FORCE MAJEURE versus DOCTRINE OF FRUSTRATION
Section 32 and 56 of Indian Contract Act specifically prescribes as ;
- SECTION 32: Enforcement of Contracts contingent on an event happening – Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.”
- SECTION 56: Agreement to do Impossible Act: An Agreement to do an act impossible in itself is void.
Contract to do act afterwards becoming impossible or unlawful- 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 void when the act becomes impossible or unlawful.
Compensation for loss through non-performance of act known to be impossible or unlawful- When 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 make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.
These two concepts have been used interchangeably, but these are two different concepts altogether and have different usage.
The concept of Forced Majeure finds no place in the Act expressly nor it has been defined anywhere but our policymakers have interpreted and dealt with it as it was clear from Section 32 of The Indian Contract Act which states Contingent Contracts.
The basic contractual object of this Section is to temporarily let off the party from performing their part/obligation of the contract on occurrence of the Forced Majeure.
The Requisites for the Forced Majeure Clause are:
- The event has to be unforeseen/ unpredicted
- The event must be external to the contract and the parties
- Such event would hinder the fulfilment of the obligation under the contract either impossible or impracticable
- All required methods were performed to mitigate the non-performance or had taken all measures to perform the obligations
- The party who claims respite under Forced Majeure would bear the burden of proof to show how it has affected the party’s performance of the contract.
According to Black’s Law Dictionary Forced Majeure means ‘an event or effect that can be neither anticipated nor controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled’.
The Forced Majeure has an unending list of events such as Earthquake, Flood, Acts of Government, lockdowns, epidemics and many other events which are penned down in the contract by the parties which are beyond the control of the parties.
This clause is to be found in almost every contract be it commercial contracts, project finance agreements, manufacturing contracts etc. It is considered to be an important clause as it relieves one party from performing the obligation upon occurrence of the Forced Majeure.
Under the English Law the Forced Majeure is based on a contractual provision and entitles the party to terminate the contract or relieves the party from performing his/her obligation upon satisfying the events laid down in the provision which are beyond the control of the party. The main object is to link the causation between the obligation and the impossibility of the event which can prove that the event was the sole reason that the party could not fulfil the obligation.
The Indian Law is akin to the English Law, as this provision is laid down in the contract. The main intent of the provision is to safeguard the performing party affecting its interests due to an act which is beyond its control. This particular provision is to be invoked if it fulfils the general parameters which have been laid down in the contract. It solely lies upon the parties to invoke this clause and temporarily abstain from fulfilling the obligation.
EXCEPTIONS TO FORCED MAJURE CLAUSE
The concept of Forced Majeure clause ceases to apply where the act involves negligence or other malfeasance and where the party has not performed the due obligation due to the circumstances which were contemplated. Also this clause cannot be claimed in situation where the contracts have become commercially or financially difficult to perform.
COVID-19 AS A FORCED MAJURE
The Govt. Of India had issued a notification vide its Memo No. F. 18/4/2020 PPD dated 19-02-2020 by the Finance Ministry as follows:
“A doubt has arisen if the disruption of the supply chains due to spread of corona virus in China or any other country will be covered in force majeure clause. In this regard it is clarified that it should be considered as a case of natural calamity and force majeure clause may be invoked whenever considered appropriate, following due procedure.”
It is worthy to mention here that this memorandum had stated that Forced Majeure would arise in the contracts dependent on the supply chain, however from the point of view of the courts commercial contracts don’t fall in the purview.
The major questions that are considered by the courts are:
- Whether the contract incorporates the Forced Majeure Clause?
- Whether this pandemic has affected the fundamental basis of the contract?
There are no direct judgments by the court whether pandemic/epidemic like Covid-19 would be considered whether it would be covered under ‘ACT OF GOD’. The reference could be extracted from the judgment of Hon’ble Supreme Court i.e. The Divisional Controller, KSRTC vs Mahadava Shetty which states that Act of God signifies that Forced Majeure coming in process is free from the human intervention and stated that every unprecedented event cannot be shadowed as an excuse if the occurrence of such event could be anticipated.
But the courts of UK and United States of America have considered pandemic/epidemic as a part of ACT OF GOD.
COVID-19 is a game changer in many respects – whether it will upend the prevailing principles of force majeure and frustration of contracts due to “impossibility” remains to be seen. The existing legal provisions and the Indian legal jurisprudence surrounding the same appear robust enough to address the large and wide-ranging legal consequences of the viral pandemic. Whether in particular cases, such consequences will actually lead to parties being able to successfully avoid their obligations, still continues to depend on the time-tested benchmarks of each case – namely, whether the changed circumstances destroyed altogether the basis of the contract and its underlying object, and whether the contractual bargain was indeed at an end as a result of the significantly altered conditions.That is until the fullness of the COVID-19 disaster unfolds.
DOCTRINE OF FRUSTRATION
The term frustration in simpler terms means not fulfilled/defeated which is quite frequently used in the contracts and agreements by the parties. This term plays a vital role when the purpose of the transaction(s) becomes impossible or is defeated.
According to the contract and its terms the parties are bound to fulfil their part and in case of the breach, the party breaching will be liable to compensate for the same. So, as an exception to this rule Section 56 of the Indian Contract Act, 1872 provides with the Doctrine of Frustration. It is primarily deals with the acts which cannot be performed and relives the party from any liability under the contract in case the party fails to perform his/her obligation due to an unavoidable reason and the contract becomes void.
The maxim that can be used in this context is “Les non cogit ad impossibilia” which means that the law cannot compel a man to do what he cannot possibly perform.
The condition necessary for this Doctrine to apply is:
- There must be a valid contract between the parties- This is an essential condition wherein a valid contract must be in existence between the parties adhering to the requirements of the same.
- There must be a part of the contract that is yet to be performed- This Section would have its applicability only if there remains a part which is yet to be performed by the party and without its performance the purpose of the contract would not be completely fulfilled.
- The contract has become impossible to perform- Thirdly, an important condition to fulfil the applicability of Section 56 is that the performance of the contract has become impossible, thus the contract becomes void. In the case of Govindbhai Govardhanbhai Patel vs Gulam Abbas Mulla Allibhai AIR 1954 SC 44, wherein the court had opined over the term “impossible of performance” as mentioned in Section 56 and stated that the parties may be relieved considerably if the contract becomes impossible to perform or impracticable due to some reason which was beyond the control of the parties.
In the matter of Ganga Saran vs Firm Ram Charan Ram Gopal AIR 1952 SC 9, the Hon’ble SC had held that for the application of the 56, the Indian courts must look at the second part of the Section 32 and 56.
Now the second part of Section 32 deals with the contract being discharged by its own internal forces- that is, where such impossibility was within their contemplation, at the time of entering into the contract. Then, such dissolution of contract would be governed by Section 32.
On the other hand Section 56 deals with contract being discharged by an external force or outside impact or a supervening impossibility- that is, such impossibility was never within the contemplation of the parties, at the time of entering into the contract, then such contracts are said to be governed by Section 56.
The source of Doctrine of Frustration in English Law is basically derived from the landmark case of Taylor vs Caldwell. The case revolves around buying of an opera house for the holding concerts which was burnt by fire and the contract was frustrated. This frustration was because the main purpose on which the contract depended ceased to exist i.e. the burning of the opera. Therefore it was held that the frustration of contract to apply the nature of the contract must be such that it would not operate if a thing ceases to exist.
This concept can also be related to Doctrine of Restitution i.e. Section 65 of the Contract Act and holds importance in the context of Doctrine of Frustration. It states that if any person has received some advantage under the void agreement or contract is bound to restore it or make compensation in this regard from who he received.
The Indian Law and its principles are undeniably rigid (some would say at a much higher threshold) in terms of its interpretation; and narrow or limited in its applicability. Outcomes in favour of reaching a conclusion of frustration by reason of impossibility need to satisfy a very high threshold in most cases – and turn on a plethora of factors, two of which are relevant for our current purposes. First, the issue of the length of time impacting the reaching of a conclusion of “impossibility” and the second, the extent or range/scope – in other words, the severity – of the intervening “impossibility”. What may in some cases be only a temporary or incomplete bar (for instance, in Mugneeram Bangur case, but which in other instances tend towards either a delay in decision making or an unambiguous conclusion of the impossibility of performance (especially where the parties could not and did not have that supervening circumstance in mind), can result in the finding of “impossibility” within the meaning of Section 56 and the consequent discharge of the parties from that contract. This was the position reached for instance, in DDA v. Kenneth Builders case.
EXCEPTIONS TO DOCTRINE OF FRUSTRATION
This doctrine would cease to apply in the following cases:
- In cases of self-induced frustration A contract having a provision wherein it is thereby agreed by the parties that despite such intervening circumstances the contract would still survive. DISTINCTION BETWEEN FORCED MAJURE AND DOCTRINE OF FRUSTRATION
Given the circumstances, it would be very difficult for every contract, which does not expressly, or impliedly contain a force majeure clause to be frustrated. The doctrine of frustration results in termination of the contract while the force majeure clauses can either suspend or extend the duration for the performance of the contractual obligations. Pertinently, mere delay in performance of the contract because of an outbreak of pandemic and subsequent lockdown is not sufficient to frustrate a contract; rather the delay should be such, which upsets the very foundation and commercial basis of the contract. Apropos word “impossible” used in Section 56, it is clear that the same has not been used in the sense of physical or literal impossibility. The performance of the act may not be literally impossible but it may be impractical and useless from the point of view of the object and the purpose, which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can be very well be said that the promisor finds it impossible to do the act which he promised to do.
Hence in the light of unparalleled turmoil caused by novel COVID-19 and extended period of lock-downs, the parties seeking to frustrate their contracts need to go a step ahead and demonstrate that time was the essence of the contract and delay would frustrate it.
The term Forced Majeure has been used interchangeably with the Doctrine of Frustration or impossibility to perform. In the case of Forced Majeure it is expressly agreed by the parties before the execution of the contract and prepares a list of unforeseen events which would put in force the Forced Majeure clause.
The Doctrine of Frustration relates to impossibility of a party to perform the obligation due to an act which was not anticipated at the time of the execution of the contract.
While applying Forced Majeure the concerned party may be relieved from performing the contractual obligations and rights thereunder, upon fulfilment on the conditions laid down in the contract. It is until the cessation of that event and does not absolutely excuse parties from its performance.
On the other hand, Doctrine of Frustration deals with the whole rationale or purpose of the contract becoming void and cannot be performed. This doctrine further states that all the contractual obligations cease to operate which were to be performed by the parties. In more clear terms this doctrine would apply when the event was neither anticipated nor was it laid down in the contract i.e. mentioned under the Forced Majeure clause then the aid of this doctrine can be taken by the affected party and cannot be claimed if the situation is vice-versa.
CIVIL LAW AND COMMON LAW PERSPECTIVE
An another aspect which is Contract Law in Common law is subject to exceptions and leaves it to the contracting parties to decide upon the terms and conditions that would govern their contractual relationship and the framework would not be altered by the legal principles existing out of the contract itself, unlike the laws governing the civil law jurisdictions.
Countries having civil laws eg: China etc. wherein they have codified their laws therefore the contracts would not require specific provisions like Forced Majeure in their contract and Common Law countries do not have codified laws hence such provisions are to be expressly provided in the contract.
Now having this discussed and debated widely about its ambiguity and existential dilemma, it is now left on the Indian Government to come up with a clearer notification or guidelines wherein it would help the parties to arrive at a win-win situation and not be unjustified on either of the side as the crisis now is without precedent and support from the Indian Government is the need of the hour.Authored by Mayank Dahiya, A Fresher Associate at Vidhiśāstras-Advocates & Solicitors.