Mapping Force Majeure and Doctrine of Frustration in Times of Pandemic
- Lawschole
- Jul 14, 2020
- 6 min read
Introduction:
The Covid-19 continues to have its catastrophic impact globally and so have been its impact on the businesses. The contracts and obligations under the contracts are being revised to evaluate its impact. As the situation continues to be grim, with the number of cases rising abruptly, and many supply chains are still disrupted, a frequent question which arises is whether a force majeure clause and frustration of contract excuse parties to a contract from performing their obligations on time.
What is a Force Majeure Clause?
The concept of force majeure emanated in French civil law which means ‘vis major’ or ‘greater force’. It encompasses within its ambit act of god, such as natural calamities (earthquakes, tsunamis etc.) and also includes human actions such as riots, internal aggression, war conflict between countries for which no party can be held accountable. This clause is embedded in commercial contracts, to cope up with circumstances, which prevent or delay performance of any contractual obligation.
According to Black Law's Dictionary, force majeure is an event or effect that can be neither anticipated nor controlled. Although this clause has neither been defined nor specifically dealt in Indian statutes, a reference to this provision can be made from Section 32 of the Indian Contract Act, 1872 dealing with contingent contract, and envisages that, if a contract is contingent on the happening of an event, which event becomes impossible, then contract becomes void.
Doctrine of Frustration:
The law relating to force majeure is present in common law as ‘doctrine of frustration’ of contract (Section 56 of the Indian Contract Act, 1872). A frustrated contract, is a contract, which subsequent to its formation, and without fault of either party, is incapable of being performed due to supervening events which is beyond contemplation and control of the parties.
The Supreme Court had interpreted the concept of force majeure in Satyabrata Ghose v Mugneeram Bangur[1] under Section 56 of the contract act and held that a ‘mere impracticality’ of performance will also suffice for determination of a force majeure event and where the changed circumstances makes the performance of the contract impossible and destroys the very foundation upon which the contract was based, it discharges the parties from their liability to perform, and renders the contract impossible to perform.
The doctrine of frustration was also dealt in Taylor v Caldwell[2], where a musical hall was burnt down in which concert was supposed to be performed by the plaintiff on certain specific days. The court held that the defendant (music hall co.) was discharged, as its performance became impossible.
Difference between force majeure and frustration of contract:
To invoke the benefits of force majeure clause, the conditions specified in that clause have to be fulfilled. The contract is not terminated but the performance of the contract is temporarily suspended for the time being, the event constituting force majeure exists. However, the fact about non-performance has to be communicated to the other party and cannot be claimed ex-post facto. After such event is over, the party who took the benefit of this clause, has to perform its part of the contract.
Frustration of a contract is the happening of an act, after execution of the contract, which makes such performance of contract impossible, which the parties didn’t knew at the time of executing the contract and the fundamental basis totally changes, upon which the performance of the contract was embarked upon. This leads to suspension of the overall contract.
Is Covid-19 and the enforced lockdown a force majeure event?
Force majeure clause can be invoked in many ways. First, where the parties would agree upon general types of specified events like natural disasters, acts of governments, civil wars etc. and the other one is open to all those events which could not have been construed at the time of execution of the contract, and which are beyond the control of either party. Language in which the clause has been drafted is an essential attribute.
In a recent case in Energy watchdog v Central Electricity Regulatory[3], it was observed that a rise in price of the coal was neither dislodgement of fundamental basis of contract, nor was any frustrating event. This does not lead to a contract as a whole, being frustrated, because the contract could be performed through alternative modes also. Where the fundamental basis of the contract remains unchanged, an unprecedented rise in the price will not relieve the parties from performing its part of the contract. The court further held that ‘if the contract stipulates a force majeure clause, it has to be ‘strictly and narrowly’ interpreted’. Even the court cannot rephrase the clause or read into what is not expressly stipulated. Nothing can be added or left out. This also clarifies that, economic hardship cannot be considered as a force majeure event.
The plea of force majeure would be available to a party only if it can be established that:
i. The non-performance was due to circumstances beyond control;
ii. There were no reasonable steps that could have been taken to mitigate the event and its consequences; and
iii. There has to be a link between the pandemic and the affected party’s failure to perform
Recently, in Halliburton Offshore Services Inc v Vedanta Ltd. & Anr[4], the Delhi High Court prima facie held that Covid-19 is in nature of force majeure and restrained Vedanta Ltd. from encashing bank guarantees extended by the plaintiff. The court said ‘such a lockdown is unprecedented and was incapable of being predicted either by the petitioner or the respondent’ and excused Halliburton from having to continue to perform its obligations during the period of lockdown. The court identified ‘special equities’ as a ground that would prevent ‘irretrievable injustice’ between parties.
Further, in Rural Fairprice Wholesale Ltd.& Anr v IDBI Trusteeship Services Ltd[5], the Bombay High Court granted ad-interim relief to the plaintiff and restrained the bank from acting upon the sale notices and directed to withdraw any pending sale orders for the pledged equity shares. The court observed the share market has collapsed due to Covid-19 and that it would have resulted in huge losses to the plaintiff.
But reversely, in another judgment, the Bombay High Court, in Standard Retail Private Ltd. v Gs Global Corp & Ors[6], refused to grant interim protection to the petitioner and observed distribution of steel is an essential service, whose movement was not restricted, and that a lockdown is for limited time frame. Consequently, petitioner cannot resile from its contractual obligations of making payment to respondent.
This means even if the epidemic Covid-19 would fall within the ambit of force majeure clause that by itself would not discharge a party from performing its part of contractual obligations. The pandemic must have a direct impact on the non-performance and the party seeking to take excuse on the force majeure event is also under a duty to mitigate alternative means of performance. If the obligation could not be discharged even by resorting to alternate means due to the effect of the force majeure event, then the case falls under the ambit of this clause.
Covid-19 alone would not be the deciding factor for determining that the plea falls under the force majeure clause. Other factors like restrictions imposed by the administration, lockdown, curfew, disruptions of supply chains for all businesses except for the essential services etc. and the deadlock caused due to it, have to be taken into account.
Absence of force Majeure clause in a contract
Where there is absence of force majeure provision within a contract, doctrine of supervening impossibility by way of Section 56 can be invoked which clearly states that in case an act under a contract becomes impossible to perform due to some unavoidable circumstance, which the parties cannot prevent, the whole contract becomes void.
But here the circumstances should have materially affected the parties and there is no way to continue the contract while such circumstances exist, then the contract is void and both parties are discharged off their obligations.
Conclusion
On February 19, 2020, the Government of India issued an office memorandum, which provides that Covid-19 should be considered a natural calamity and force majeure may be invoked, wherever appropriate.
However, the pandemic/ lockdown cannot be said to be a force majeure event, if the parties are somehow able to continue operations, either partially or via digital mode. It has to be seen whether the parties are truly unable to discharge their obligations. Thus, labelling the pandemic under a blanket force majeure event is legally erroneous and depends on contractual obligations and ways to perform the same.
Every case will differ, depending on the terms of contract clauses, the scope and the abilities of the parties to opt for substitute methods to fulfil their contractual obligations.
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