COVID-19, Courts and Contracts – Doctrines of Force Majeure and Frustration at Juxtaposition

This blog is inscribed by Veera Gandhi

Introduction: A World of Pandemonium

The outbreak of COVID-19 or SARS-CoV-2, a global pandemic, has unfolded new disasters affecting economies globally. The pandemic has interrupted our personal, professional, financial and commercial lives, to a point of preventing best performance at all levels. As Global Health safety issues take the center stage, economic concerns are also rising at an undeniable and unmanageable pace.

With restrictions on movement and partial/total lockdown in all the affected countries, the international and domestic supply chains exist in continued disorder. COVID-induced commercial hardships have made contractual performance almost impossible for some parties. In light of this monetary predicament, enterprises themselves or their opposite parties facing contractual default(s) are now looking for shelter under the Doctrine of Force Majeure and Frustration.

Considering the complications around the check-boxes of its successful invocation, this article focuses on general principles of testing a prospective force majeure or an ‘impossible’/frustrating event. The article seeks to bring clarity about which of the above can indeed come to the rescue of economically burdened enterprises amid the Pandemic.

A Tale of Two Things – Force Majeure and Frustration

Etymologically, the French term ‘Force Majeure’ translates as a ‘superior force’. An event of force majeure is an extraordinary circumstance beyond human control and anticipation[1] which has resulted into contractual non-performance; an event described as an Act of God, a war, a strike, a natural calamity, an epidemic and the like, may qualify as a force majeure event. The force majeure clause provides temporary reprieve to one/all parties of the contract by allocating the risk of loss and relieving them from performing its obligations through temporary suspension of terms or in ways as agreed upon before its execution. A force majeure event is an exception to what would otherwise amount to a breach of contract.

The concept of force majeure has not been defined under the Indian statutes. However, the legislators have to some extent have dealt with it in Section 32 of the Indian Contract Act, 1872 (the “1872 Act”) while dealing with ‘contingent contracts’.

Force majeure must be expressly referred to and defined in the respective contract, as the parties recognise that aspects of their contract may not always be within their contemplation or control. They are usually found in supply contracts, manufacturing contracts, real estate contracts, project finance contracts, etc. and provide flexibility in a volatile economy. Notably, in light of COVID-19, on February 19, 2020, the Ministry of Finance issued an Office Memorandum[2] on ‘Force Majeure Clause’ providing that “coronavirus should be considered as a case of natural calamity and force majeure may be invoked, wherever considered appropriate, following the due procedure (in the Office Memorandum)”.

In the absence of a force majeure clause, the doctrine of frustration may come to a Party’s aid. Under Section 56, Chapter IV of the 1872 Act, to claim ‘frustration of a contract’ is to discharge the contract by reason of a supervening event resulting in impossibility or impracticality of the contractual act’s performance. The statutory provision under Section 56 sets out a positive rule of law[3] that renders performance impossible in its practical and not literal sense. The above is applicable only if the concerned event has resulted in the destruction of the object and purpose of the contract, or has caused a fundamental difference in the way the contract now stands, far beyond the contemplation of the parties. Whether the contract stands frustrated is subject to determination by a court or arbitral tribunal ex post facto.

Force Majeure and Frustration – A Contrast

The Doctrine of Frustration is a common law principle whereas Force Majeure is a creature of contract. The latter enables parties to contractually provide a wide class of events to be covered under it and brings about a degree of certainty. Contrarily, according to the general principles of frustration, it operates within narrow limits as to what falls under the reason of ‘impossibility’. Moreover, the invocation of frustration of a contract, irrespective of the party’s wishes, terminates the contract. On the other hand, consequences of invocation of the force majeure clause are contractually pre-defined at the will of the parties.

Practical Considerations – Threshold of the Doctrines

Whether or not the doctrine of frustration – one of rigid interpretation and limited applicability, or a Force Majeure Clause comes to the rescue of COVID-induced failing businesses can be assessed by evaluating the following –

  1. Impact of COVID-19 – Extent and Duration

Firstly, there needs to be a pivotal link[4] between the said event and the affected party’s role and therefore failure to perform the contractual duty. Has COVID-19 resulted in a mere commercial hardship, partial failure of performance, complete incapability to perform or delays which if extended beyond a tolerable limit could strike at the root of the contract? A fundamental contract-altering effect[5] of the uncontrollable event should necessarily be brought out by the parties and not merely because its performance has become onerous on account of an unforeseen turn of events. If a Force Majeure Clause contains words like ‘prevent’, ‘delay’, then according to the extent of impact, it can be successfully invoked. Alternatively, the Contract may be absolved if has become ‘impossible’ for an indefinite amount of time by invoking Frustration. The duration of the event will also play an important factor in calculating the impact of the concerned contract. While the Ministry of Finance had issued a notification to this effect as early as on 19 February 2020, the notification as to a complete lockdown was issued more than a month later on 24 March 2020. A more pressing question is when the relevant period ends. On that account, the Courts may have to consider a reasonable period for determining the subsistence of force majeure in each case.

  1. Terms and Intention of Contract

As laid down in a landmark Supreme Court case[6], only those events, which are explicitly included in the contract, can excuse a party from performance. A force majeure clause should typically spell out the events which would qualify as force majeure (exhaustive or non-exhaustive list), conditions to be fulfilled for its application and consequences for its implementation.[7] If the Clause does not contemplate the occurrence of an event, and the event occurs, the remedy might lie in Section 56. While closely looking at the contents of the concerned contract, the Court may also examine the nature of the obligation to be performed and initial chartered intentions of the parties in relation to the central/underlying objective of the contract.

  1. Duty of Mitigation / Best Endeavors clause

Another important step, while testing the validity of an event to qualify as Force Majeure, is to prove that no reasonable steps could have been taken to avoid or mitigate the event or its consequences and if parties were diligent in exploring all alternatives.[8] Further, if the parties are able to somehow continue operations, either digitally or partially and there is an extended time within which they can complete their obligations, post the lockdowns in the city/country, the Court may not allow a Frustration application.

  1. Formal and Procedural requirements

The party may also be required to comply with any procedural requirements specified in the respective contract – such as a notice of its intention to rely on the clause to the other party, to notify its inability to fulfil contractual duties and to provide relevant government directives/notifications, in a timely manner. Unlike a force majeure clause where the non-performing party needs to choose and notify the invocation, frustration of contract operates automatically from the date of the impossibility and puts the contract to an end.

  1. Desired consequences- to terminate or not to terminate

The effect of frustration or force majeure, both could result in termination of contract, depending on its terms. Therefore, in cases where the performance has merely become commercially more difficult but not impossible, parties could consider whether it would be commercially viable to suspend the contract, or use this opportunity to renegotiate the contract.

Conclusion

A scrutiny of the Court’s approach on Force Majeure and Frustration issues in recent cases suggests that there are no straight jacket principles with respect to its successful application to each case [Rural Fairprice Wholesale Ltd. & Anr. v. IDBI Trusteeship Services Ltd. & Ors. (Bombay HC, 3 April 2020), Standard Retail Pvt. Ltd v. Gs Global Corp And Ors (Bombay HC, 8 April, 2020), M/s. Halliburton Offshore Services Inc. v. Vedanta Limited & Anr. (Delhi HC, 20 April 2020) and Indirajth Power Private Limited v. UOI & Ors (Delhi HC, 28 April 2020)] [9].

Considering the rigid response of the Judiciary, the COVID-19 situation could be viewed as temporary, making it difficult for parties to prove indefinite impossibility. “The remedial rigidity of the doctrine of frustration contrasts unfavourable with the flexibility which can be obtained by drafting an appropriate force majeure clause.” Suggestively, parties should steer away from attempting to demonstrate frustration in a case where performance is otherwise possible. While Courts will be burdened with a copious amount of COVID-induced cases, delay and high litigation costs are unavoidable. Mediation and other methods of Alternate Dispute Resolution may serve as a benefit to the enterprises experiencing a crash-crunch.

The Doctrine of Force Majeure, which was sidelined while drafting of contracts has now taken the limelight in the current economic backdrop – a possible road to Damascus for the drafting parties. Although currently it would be impossible to ascertain the quantum and extent of damage caused due to the Outbreak, it would be prudent for any commercial organisation to be adequately prepared to protect their respective businesses. That is, until the fullness of the COVID-19 disaster unfolds.


[1]  Black’s Law Dictionary, Edition 11 (2019).

[2] No.F.18/4/2020-PPD, https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf.

[3] Satyabrata Ghose vs. Mugneeram Bangur & Co., And Anr., 1954 AIR 44.

[4] Edmund Bendit And Anr. vs Edgar Raphael Prudhomme, AIR 1925 Mad 626.

[5] supra no. 3, Satyabrata Ghose case.

[6] Energy Watchdog v. Central Electricity Regulatory Commission and Ors. etc., 2017 SCC Online SC 378.

[7]  Hugh Beale, Chitty on contracts, (Volume I (31st Edition), Sweet and Maxwell).

[8] Mamidoil – Jetoil Greek Petroleum Company SA Moil – Coal Trading Company Limited vs. Okta Crude Oil Refinery, [2003] 2 Lloyd’s Rep. 635; Channel Island Ferries Ltd v Sealink UK Ltd [1988] 1 Lloyd’s Rep. 323 (10 December 1987).

[9] A Closer Look At Force Majeure, Frustration Of Contract And Impossibility To Perform Contracts During The COVID-19 Pandemic, Mondaq (May 2020), https://www.mondaq.com/india/litigation-contracts-and-force-majeure/928048/a-closer-look-at-force-majeure-frustration-of-contract-and-impossibility-to-perform-contracts-during-the-covid-19-pandemic.

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