Understanding Section 56 of the Indian Contract Act, 1872

People all over the world undertake contractual obligations by entering into contracts for doing or abstaining from doing an act. When a proposal from one side is accepted by the other, forming consideration for each other, an agreement is set up. A contract is an agreement which is enforced by law.[1] The conditions of enforceability are given under section 10 of the Indian Contract Act, 1872 (hereinafter, “ICA”).

The fulfilment of the object the parties had contemplated at the time of the contract is the next step after contract formation, which is called discharge of contract. A contract is said to be discharged when either party is relieved from its contractual obligation. Impossibility of performance u/s 56 of ICA is just a way in which a contract is discharged. S/56 talks about two kinds of impossibility: –

1. Initial impossibility

“Agreement to do impossible act. – An agreement to do an act impossible in itself is void.”

The first part of the section is based on the maxim “Imppossibilium nulla obligato est”, which means the law does not expect a party to do the impossible. The law says that a contract to do an impossible thing is no contract at all or void ab initio. The act is impossible inherently and by its very nature rendering the contract impossible to perform.

Examples: A agrees with B to marry C, who is dead at the time of contract, void.
A and B entered into a contract to buy the moon, void.
Contract in which non- existent vehicles were insured, void.[2]

2. Subsequent impossibility

“Contract to do act afterward 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.”

The second part of the section is based on the maxim “lex non cogit ad impossibilia” meaning thereby that law does not compel a person to do that which she cannot possibly perform. Sometimes when a contract is made, the performance of it is possible at the time of its formation, however, due to some subsequent supervening event, the performance becomes either impossible or unlawful.

Examples: A and B contract to marry each other. Before performance, A becomes insane, void. A contract was between A and B to export groundnut, subsequently to which government prohibited the export of groundnut, void.  B contracts to sing at a concert in consideration of a sum paid in advance by A. B is too ill to perform, void.

The doctrine of frustration has been conceptualised in the second part of S/56 of Indian contract law. In the famous English case of Taylor v. Caldwell[3], where a music hall was let out for holding a concert but before the due date, the hall was destroyed by fire without the fault of either party, it was held that the performance was depended on the continued existence of the hall and with the subject matter of the contract being physically damaged, it has become impossible to perform.

This Doctrine applies not only in the cases when performance becomes physically impossible as in the foregoing case but also when the object of the contract fails to materialise, though performing the contract is physically possible. The real object in hiring the flat was to have a view of coronation procession in the case of Krell v. Henry[4]. The foundation of the contract was the coronation procession of the King which was cancelled and thereby frustrating the contract. The defendant was not liable to pay the balance amount of rent as the purpose was collapsed. The Indian authority in this regard is Satyabrata Ghose v. Mugneeram Bangur & Co.[5] which holds that due to an unforeseen event that upsets the root of the contract, the performance may not be physically impossible but it may be impracticable from the point of view of the object which the parties had in their minds. A contract for the sale of agricultural land for non-agricultural use was held to have been frustrated when the application for such use was later rejected by the authorities.[6]

The following are the various grounds on which frustration can be pleaded.

Destruction of subject matter: where the actual subject matter of the contract ceases to exist, the doctrine of frustration comes into play. Madras HC held[7]that the contract to exhibit a film in the cinema hall became impossible when heavy rains crumbled the rear wall of the hall. Example- A contracted to B to sell a specified quantity of rice but failed to supply as the rice was destroyed by floods. The same result would follow where the subject matter of the contract, though intact is unavailable to the parties.[8]
The defence of frustration fails if the unexpected even occurred due to the fault of either party, like lack of reasonable care.

Change of circumstances: Unanticipated change of circumstances that affects the performance of contract to such an extent as to make it impossible or render it radically different from that which was undertaken by the contract. Example: frustration occurred in circumstances when an explosion took place in an auxiliary boiler of a chartered ship which made it impossible to undertake voyage at the scheduled time. In Deokabai v. Uttam[9], the Supreme Court (hereinafter, “SC”), held, “Whatever the alleged source of frustration, a contract is not discharged merely because it turns out to be difficult to perform or is onerous.” In another 2017 case[10], the SC held that a mere rise in price rendering the contract more expensive to perform will not constitute hindrance so as to attract S/56 ICA. Thus, a normal change of circumstances, such as price rise or fall, does not frustrate a contract.[11]

Death or incapacity of a party- The death or incapacity of a person on whose existence performance of the contract is dependent, excuses the party from performance. Example: Contract between A and B, a pianist to perform at the concert of A. Before the day of the concert, B died. The nature of the contract required personal performance by B and her death put an end to the contract. She would have excused from the performance if B had been too ill to attend the concert.[12] It was held in Guruvamma v. State of Karnataka[13], that S/56 cannot be called in support by the legal heir in cases where rights and liabilities are heritable and could be continued in the hands of the legal heirs.

Intervention by Government, Administration, or Legislature- The intervention which makes a contract impossible of performance after which the doctrine of frustration steps in. Example: A contract for cutting and sale of trees of a forest was discharged under S/56 by reason of the government’s order forbidding the same in the area.[14] Similarly in Hamara Radio and General Industries v. State of Rajasthan[15], there was a contract to give a monopoly of manufacturing radios, radiograms, loudspeakers, and other electronic apparatuses in Bharatpur. The court held that the contract was hit by A/19(1)(g) of the constitution since commencement thereof.

The parties cannot claim to be discharged if the terms of the contract suggest that the parties have undertaken an absolute obligation regardless of administrative changes. This is shown by the decision of the SC in Naihati Jute Mills Ltd. v. Khyaliram Jaganath[16], “There is nothing improper or illegal for a party to take upon himself an absolute obligation to obtain a permit or a licence and in such a case if he took the risk, he must be held bound to his stipulation.”

But the courts have to put an end to the contracts which became illegal, like in the case of Boothalinga Agencies v. V.T.C. Poriaswami Nadar[17] the performance became unlawful after the Imports (Control) Order, 1955, came into force. The subsequent order prohibited the sale of imported goods making the contract void under S/56.

The intervention of war- If some unforeseen war or warlike situations arise after the contract is made; the performance of it becomes unfathomable and difficult. In a case dealt with by Calcutta HC[18], a boat along with cargo was seized by the enemy during hostilities between India and Pakistan prevailing at that time which interrupted the contract by way of discharge of contract by impossibility of performance. It is to be kept in mind that if the war or warlike conditions cut off only one of the many other ways of performance, the party is still bound to perform in other ways, however, expensive or burdensome it might become.[19]

The rights of the parties are to be adjusted as an effect of frustration after the dissolution of the contract due to the impossibility of performance under Section 65 of ICA.

Section 65 reads – “Obligation of person who has received advantage under a void agreement, or contract that becomes void. – 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 compensations for it, to the person whom he received it.”

Interpreting S/65 in light of S/56 suggests that when an agreement is already void because of the inherent impossible act but is discovered to be void at a later stage, or when a contract is valid at the time of its formation but circumstances arising subsequently lead it to be impossible of performance, thereby making the contract void, and, if any party has gained any benefit then he is obliged to restore it or to compensate for it, to the party from whom he had derived it. Examples: A pays B 1000 rupees in consideration of B’s promising to marry C, A’s daughter. At the time of the promise, C was dead entitling A to take back 1000 rupees. A, a dancer, contracts with B, an organiser to dance in the event for 1000 rupees, which are paid in advance. Before the due date, A becomes ill and unfit to dance. A must refund to B 1000 rupees paid in advance.

The obligation to return any advantage received is based on the equitable principle of restitution. This principle was applied in the case of New India Assurance Co. Ltd. v. Itty Kurian,[20] (discussed above) in which the premium paid was held to be refundable under S/65.

The restitutory remedy embodied in S/65 aims to restore the party to the position which it would have been in if the contract had never been entered into.

Section 65 does not apply where parties already knew the contract to be void at its very inception. A thing can only be discovered if it pre-exists the existence of which being unknown. Example: A contracts to sell opium to B, the sale of which is prohibited by the law, in consideration of 1000 rupees paid in advance. Parties know the contract to be void and therefore, the case cannot fall under section 65.

Is the Doctrine of Frustration applicable to lease agreements apply?

A disputed question of law whether the doctrine of frustration applies to a lease[21] of land was settled by the SC in the case of Raja Dhruv Dev Chand Vs. Raja Harmohinder Singh & Anr[22]by observing that S/56 is not applicable to lease contracts as a completed conveyance is different from an executory contract, and; a supervening circumstance does not terminate a concluded transfer.

A lease is an executed contract thought it involves monthly payment of rent and hence, S/56 cannot be called to declare it as void because only executor contracts are capable of being frustrated. The view of the SC has been reiterated in various cases like T. Lakshmipathi and Ors. v. P. Nithyananda Reddy[23]and Ors., Hotel Leela Venture Ltd. v. Airports Authority of India[24]and Energy Watchdog v. CERC[25].  However, where the lessor is unable to transfer possession to the lessee on account of an unavoidable event, the latter would be allowed to take back his rent.[26]

An agreement to lease is different from a lease agreement, therefore, the former can come within the scope of S/56.[27]

Recently, an application came before Delhi HC praying for suspension of payment of rent by lessee owing to COVID-19 lockdown. The court had the chance to discuss the position of law concerning lease agreements. It held that it is a settled law that a contract for lease is an executed contract and the doctrine of frustration does not apply to a lease because only executory contracts are capable of being frustrated and not executed contracts.

The court also discussed S/108(B)(e) of the Transfer of Property Act, 1882 (hereinafter, “TPA), whereby lessee has been conferred a right to avoid a lease if any of the situations mentioned therein occurs rendering the property substantially and permanently unfit to be used for the purpose contemplated. The lessee cannot avoid the lease if the leased property is not destroyed or substantially unfit, and just because he is unable to use the land for the purpose for which it is let out to him.

The decision stated that until and unless the property is wholly destructed or rendered materially unfit, S/108(B)(e) cannot be called for help. Therefore, the temporary non-use of the property due to the lockdown in the backdrop of a pandemic cannot be construed as rendering the lease void under S/108(B)(e) of TPA.

So the lessor was disallowed to avoid payment of rent and could not avail the help of S/56 or S/108(B)(e).[28] The pandemic is an unforeseen circumstance that could not be avoided, amounts to a Force Majeure. Generally, all contracts contain a force majeure clause or any other condition that could permit waiver or suspension of an obligation under the contract. Parties seeking a waiver or suspension under contracts that have a force majeure clause are governed by S/32 of ICA and not S/56.

Compensation for loss- “Compensation for loss through non-performance of an act known to be impossible or unlawful: Where one person has promised to be something which he knew or, with reasonable diligence, might have known, and which the promisee did not know to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.”

The third part of S/56 binds the party (promisor) who knew or ought to have had known with reasonable diligence, that the act promised was impossible or unlawful to do, then that party must compensate the other party (promisee) for any loss sustained by it through non-performance. This part of S/56 cannot be invoked by the promise if he knew about the same. Example: A agreed with B’s wife that B will sing on A’s concert, in consideration of 1000 rupees. B’s wife knew that at the time of the contract, B was dead. Therefore, B’s wife would be liable to compensate A for any loss incurred by him.

[1] Indian Contract Act, 1872 (Act 9 of 1872), s.2(h).

[2] New India Assurance Co. Ltd. v. Itty Kurian, (1997) 2 KLT 830.

[3] (1863) 3 B&S 826                                                 

[4] (1903) 2 KB 740.

[5] AIR 1954 SC 44.

[6] Naimudin I. Bharmal v. Charotar Gramoddhar Sahalari Mandli Ltd, (1997) 1 Guj LR 547.

[7] V.L. Narasu v. P.S.V. Iyer, AIR 1953 Mad 300.

[8] See Bank Line Ltd. v. Arthur Capel & Co., 1919 AC 435.

[9] (1993) 4 SCC 181.

[10] Energy Watchdog v. CERC, (2017) 4 SCC 80.

[11] Continental Construction Co. Ltd. v. State of M.P., (1988) 3 SCC 82.

[12] Robinson v. Davison, 24 LT 755

[13] (2007) 4 Kant LJ 26.

[14] Man Singh v. Khazan Singh, AIR 1961 Raj 277.

[15] AIR 1964 Raj 204.

[16] AIR 1968 SC 522.

[17] (1969) 1 SCR 65.

[18] Basanti Bastralaya v. River Steam India Navigation Co. Ltd., AIR 1987 Cal 271.

[19] Tsakiorglou & Co. Ltd. v. Noblee & Thorl GMBH, 1962 AC 93.

[20] Supra note 2.                                                          

[21] Transfer of Property Act, 1882 (Act 4 of 1882), s.105.

[22] AIR 1968 SC 1024.

[23] (2003) 5 SCC 150

[24] 2016 (160) DRJ 186

[25] Supra note 10.

[26] Gurdarshan Singh v. Bishen Singh, (ILR 1962) Punjab 5

[27] Sushila Devi v. Hari Singh, (1971) 2 SCC 288.

[28] Ramanand v. Dr. Girish Soni, decided on 22nd May.

Jyoti Bhagchandani from Amity Law School Delhi GGSIPU

A lover of books, newspapers, gardening, and dance. I gracefully handle the tantrums life throws at me.”

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