Breach, Frustration, Void and Voidable Agreements

Agreements declared void by the Act: s.11 (incompetent party), s.20 (bilateral mistake), s.23 (unlawful object/consideration), s.24 (partly unlawful and inseparable), s.25 (no consideration), s.26 (restraint of marriage), s.27 (restraint of trade), s.28 (restraint of legal proceedings), s.29 (uncertainty), s.30 (wager), s.36 (contingent on impossible event), s.56 para 1 (agreement to do an impossible act).

Voidable by statute: s.19 and 19A (consent not free), s.39 (repudiation by a party), s.53 (prevention of performance by one party), s.55 (failure to perform at a time fixed when time is of the essence).

Consequences:

• s.64: a party rescinding a voidable contract must restore any benefit received to the other party.

• s.65: when an agreement is discovered to be void, or a contract becomes void, any person who has received any advantage must restore it or make compensation. See Kuju Collieries Ltd. v Jharkhand Mines Ltd. (1974). Note that in Mohori Bibee restitution under s.65 was refused, because s.65 applies to persons competent to contract.

• Rights of third parties: a bona fide purchaser for value without notice acquires good title before rescission.

• Rescission may be lost by affirmation, lapse of time, intervention of third-party rights, or impossibility of restitutio in integrum.

1. By performance (ss.37–67): both parties must perform or offer to perform.

   • Tender (s.38): an offer of performance that is unconditional, made at the proper time and place, with a reasonable opportunity to inspect the goods. A valid tender of performance, if refused, relieves the promisor of liability for non-performance but not of the promise itself. A valid tender of money does not discharge the debt.

   • Joint promisors (ss.42–45).

   • Appropriation of payments (ss.59–61): the debtor can direct the appropriation; if not, the creditor; if neither, in the order of time.

   • Reciprocal promises (ss.51–54): performance in the order specified; where one is dependent on the other, the party at fault must compensate.

   • s.55 (time as the essence): if time is of the essence and the promisor fails, the contract is voidable at the promisee’s option. If not of the essence, the promisee can claim compensation only. In contracts for sale of immovable property, time is presumed not to be of the essence (Hind Construction Contractors v State of Maharashtra, 1979; Gomathinayagam Pillai v Palaniswami Nadar, 1967).

2. By mutual agreement (ss.62–63): novation (substitution of a new contract), rescission (cancellation), alteration, remission (acceptance of lesser performance or satisfaction), waiver, accord and satisfaction.

3. By impossibility (s.56), discussed below.

4. By lapse of time, under the Limitation Act, 1963.

5. By operation of law: death (in personal contracts), insolvency, merger, and material alteration of a written document.

6. By breach (s.39 and following).

Text of s.56:

• Para 1: An agreement to do an act impossible in itself is void.

• Para 2: 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.

• Para 3: 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 compensate the promisee for any loss through the non-performance.

Indian position: the doctrine is a rule of positive law under s.56, not a rule based on an implied term. Unlike English law (where frustration was developed by the courts and is regulated by the Law Reform (Frustrated Contracts) Act, 1943), the Indian statute governs, and s.65 provides restitution.

Leading cases:

• Taylor v Caldwell (1863): music hall destroyed by fire before the concerts. Origin of the doctrine.

• Krell v Henry (1903): rooms hired for viewing the coronation procession, which was cancelled. The foundation of the contract was frustrated.

• Herne Bay Steam Boat Co. v Hutton (1903): hire of a boat to see the naval review. Not frustrated as the boat could still cruise.

• Satyabrata Ghose v Mugneeram Bangur & Co. (1954): Supreme Court: s.56 is wider than the English rule; ‘impossible’ includes impracticable and useless from the point of view of the object and purpose of the parties. The test is the destruction of the foundation of the contract.

• Naihati Jute Mills v Khyaliram Jagannath (1968): mere commercial hardship or difficulty is not frustration.

• Alopi Parshad & Sons v Union of India (1960): increase in cost does not frustrate a contract.

• Sushila Devi v Hari Singh (1971): migration after Partition made performance impossible.

• Energy Watchdog v CERC (2017): a rise in coal prices and a change in Indonesian regulation did not frustrate the power purchase agreement; force majeure clauses are dealt with under s.32 and are distinct from s.56.

• Halliburton Offshore Services v Vedanta Ltd. (Delhi HC, 2020): Covid-19 force majeure claims are examined on the contract wording and cannot excuse non-performance that occurred before the event.

Grounds for frustration: destruction of the subject-matter; non-occurrence of a contemplated event; death or incapacity of a party in personal-service contracts; change of law or governmental intervention; outbreak of war.

Where the doctrine does NOT apply: self-induced frustration; mere hardship, delay or increased cost; a contract expressly providing for the risk (force majeure clauses); leases (a transfer of property, per Raja Dhruv Dev Chand v Raja Harmohinder Singh, 1968); and where the event was foreseeable.

Initial vs supervening impossibility: initial impossibility (para 1) renders the agreement void from the start; supervening impossibility (para 2) makes a valid contract void later.

Meaning: failure or refusal to perform contractual obligations without lawful excuse.

Kinds:

• Actual breach: on the due date of performance, or during performance.

• Anticipatory breach (s.39): a party, before the due date, refuses wholly to perform or disables himself. The promisee may treat the contract as repudiated and sue at once, or wait until the due date (affirm) and keep the contract alive (Hochster v De La Tour, 1853; Frost v Knight, 1872). By electing to wait, the promisee risks supervening events and still has the duty to mitigate.

Remedies for breach:

1. Rescission (s.39, s.75): the injured party may rescind and claim compensation (s.75).

2. Damages (s.73): compensation for any loss or damage caused which naturally arose in the usual course of things or which the parties knew, when they made the contract, to be likely to result. Compensation is not given for remote and indirect loss. The rule in Hadley v Baxendale (1854) underlies this: damages are limited to (a) those arising naturally and (b) those within the reasonable contemplation of both parties at the time of contract. The injured party has a duty to mitigate (Explanation).

3. Liquidated damages and penalty (s.74): where a sum is named as payable on breach, or a penalty is stipulated, the party complaining is entitled to reasonable compensation not exceeding the amount named, whether or not actual damage is proved. The English distinction between penalty and liquidated damages is not followed.

   • Fateh Chand v Balkishan Dass (1963): s.74 applies to both; the court awards reasonable compensation; forfeiture of earnest money beyond a reasonable amount is a penalty.

   • Maula Bux v Union of India (1969): forfeiture of earnest money/security deposit.

   • ONGC v Saw Pipes (2003): the party claiming must prove the loss unless the loss is impossible to prove.

   • Kailash Nath Associates v DDA (2015): the Supreme Court summarised the s.74 principles.

4. Specific performance: governed by the Specific Relief Act, 1963, as amended by the Specific Relief (Amendment) Act, 2018 (in force 1 October 2018). Specific performance is now a general rule rather than a discretionary remedy. New s.20 provides substituted performance; s.20A sets out special provisions for infrastructure projects (courts cannot grant injunctions that obstruct them); s.20B designates special courts.

5. Injunction: preventing a breach of a negative covenant (Specific Relief Act, Chapter VII).

6. Quantum meruit (‘as much as he has earned’): a claim for reasonable remuneration for work done where the contract is discharged by breach or is incomplete (Alopi Parshad; s.70 as a quasi-contract).

7. Restitution (ss.64, 65, 72).

Types of damages: nominal (breach with no loss), ordinary or general, special (foreseeable by the parties), exemplary/vindictive (generally not awarded in contract except for breach of promise to marry and wrongful dishonour of a cheque by a bank), and damages for mental agony (rare).

Remoteness: Hadley v Baxendale (mill-shaft case), Victoria Laundry v Newman, Czarnikow v Koufos (The Heron II). In India: Murlidhar Chiranjilal v Harishchandra Dwarkadas (1962).