In commercial contracts, parties often agree to specific obligations assuming normal circumstances will prevail. But what happens when an unforeseen event makes performance impossible or unlawful? This is where the Doctrine of Frustration under Section 56 of the Contract Act, 1872 comes into play.
This article explains the doctrine, its application in Pakistan, legal interpretation by courts, and how it impacts commercial agreements.
Relevant Law: Section 56 of the Contract Act, 1872 (Pakistan)
“An agreement to do an act impossible in itself is void.”
“A contract to do an act which becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful after the contract is made, becomes void when the act becomes impossible or unlawful.”
The Doctrine of Frustration in commercial agreements, as enshrined in The Contract Act 1872, Section 56, addresses situations where the performance of a contract becomes impossible or unlawful after the contract is made. This doctrine and its practicality within Pakistan’s legal system are detailed below:
1. Definition and Legal Basis
The Contract Act 1872, Section 56 states: “An agreement to do an act impossible in itself is void. 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.” This provision essentially means that if an event occurs that renders the performance of a contract impossible or illegal through no fault of the contracting parties, the contract is discharged.
2. Effects of Frustration
- Discharge of Contract: The primary effect of frustration is that it discharges the contract, relieving both parties from their obligations from the time of the frustrating event.
- Restitution: The Contract Act 1872 also incorporates principles of restitution. Section 65 provides that when a contract becomes void, any party who has received any advantage under the agreement must restore it or make compensation for it to the person from whom they received it.
3. Key Elements for the Application of the Doctrine
- Impossibility or Illegality: The performance must become impossible or illegal. Impossibility isn’t limited to physical impossibility but also includes situations where the fundamental basis of the contract has been undermined.
- Unforeseeability: The event causing the impossibility or illegality must be one that the parties could not have reasonably foreseen at the time of entering into the contract.
- No Self-Induced Frustration: The frustrating event must not be due to the fault of either party. A party cannot rely on self-induced frustration to escape their contractual obligations.
4. Application and Practicality in Pakistan
- Natural Disasters:
- In Province of West Pakistan v. Pir Muhammad and Others, 1980 CLC 525, the Sindh High Court dealt with a case where a severe storm destroyed fruit crops that were the subject of an auction. The court held that the contract was an agreement to sell future goods and the storm was an unforeseeable event making performance impossible.
- Similarly, where natural calamities destroy goods, courts have the power to reduce contractual prices.
- Government Actions and Regulatory Changes:
- Government actions, such as imposition of ban, can also lead to the frustration of contract.
- Outbreak of War:
- The case of A.R. MOHAMED SIDDIK and others versus THE TRANS OCEANIC STEAMSHIP CO. LTD. and another, 1988 CLC 299, examined a contract frustrated by the 1971 war between India and Pakistan. The court held that while damages for breach of contract could not be claimed under Section 56, Section 65 mandated the restoration of any advantage received, such as the refund of freight.
- Specific Performance:
- In the case of Messrs PAKISTAN STATE OIL COMPANY LTD. v. Malik HADI HUSSAIN, 2013 YLR 2769, the Lahore High Court addressed the issue of contractual obligations and specific performance, reinforcing the importance of adhering to contractual terms unless they contravene existing laws.
5. Limitations and Considerations
- Commercial Hardship: Mere commercial difficulty or increased expense is generally not sufficient to invoke the doctrine of frustration. The event must truly render performance impossible or fundamentally different from what was originally contemplated.
- Express Contractual Provisions: If a contract contains provisions that specifically address what should happen in the event of certain contingencies, those provisions will usually take precedence over the doctrine of frustration.
- Due Diligence: Parties are expected to take reasonable steps to mitigate the impact of foreseeable events. Failure to do so may prevent them from relying on the doctrine of frustration.
Conclusion
The Doctrine of Frustration plays a crucial role in Pakistan’s legal system by providing a mechanism to deal with unforeseen events that render contractual performance impossible. While it is not a tool to escape bad bargains, it ensures fairness when circumstances fundamentally alter the nature of contractual obligations. Its application is, however, subject to careful consideration of the specific facts, the foreseeability of the event, and the conduct of the parties involved.