FRUSTRATION OF CONTRACT

Frustration refers to the “the destruction of the value of the performance that has been
bargained for by the promisor as a result of a supervening event.” It is also referred to as “a
situation where the terms of a contract cannot possibly be fulfilled” Thus, frustration of a
contract simply refers to when the promiser (the one who makes a promise) is unable to
fulfill their promises to the promisee (the one to whom the promise was made to) in a
contract due to unforeseen circumstances beyond their control.

Section 56 of the Contract Act 1872 provides that

“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

Where one person has promised to do 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.”

Thus, the doctrine of frustration is incorporated within Section 56 of the Contract Act, which
is based on the maxim “lex non cogit ad impossibilia” (the law will not compel a man to do
what he cannot possibly perform). When something unexpected happens that neither party
can control, and it makes it impossible for them to do what they promised in a contract, the
contract becomes void. This can happen if the promised act becomes impossible or illegal
after they agreed on the contract, but only if the person making the promise didn't know it
would happen. So, the person who made the promise usually has to do what they said they
would in the contract, unless it's become impossible or illegal because of circumstances they
couldn't control. This is sometimes called "physical impossibility" when the act itself is
impossible, or "non-self-induced legal impossibility" when the act becomes illegal, and it's
not the person's fault who made the promise.

If the person who made a promise could have known, with reasonable care, that what they
promised would later become unlawful, and the other person didn't know about it, then the
person who didn't know can ask for compensation. It means the person who made the
promise may have to pay for any harm or damage caused by not keeping their promise.
In Abdul Mutaleb v. Mst. Rezia Begum (PLD 1970 SC 185, para 8), the court held that

“Section 56 of our Contract Act lays down as rule of positive law relating to
frustration of contract by reason of supervening impossibility or illegality of the act agreed
to be done by the contracting parties.”

Frustration of a Contract due to Impossibility of Performance of the Act

If someone promises to do something in a contract but later finds it's impossible to do due to
unexpected events, the contract can be frustrated, and it becomes void. However, if the court
decides the contract isn't impossible to fulfill despite the unexpected events, both parties are
still bound by the contract's original terms. The court cannot change the contract based on the
unforeseen circumstances. The court might, though, decide not to stop legal proceedings (stay
of proceedings) in cases governed by Section 56. When the contract involves selling goods,
frustration applies only if the goods are destroyed or no longer exist. Frustration can also be
partial, meaning only part of the promised act is impossible to perform, and in such cases, the
contract becomes frustrated.

In Shaikh Muhammad Taqi v. Muhammad Anwar Khan Ghauri (1983 CLC 1085
Karachi, para 15), where the appellant took the plea of frustration of an agreement for sale
of property by claiming that the price of the property has increased due the devaluation of
currency in the country that arose due to the fall of East Pakistan. The court held that the
appellant’s plea of frustration fails as these circumstances do not justify his non-performance
in the contract.

Frustration of a Contract due to the Act becoming Unlawful

If someone promises to do something in a contract but later finds it's against the law to do so,
the contract can be frustrated and become void. Unlawfulness means the act is either
prohibited or made illegal by a valid law or order from a lawful authority. So, if a law or
order makes it impossible to carry out the promised act, the contract is frustrated. This can
happen, for example, if ownership of the land is transferred to a local authority. Even if a
court orders someone not to keep their promise, it's also considered frustration of the
contract.

Self-imposed Frustration
If a problem in a contract could have been avoided by being careful and taking the necessary
steps, frustration doesn't apply. For example, in a case where a company couldn't deliver
cotton due to a lack of railway wagons, the court said frustration didn't apply because the
company could have planned ahead and taken precautions. This is called self-imposed
frustration. The court also discussed whether frustration is based on implied terms (things not
explicitly stated in the contract), but they rejected this idea.

In Bengal Oils Mills Ltd. v. Dada Sons (PLD 1964 W.P Karachi, para 8-14), where a
company failed to supply cotton seeds, the court said the contract was void because the
promised act became unlawful. The court emphasized that we shouldn't use laws from other
countries, like the UK, to change our own laws, especially in frustration cases. This
observation is still followed in India, even though our courts sometimes consider foreign laws
for different reasons.

Effect of Frustration

Frustration causes the contract to become null and void. However, even if the contract
becomes null and void, the promisee who suffered as a result of the non-performance of the
promised act in a contract is entitled to compensation for any loss caused as a result of the
non-performance of the act promised by the promisor.

Payment of Damages

If the person who made a promise could have known, by being careful, that what they
promised would later become impossible or against the law, and the other person didn't know
about it, then the person who didn't know can ask for compensation. This is because the
person who made the promise didn't do what they said they would, and it caused some kind
of harm or damage to the person who was expecting the promise to be kept.

The concept of frustration is not a way to avoid paying damages for breaking a contract; it's
more like the idea of negligence. It doesn't excuse the person from paying for the harm
caused by not keeping the promise. If the court accepts a plea of frustration, it depends on the
details of each case, and it can't be used to escape the responsibility of payment. If a contract
becomes void due to Section 56 of the Act, the only option for the person expecting the
promise is to sue for any loss and ask for a return of any money paid in advance.
In Muhammad Sabir v. Maj. (Rtd.) Muhammad Khalid Naeem Cheema (2010 CLC
1879 Karachi, pg. 6), the court while contemplating Section 56 of the Act held that

“Section 56 of the Contract Act which embodies a positive rule of law relating to
doctrine of frustration. It contemplates that a contract may be void under its provisions and
yet compensation may be payable by the person, who is unable to perform it, whether the
impediment is impossibility or unlawfulness and whether the impediment existed at the time
of contract or supervened.”

Doctrine of Frustration and Leases

The doctrine of frustration is not applicable in contracts of lease or lease agreements. It

is applicable only to executory contracts whereunder performance or further performance of a
promise is outstanding, but does not apply to a transaction which is complete and has already
created a right in immovable property in favour of a party. The lease creates a right in rem for
the party involved and after the accrual of the said right, there remains no further
performance to be undertaken by the parties. This jurisprudence has been upheld to this day.