Doctrine of Frustration (Common Law overview)

A contract may be frustrated when the occurrence of an event, after entering into the contract, renders it physically or commercially impossible to perform or transforms the obligation to perform such that it radically differs from the obligation originally undertaken to be fulfilled at the time of entering into the contract.

Common Law History

Earlier, supervening events were not permitted as valid grounds for non-performance of an obligation under a contract, on the basis that the parties could have provided for such eventualities in their contract. A classic example of this rule of “absolute” contracts is set out in Paradine v. Jane (1647). In this case, a lessee, who was sued for arrears of rent, pleaded that he had been evicted from and kept out of possession of the leased land by an alien enemy, an event was beyond his control. Such eviction had deprived him of profits derived from business conducted on the leased land, which profits he had expected to appropriate towards payment of the rent to the lessor. He was nevertheless held liable to pay the rent on the following ground:

where the law creates a duty or charge and the party is disabled to perform it and hath no remedy over, there the law will excuse him… but when the party of his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract. ”

Therefore, it was held that a party must perform the contract irrespective of the hardships it may encounter, since the contract would have provided for those hardships had the party had foreseen them.

Subsequently, in Taylor v. Caldwell (1863), the defendants had agreed to permit the plaintiffs to use a music hall for concerts on four specified nights. After the contract was executed, but before the first night on which the plaintiffs were to utilize the music hall, the music hall was destroyed by fire. Blackburn J., held that:

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… the principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance. In none of these cases is the promise other than positive, nor is there any express stipulation that the destruction of the person or thing shall excuse the performance; but that excuse is by law implied. 

The Test for Frustration

Lauritzen AS v Wijsmuller BV, Bringham L.J (1990) sets out five propositions which describe the doctrine of frustration of a contract, as follows:

  1. The doctrine of frustration of a contract has evolved to mitigate the insistence of common law on the literal performance of absolute promises.
  2. Frustration operates to terminate the contract and discharge the parties from further liability under it. Therefore, it cannot be lightly invoked, but must be kept within very narrow limits and ought not to be extended.
  3. Frustration forthwith brings a contract to an end.
  4. The essence of frustration is that it should not be due to the act or election of the party seeking to rely on it.
  5. The frustrating event must take place without blame or fault on the side of the party seeking to rely on it.

The Implied term test and its shortcomings

As stated above, the implied term test was originally adopted in Taylor v. Caldwell (1963). Consequently, the doctrine of frustration was first introduced into English law and thereafter frequently applied in later judgments. However, it also became subject to considerable criticism and was finally laid to rest in National Carriers Ltd v Panalpina (Northern) Ltd (1980), where it was observed that implied term test was artificial since there could be a genuine common intention between the parties of the contract to terminate the contract upon the occurrence of the event. Therefore, it was decided that the meaning of a contract must be taken to be not what the parties intended, but that which the parties, in their fair and reasonable opinion, would presumably have agreed upon if they had foreseen the occurrence of an event and consequently expressly set out their several rights and liabilities on the occurrence of such event.

The Radical change in the obligation

The radical change finds its place by the reasoning that if the words of the contractual promise were to be enforced after happening of any unforeseeable event, would performance involve a radical change from the obligation initially undertaken? If yes, a radical change is said to have occurred. The radical change test has been expressly upheld and applied in subsequent cases by the House of Lords to determine whether a contract has been frustrated.

Scope of Frustration

As stated above, the doctrine of frustration cannot be lightly invoked as it kills the contract and discharges the parties from further liability under it. Parties cannot resort to it solely to escape from an onerous obligation which they have by their consent agreed to fulfil. It has been observed that the parties usually make provisions in their contract for the impact which various possible catastrophic events may have on their contractual obligations. Therefore, when such event which is foreseen and occurs, the contract is not frustrated (Joseph Constantine S.S Line Ltd v. Imperial Smelting Corp Ltd (1942) A.C 154, 163.)

Types of Frustration

As upheld from time to time, since frustration depends on the construction of the “obligation” in a particular contract taking into account unique facts and circumstances, reported decisions can only be applied as rough guides for the application of the doctrine.

Instances of an explosion, disabling or seizure of a ship and requisitioning of the subject-matter of the contract by the government has been treated as frustration by the courts. On the other hand, a mere inconvenience, hardship, or financial loss during performance of the contract, or delay within the commercial risk undertaking of the parties, has been held insufficient to frustrate particular contracts.

The following are the common types of frustrating events:

  1. Subsequent legal changes
  2. Changes affecting employment
  3. Supervening illegality
  4. War-time restrictions

One of the most common grounds for frustration is delay. It is often difficult to decide whether a contract has been frustrated by an event or change in circumstances which causes an unexpected delay in its performance. To frustrate a contract, the delay must be abnormal in its cause, effects, or expected duration, so that it falls outside of what the parties could reasonably have contemplated at the time of contracting. The fact that the delay was caused by “a new and unforeseeable factor or event” is relevant.

Limits of Frustration

As mentioned above, a provision in a contract setting out the effect of specified events or circumstances will typically preclude the application of the doctrine of frustration. Therefore, the impact of a force majeure clause or a hardship clause may prevail over the doctrine of frustration since the contract, on its proper construction, will be held to have provided for the event which has occurred. However, the inference that a foreseen event is not a frustrating event is only prima facie and can be excluded by evidence of contrary intention [Edwinton Commercial Corp v. Tsavliris Russ Ltd. EWCA Civ 547, (2007) 2 Lloyd’s Rep 517 at (103)]

Frustration does not rescind the contract ab initio; however, it brings the contract to an end forthwith, in the sense that it releases both the parties from any further performance of the contract (b.p. exploration Co. Ltd v. Hunt (1983) 2 A.C. 352). In fibrosa spolka akcyjna v Fairbairn Lawson Combe Barbour Ltd. English sellers agreed to sell specific machinery to polish buyers and to deliver its CIF in Gdynia, Poland. The contract was made in July 1939, and in that month an amount of 1,000 pounds was paid towards the price. However, before the sellers were able to complete the manufacture of the machines, the contract was frustrated when the German army occupied Gdynia. The buyers sued to recover the 1,000 pounds they had paid on the signing of the agreement. It was observed that they were entitled to recover the money because there had been a total failure of consideration i.e. the condition on which the 1000 pounds were paid had failed to materialize. However, in Appleby v. Myers (1867) L.R. 2 C.P. 651, where the frustrating event destroyed the completed work of a service provider and payment was due only on the completion of the work, the service provider was held not entitled to bring a restitution claim to recover payment in respect of the work which he had done prior to the frustration of the contract.

Conclusion

Frustration brings the contract to an end from the date the event occurs, subject to fulfilment. It releases both the parties from any further performance of the contract. However, the parties may be able to claim restitution for the loss suffered in performing the obligations.

 

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Doctrine of Frustration (Common Law overview)

Law of Restitution (Common and Indian Law)

Common Law

The law of restitution in common law is concerned with whether a claimant can claim a benefit from the defendant. This is distinct from whether the claimant can be compensated for the loss suffered, and remedies such as restitution are therefore distinct from those which are traditionally available in a contract or tort.

A claim of unjust enrichment is a claim of debt and not for damages and which is not founded on the commission of a wrong [(Haugesund Kommune v Depfa ACS Bank (2011) EWCA Civ 33 at (69)].

In many cases, the increase in the defendant’s wealth is the direct result of and is matched by, a corresponding diminution in the claimant’s wealth. Sometimes, this direct correspondence does not exist, but restitution is still awarded. In Littlewoods retail ltd v commissioners for her Majesty’s revenue and customs, it was recognized that unjust enrichment is concerned with the defendant’s gain rather the claimant’s loss, and if the defendant’s benefit from such gain is greater than the claimant’s loss, the claimant can still recover the value of the defendant’s benefit.

The principle of unjust enrichment requires:

firstly, that the defendant has been enriched by the receipt of a benefit;

secondly, that this enrichment is at the expense of the claimant;

thirdly, that the retention of the enrichment be unjust; and

finally, that there is no defence or bar to the claim (Banque Financiere de la Cite v Parc (battersear) Ltd [1999] 1 A.C. 221, 234).

 

Change in Law

Under Common Law, where the law is changed by legislation a payment made or service rendered in accordance with the previous law cannot be recovered since, clearly, there was no mistake when such payment was made, or service was rendered (Kleinwort Benson Ltd v Lincoln city council (1992) 2 A.C. 349, 382). However, where the law is changed by a judicial decision, the position differs. Such a change may occur either by the overruling an earlier decision or by changing what had previously been commonly regarded as the law. The traditional working assumption upon which the common law proceeds is that judges declare law but do not make it. Therefore, payment must be regarded as a mistake and is therefore recoverable.

However, it has been recognized in Dawood Ltd v Health Ltd (1961) that a claimant who has paid money under a contract, which was subsequently terminated for breach, cannot claim all the money paid as damages for wasted expenditure where there was no total failure of consideration, i.e., when all or part of the consideration fails to materialize or subsists.

Indian Law

Section 65 of the Indian Contract Act, 1872 provides for restitution as “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”. This Section aims to put the parties back in the same position as they were before entering into the contract which subsequently became void. The Section provides emphasis on the different words, one of them being unjust enrichment. The basis of this section is the doctrine of restitution in integrum which means the restoration of an injured party to the situation which would have prevailed had no injury been sustained, i.e. reinstatement to the original or pre-contractual position.

The Supreme Court in the case of State of Gujarat v. Essar Oil Ltd. (2012) has succinctly encapsulated the principle of restitution and its place in the Indian Contract Act which is summarised as follows:

  1. The concept of restitution is virtually a common law principle, and it is a remedy against unjust enrichment or unjust benefit. The core of the concept lies in the conscience of the court which prevents a party from retaining money or some benefit derived from another which it has received by way of an erroneous decree of the court. Such remedy is different from a remedy in contract or tort and falls into the category of common law remedy which is called quasi-contract or restitution.
  2. The obligation to restitute lies on the person or the authority that has received unjust enrichment or unjust benefit. A person is enriched if he has received a benefit and a person is unjustly enriched if the retention of the benefit would be unjust.
  3. The question is what constitutes a “benefit”. A person is said to confer a benefit upon another, if he gives to the other, possession of or some other interest in money, land, chattels, or platforms services beneficial to or at the request of the other, satisfies a debt or a duty of the other or in any way adds to the other’s security or advantage. Thus, benefit denotes any form of advantage.
  4. Ordinarily, in cases of restitution if there is a benefit to one, there is a corresponding loss to another, and in such cases, the benefiting party is under a duty to return the amount by which it has been enriched to the losing party. However, equity demands that if one party has not been unjustly enriched, no order of recovery can be made against that party. Therefore, when an individual acquires benefit lawfully, which is not conferred by the party claiming restitution, the court cannot order restitution.
  5. The Court while determining the quantum of restitution, depending on the facts and circumstances of a given case, may take into consideration not only what the parties would have made but also what the party under obligation has or might reasonably have made.

Conclusion

In the end, unjust enrichment is when a person derives advantage on account of the loss suffered by another person. The benefit is essential to enrichment. A person is not entitled to claim the benefit of Section 65 of the Indian Contract Act, 1872 unless the other person has received unjust enrichment, i.e. when (i) the winning party under an agreement has gained an advantage which it would not have otherwise earned, or, (ii) the losing party has suffered an impoverishment which it would not have suffered.

 

Law of Restitution (Common and Indian Law)

Is India finally recognising “the right to be forgotten?”

Right to be forgotten

In India, for the first time, Karnataka High Court has passed a judgment where it applied and accepted the principle of “Right to be forgotten” which was first recognised by the Court of Justice of the European Union.

To summarise the case, a woman had instituted a civil suit, whereby she sought a declaration that there was no marriage between her and the Defendant, and prayed for annulment of the marriage certificate issued by the Sub-Registrar.  The Parties ultimately entered into a compromise, and the suit was decreed in terms of the compromise petition. According to the conditions of the compromise, the woman was to withdraw all the cases instated by her.

Subsequently, a Petition was instituted by the father of the woman, the Petitioner approached the Karnataka High Court and after discussing the entire background of the case prayed that the name of his daughter be removed from the cause-title  of the aforementioned civil suit instituted by her. The Petitioner stated that the decree passed in the civil suit may reflect in the results of a name-wise search carried out through any of the internet service providers such as Google and Yahoo! and consequently, details of the daughter’s marriage and the cases instituted by her would be available on the public domain. This would, in turn, be detrimental to her marriage, her relationship with her husband and her reputation in the society. The Karnataka High Court, after carefully hearing the facts and Petitioner’s concerns directed that the daughter’s name should not be reflected in the body of the order. Furthermore, the Karnataka High Court directed the Registry to take steps to mask the name  of the Petitioner’s daughter before releasing the order to any such service provider, and also to ensure that any internet search made in the public domain does not reflect the nameof the Petitioner’s daughter in the cause title of the order.

While concluding the judgement, the Karnataka High Court stated “This would be in line with the trend in the western countries where they follow this as a matter of rule “Right to be forgotten” in sensitive cases involving women in general and highly sensitive cases involving rape of affecting the modesty and reputation of the person concerned.

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The Karnataka High Court makes reference to “western countries”, which may be read to mean countries within the jurisdiction of the Court of Justice of the European Union, which passed a ruling in Google v. Spain recognising the “Right to be forgotten” in 2014. In this particular case, a Spanish citizen had lodged a complaint against a Spanish newspaper and Google Inc. wherein the complainant’s main grievance was that an auction notice of his repossessed home appearing in Google’s search results, infringed his privacy rights, more so since the proceedings against him in the matter had been determined years ago. The citizen stated that the said auction notice was completely irrelevant and requested that Google Inc. be directed to remove the personal data relating to him.

The Spanish Court referred this case to the Court of Justice of the European Union. The main question before them was whether an individual has the right to request that his or her personal data be removed from the search engines.

The judgement passed by the Court of Justice on 13th May 2014, recognised the “Right to be forgotten” and inter alia stated that individuals have the right, under certain conditions, to ask search engines to remove links to personal information about them. This applied where the information is inaccurate, inadequate, irrelevant or excessive. However, the Court of Justice specified that the right to be forgotten is not absolute and will always need to be balanced against other fundamental rights, such as the freedom of expression and the media.

Similarly, in French Jurisprudence, “Right to Oblivion” entitles  criminal offenders, who have served their sentence, to have information about their crimes and convictions removed, to provide them a chance to turn their life around.

In India, however, no such right had been recognised by the courts. This judgment passed by the Karnataka High Court is a small step in the right direction, since it acknowledges that when a piece of information could affect a person in a negative way, such a person has the right to get the sensitive information removed. However, only time will tell whether and in what manner the right to be forgotten as recognized by this judgment is upheld and applied by other courts in various other circumstances, arguably, the most important of them being the right to be forgotten on social media.

The right to be forgotten, together with the right to privacy are essential in the age of digitization where information is available at a click of a button, and misleading information could very well have a long lasting effecting on one’s life. The Supreme Court of India has the opportunity in two cases pending before it, i.e. the WhatsApp privacy case case and the Aadhar Card case, to pass judgments to strengthen the right to privacy.

Is India finally recognising “the right to be forgotten?”