Impossibility of Performance, and Frustration

Its illustrations:

"(a) A agrees with B to discover treasure by magic. The agreement is void.

(b) A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract becomes void.

(c) A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject to practise polygamy, A must make compensation to B for the loss caused to her by the non-performance of his promise.

(d) A contracts to take in cargo for B at a foreign port. A's Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared.

(e) A contracts to act at a theatre for six months in consideration of a sum paid in advance by B. On several occasions A is too ill to act. The contract to act on those occasions becomes void."

Broken down: three paragraphs, three distinct rules

Paragraph one: initial impossibility

An agreement to do an act impossible in itself is void, and it is void from the beginning. Illustration (a), discovering treasure by magic, is the Act's own example.

Note the vocabulary. The paragraph speaks of an agreement which is void, because there never was a contract; paragraphs two and three speak of a contract which becomes void. The Act is consistent about this and it is worth pointing out in an answer.

Initial impossibility overlaps with mistake. Where both parties were unaware of the impossibility, the case may equally be analysed as a bilateral mistake as to a matter of fact essential to the agreement under section 20. Where the promisor knew, paragraph three applies. See [Mistake of Fact and Mistake of Law].

Paragraph two: supervening impossibility or illegality

The contract becomes void when the act becomes impossible or unlawful. Three features.

The event must occur after the contract is made. That is what "supervening" means.

Impossibility, or unlawfulness by reason of an event the promisor could not prevent. Note that the qualification "which the promisor could not prevent" is attached to unlawfulness in the section's own words; the courts have in any event refused relief where the impossibility was self induced, because a party cannot rely on his own act to discharge himself.

The contract becomes void automatically, from the moment of the event. It is not voidable, so neither party elects; the discharge is by operation of law and both are released as to the future.

Paragraph three: the promisor who knew

Where the promisor knew, or with reasonable diligence might have known, of the impossibility or unlawfulness, and the promisee did not know, the promisor must compensate the promisee for the loss.

Illustration (c) is the case: a man already married and forbidden to practise polygamy contracts to marry another, and must compensate her. He knew; she did not.

The recognised grounds of supervening impossibility

Six categories are settled, and an answer that lists them scores.

(a) Destruction of the subject matter. The thing essential to performance ceases to exist.

(b) Death or incapacity in a contract of personal service. Illustration (b), where A goes mad before the marriage, and illustration (e), where A is too ill to act.

(c) Supervening illegality, and a change of law. Illustration (d), where war is declared against the country of the port. A statute passed after the contract that forbids the very thing promised discharges it.

(d) Non occurrence of a state of things forming the basis of the contract. Where the whole foundation of the bargain, as both parties understood it, has gone, even though literal performance remains possible.

(e) Outbreak of war, which both makes trading with an enemy unlawful and may make performance impossible.

(f) Government or administrative intervention, such as requisition or an indefinite prohibition, provided it strikes at the root of the contract and is not merely a temporary interference.

What does NOT frustrate a contract

This list is as examinable as the last one, and it is where most problem questions are decided.

• Commercial hardship. Performance becoming more expensive, less profitable, or ruinous is not impossibility.
• A rise in prices, or a shortage of labour or materials, unless it makes performance genuinely impossible rather than merely difficult.
• Self induced impossibility. A party who by his own act or default brings about the event cannot rely on it.
• A temporary or partial difficulty that does not strike at the root of the contract.
• Failure of one of several means of performing, where another means remains available.
• Impossibility the parties FORESAW and provided for. Where the contract itself allocates the risk, for example by a force majeure clause, the clause governs and the parties are held to their own allocation.

The consequence: section 65

Discharge under section 56 is not the end of the matter, because money and goods may already have changed hands.

Section 65 provides 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."

So an advance paid must be returned, and a benefit received must be restored or paid for. The words "or when a contract becomes void" are what make section 65 apply to a frustrated contract, and it is the standard second half of any answer on section 56. See [Consequences of Rescission, and Restoration of Benefit].

A worked example

Ashwini contracts in January to supply and install stage lighting at a hall for a music festival on 15 June, for twenty lakh rupees, and Bhaskar pays five lakh rupees in advance.

• The hall burns down in May. Destruction of the subject matter essential to performance. The contract becomes void under paragraph two, from the date of the fire, and under section 65 the five lakh rupees must be restored.
• The Government prohibits all public gatherings indefinitely from May. Supervening illegality by an event the promisor could not prevent. The contract becomes void, and again section 65 applies.
• The prohibition lasts two weeks in March and is lifted well before June. A temporary interference that does not strike at the root of the contract. No frustration.
• The price of lighting equipment triples because of an import duty. Commercial hardship, not impossibility. Ashwini must perform at the agreed price.
• Ashwini sells her only suitable equipment in April and cannot obtain other. Self induced. She cannot rely on section 56, and this is a breach; it is also a disablement under section 39.
• The contract contains a clause saying that if a Government order prevents the event, the advance is refundable less ten per cent. The parties have provided for the event, so the clause governs rather than section 56 and section 65.

Now take initial impossibility. Ashwini contracts in January to install lighting at a hall that, unknown to both, had already burnt down in December. That is an agreement to do an act impossible in itself, void under paragraph one and analysable also as a bilateral mistake under section 20. If Ashwini knew the hall had burnt and Bhaskar did not, paragraph three makes her compensate him.

What it does NOT mean

"A contract is frustrated when performance becomes difficult or unprofitable." It is not. Impossibility, not hardship.

"Frustration makes the contract voidable." It makes it void, automatically, when the act becomes impossible or unlawful. Neither party elects.

"Everything done under the contract stands." Section 65 requires an advantage received to be restored or compensated for.

"A party can rely on an event he brought about." Self induced impossibility does not discharge.

"Section 56 applies to initial impossibility in the same way." Paragraph one voids the agreement from the outset; paragraph two makes a contract become void from the date of the event. Different words and different consequences.

"Frustration applies even where the contract provides for the event." Where the parties have allocated the risk themselves, their clause governs.

Quick revision

• s.56, paragraph one: an agreement to do an act impossible in itself is void. Illustration (a), treasure by magic.
• Paragraph two: a contract to do an act which after the contract is made becomes impossible, or unlawful by an event the promisor could not prevent, becomes void when the act becomes impossible or unlawful. Automatic, not at anyone's option.
• Paragraph three: a promisor who knew or might with reasonable diligence have known, where the promisee did not, must compensate. Illustration (c), the man already married.
• Grounds: destruction of the subject matter; death or incapacity in personal service; supervening illegality or change of law; failure of the basis of the contract; war; government intervention.
• NOT grounds: commercial hardship, price rises, shortage of labour, self induced impossibility, temporary difficulty, failure of one of several means, and an event the parties provided for.
• s.65: where a contract becomes void, an advantage received must be restored or compensated for.

Test yourself

1. Set out the three paragraphs of section 56. 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. And where a promisor 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, he must compensate the promisee for any loss sustained through the non performance.

2. Name four grounds of supervening impossibility. Destruction of the subject matter essential to performance; death or incapacity where the contract is one of personal service, as in illustrations (b) and (e); supervening illegality or a change of law, as in illustration (d) where war is declared against the country of the port; and the failure of a state of things which formed the very foundation of the contract.

3. Does commercial hardship frustrate a contract? No. Performance becoming more expensive, less profitable or even ruinous is not impossibility. A contract allocates risk, and a party who has agreed a price or a date has taken the risk of ordinary market and supply movements, so section 56 does not release him.

4. What happens to money already paid under a frustrated contract? Section 65 applies, because it covers the case where a contract becomes void as well as where an agreement is discovered to be void. Any person who has received an advantage under the contract is bound to restore it, or to make compensation for it, to the person from whom he received it, so an advance must be returned.

5. Can a party rely on an impossibility he caused himself? No. Self induced impossibility does not discharge a contract, because a party cannot rely on his own act or default to escape his promise. Such conduct is a breach, and where it puts performance out of his power it is also a disablement within section 39.