1. Where a supervening event makes the performance of a contract impossible.
2. Where the common object of the contract is frustrated because of a supervening impossibility.
Thus frustration takes place when: (1) an event occurs which the parties could not contemplate when they made out the contract, (2) the event is one for which neither party is responsible, i.e., Act of God, Vis Major etc. (3) the contract, if performed, would be something entirely different from the bargain made by the parties.
James Scott & Sons vs. Delsel. In that case, a tiger had escaped from a traveling menagerie. Out of fear one mils girl failed to deliver the milk. Held, the contract was not discharged by frustration because, it would seem hardly reasonable to exonerate on the ground that "Tiger days excepted" could be implied as if written into the milk contract.
British Movie Tones Ltd. vs. London & District Cinemas Ltd. In this case, the House of Lord based the doctrine of frustration on the principle of construction. It requires the Court, as a matter of fact, first to construe the contract according to the moral canons of interpretation without the necessity of resorting to any artificial speculation concerning the party's actual or presumed intentions.
Limitations to the Doctrine of Frustration :
1. Any term which is inconsistent with the express terms of contract cannot be implied.
2. The doctrine does not apply where the supervening even arises from the intentional or willful act of a party.
3. The contract is not discharged by frustration where one party had the knowledge of the impossibility of performance of the contract. The doctrine is not applicable to the cases of commercial impossibility, failure of a third party on whose work the promisor had relied on etc.
Indian Law regarding Frustration :
The rules of English Law regarding the doctrine of frustration are not applicable in our country. Section 56 of the Contract Act lays down positive rules and does not leave anything to be determined according to the intention of the parties. In deciding cases in India, the only doctrine that the Courts follow is of supervening impossibility as laid down in section 56, being impossibility in its practical and not literal sense. The Supreme Court classified the position of Indian Law regarding the doctrine of frustration in the following case:
Satyabrat Ghosh vs. Magnee Ram Banger & Co. was the owner of a large tract of land. It started a scheme of dividing it into small plots and develops them for residential purposes. It invited offers from the intending buyers. A small portion of the price was to be paid as earnest money by the buyers at the time of making the contract. One third of the price was to be paid within one month of the construction of roads and drains and the rest was to be paid within 6 months bearing interest @ 6% p.a.
On 5-8-1940, B entered into a contract on these terms with M & Co. and later on, assigned the contract to S. Shortly prior to the assignment a portion of the land covered by the scheme was requisitioned under Defence of India Rules. The Company gave a notice to B to treat the contract as cancelled and have the earnest money. The contention of the Company was that the performance of the contract has become impossible on account of supervening impossibility. B handed over the letter to his assignee, who filed a suit against the company asserting that the company was liable under the contract and there was no case for treating the contract as rescinded on the ground of frustration.
On appeal, the Supreme Courts held that having regard to the terms of the contract, the actual existence of war conditions, at the time when the contract was made, the extent of work involved in the development scheme and the total absence of any definite period of time agreed to by the parties within which the work was to be completed, it could not be said that the requisition order vitally affected the contract or made its performance impossible. The appeal was, therefore, allowed and the suit decreed.
"The doctrine of frustration of contract comes into play when a contract becomes impossible of performance, after it is made, on account of circumstances beyond the control of the parties. It is really an aspect of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of sec. 56...................... Section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties."
The Indian Law regarding frustration was again made clearer in the case of Sushila Devi vs Hari Singh where the following observations were made:
"The view that section 56 applies only to cases of physical impossibility and that where this section is not applicable, recourse can be had to principles of English Law on the subject of frustration is not correct. Sec. 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. The impossibility contemplated is not confined to something not humanly possible.
If the performance of a contract becomes impracticable or unless having regard to the object and purpose the parties had in view, then it must be held that performance of the contract has become impossible. But the supervening events should take away the basis of the contract and it should be of such a character that it strikes at the root of the contract".
Chandler vs. Webster. In that case, A agreed to let a room to B to view the coronation of Edward VII. B agreed to pay the rent of Rs. 141 immediately. B paid Rs. 100 and agreed to pay the balance. Subsequently the procession was cancelled due to the illness of the King. The contract was frustrated, but the Court held B liable to pay Rs. 41 to A.
Fibrasa Spolka Akeyjna vs Fairbaira Lawson Combe Barbour Ltd. In that case, A company paid Rs. 1000 as advance for purchasing a machinery which was to be imported from Germany. The performance of the contract was rendered illegal by the intervention of war in 1939. The company thereupon requested the return of Rs. 1000 which they had paid. The House of Lords allowed the money to be recovered and pointed out that such an action was not an action on the quasi contract, which had ceased to exist, but an action in quasi-contract to recover money paid on a consideration which had wholly failed.
The Law Reforms (Frustrated Contracts) Act 1943 has now clarified the position. It lays down the following provisions:
1. Money paid before the frustration of the contract is recoverable.
2. Money not paid shall cease to be payable.
3. In case one party has done something in partial performance of the contract, he will be entitled to get compensation for the work done by him.
Thus, now both Indian and English laws stand on the same footing as regards effects of frustration. Section 65 of the Contract Act lays down that "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 compensation for it, to the person from whom he received it."