Force Majeure And Doctrine Of Frustration

“A developed India, by 2020 or even earlier is not a dream. It need not even be a mere aspiration in the minds of many Indians. It is a mission we can all take up­ and accomplish.” That was the aspirational message of hope that Honorable Dr. APJ Abdul Kalam spelt out in “India 2020 A Vision for the New Millennium” a book that he co-authored with Prof. Y. S. Rajan in 1998.

Little did the authors know that 2020 would in fact turn out to be the worst performing years for the Indian economy that would set it back by years, if not decades. 2020 would undoubtedly go down in history as the year that would forever be blemished with grief and unforgettable horrors unleashed on millions of Indians due to the outbreak of Covid-19. Not only did the pandemic bring the Indian economy down to its knees but also led to a rather bizarre turn of events where individuals, corporations, and the Government itself found it impossible to meet its contractual obligations and thus end up in breach of contract.

Introduction

The basic building blocks of a thriving economy, inter alia, are high economic growth, free market, fair regulatory framework, stable tax regime, minimum government interference and speedy dispute resolution. Investors usually frown upon economies that score low on these indicators as it makes it riskier to invest money in such countries. Setting up a business enterprise involves commercial transactions with a variety of stakeholders that form part of the ongoing business cycle ranging from clients, vendors, contractors, employees to government authorities. Owing to the complexity of the business cycle some disputes and differences among parties are bound to happen.

Thus, the ease with which a business enterprise can resolve contractual disputes assumes significant importance in investment decisions. An economy that is infamous for retrospective changes in tax policy, poor enforcement of contractual obligations or its clogged judicial system usually ranks low on the preference of investors.

Enforcement of Contracts – India vs The World

In the latest Ease of Doing Business ranking published by the World Bank, India’s overall rank was 63 among 190 Countries that formed part of the study. However, in terms of enforcing contracts, one of the key parameters of the rankings, India ranks a dismal 163. Even India’s neighbors Nepal (ranked 151) and Pakistan (ranked 156) have scored better than India on enforcing contracts. In India, it takes 1,445 days for a company to resolve a commercial dispute through a local first-instance court, almost three times the average time in OECD high-income economies![1]

The World in Cold Storage

As if to add insult to India’s injury, only a few months after the Ease of Doing Business rankings were released, an unprecedented pandemic caused due to the highly contagious Covid-19 virus brought the world to a standstill. Even some of the most powerful economies were caught off-guard and found themselves struggling to cope with the unforeseen events that led to mass lockdowns, curfews, and severely hindered movement of goods both domestic and international. Even the developed world found itself grossly unprepared to handle the outbreak of a pandemic and as a result business cycles across all major countries affected by CoVid-19 took a severe beating. One of the first casualties of the pandemic was the inability of individuals, corporations as well as Governments to conduct their business in a smooth manner and meet their mutual contractual obligations. The catastrophic combination of severe lockdowns, quarantine and mitigation measures imposed by some of the worst affected countries put almost all the business activity in the cold storage. These measures acted as a catalyst to a mass breach and non-performance of contractual obligations by various business enterprises against one another.

The Legal Conundrum

What then is the recourse available to parties when they are simply unable to perform their obligations owing to the circumstances created by CoVid-19? Will the defaulting party be liable for damages owing to breach of contract? Does inability to perform the contract due to severe restrictions put in place by governments entitle a party to not perform their part of the contract? Or can the defaulting party be excused for such a breach of contract? The answer lies in the legal twins commonly referred to as “Force Majeure” and “Doctrine of Frustration” in the parlance of valid legal Contracts.

The Key Ingredients

Before we deep dive into these, let us look at some simplified definitions of some of important aspects of a contract:

Contract: An agreement between two or more parties that is enforceable by law; a transaction between two or more people in which one or both promises to perform some duty in exchange for consideration, and if a party fails to do what he or she promised, the law allows the other party to seek a remedy[2].

Nonperformance: Failure to perform some duty or obligation; failure to perform according to the terms of a contract.

Force Majeure: Unforeseeable and unavoidable circumstances outside the control of a party to a contract that render him or her incapable of carrying out contractual duties.

Frustration of purpose: Situation that arises when a condition that was part of a contract does not occur, through no fault of either party, but the condition was the reason for one party entering the contract in the first place; can be cause for terminating the contract.

These definitions make it exceedingly clear that in case of a breach of contract the aggrieved party may seek a remedy (in the form of damages or specific performance etc.). It is also evident that non-performance of a contract, based on the circumstances of default by a party, could fall under Force Majeure or Frustration of Purpose.

Thus, simply speaking a defaulting party may take recourse to Force Majeure or Frustration of Contract to be excused from performing its contractual obligations either temporarily or permanently.

Force Majeure vs Doctrine of Frustration

The remedy available under both these concepts may seem like the uninitiated however, they are fundamentally different from each other in how they operate as well as threshold to prove.

Force Majeure is a clause agreed by the contracting parties to be included in the contract by clearly outlining what events beyond the control of the parties would amount to Force Majeure and the recourse available when one or both parties invoke this clause. These events could include act of God including but not limited to floods, drought, fire, earthquake, volcanic eruption, cyclone etc. They could also include non-natural events like any act of war, invasion, blockade, embargo, terrorist attack etc. Even an epidemic or a pandemic could be considered a Force Majeure event and included in the Force Majeure Clause contract. Thus, the contracting parties are free to negotiate which acts may amount to and trigger a Force Majeure event. The parties may either provide for suspension of contractual obligation, extension to perform these obligations or termination of the contract in the Force Majeure clause. Thus, invocation and rightful application of this clause would protect the defaulting party from any legal or financial liabilities. Though the concept of Force Majeure has no mention in the Indian Contract Act, 1872, it nonetheless gets covered as a contingency under Section 32 of the Act.

Doctrine of Frustration on the other hand has statutory sanction and propounded by Section 56 of the Indian Contract Act 1872: Agreement to do impossible act – An agreement to do an act impossible is void. Its further outlines that the party making a promise to do a certain act despite knowing its impossibility must compensate the aggrieved party for such non-performance of the promise.

Position Taken by English Courts

The prevailing position in England prior to 1863 was that a contract must be performed despite the fact it had become impossible to perform owing to some unforeseen events that took place after the parties entered the contract. This was effectively negatived in Taylor v. Caldwell[3] in which the English Court held that it would be unjust to seek performance of a contract which had become impossible to perform owing to unforeseen events that fundamentally alter the basis of the contract.

However, the House of Lords in Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH[4] observed that the Doctrine of Frustration must be interpreted narrowly and further held that “even though the contract had become more onerous to perform, it was not fundamentally altered. Where performance is otherwise possible, a mere rise in freight price would not allow one of the parties to say that the contract was discharged by impossibility of performance”.

Position Taken by Indian Courts

In India, the Supreme Court in the landmark judgement Satyabrata Ghose v. Mugneeram Bangur[5]. held that, “the word “impossible” has not been used in Section 56 of Indian Contract Act, 1872 in the sense of physical or literal impossibility. The performance of an act may not be literally impossible, but it may be impracticable and useless from the point of view of the object and purpose of the parties. If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do. It was further held that where the Court finds that the contract itself either impliedly or expressly contains a term, according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with Under Section 32 of the Act. If, however, frustration is to take place de hors the contract, it will be governed by Section 56”.

Principles Governing Force Majeure And Doctrine Of Frustration In India

The Supreme Court in Energy Watchdog and Ors. v. Central Electricity Regulatory Commission and Ors.[6] laid out some guiding principles relating to invocation of the Force Majeure clause, the same are reproduced below:

a) Force Majeure would operate as part of a contract as a contingency under Section 32 of the Indian Contract Act 1872 (hereinafter ICA).

b) Independent of the contract sometimes, the Doctrine of Frustration could be invoked by a party as per Section 56, ICA.

c) The impossibility of performance under Section 56, ICA would include impracticability or uselessness keeping in mind the object of the contract.]

d) If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement it can be said that the promisor finds it impossible to do the act which he had promised to do.

e) Express terms of a contract cannot be ignored on a vague plea of equity.

f) Risks associated with a contract would have to be borne by the parties.

g) Performance is not discharged simply if it becomes onerous between the parties.

h) Alteration of circumstances does not lead to frustration of a contract.

i) Courts cannot generally absolve performance of a contract either because it has become onerous or due to an unforeseen turn of events. Doctrine of Frustration must be applied narrowly.

j) A mere rise in cost or expense does not lead to frustration.

k) If there is an alternative mode of performance, the Force Majeure clause will not apply.

l) The terms of the contract, its matrix or context, the knowledge, expectation, assumptions, and the nature of the supervening events must be considered.

m) If the Contract inherently has risk associated with it, the Doctrine of Frustration is not to be likely invoked.

n) Unless there was a break in identity between the contract as envisioned originally and its performance in the altered circumstances, Doctrine of Frustration would not apply.

Force Majeure Relief: Government Contracts

To provide relief to the parties that had contracted with the Government of India, the Ministry of Finance issued an Office Memorandum[7] (O.M. No. F. 18/4/2020-PDD) on 19th February 2020 stating that the Covid-19 pandemic would be treated as a natural calamity and Force Majeure clause may be invoked wherever relevant and applicable.

Similarly, the Ministry of Road Transport and Highways (MoRTH) also acknowledged the outbreak of Covid-19 as a trigger of the Force Majeure Clause and vide its Office Memorandum[8] (covid-19/roadmap/js(h)/2020) dated 18th May 2020 detailed the relief to be provided to developers by way of extension for completion time and to tolling contractors by waiver of penal interest for delayed/short remittances.

In South Delhi Municipal Corporation v. MEP Infrastructure Developers Ltd., the Delhi High Court[9] relied on the MoRTH Office Memorandum to give relief to a tolling contractor which was unable to meet its contractual obligations due to lower traffic and fall in toll revenues.

Conclusion

In both the instances, it is necessary for the invoking party to establish that there is a fundamental change in the terms involving performance of the contract. The said change must not be temporary or transient but permanent in nature. In case time is of the essence in performance of a contract then even a temporary radical change in terms of a contract may fall under Force Majeure or frustrate the contract.

Since Force Majeure is included in the Contract it is relatively easier to establish should need arise. A Force Majeure clause usually also provides for the course of action to be taken by the parties to the contract in the event this clause is invoked by either party. Thus, mitigating the potential dispute owing to non-performance of the contract to some extent. Whereas in the absence of a Force Majeure clause in the contract it is relatively difficult to justify non-performance of contractual obligations due to frustration of contract as the burden to prove it is on the defaulting party.

FAQs

1) What Is Force Majeure?

Force Majeure is a clause agreed by the contracting parties to be included in the contract by clearly outlining what events beyond the control of the parties would amount to Force Majeure and the recourse available when one or both parties invoke this clause.

2) What Kind Of Events May Be Covered Under Force Majeure Clause In A Contract?

These events could include act of God including but not limited to floods, drought, fire, earthquake, volcanic eruption, cyclone etc. They could also include non-natural events like any act of war, invasion, blockade, embargo, terrorist attack etc. Even an epidemic or a pandemic could be considered a Force Majeure event and included in the Force Majeure Clause in a contract.

3) What Is Doctrine Of Frustration? Does It Have Legal Recognition Under Indian Laws?

The Doctrine of Frustration implies the frustration or impossibility of performance of a contract owing to unforeseen events that was not due to fault of either party. As per Section 56 of the Indian Contract Act, an agreement to do an impossible act is void.

4) Does The Contract Automatically Stand Dissolved In The Event Of Frustration?

When there is frustration of contract the dissolution of the contract occurs automatically.

5) Can Force Majeure And Doctrine Of Frustration Apply Simultaneously?

The Supreme Court in Satyabrata Ghose vs. Mugneeram Bangur and Company and Ors (AIR 1954 SC 44) has held that, when a contract contains a Force Majeure Clause which on construction by the Court is held to apply to the facts of the case, Section 56 (Frustration of Contract) can have no application.


[1] https://www.worldbank.org/en/news/press-release/2019/10/24/doing-business-india-top-10-improver-business-climate-ranking

[2] The Essential Law Dictionary – Amy Hackney Blackwell – Sphinx Publishing – First Edition 2008

[3] [1863] EWHC J1(QB)

[4] 1961 (2) All ER 179

[5] AIR 1954 SC 44

[6] ((2017) 14 SCC 80)

[7] https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf

[8] https://images.assettype.com/barandbench/2020-06/4f0a39c5-9f85-451d-975d-92120b83db86/MORTH_Circular.pdf

[9] https://www.casemine.com/judgement/in/5fb39bfe9fca190ea8df1a0c

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