escape the contractual obligation merely because obtaining the licence subsequently becomes difficult.

6. Intervention of War

War or warlike conditions may, in appropriate circumstances, render contractual performance impossible or unlawful. Section 56 itself gives the illustration of a contract to take cargo to a foreign port where the promisor’s Government subsequently declares war against the country in which the port is situated. The contract becomes void when war is declared. However, the mere occurrence of war does not automatically discharge every contract connected with the affected transaction. The effect depends upon the actual impact of the war upon the contractual obligations.

Cases Where Frustration Does Not Apply

The doctrine is subject to strict limitations. It generally does not apply in the following situations:

1. Commercial Hardship is Not Frustration

One of the most important limitations on the doctrine is that mere commercial hardship does not amount to frustration.

A contract does not become frustrated merely because:

• the cost of performance has increased;
• the contract has become less profitable;
• the expected profit has disappeared;
• performance has become more difficult;
• the market price has substantially increased or decreased;
• the currency has depreciated;
• procurement has become more expensive; or
• performance has been delayed.

The law ordinarily requires parties to honour the bargain they have made.

Case: M/s. Alopi Parshad & Sons Ltd. v. Union of India, AIR 1960 SC 588

The appellants were agents supplying ghee for the use of Army personnel. During the Second World War, the economic conditions changed substantially and the cost of performance increased. The agents sought payment at enhanced rates.

The Supreme Court held that the contract had not been frustrated. Performance had not become impossible or unlawful; it had merely become onerous. The Court emphasised that an unforeseen rise or fall in prices, depreciation of currency or unexpected difficulty in execution does not by itself discharge a contractual obligation. Courts do not possess a general power to rewrite a bargain merely because performance has become commercially burdensome.

Thus, Hardship is not frustration. The relevant question is whether the supervening event has fundamentally altered the contractual obligation, not merely whether performance has become financially unattractive.

2. Abnormal Rise in Prices

An abnormal increase in prices may be evidence of changed circumstances, but price escalation by itself is not sufficient to establish frustration.

This principle was strongly reaffirmed in Alopi Parshad and subsequently in Energy Watchdog v. Central Electricity Regulatory Commission, (2017) 14 SCC 80.

In Energy Watchdog, the Supreme Court held that alternative modes of performance being available at a higher price did not frustrate the contracts. The Court emphasised that neither a rise in the price of coal nor increased cost of performance, in the circumstances of the case, displaced the fundamental basis of the contracts.

Case: Easun Engineering Co. Ltd. v. Fertilisers & Chemicals Travancore Ltd., AIR 1991 Mad 158

This decision should not be understood as laying down a general rule that a very large increase in price constitutes frustration. The case involved a firm-price contract for the supply of transformers and contained contractual provisions concerning force majeure. Extraordinary circumstances, including a substantial increase in the price of transformer oil, were considered in the context of the contractual force-majeure provision and the arbitral findings.

The decision therefore illustrates the importance of examining the terms of the particular contract and the contractual allocation of risk, rather than treating price escalation alone as sufficient for frustration.

3. Self-Induced Frustration

A party cannot take advantage of an event which has been brought about by his own act, choice, default or election. The doctrine is based upon the occurrence of an external supervening event which fundamentally affects performance. A party cannot deliberately create the circumstances preventing performance and then claim that the contract has been frustrated.

Case: Maritime National Fish Ltd. v. Ocean Trawlers Ltd. (1935)

The case is a classic illustration of self-induced frustration. The relevant fishing operation required a licence. The party had control over which trawlers would receive licences and chose not to obtain one for the trawler concerned. The party was therefore not permitted to rely upon frustration resulting from its own election.

The principle is consistent with the Indian position that Section 56 does not permit a party to rely upon an impossibility which is self-induced. The Supreme Court has also applied this principle in Boothalinga Agencies v. V.T.C. Poriaswami Nadar. 

4. Act or Default of a Third Person

The mere failure of a third person upon whom a party has relied does not necessarily frustrate the contract.

For example, where a seller has undertaken an absolute obligation to supply goods, he cannot ordinarily escape liability merely because the manufacturer or supplier from whom he expected to obtain those goods failed to supply them.

The terms of the contract are crucial in determining whether performance was expressly or impliedly made conditional upon the third person’s performance. The Supreme Court’s decision in Naihati Jute Mills Ltd. v. Khyaliram Jagannath illustrates the importance of determining what obligation the contracting party actually undertook.

5. Failure of One of Several Objects

Where a contract has several independent purposes, the failure of one purpose does not necessarily frustrate the entire contract. The relevant question is whether the failed purpose constituted the foundation of the whole bargain. If a substantial part of the contract can still be performed in accordance with its essential purpose, frustration may not arise.

6. Temporary Delay or Interruption

Mere delay does not ordinarily amount to frustration. The delay must be so substantial in duration or effect that it fundamentally destroys the contractual purpose or makes performance radically different from what was undertaken.

In Satyabrata Ghose, the Government requisition was temporary and there was no fixed time-limit for completing the development work. The Supreme Court consequently found no frustration.

Thus, ordinary delay causes no frustration. In case of prolonged or fundamental delay destroying the contractual object, frustration may arise.

Contracts for Sale or Transfer of Land and the Doctrine of Frustration

The doctrine of frustration may apply to an executory contract relating to land where a supervening event fundamentally prevents the contemplated performance.

However, a distinction must be made between:

• an executory agreement to transfer property; and
• a completed transfer of an interest in property, such as a completed lease.

Case: Raja Dhruv Dev Chand v. Raja Harmohinder Singh, AIR 1968 SC 1024

The Supreme Court held that Section 56 does not ordinarily apply where the rights and obligations arise from a completed transfer of property under a lease. The case concerned agricultural land which the lessee was unable to use because of circumstances arising out of the Partition. The Court held that the completed lease was not discharged under Section 56 merely because the lessee could not use the land for the purpose contemplated. The Court distinguished between an executory agreement and an already completed transfer creating an interest in property.

Therefore, the statement that “a lease can never be frustrated” is too broad. The proper distinction is between a completed lease/transfer of an interest in property and an executory agreement to lease or transfer, to which Section 56 may apply where its requirements are satisfied.

Force Majeure and Section 56

Modern commercial contracts frequently contain force majeure clauses specifying events such as war, natural disasters, governmental restrictions, epidemics or other events which may excuse or suspend performance. A force majeure clause must be distinguished from frustration under Section 56.

Section 32 and Section 56

The Supreme Court in Energy Watchdog v. Central Electricity Regulatory Commission, (2017) 14 SCC 80 clarified the distinction.

• Where the contract itself contains an express or implied provision dealing with the consequences of a specified uncertain event, the matter is governed by the contractual terms and, where applicable, Section 32 relating to contingent contracts.
• Where the alleged frustrating event operates outside the contractual allocation of risk, the statutory rule of supervening impossibility or illegality under Section 56 may apply.

Thus, the first question in a contract containing a force majeure clause is ordinarily, “What does the contract itself provide?” The court must interpret and apply the contractual clause before resorting to Section 56 where the clause governs the relevant event.

A force majeure clause is also not a general licence to avoid an inconvenient bargain. Its scope depends upon its wording, the circumstances covered by it, and the contractual allocation of risk. 

Effect of Frustration

Once a contract is frustrated within the meaning of Section 56, the contract becomes void when the act becomes impossible or unlawful.

The important consequences are as follows:

1. Discharge is automatic - Frustration operates by operation of law. It does not depend upon the discretion of either party. This was expressly emphasised in Satyabrata Ghose.
2. The parties are discharged from future performance - The parties are no longer bound to perform obligations which have become impossible or unlawful as a result of the frustrating event.
3. Frustration is different from rescission of a voidable contract - A voidable contract is avoided by the exercise of an option by the aggrieved party. Frustration, on the other hand, operates automatically when the requirements of Section 56 are satisfied.
4. Restitution may follow - Section 65 provides that when an agreement is discovered to be void, or when a contract becomes void, any person who has received an advantage under it must restore that advantage or make compensation for it to the person from whom it was received.

Illustration:
A contracts to sing for B at a concert for ₹1,000, which B pays in advance. A becomes too ill to sing. A is not liable to compensate B for the profits B would have earned, but A must refund the ₹1,000 paid in advance.

Thus, frustration discharges future contractual performance, but questions concerning benefits already received are governed by the applicable rules of restitution, particularly Section 65.

Frustration and Arbitration Clauses

Frustration does not necessarily destroy every provision contained in a contract. An arbitration clause may survive the termination or frustration of the substantive contractual obligations because disputes concerning the consequences of the contract may still require adjudication. This principle was recognised by the Supreme Court in Naihati Jute Mills Ltd. v. Khyaliram Jagannath.  The survival of an arbitration clause is therefore distinct from the question whether the substantive obligations under the contract have been discharged.

Landmark Case Laws

1. Satyabrata Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 44

The word “impossible” in Section 56 does not mean merely physical or literal impossibility. A contract may be frustrated where an unforeseen event fundamentally destroys the basis of the bargain. Frustration operates automatically by operation of law.

2. M/s. Alopi Parshad & Sons Ltd. v. Union of India, AIR 1960 SC 588

Mere commercial hardship, abnormal rise in prices or increased burden of performance does not amount to frustration. Courts have no general power to rewrite contractual obligations merely because performance has become onerous.

3. Naihati Jute Mills Ltd. v. Khyaliram Jagannath, AIR 1968 SC 522

A change in Government policy or difficulty in obtaining a licence does not necessarily frustrate a contract. The contractual terms and the risk undertaken by the parties must be examined.

4. Boothalinga Agencies v. V.T.C. Poriaswami Nadar, AIR 1969 SC 110

Where a subsequent legal prohibition makes contractual performance unlawful, Section 56 may apply. The doctrine cannot be invoked where the alleged frustration is self-induced.

5. Raja Dhruv Dev Chand v. Raja Harmohinder Singh, AIR 1968 SC 1024

Section 56 does not ordinarily apply to a completed transfer of an interest in property under a lease. A distinction must be drawn between a completed transfer and an executory agreement.

6. Energy Watchdog v. Central Electricity Regulatory Commission, (2017) 14 SCC 80

Force majeure expressly or impliedly provided for in a contract is dealt with under Section 32; a frustrating event operating outside the contractual terms may fall under Section 56. Mere increase in the cost of performance does not necessarily frustrate a contract.

Conclusion

The Doctrine of Frustration is an important exception to the general rule that contractual promises must be performed. In India, the doctrine is governed principally by Section 56 of the Indian Contract Act, 1872, which embodies the law of supervening impossibility and illegality.

The doctrine applies where, after the formation of a valid contract, an unforeseen event beyond the control of the parties makes performance impossible or unlawful, or fundamentally destroys the basis of the contractual obligation. The expression “impossible” is not confined to physical impossibility; it may include practical impossibility where the supervening event has completely destroyed the foundation or purpose of the bargain.

At the same time, the doctrine is applied within narrow limits. Mere hardship, inconvenience, delay, increased expense, loss of profit or commercial difficulty does not ordinarily amount to frustration. The sanctity of contract remains the general rule.

Thus, the doctrine balances two competing principles: the sanctity of contractual obligations and the recognition that the law should not compel performance of an obligation which, because of a supervening event, has become impossible, unlawful or fundamentally different from what the parties originally undertook.