Contingent Contract versus Frustrated Contract - A Thin Line of Distinction
This article titled ‘Contingent Contract versus Frustrated Contract – A Thin Line of Distinction’ is written by Darshin Jayesh Parekh and discusses the difference between the concepts of Contingent contracts and Frustrated contracts. Contingent Contract versus Frustrated Contract – A Thin Line of Distinction The creation of a contract between two parties usually results in the creation of legal… Read More »
This article titled ‘Contingent Contract versus Frustrated Contract – A Thin Line of Distinction’ is written by Darshin Jayesh Parekh and discusses the difference between the concepts of Contingent contracts and Frustrated contracts.
Contingent Contract versus Frustrated Contract – A Thin Line of Distinction
The creation of a contract between two parties usually results in the creation of legal obligations which are enforceable by law in case of non-performance. However, after the creation of the contract, certain events can jeopardize the performance of the contract and render the legal obligations unenforceable and the contract void.
The focus of this article will be on two such types of contracts that lose their legal value on the happening of certain events- Contingent Contracts and Frustrated Contracts.
Contingent contracts refer to those which become enforceable only on the happening of a certain event. Frustrated contracts, on the other hand, are those contracts that become void due to the impossibility of performing the obligations. Such impossibility can be inherent in the obligation or may be created due to subsequent events.
The endeavour of this article will be to define contingent and frustrated contracts with the help of legal provisions and case laws attached to them. The article will then go on to look at how the courts have differentiated between these two contracts and how these differences manifest themselves in the application of these contracts
I. Contingent Contract
Contingent contracts as defined under Section 31, of the Indian Contracts Act, 1872, states that it is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen.[1]
The words “some event collateral to such contract” suggest that the performance of the contract is connected to the occurrence of the event.
A contingent contract contains in itself two contracts, a principal contract and a contingent contract. A principal contract suggests that the parties agree to do or not do a certain act and a contingent contract points to the occurrence of a certain event after which the obligation under the principal contract can be enforced.
Therefore, the principal contract, in a contingent contract cannot be specifically enforced unless the contingency arises.[2] A contract is not contingent on the mere reason of it being performed on the occurrence of a future certain event, but the event must also be a contingent one (one which may or may not happen).[3]
One very common example of this type of contract is an insurance agreement.[4] In the case of an insurance agreement, the liability of the insurer depends on the occurrence of certain events, for e.g. damage to property caused by fire. Only in the occurrence of the particular event will the insurer be held liable, else the contract would not bring upon any obligation on the insurer. Whether a contract is contingent or not is decided by the court on the basis of the question of fact or construction.[5]
II. Effects of a Contingent Contract
A contingent condition in any contract can bring a number of effects on the application of the contract. Firstly, in cases where there is a condition precedent to the formation of a contract, e.g. an agreement “subject to confirmation or approval”, the contingent condition can prevent the formation of the contract.
If a particular condition is the basis of the formation of a contract, and that condition remains unfulfilled then it would prevent the formation of a contract in the first place.[6]
Secondly, one party to a contract may assume immediate unilateral obligation subject to a condition in the contract. In this case, the fulfilment of the condition is dependent on the option holder, for e.g. a purchaser under “sale or return transaction”. Once the option holder exercises his right, then the other party cannot withdraw.[7]
Thirdly, the parties immediately enter into a contract that binds both parties, for e.g. the transfer of property which is subject to the approval by relevant authorities.[8]
III. Enforcing a Contingent Contract
A contract that is contingent on the happening of an event can be enforced only after that event has occurred. The parties are obligated to not arise any situation which would prevent the occurrence of the event[9] and take all reasonable steps to secure the fulfilment of the condition or bring about the event.[10]
The contract can place no obligation on either of the parties till such an event occurs, but even when there is no obligation the parties must take reasonable efforts to bring about the occurrence of an event.[11]
If it is found that such reasonable efforts are not taken by the parties, the court can direct specific performance subject to the conditional event happening and direct the defaulting party to take appropriate steps.[12]
In the case of Samina Venkata Sureswara Sarma v. Meesala Kota Muyullayya, it was held that when a vendor of land had agreed for the sale of land after the eviction of tenants and then fails to take sincere steps to evict the tenants, he himself is considered in default as he has failed to take a reasonable step for enforcement of the contract. he cannot claim the defence that the contract has become impossible.[13]
IV. Contingent Contract in cases of Future Uncertain Events
Contingent contract to do or not to do anything if an uncertain future event does not happen, can be enforced when the happening of such an event becomes impossible and not before.[14]
Further, if a contingent contract to do or not to do anything becomes void if the specified uncertain event does not happen at the expiration of the fixed timed time or if before the time limit is reached, the performance or occurrence of the event becomes impossible.[15]
In the event of happening of an event becoming impossible the contract is rendered void[16] and all the parties to the contract are discharged of any liability of performance or of payment of damages.[17]
Where a person has promised the other party to do something, and with reasonable diligence, he tries to carry out the activities, but due to unforeseen circumstances the act becomes impossible or unlawful, the promisee will be compensated for any loss which is sustained through the non-performance of the promise.
V. Frustrated Contract
The doctrine of frustration can be defined as the doctrine of the special case of the discharge of contract by an impossibility to perform it.[18]
This doctrine is not mentioned expressly under the Indian Contracts Act but Section 56 deals with the situation under which a contract is deemed to be void.[19] Section 56 is divided into three parts, the first part of the section states that an agreement to do an impossible act is in itself void.
The second part states that a contract to do any act becomes unenforceable if the act becomes impossible or because of some event that prevents the promisor from executing his promise. It also states that the act becomes unenforceable if the act is impossible to perform or becomes unlawful.
The third part places a liability on the promisor to compensate the promisee for non-performance, where the promisor knew that the act was unlawful or impossible and the promisee did not.[20]
There are three very basic conditions for the application of the second part of Section 56:
Firstly, there must be a valid and subsisting contract between the parties.
Secondly, there must be some part of the contract which is still not performed and
Thirdly, the contract is rendered as impossible of performance after it has been duly entered into by the parties.[21]
This section recognizes the events which are dehors the contract, which can render the performance of the contract impossible and can disturb the performance of the contract.[22] The doctrine of frustration has been developed to escape from the clutches of injustice, where such would amount to enforcement of a contract in literal terms after the circumstances change significantly.[23] It is a device that provides for an exception to absolute contracts so that justice is delivered.[24]
VI. English Law v. Indian Law
This doctrine was introduced first time in the year 1863, in the case of Taylor v. Caldwell, where the court held that “but as subject to an implied condition that the parties shall be excused in case, before the breach, performance becomes impossible from the perishing of the thing without default of the contractor.”[25]
The test of frustration as adopted by the English courts state that there must be a significant change in the obligation, that thing if performed would be very different from the thing contracted for.[26]
The Indian courts do not follow the tests laid down by the English courts. The Indian courts have stated that the Indian Contracts Act is exhaustive and hence there is no need to refer to the decisions of English Courts.
The only doctrine being followed by the court is that of supervening impossibility or illegality of the act agreed to be done and this section lays down a rule of positive law and does not leave the matter to be determined on the basis of the intention of the parties.[27] The section takes the word ‘impossible’ in its practical sense and disregards the literal meaning of the word.[28]
Therefore, in cases where the court can decipher from the contract that the terms itself contained impliedly or expressly a condition according to which it would stand discharged subject to the occurrence of a certain event, then the dissolution of contract would take place under the contract itself and cannot be brought under the purview of Section 56. Whereas the English Law would consider these cases as one of frustration, in India this would be dealt with under the provisions of a contingent contract.
VII. Application of Frustrated Contracts
Where any event can change the circumstances of the contract, to an extent that it is fundamental and is regarded as the root of the contract, the court can in such cases declare the contract as frustrated.
The court before declaring a contract as frustrated has to examine the circumstances surrounding the contract, the belief, knowledge and intention of the parties and has to decide whether the change in circumstances has affected the very basis of the contract and its underlying object.[29]
The doctrine of frustration is primarily associated with the incidence of the risk. The question to be considered is one of risk allocation i.e. whether one or the other parties have expressly assumed the risk of the event occurring. It is decided on the basis of whether the parties to the contract ought to have reasonably assumed the risk.[30]
The contract is not considered to have been frustrated if the parties ought to have foreseen the risk of occurrence of a particular event. The reason behind this is that the parties have consciously accepted the risk. A contract that involves speculation would not be considered under Section 56, as the basis of such a contract is to distribute all risks on one side or the other.[31]
To decide whether the contract is frustrated or not you have to look at it objectively since frustration is automatic on the occurrence of the event and does not depend on the volition or act of any of the parties to the contract. When an uncertain event occurs, which was not contemplated by any of the parties, the meaning of the contract is considered and the intention of the parties is not considered.
The meaning of a contract is determined on the basis of how a reasonable man would presumably have agreed upon and if it was possible for them to have an express provision as to their rights and liabilities in the event of the occurrence of the event.
VIII. Contingent Contract v. Frustrated Contract
The difference between a contingent contract and a frustrated contract might look like a confusing area, but the Indian Jurisprudence has set out a clear difference between both types of contract. The first and very major difference between the two is that the event leading to the frustration of contract if it is impliedly or expressly mentioned in the clauses of the contract then it is governed by Section 32. Whereas if it occurs dehors the contract, it is dealt with under Positive Law included within the ambit of Section 56.
The court can provide for relief under Section 56 if it finds that there was a subsequent impossibility that defeats the whole purpose or the basis on which the contract was created because of the intrusion or occurrence of a certain event, which could not have been contemplated by the parties.
In the case of Nafed v. Alimenta S.A, the two parties had entered into a supply agreement for 5000 MT of a commodity in the year 1979-80. Owing to a cyclone the party could only supply 1900 MT of the commodity. The party agreed to supply the rest of the commodity in the year 1980-81, but was denied a permit by the Government authorities. The court brought this under the ambit of Section 32 and not Section 56.
The court stated that matters can be brought under Section 56 if agreement becomes impossible to perform due to unforeseen exigency, but in this case, the clauses provided for the events that would prevent the parties from supplying the commodity. Hence it is a matter under Section 32.
Also in the case of Alopi Prashad &Sons Ltd v. UOI, the parties entered into a contract for the supply of ghee to the Union of India, but before the contract could have been executed, World war II had started which lead to a rise in the price of Ghee.
The courts, in this case, did not consider the case under Section 56 as it could have reasonably concluded that the parties to the contract could have foreseen the altered circumstances and hence it wasn’t an event that was not unpredictable, so should not be considered as frustrated.
The difference between Section 32 and Section 56 is that a contract is dissolved under its own force under Section 32, but when it comes to Section 56, the contract is deemed as unenforceable because of outside forces that are unrelated to the contract.
On the basis of various Supreme Court decisions, it can be conferred that the primary difference between a Contingent Contract and a Frustrated Contract is whether such contingency or the occurrence of the event was expected by the parties or not. The intention of the parties can be generally deciphered from the terms of the contract and whether the terms provide for such an event to occur, whether expressly or impliedly. The courts are to decide the case on the basis of facts and circumstances and what the parties have negotiated and agreed upon.
IX. Conclusion
Through this article, the author has attempted to discuss the various dimensions of frustrated contracts and contingent contracts along with their application by the judiciary. The distinction between contingent contracts and frustrated contracts holds even more relevance in today’s time as during the covid 19- pandemic, difficulties are being faced by parties in fulfilling their contractual obligations.
Either contracts are becoming impossible to perform or there is a severe delay in performance due to nationwide lockdowns and halt of business activity. Hence, the courts have a huge responsibility in curling out the intention of the parties by adequately constructing the terms of the agreement with respect to the foreseeability of the events mentioned in the contract.
The concept of force majeure also holds relevance for such contracts and it can be defined as some event or effect which cannot be anticipated or controlled making it difficult or impossible to perform contractual obligations. It includes acts of nature, Act of God and act of people like riots and wars.
It is interesting to note, that if contracts provide for an express or implied force majeure clause it will be governed by section 32 and when a force majeure clause or covid-19 like the situation is dehors the contract then the doctrine of frustration can be used under section 56.
However, this must be applied cautiously by the judiciary as every change in circumstances cannot be viewed as rendering the performance of the contract impossible and force majeure in all kinds of contracts must be subjected to a narrow construction.
Therefore, from the above discussion, it can be concluded that the concepts of frustration and contingent contract depend extensively on the terms of the contract along with the facts and circumstances and so a careful examination is essential to a fair remedy to the affected party.
References
[1] Section 31, Indian Contracts Act, 1872.
[2] Sati Oil Udyog Ltd v. Avanti Project Infrastructure Ltd, (2010) 2 Gau LR 512 (Gau).
[3] J.P. Builders v. A. Ramadas Rao & Anr, (2011) 1 SCC 429.
[4] The Commissioner of Excess v. The Ruby General Insurance Co Ltd, 1957 AIR 669.
[5] In re: Jaunpur Sugar Factory Ltd. v. Unknown, AIR 1925 All 658.
[6] Ansons’s Law of Contract, 29th Edition, p. 140.
[7] Id.
[8] Id.
[9] Chitty on Contracts, 28th Edition, p.152.
[10] Motilal v. Nanhelal, AIR 1930 PC 287.
[11] Id.
[12] Chandnee Widya Vati Madden v. Dr. C.L. Katiai, 1964 AIR 978.
[13] Samina Venkata Sureswara Sarma v. Meesala Kota Muyullayya, AIR 1996 AP 440.
[14] Section 33, Indian Contracts Act, 1872.
[15] Section 35, Indian Contracts Act, 1872.
[16] Satyabrata Ghose v. Mugneeram Bangur, 1954 AIR 44.
[17] Section 65, Indian Contracts Act, 1872.
[18] Joseph Constantine Steamship Line Ltd v Imperial Smelting Corporation Ltd, (1942) A.C. 154.
[19] Section 56, Indian Contracts Act, 1872.
[20] Id.
[21] Industrial Finance Corporation v. Cannanore Spinning and Weaving Mills Ltd, (2002) 5 SCC 54.
[22] Energy Watchdog v. Central Electricity Regulatory Commission, (2017) 14 SCC 80.
[23] National Carriers Ltd v. Panalpina (Northern) Ltd, (1981) AC 675.
[24] Hirji Mulji v. Cheoung Yue Steamship Co., (1926) AC 497.
[25] Taylor v. Caldwell, (1863) 3 B&S 826.
[26] Davis Contractors v. Fareham UDC, (1956) AC 696.
[27] Boothalinga Agencies v. V.T.C. Poriaswami Nadar, 1969 AIR 110.
[28] Satyabrata Ghose v. Mugneeram Bangur, 1954 AIR 44.
[29] Id.
[30] PS Atiyah, An Introduction to the Law of Contract, 5th Edition, p.237
[31] Larrinaga & co. ltd. v. The Societe Franco-Americaine des Phosphates de Medulla, Paris, (1923) 14 LI.L.Rep. 457
