Where parties carry on various types of commercial transactions, an agreement is sometimes followed by unforeseen events occurring without the fault of either party. The occurrence of such events may interfere in the performance or prevent the performance of the contractual obligations. This brings uncertainty as to the legal effect of such change of circumstances on rights and obligations of the parties and may even result in discharge of the contract in question. In order to identify legal consequences of such extraordinary events, terms of the contract must be analyzed in the first place. The consequences arising out of such extraordinary events/uncertainties can be answered by applying the "Doctrine of Commercial Impracticability". The concept of impracticability is viewed to have been initiated from the common law prerequisite for excuse where performance of the contract is "vitally different" from the one originally contemplated/envisaged by the parties.
In interpreting the term "impracticability", courts have paid attention exclusively to a single indication of those changed circumstances where the real cost of performance surpasses the predicted cost of performance. In the view of American law, it is accepted that an issue is impossible when it is not executable. On the other hand, an issue is not executable when it is executable only by means of high and unreasonable cost. In the other words, although performing contract is possible technically but conditions of performing contract are very different from conditions at the time of making of the contract.
Though the Latin dictum Pacta sunt servanda provides that contracts should be performed absolutely and the sanctity of a contract displays party's absolute liability for obligations assumed; however, under the impracticability doctrine "when an event or a contingency occurs following to the contract formation but preceding to its performance, causing that performance to be impracticability, performance is said to be to be exempted and the contract is discharged". Indeed impracticability is one of the exceptions of sanctity of contract.
The doctrine of commercial impracticability has its origins in the English common law "doctrine of impossibility". According to the early version of common law, English courts refused to excuse a party to a contract when an event occurred following the making of the contract that affected one party's ability to execute. The court demanded the parties to perform absolutely. Paradine v. Jane1 is the case that is often cited for this rule of absolute legal responsibility, assuming that the parties were capable of allocating the risks of any accident by unavoidable requirement. Since this rule caused harsh consequences, the courts began to distinguish particular exceptions to its stringent application. The exception that emerged became the law of impossibility or law of implacability. It was not until 1863 that the conditions implied by the doctrine were first changed to incorporate impossibility as a defense as in the case of Taylor v. Caldwell2. Following this case, there is a famous case of Krell v. HenryBI3 about this subject. The doctrine of the impossibility in Taylor v. Caldwell maintained that even though the contract did not specify the contingency that took place, its occurrence depicted performance as impossible and validated the court's imposition of an implied term to the contract. At the dawn of the twentieth century, the test of impracticability was introduced in the case of Mineral Park Land v. Howard4 as another measure for ascertaining impossibility/impracticability, and therefore excusing performance. The rule as stated in that case was that "a thing is impossible in legal contemplation when it is not practicable; and a thing is impracticable when it can only be done at an excessive and unreasonable cost". Up until this decision, the court had never excused the obligator's performance due to only hardship, or due to a contract becoming unprofitable. Nonetheless, for the first time, the court acknowledged that a contract that was not performable except at an excessive cost was not different compared to a contract whose subject matter had been destroyed. Both types of contracts were recognized as impossible to perform. In Mineral Park, case5 the obligator had agreed to remove from the land of the oblige, all the earth and gravel needed for the bridge construction. Following the removal of approximately one-half of the necessary materials, the obligator stopped the performance because the rest of the material was below the water level. In reaching the verdict of excusing the obligator's performance, the court discovered that the parties assumed, as the basis of their agreement, that the land contained the requisite quantity [of earth and gravel] available for use, and that the removal of gravel located below the water level was not within the parties contemplation". With heightened globalization recent times have witnessed increasing business relations between the nations, and the development of Contractual Law has also recorded an enormous growth. Hence, the scope of Doctrine of Commercial Impracticability has also increased and a modem statement of this doctrine appears in Translantic Financing Corporation v United States.6 In this case it was held that "A contractual obligation is impracticable when it can only be done at an excessive and unreasonable cost." Another noteworthy case where the American courts have dealt with Commercial Impracticability is Aluminum Co. of America v. Essex Group Inc.7 In this case it was held that "Where, at the time a contract is made, a party's performance under it is impracticable without his fault because of a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty to render that performance arises, unless the language or circumstances indicate the contrary."
The court, in this case, also dealt with the discharge due to supervening impracticability of contractual obligations between the parties stating that "Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the nonoccurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary".
COMMERCIAL IMPRACTICABILITY: INDIAN VIEW
Impracticability in Indian law comes under the scope of Section-56 of the Contract Act of India (1872) in which it has been held that "An agreement to do an impossible act is void". Also, if a contract to do an act which after the formation of the contract, becomes impossible by the reason of some event beyond the control of the promisor, then such a contract becomes void, when the said act becomes impossible or unlawful. In other words, when one person has promised to do something which he knows or, which he with a reasonable diligence might have known and which the promisee did not know to be impossible or unlawful, then, in such a case the promisor must make the compensation to such a promisee for any loss which the promisee sustains because of the non-performance of the promise.
In India the issue of impossibility or impracticability, first cropped up in the landmark case of Satyabrata Ghose v Mugneeram Bangur.8 In this, Justice Mukherjee enunciated the doctrine as contained in section 56 of the Indian Contract Act, 1872:
"The first paragraph of the section lays down the law in the same way as in England. It speaks of something, which is impossible inherently or by its very nature, and no one can obviously be directed to perform such an act. The second paragraph enunciates the law relating to discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done."
In the Indian legal system, under the scope of Section 56 of the Indian Contract Act, 1872, the court can give relief on the ground of subsequent impracticability when it finds that the whole purpose or the basis of the contract has been frustrated by the intrusion or occurrence or happening of untoward, unexpected or unforeseen event or change in circumstances or there is material alteration in the conditions, which was not contemplated by the parties at the time of formation of the contract.
The concept of changed circumstances or altered conditions has not come into play in the form of an independent rule but is laid down with the Doctrine of Commercial Impracticability which has been recognized as a mode of discharge of contract in case, where the performance of the contract becomes impossible or impracticable due to some unforeseen or unexpected event beyond the control of the parties. From the legal point of view, the expression "Commercial Impracticability" exists only in the sense of difficulty of the performance of the contractual obligation of the contract which occurs unexpectedly.
Finally, doctrine of impracticability of contract is an exception to the principle of sanctity of contract. Historically, American law has gradually moved from its origin in the common law to modern law apropos this doctrine. It means that the two concepts of frustration of purpose and impossibility are commonly combined in common law resulting into the single concept of commercial impracticability. It is recommended here that when performance of a contract faces hardship because of the occurrence of an unforeseen event and it must not have been a basic assumption when the contract was made and moreover, performance was rendered impracticable by this incidence, the doctrine of impracticability should apply.
Footnotes
1 Paradine v Jane (King's Bench division 1647).
2 [1863] 3 B & S 826.
3 [1903] 1903 KB2 470.
4 [1916] 172 Cal 289.
5 [1916] 172 Cal 289, p 458.
6 Translantic Fin. Corp. v United States, 363 F. 2d. 312 [D.C. Cir 1966].
7 499 F. Supp.53 (W.D. Pa.1980)
8 Satyabrata Ghose v Mugneeram Bangur & Co. (1954) S.C.R. 319 317-18.
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