GROUNDS OF FRUSTRATION AND ITS EFFECT; DISCHARGE BY AGREEMENT AND NOVATION

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ABSTRACT

In general, a contract is a fairly enforceable agreement that commits two or more parties to carrying out particular actions or behaviors. A contract is described as “An agreement between two or more parties creating scores that are enforceable or else recognizable at law” in Black’s Law Dictionary. A contract essentially consists of a group pledge, or pledges, and any form of remuneration to which the law will apply. A contract is defined as an agreement that is legally enforceable in Section 2(h) of the Indian Contract Act, 1872. The Act provides a framework for comprehending the formation, performance, and termination of contracts. In order to meet creative scripts when a contract may need to be terminated or amended, the Indian Contract Act, 1872, established rules for the frustration, agreement, and novation of contractual scores.

Under Section 56 of the Indian Contract Act, 1872, a contract is frustrated and becomes void if an unforeseen event makes performance impossible or significantly alters its nature. Sections 62 & 63 allow parties to discharge a contract by mutual agreement, enabling them to terminate, amend, or replace it. Novation, as detailed in Section 62, is a specific type of discharge where the original contract is replaced by a new one, preserving the main objectives but allowing changes to the terms or parties. This process effectively cancels the old contract and establishes a new agreement.

This exploratory paper’s primary goal is to honestly acknowledge the theories of frustration, reasons for frustration, discharge, discharge by consent, and innovations. The Indian Contract Act, 1872, guarantees that the agreements between parties remain valid and flexible in the face of changing circumstance

KEYWORDS

Indian Contract Act, Frustration, Discharge, Agreement, Novation.

INTRODUCTION

A written or informal agreement that establishes duties with legal force between parties is called a contract. Ordinarily, there’s an offer, an acceptance, consideration, and collaborative consent. A contract must also contain the parties’ capacity and licit purpose in order to be enforceable. In order to guarantee that parties adhere by the stated terms and conditions, the agreement must be fairly binding. The description of a contract is stated under Section 2(h) of the Indian Contract Act, 1872″ A contract is an agreement enforceable by law”. The fundamentals for a valid contract under the Indian contract act, 1872, are primarily outlined in Section 10 and its states: “All agreements are contracts if they’re made by the free consent of parties competent to contract, for a legal consideration and with a legal object, and are not hereby expressly declared to be void.” This Act provides the frame for comprehending multitudinous aspects of contract conformation, performance, and discharge. It’s forcefully grounded upon common law generalities. The grounds of frustration, discharge by agreement, and novation are among the important ideas covered by the Act; each is essential to the development and termination of contractual obligations. Moreover, frustration voids contracts due to unforeseen events, while agreement and novation enable parties to adjust or replace contracts by mutual consent. A contract is frustrated and voids under Section 56 of the Indian Contract Act, 1872, if an unforeseeable occurrence renders performance impossible or materially changes the nature of the contract. Parties may discharge a contract by mutual consent or agreement under Sections 62 and 63, which gives them the power to end, modify, or replace it. Novation is a special kind of discharge where the old contract is replaced with a new one that allows modifications to the parties or terms while maintaining the primary goals, as explained in Section 62. Through this procedure, a new agreement is created and the previous one is essentially canceled.

DOCTRINE OF FRUSTRATION

As per Cambridge Dictionary, frustration refers to the emotion of annoyance or decreased self-assurance resulting from being unable to attain desired goals, or a factor that induces feelings of despair or dissatisfaction. Frustration is described as the prevention or obstruction of achieving something, akin to fulfilling a contract. In accordance with the Black Law Dictionary (Page 1974, 8th ed.,2004)[1]. The Indian Contract Act, 1872 refers to the Doctrine of Frustration in Section 56, stating that an agreement to perform an impossible act is considered void. An agreement that is impossible to solve or perform is considered void.[2] In contract law, this renders the contract unenforceable and therefore frustrated. The legal doctrine of frustration is based on a judicial ruling. This principle is based on the Latin phrase “Les Non Cogit Ad Impossibilia,” which states that a law cannot compel someone to fulfill a contract that is impossible to fulfill due to unforeseen circumstances.[3] In simpler terms, the doctrine of frustration deals with situations where performance becomes impossible. Deals that ended up being unprofitable or were unable to be finalized due to unforeseen circumstances are considered to be frustrating. The execution of the contract turns into frustration, meaning it becomes complex, unsolvable, or even unlawful. The termination of a contract may result from unexpected, unsolvable events beyond the parties’ control. The Force Majeure clause is frequently utilized in cases where unexpected events impact the ability to fulfill obligations. In 2020, due to the Covid-19 pandemic, several Indian departments declared a state of force majeure, providing relief when external factors impact prosecution.[4] Section 56 also pertains to scripts that involve acts of god like natural disasters such as floods, fires, outbreaks, protests, riots, wars, etc. These scripts are considered to have caused frustration in the contract. Similar to this, Section 32 also covers contingent contracts which rely on a specific condition for their validity. If the condition of a contingent contract is not met, it will automatically be terminated, while section 56 is applicable when a contract becomes impossible to fulfill due to external factors. Hence, one could argue that determining whether a contract falls under section 32 or section 56 can sometimes be due to lack of trust.

GROUNDS FOR APPLICABILITY OF DOCTRINE OF FRUSTRATION

The Subject Matter of the Contract is physically destroyed: The contract becomes frustrated if the specific subject matter is physically destroyed, as it is essential for the performance of the contract. Therefore, as a result, it becomes unfeasible to carry out the destruction of the subject matter of the contract. Even if the subject matter is not completely destroyed, but severely damaged, the contract can still be terminated. The items that are ruined must be the exact focus of the agreement, so if the contract wasn’t limited to those particular items, it might not be cancelled.[5]
Impossibilities of Performance: Performance impossibilities arise when external events such as an Act of God or Force Majeure make it physically impossible to fulfill the contract, altering its fundamental nature.
Change in Law: If there is a modification in law post-contract formation, it could potentially hinder the contract by rendering performance illegal or unattainable. The alteration should come as a surprise and have a major effect on the conditions of the agreement. If the contract cannot be upheld due to changes in the law, the courts have the authority to cancel it.
Death or Incapacity of Parties: If a party dies or becomes incapacitated, the frustration doctrine will come into effect if their personal performance is essential to the contract. The agreement will become invalid if the party on which its performance was dependent dies or becomes unable to enter into contracts. In simpler terms, if someone’s involvement in a contract is contingent on their survival, they will be excused if they die. These types of cases rely on the individual’s specific skill, such as the promisor in this case, and if they pass away or become incapacitated, the contract or agreement is terminated.[6]
Government, Administrative, Legislative, Intervention: The agreement will end if legislative or administrative actions modify the contract’s objective, changing its fundamental essence. Hence, if a land seller couldn’t complete the sales contract due to no longer being the legal owner under a new law, the agreement was deemed non-enforceable.
Intervention of War: Declaring war could also stop a contract from being completed. If the conflict makes it difficult or impossible to carry out the agreement, the agreement will be canceled and the frustration theory will be used.[7]

EFFECTS OF FRUSTRATION

When the Doctrine of Frustration is invoked in a contract, certain consequences of the frustration are activated.

Contract is rendered null: In case of a frustrating event occurrence, the contract is voided as per Section 56. This shows that both parties have completed their obligations as specified in the contract, resulting in its termination. The contract was also terminated automatically.

Release from Future Obligations: Both parties are no longer required to fulfill any future obligations, as the contract has become impossible to perform or has been affected by an unexpected event.

No one can claim damages for failure to fulfill the contract as neither party is held accountable for the impediment. In such situations, both parties are not responsible for breach, as stated by the law.

Accrued Obligations Remain Unchanged: Any legal rights or obligations that have already accumulated before the contracts are deemed frustrating will not be impacted, and all prior events will stay unaffected.[8]

DISCHARGE

Discharge is not clearly outlined in the Indian Contract Act, 1872, however, there are provisions allowing discharge through different methods. Discharge of a contract involves ending the contractual responsibilities of the party, indicating that the contract between both parties is terminated, and they are no longer obligated to fulfill their duties as outlined in the agreement. A contract may be terminated if both parties agree to end the contract. Termination of the contract also ends the contract’s legally enforceable authority. Different methods to end a contract include Performance (Section 37-38), Agreement (Section 62-63), Lapse of time, Operation of Law, Supervening Impossibilities (Section 56), and (Section 39).

Once the discharge occurs the agreement is viewed as either fulfilled, void or terminated, based on the situation.

DISCHARGE BY AGREEMENT

A contract is established through mutual agreement between both parties, indicating that it is indeed created through the agreement of both parties. When the agreement is mutually established, it can also be mutually terminated or discharged. Section 62 and Section 63 relate to the regulations concerning discharge through agreement. Nevertheless, if one party has fulfilled their obligations under the agreement while the other has not, the situation becomes more intricate. In this instance, some type of thought must be given in order to end a contract through mutual agreement.[9] Six ways agreement discharge can occur include novation, rescission, alteration, remission, waiver, merger, and accord and satisfaction. This paper will discuss the concept of discharge through novation within the framework of discharge by agreement as outlined in Section 62 of the Indian Contract Act, 1872.

DISCHARGE BY NOVATION

The term ‘novation’ specifically refers to substituting an old contract with a new one where different parties carry out the same obligations. In novation, the existing contract’s liabilities are eliminated. Section 62 of the Indian Contract Act, 1872 acknowledges the concept of novations, which allows parties to replace, cancel, or modify a contract without needing to fulfill the original agreement.

Novating any contract is possible, but for novation to be valid, a new contract must exist, not just a new agreement. Therefore, just agreeing to replace the current contract will not hold legal weight unless all parties have accepted and signed it together. A fresh contractual duty is formed when parties enter into a contract novation.[10] Simply put, novation involves forming a fresh agreement that replaces the original contract, rendering it void and no longer applicable. Replacing an existing obligation or parties in a contract with a new one that is equally valid, enforceable, involves consideration and mutual consent of both parties, and meets the expectations of both parties.

There are two types of novation: one where parties changes, and one where a new agreement is substituted. These are likewise protected by Section 62 of the Indian Contract Act, 1872.

CASE LAWS

The Supreme Court of India delved into the doctrine of frustration in the important case of Satyabrata Ghose v. Mugneeram Bangur.[11] The core concept of this doctrine, as explained by Justice Mukherjee, is the inability to uphold a contract. He stressed that “frustration” and “impossibility” is often used interchangeably as they both describe situations in which fulfilling the contract becomes impossible. Basically, the frustration theory acknowledges that there are instances where fulfilling a contract becomes impossible, potentially freeing the involved parties from their contractual obligations.
In the case of Govindbhai Govardhanbhai Patel vs. Gulam Abbas Mulla Allibhai[12], the court interpreted the term “impossible of performance” in Section 56 and noted that parties could be relieved if the contract becomes impossible or impracticable due to factors beyond their control.[13]
The Supreme Court discussed the fundamental requirement of Section 62 in the case of Lata Construction & Ors v. Dr. Rameshchandra Ramniklal Shah[14], stating that novation necessitates the replacement of a new contract for the old one, and only then does the original contract not need to be fulfilled. The new replacement agreement must revoke or completely change the terms of the original agreement.
In the case of Ramdayal v. Maji Devdiji,[15] the court noted that novation occurs either by adding new terms or by adding new parties to the contract. A novation contract entails one party agreeing to cancel or eliminate their obligation or debt. Without this being done, novation is not possible. So, the purpose of the test is to determine if the parties had the intention of forming a new contract with each other.

CONCLUSION

Section 56 of the Indian Contract Act,1872 which includes the concept of frustration, provides a way out for the party or parties if an unexpected situation renders performance impossible. In certain changed scenarios, the doctrine’s relevance raises concerns about the contract’s integrity. English courts created various theories to back up the use of the doctrine in certain scenarios, whereas Indian law avoided the need for such theories by incorporating the doctrine into section 56. It is the idea of English and Roman Law. It is recommended that the doctrine should be used in all instances of impossibility and frustration to enhance and grow the doctrine. It acts as a system to guarantee equity and protect parties from having to make up for events they cannot control. Additionally, we talked about the Termination of contract, which occurs when the responsibilities and duties outlined in a contract have been completed by both parties, resulting in the contractual relationship ending. In this situation, the parties are not bound by the terms of the contract. In this article, we have discussed the concept of frustration leading to contract discharge, highlighting its development under the India contract act and its importance in achieving a fair solution when a contract proves challenging to uphold. Comprehending the reasons, terms, and consequences of a contract is crucial for professionals and individuals in India when entering into agreements to avoid contract breaches, damages, and compensation disputes.

REFERENCES

[1]Bryan A Garner’s Black Law Dictionary 8^th Edition, 2004 (Page no 1974)

[2] Indian Contract Act, 1872, Section 56, Act no 9 of 1872 (India)

[3] Vis Legis Law Practice, Advocate, Doctrine of Frustration (Sep 12, 2023) https://www.linkedin.com/pulse/doctrine-frustration-vllp2017

[4] Vartika Kulshreshtha, Doctrine of frustration under the Indian Contract Act, 1872 (Oct 17, 2023) https://www.startupfino.com/blogs/doctrine-of-frustration-under-indian-contract-act-1872/

[5] MP Ram Mohan & Others, The Doctrine of Frustration under Section 56 of the Indian Contract Act, (Oct 2020) (Page no. 15-16) https://www.iima.ac.in/sites/default/files/rnpfiles/8569076382020-10-01.pdf

[6] Suryash Kumar, Doctrine of Frustration: Facts you need to know (Sept. 26, 2010) https://blog.ipleaders.in/doctrine-of-frustration-2/

[7] Suryash Kumar, Doctrine of Frustration: Facts you need to know (Sept. 26, 2010) https://blog.ipleaders.in/doctrine-of-frustration-2/

[8]Doctrine of Frustration: Meaning, Applicability, Condition, and Effects(Last updated: March 20, 2024) https://www.geeksforgeeks.org/doctrine-of-frustration-meaning-applicability-conditions-and-effects/

[9] Discharge of contract: a detailed guide https://juro.com/learn/discharge-of-contract#

[10] Sachi Ashok Bhiwgade, Novation, Rescission, Alteration under Indian Contract Act, (Feb 8, 2020) https://blog.ipleaders.in/novation-rescission-alteration-under-the-indian-contract-act/

[11] Satyabrata Ghose v. Mugneeram Bangur & Ors., AIR 1954 SC 44.

[12] Govindbhai Govardhanbhai Patel vs. Gulam Abbas Mulla Allibhai, 1977 3 SCC 179

[13] https://www.tutorialspoint.com/doctrine-of-frustration-under-indian-contract-act

[14] Lata Construction & Ors v. Dr. Rameshchandra Ramniklal Shah AIR 2000 SC 380

[15] Ramdayal v. Maji Devdiji AIR 1956 Raj 12

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