Applicability of Force Majeure and Frustration of Commercial Contracts in Times of COVID-19
The author of this blog is Maitreya, 6th sem B.A. LL.B. (Hons.) student of National University of Study and Research in Law, Ranchi.
COVID- 19 has for the past few months continued to unleash a withering impact on the human life across the globe. Lockdowns and travel restrictions imposed by most of countries have brought the whole world to an unprecedented standstill. Commerce and business have also not proved to be immune to it.
The supply chain has been disrupted worldwide; consequently the performance of various contracts is likely to get either delayed or even cancelled. Parties to such contracts may seek to delay and/or avoid performance of their contractual obligations and/or terminate contracts, as either the spread of covid-19 has genuinely rendered the performance of their contractual obligations impossible or they are seeking to use it as an excuse in order to avoid an unfavorable deal.[1] Parties may also cite Covid-19 as the ground for renegotiation of price or other significant contractual provisions.
Consequently, in the contractual context at present, the concepts that have assumed relevance are ‘force majeure’ and ‘frustration of Contract’. Both of these doctrines act as an exception to the general rule of ‘pacta sunt servanda’ i.e. agreements must be kept. This article seeks to draw a comprehendible picture of the applicability and consequences of the doctrines of force majeure on one hand and frustration of contract on the other under Indian law with reference to the present contractual context.
Force Majeure under Indian Law
Force majeure is a French term, the literal meaning of which is ‘superior force’. This doctrine has been founded on the basis of the principle crystallized in the Napoleonic Code in the 1800s, although its origin can be traced back to the Roman law.[2]
Black’s Law Dictionary defines force majeure as an event or effect that can be neither anticipated nor controlled. This term incorporates both acts of nature (e.g. heavy rains, earthquakes) and acts of people (e.g. wars, riots) also termed as superior force, vis major.[3] It has been settled by the Apex Court as well that the term force majeure is of generic nature as compared to Vis Major. In the case of Dhanrajamal Gobindram v. Shamji Kalidas & Co.[4], it was observed by the SC that:
“McCardie J. in Lebeaupin v. Crispin ([1920] 2 K.B. 714), has given an account of what is meant by force majeure with reference to its history. The expression force majeure is not a mere French version of the Latin expression vis major. It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in force majeure. Judges have agreed that strikes, breakdown of machinery, which, though normally not included in vis major are included in force majeure.”
Despite the wide recognizance of the doctrine of force majeure, there is no express reference to it in the Indian Contract Act, 1872. The law relating to it has been embodied in section 32 and section 56 of the Act. Section 32 deals with contingent contract meaning thereby the performance of the contractual obligations is solely dependent on the happening or non-happening of a particular event, whereas section 56 on the other hand deals with the frustration of contract. Therefore, section 32 specifically is more relatable to the doctrine of force majeure.
COVID-19 and Force Majeure
A force majeure clause in a contract relieves a party temporarily from performing its contractual obligations due to the occurrence of an event outside the control of both the parties. This clause in the contract comes to the rescue of the parties to the contract as the pandemic makes it worse for them to perform their contractual obligations. However, the invocation of force majeure requires that first there must be clause pertaining to it in the contract.
Further there are two instances which may suggest that the force majeure clause covers the pandemic: I) if the force majeure clause expressly includes the term Pandemic, II) if the wordings of the force majeure clause is such that it generally covers the extraordinary events and circumstances beyond the control of both the parties. The party claiming the invocation of the force majeure clause must establish that it took all the necessary and reasonable endeavors to avoid and mitigate the event and its consequences. This is a subjective standard and is interpreted taking in consideration the facts and circumstances of each case. The party claiming the force majeure is usually under a duty to establish that the force majeure event or circumstance was the main factor behind the causation of the breach of contractual obligations.[5]
The remedy following the application of force majeure depends entirely on the language used in the clause. In some cases the clause may provide for deferment of the performance of contractual obligations until the cessation of the force majeure event. In other cases it may provide for termination of the contract upon the happening of the force majeure event. In certain cases the clause could even provide that the contract be termed void upon the occurrence of the event. Whereas in some contracts only certain contractual obligations get suspended.
The ministry of finance has already via an office memorandum dated 19th Feb 2020, clarified the disruption of supply chains due to the pandemic to be considered as a case of natural calamity in which force majeure clause may be invoked.[6] Despite of the issuance of notification, COVID-19 defense is unlikely to act as valid defense in every contract as circumstances in each case differ from the other. Therefore, each contract would have to be looked upon individually and it must be established that there were no alternative means or methods for performing the obligations under the contract.
Doctrine of Frustration under Indian Law
Doctrine of frustration in India is akin to the roman principle of nemo tenetur ad impossibile meaning thereby, no one is bound to perform an impossibility. Impossibility and frustration are the terms, often used interchangeably. However, it is pertinent to note that the common law doctrine of frustration, as provided under the English law is distinct from the statutory concept of supervening impossibility and illegality under Indian law[7].
Under Indian law, the statutory provision of section 56 unlike English law provides a positive law on supervening impossibility or illegality that renders the performance of contractual obligations impossible in its practical and not literal sense.[8] In the case of Alopi Parshad and Sons Ltd. v. Union of India[9], the court was of the view that merely because the circumstances in which the contract was made are altered and the performance of the contract has become onerous doesn’t mean that the contract gets frustrated. Relief is granted on the ground of subsequent impossibility only if the outward event or change of circumstances frustrates the very object or purpose of the contract.
Frustration of Contract and COVID-19
The parties to a contract can claim the relief of frustration of contract under section 56 only in the absence of a clause pertaining to force majeure. It was held by the Apex Court in the case of Energy Watchdog v. Central Electricity Regulatory[10], in so far as the force majeure event occurs de hors the contract, then such cases would be dealt with under section 56 of the Indian Contract Act. Therefore, the pre requisite for invocation of section 56 in a contract is that the parties to the contract should not be under any belief, as to the occurrence of the supervening event at the time of entering into the contract.
A claim of frustration of contract is followed by an analysis of various factors such as impact of the event, the object of the contract etc. Therefore, it must be established by the party claiming the relief of frustration of contract that the performance of the contractual obligations became impossible by reason of an outward event over which he/she had no control and that the impossibility was not self induced or due to his/her negligence. Once it is established, the whole contract would get frustrated and consequently both the parties would get discharged from their respective contractual obligations.
Conclusion
There would be various cases in which the contract merely becomes commercially difficult and not impossible, neither force majeure clause nor the doctrine of frustration comes to the rescue in such cases, in such cases it is upon the parties to contemplate whether it would be feasible to suspend the contract, or use this opportunity to renegotiate the contract.
Moreover, it is evident from the aforesaid deliberations that the applicability of the force majeure clause and the doctrine of frustration are heavily contract specific and fact specific. Whether the parties in particular cases can successfully avoid their contractual obligations, depends wholly on the case to case analysis by the courts, taking in consideration the facts, whether the supervening event destroyed altogether the basis of the contract and its underlying object, and whether the contractual bargain at the end was an effect of the significantly altered conditions.
References
[1] Bharat Vasani, Molla Hasan, Samiksha Pednekar & Esha Himadri, COVID- 19: Officially a Pandemic, Indian Corporate Law (21 April, 2020, 12:10 P.M.), https://corporate.cyrilamarchandblogs.com/2020/03/covid-19-officially-a-pandemic-faqs-coronavirus/.
[2] Siddharth Raja, A Tale of Two Things — Of Frustration & Force Majeure Clauses in the time of COVID-19, The SCC Online Blog (21 April, 2020, 10:P.M.), https://www.scconline.com/blog/post/2020/04/06/a-tale-of-two-things-of-frustration-force-majeure-clauses-in-the-time-of-covid-19/.
[3] Adv. Darshit K. Jain, Principles Relating to Frustration of Contract and Force Majeure Clause, Manupatra (22 April 1:19 P.M.), https://www.manupatrafast.com/articles/articleSearch.aspx.
[4] Dhanrajamal Gobindram v. Shamji Kalidas & Co, AIR 1961 SC 1285.
[5] Supra note 1.
[6] No. F18/4/2020-PPD, Ministry of Finance.
[7] Kshama Loya Modani & Vyapak Desai, Impact of COVID-19 on Contracts: Indian Law Essentials, Nishith Desai Associates (26 April, 2020, 9:49 P.M.), http://www.nishithdesai.com/information/news-storage/news-details/article/impact-of-covid-2019-on-contracts-indian-law-essentials-1.html.
[8] Satyabrata Ghose v. Mugneeram Bangur, AIR 1954 SC 44.
[9] Alopi Parshad and Sons Ltd. v. Union of India, AIR 1960 SC 588.
[10] Energy Watchdog v. Central Electricity Regulatory, (2017) 14 SCC 80.
COVID- 19 has for the past few months continued to unleash a withering impact on the human life across the globe. Lockdowns and travel restrictions imposed by most of countries have brought the whole world to an unprecedented standstill. Commerce and business have also not proved to be immune to it.
The supply chain has been disrupted worldwide; consequently the performance of various contracts is likely to get either delayed or even cancelled. Parties to such contracts may seek to delay and/or avoid performance of their contractual obligations and/or terminate contracts, as either the spread of covid-19 has genuinely rendered the performance of their contractual obligations impossible or they are seeking to use it as an excuse in order to avoid an unfavorable deal.[1] Parties may also cite Covid-19 as the ground for renegotiation of price or other significant contractual provisions.
Consequently, in the contractual context at present, the concepts that have assumed relevance are ‘force majeure’ and ‘frustration of Contract’. Both of these doctrines act as an exception to the general rule of ‘pacta sunt servanda’ i.e. agreements must be kept. This article seeks to draw a comprehendible picture of the applicability and consequences of the doctrines of force majeure on one hand and frustration of contract on the other under Indian law with reference to the present contractual context.
Force Majeure under Indian Law
Force majeure is a French term, the literal meaning of which is ‘superior force’. This doctrine has been founded on the basis of the principle crystallized in the Napoleonic Code in the 1800s, although its origin can be traced back to the Roman law.[2]
Black’s Law Dictionary defines force majeure as an event or effect that can be neither anticipated nor controlled. This term incorporates both acts of nature (e.g. heavy rains, earthquakes) and acts of people (e.g. wars, riots) also termed as superior force, vis major.[3] It has been settled by the Apex Court as well that the term force majeure is of generic nature as compared to Vis Major. In the case of Dhanrajamal Gobindram v. Shamji Kalidas & Co.[4], it was observed by the SC that:
“McCardie J. in Lebeaupin v. Crispin ([1920] 2 K.B. 714), has given an account of what is meant by force majeure with reference to its history. The expression force majeure is not a mere French version of the Latin expression vis major. It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in force majeure. Judges have agreed that strikes, breakdown of machinery, which, though normally not included in vis major are included in force majeure.”
Despite the wide recognizance of the doctrine of force majeure, there is no express reference to it in the Indian Contract Act, 1872. The law relating to it has been embodied in section 32 and section 56 of the Act. Section 32 deals with contingent contract meaning thereby the performance of the contractual obligations is solely dependent on the happening or non-happening of a particular event, whereas section 56 on the other hand deals with the frustration of contract. Therefore, section 32 specifically is more relatable to the doctrine of force majeure.
COVID-19 and Force Majeure
A force majeure clause in a contract relieves a party temporarily from performing its contractual obligations due to the occurrence of an event outside the control of both the parties. This clause in the contract comes to the rescue of the parties to the contract as the pandemic makes it worse for them to perform their contractual obligations. However, the invocation of force majeure requires that first there must be clause pertaining to it in the contract.
Further there are two instances which may suggest that the force majeure clause covers the pandemic: I) if the force majeure clause expressly includes the term Pandemic, II) if the wordings of the force majeure clause is such that it generally covers the extraordinary events and circumstances beyond the control of both the parties. The party claiming the invocation of the force majeure clause must establish that it took all the necessary and reasonable endeavors to avoid and mitigate the event and its consequences. This is a subjective standard and is interpreted taking in consideration the facts and circumstances of each case. The party claiming the force majeure is usually under a duty to establish that the force majeure event or circumstance was the main factor behind the causation of the breach of contractual obligations.[5]
The remedy following the application of force majeure depends entirely on the language used in the clause. In some cases the clause may provide for deferment of the performance of contractual obligations until the cessation of the force majeure event. In other cases it may provide for termination of the contract upon the happening of the force majeure event. In certain cases the clause could even provide that the contract be termed void upon the occurrence of the event. Whereas in some contracts only certain contractual obligations get suspended.
The ministry of finance has already via an office memorandum dated 19th Feb 2020, clarified the disruption of supply chains due to the pandemic to be considered as a case of natural calamity in which force majeure clause may be invoked.[6] Despite of the issuance of notification, COVID-19 defense is unlikely to act as valid defense in every contract as circumstances in each case differ from the other. Therefore, each contract would have to be looked upon individually and it must be established that there were no alternative means or methods for performing the obligations under the contract.
Doctrine of Frustration under Indian Law
Doctrine of frustration in India is akin to the roman principle of nemo tenetur ad impossibile meaning thereby, no one is bound to perform an impossibility. Impossibility and frustration are the terms, often used interchangeably. However, it is pertinent to note that the common law doctrine of frustration, as provided under the English law is distinct from the statutory concept of supervening impossibility and illegality under Indian law[7].
Under Indian law, the statutory provision of section 56 unlike English law provides a positive law on supervening impossibility or illegality that renders the performance of contractual obligations impossible in its practical and not literal sense.[8] In the case of Alopi Parshad and Sons Ltd. v. Union of India[9], the court was of the view that merely because the circumstances in which the contract was made are altered and the performance of the contract has become onerous doesn’t mean that the contract gets frustrated. Relief is granted on the ground of subsequent impossibility only if the outward event or change of circumstances frustrates the very object or purpose of the contract.
Frustration of Contract and COVID-19
The parties to a contract can claim the relief of frustration of contract under section 56 only in the absence of a clause pertaining to force majeure. It was held by the Apex Court in the case of Energy Watchdog v. Central Electricity Regulatory[10], in so far as the force majeure event occurs de hors the contract, then such cases would be dealt with under section 56 of the Indian Contract Act. Therefore, the pre requisite for invocation of section 56 in a contract is that the parties to the contract should not be under any belief, as to the occurrence of the supervening event at the time of entering into the contract.
A claim of frustration of contract is followed by an analysis of various factors such as impact of the event, the object of the contract etc. Therefore, it must be established by the party claiming the relief of frustration of contract that the performance of the contractual obligations became impossible by reason of an outward event over which he/she had no control and that the impossibility was not self induced or due to his/her negligence. Once it is established, the whole contract would get frustrated and consequently both the parties would get discharged from their respective contractual obligations.
Conclusion
There would be various cases in which the contract merely becomes commercially difficult and not impossible, neither force majeure clause nor the doctrine of frustration comes to the rescue in such cases, in such cases it is upon the parties to contemplate whether it would be feasible to suspend the contract, or use this opportunity to renegotiate the contract.
Moreover, it is evident from the aforesaid deliberations that the applicability of the force majeure clause and the doctrine of frustration are heavily contract specific and fact specific. Whether the parties in particular cases can successfully avoid their contractual obligations, depends wholly on the case to case analysis by the courts, taking in consideration the facts, whether the supervening event destroyed altogether the basis of the contract and its underlying object, and whether the contractual bargain at the end was an effect of the significantly altered conditions.
References
[1] Bharat Vasani, Molla Hasan, Samiksha Pednekar & Esha Himadri, COVID- 19: Officially a Pandemic, Indian Corporate Law (21 April, 2020, 12:10 P.M.), https://corporate.cyrilamarchandblogs.com/2020/03/covid-19-officially-a-pandemic-faqs-coronavirus/.
[2] Siddharth Raja, A Tale of Two Things — Of Frustration & Force Majeure Clauses in the time of COVID-19, The SCC Online Blog (21 April, 2020, 10:P.M.), https://www.scconline.com/blog/post/2020/04/06/a-tale-of-two-things-of-frustration-force-majeure-clauses-in-the-time-of-covid-19/.
[3] Adv. Darshit K. Jain, Principles Relating to Frustration of Contract and Force Majeure Clause, Manupatra (22 April 1:19 P.M.), https://www.manupatrafast.com/articles/articleSearch.aspx.
[4] Dhanrajamal Gobindram v. Shamji Kalidas & Co, AIR 1961 SC 1285.
[5] Supra note 1.
[6] No. F18/4/2020-PPD, Ministry of Finance.
[7] Kshama Loya Modani & Vyapak Desai, Impact of COVID-19 on Contracts: Indian Law Essentials, Nishith Desai Associates (26 April, 2020, 9:49 P.M.), http://www.nishithdesai.com/information/news-storage/news-details/article/impact-of-covid-2019-on-contracts-indian-law-essentials-1.html.
[8] Satyabrata Ghose v. Mugneeram Bangur, AIR 1954 SC 44.
[9] Alopi Parshad and Sons Ltd. v. Union of India, AIR 1960 SC 588.
[10] Energy Watchdog v. Central Electricity Regulatory, (2017) 14 SCC 80.
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