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The COVID-19 pandemic has caused significant disruption to companies all across the globe, with several finding it hard, if not impossible, to meet their contractual commitments as a result of the outbreak and the reaction to it. As a result, Force Majeure and Doctrine of Frustration are becoming more appealing possibilities for parties seeking a legal remedy when they are unable to execute their duties through no fault of their own.
This scenario has sparked numerous debates over whether the pandemic will be viewed as a ‘Act of God’ or ‘Force Majeure’ occurrence to excuse a party from contract non-performance or has ‘frustrated’ the contract, making it impossible or impracticable to fulfil. If so, is it lawful, what are the consequences, and what role would the courts play if such a non-performing party is sued for breach of contract?
This blog examines the basic legal ideas of Force Majeure and Doctrine of Frustration and how they apply to contracts impacted by the pandemic.
“Force Majeure” is defined as “an incident or consequence that cannot be predicted or controlled, is unanticipated, and prohibits someone from doing or fulfilling anything that he/she had agreed or formally intended to accomplish.”
According to Webster’s Dictionary, Force Majeure is defined as:-
As per Black’s Law Dictionary, Force Majeure is “an incident or consequence that cannot be predicted or controlled.” It is a contractual clause that allocates the risk of loss if performance becomes impossible or impractical, particularly as a result of an occurrence that the parties could not have predicted or controlled.
This provision may be included in nearly every contract, including commercial contracts, project financing agreements, manufacturing contracts, and so on. It is regarded as an essential provision since it exempts one party from executing the obligation in the event of Force Majeure.
In today’s business practise, Force Majeure clauses are commonly embodied in the type of contractual provisions, agreed upon amongst parties to excuse non-performance of contract in cases of events beyond their control, like an Act of God, natural calamities, war, labour unrest, epidemics, pandemics, and so on. If the terms ‘epidemic’ or ‘pandemic’ appear in the Force Majeure provision, the Force Majeure clause is almost certainly activated under the contract with the proclamation of Covid—19 as a pandemic.
The term of Forced Majeure is not directly specified in the Contract Act of 1872, nor is it defined elsewhere, but “Force Majeure” is regulated by the Indian Contract Act of 1872. In case a contract contains express or implied clause stipulating ‘Force Majeure’ events, it is regulated by Section 32, Chapter III which deals with contingent contracts – i.e., a term or provision that is enforceable upon the occurrence of an uncertain future (contingent) event and provides for its outcomes. Suppose a Force Majeure event occurs outside of the contract. In that case, it is dealt with by a positive law rule u/s 56 of the Contract Act, 1872, which states that an agreement to do an act impossible in itself is void, and that a contract that becomes impossible or unlawful to perform due to an intervening event is void in law. Hence, from the standpoint of contracts, the ‘Force Majeure’ provision relieves a party from executing its liability under a contract in the case of a force majeure event.
The scope and degree of the Force Majeure provision may vary depending on the situation. Force Majeure is commonly used as a defence for contract non-performance due to barriers beyond the party’s control. As a result, Force Majeure is an exemption or defence to contractual breach.
The Finance Ministry of the Government of India issued the following notification in Memo No. F. 18/4/2020 PPD dated 19-02-2020:-
“A question has emerged as to whether the disruption of supply chains caused by the spread of the Corona virus in China or any other nation would be covered by the force majeure provision. It is stated in this respect that it must be regarded a situation of ‘natural catastrophe’, and the ‘Force Majeure’ clause may be used whenever deemed suitable, in accordance with legal procedure.”
It’s worth noting that this memorandum claimed that Forced Majeure would emerge in contracts involving the supply chain, but commercial transactions, in the eyes of the courts, do not come under this category.
The following are the key issues that the courts consider:-
There have been no clear decisions by the court on whether a pandemic like Covid-19 would be declared an “ACT OF GOD.” The reference can be found in the Supreme Court’s decision in The Divisional Controller, KSRTC vs. Mahadava Shetty, which states that “Act of God” means that “Forced Majeure” is unaffected by human intervention, and that “Every unprecedented event cannot be shadowed as an excuse if the occurrence of that event could be anticipated.”
However, the courts in the United Kingdom and the USA have determined that a pandemic/epidemic is an ACT OF GOD.
In many ways, COVID-19 is a game changer; whether it will upend the current notions of force majeure and doctrine of frustration of contract due to “impossibility” remains to be seen. The current legal standards, as well as the Indian legal doctrine surrounding them, appear to be sufficient to meet the vast and far-reaching legal implications of the viral epidemic.
In layman’s language, “Frustration” implies “not fulfilled/defeated,” and it’s a term that’s commonly used by the parties in contracts and agreements. This phrase is important when the goal of the transaction(s) becomes unachievable or defeated.
As per the contract and its provisions, the “Doctrine of Frustration” means when the parties are compelled to fulfil their obligations, and in the event of a breach, the party breaching is obligated to compensate for the same. As an exception to this norm, Section 56 of the Indian Contract Act of 1872 incorporates the Doctrine of Frustration. It is concerned with the impossibility of contract execution. It indicates that a contract cannot be carried out due to an event beyond the parties’ control. It generally deals with acts that cannot be executed and releases the party from any contractual duty if the party fails to execute his/her obligation due to an unavoidable reason and the contract becomes void.
The maxim “Les non-cogit ad impossibilia” may be used in this case, which indicates that the law cannot compel a man to do something that he cannot possibly do.
In the case of Govindbhai Govardhanbhai Patel vs. Gulam Abbas Mulla Allibhai AIR 1954 SC 44, the court opined on the term “impossible of performance” as stated u/s 56 and stated that the parties may be significantly relieved if the contract becomes impossible to perform or impracticable due to some reason beyond the party’s control.
The Hon’ble Supreme Court decided in Ganga Saran vs. Firm Ram Charan Ram Gopal AIR 1952 SC 9, that for the applicability of Section 56, Indian courts should look at the second portion of Section 32 and 56.
The second portion of Section 32 concerns with the contract being fulfilled by its own internal forces – that is, if such impossibility was contemplated at the time the contract is made. Then, such contract dissolution would be regulated by Section 32.
Section 56, on the contrary, deals with contracts which are discharged due to an external force or outside impact or a supervening impossibility – which means, such impossibility was never in the party’s contemplation at the time of entering into the contract – then such contracts are said to be governed u/s 56.
The origins of the Doctrine of Frustration in English Law can be traced back to the landmark decision of Taylor vs. Caldwell, (1863) 3 B & S 826. The issue focuses around the purchase of an opera theatre for the purpose of performing concerts, which was destroyed by fire and the contract was frustrated. This contract of frustration was caused by the fact that the fundamental goal on which the contract was based, namely the burning of the opera, had ceased to exist. As a result, it was determined that in order for the frustration of contract to apply, the nature of the contract must be such that it does not work if a thing ceases to exist.
This principle is also connected to the Doctrine of Restitution, specifically Section 65 of the Contract Act, and is significant in the context of the Doctrine of Frustration. It indicates that if any individual has benefited from a void agreement or contract, he is obligated to restore it or compensate the person from whom he benefited.
The Indian Law and its principles are clearly rigorous (some would argue at a considerably higher threshold) in terms of interpretation, as well as confined or limited in their applicability. In most situations, results in favour of reaching a conclusion of frustration due to impossibility must satisfy a very high threshold – and depend on a multitude of elements, two of which are important for our present purposes. The first concern is the amount of time required to reach a judgement of “impossibility”, and the second is the size or range/scope – in other words, the severity – of the intervening “impossibility”. What seems to be only a temporary or incomplete bar in certain cases (for example, in the case of Satyabrata Ghose vs. Mugneeram Bangur 1954 AIR 44), but which in others tends towards either a delay in decision making or an unambiguous conclusion of impossibility of performance (especially where the parties cannot and did not have that supervening circumstance in mind), could result in the finding of “impossibility” within the mean. This was the conclusion reached in the DDA vs. Kenneth Builders case.
This doctrine would be null and void in the following circumstances: –
Given the conditions, it would be extremely difficult to frustrate any contract that does not overtly or implicitly contain a force majeure clause. The concept of Force Majeure doctrine and doctrine of frustration of contract or impossibility of performance is sometimes interwoven and overlapped. The doctrine of frustration leads in contract termination if contract performance turns impossible, but force majeure provisions can either postpone or prolong the time for contractual obligations fulfilment.
In this regard, simple delay in fulfilment of the contract due to a pandemic and subsequent lockdown is insufficient to frustrate a contract; rather, the delay must be such that it disrupts the fundamental foundation and commercial premise of the deal. In relation to the word “impossible” used u/s 56, it is apparent that it was not intended in the sense of physical or literal impossibility. The performance of the act might not be literally impossible, but it could be impractical and useless in terms of the object and purpose that the parties had in mind; and if an untoward event or change in circumstances completely upsets the very foundation upon which the parties rested their bargain, it could well be said that the promisor finds it impossible to do the act which he has promised to do.
Therefore, In view of the unprecedented turmoil generated by the pandemic and lengthy periods of lock-downs, the parties seeking to frustrate their contracts must go a step further and establish that time was of the importance of the contract and that delay would frustrate it.
The phrase “forced Majeure” has been used simultaneously with “doctrine of frustration” or “impossibility of performance”. In the event of Forced Majeure, the parties expressly agree prior to contract signing and create a list of unforeseeable occurrences that would trigger the Forced Majeure provision. Whereas, the Frustration Doctrine refers to a party’s inability to satisfy an obligation as a result of an act that was not foreseen at the time the contract was executed.
When Forced Majeure is invoked, the affected party may be freed from executing contractual responsibilities and rights in exchange for meeting the contract’s requirements. It is valid until the end of the event and does not completely exclude parties from performing. The Doctrine of Frustration, on the contrary, is concerned with the contract’s entire reason or purpose becoming void and unable to be carried out. This concept also holds that any contractual duties that the parties were supposed to fulfil cease to exist. In more concrete terms, this concept applies when an occurrence was not foreseen nor specified in the contract, i.e. when the incident was not stated under the Forced Majeure clause. The affected party can invoke this doctrine, but it cannot be invoked if the case is the opposite.
Force Majeure and Doctrine of Frustration have long been recognised as extraordinary defences in cases of total impossibility. While the burden of proof will remain high, the courts will assess the realities of the case in a more dynamic manner. Nevertheless, it is best left to the parties to design adequate Force Majeure provisions that encompass situations that prevent them from carrying out contracts. As a result, an increase in the number of commercial contracts including Force Majeure provisions is quite probable — to explicitly cover circumstances like government-imposed lockdowns and pandemics, in addition to conventional occurrences like Acts of God, natural catastrophes, and so on.
Contracts will undoubtedly be influenced by COVID-19 pandemic circumstances. However, in the future, we may see different interpretations of clauses, conditions, and parameters of contract performance due to unanticipated events, as well as notices and directions from the government in this regard. In light of this pandemic, the legislation pertaining to Force Majeure is expected to undergo a significant change, which we will continue to update in the future.
Read our article:The Doctrine of Frustration under the Indian Contract Act, 1872