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Author - Ankit Rajgarhia & Tarun Sharma

On 19.02.2020, Ministry of Finance, Government of India released a Circular clarifying that disruption of supply chains due to spread of COVID-19 shall be construed as a force majeure event and shall be considered as a natural calamity in relation to procurement of goods as per the Manual for Procurement of Goods, 2017. Consequently on 11.03.2020 the World Health Organization (WHO) declared the COVID-19 virus outbreak as a pandemic, which prompted the Ministry of Home Affairs (MHA) Government of India on 11.03.2020 to declare the coronavirus or COVID-19 pandemic as a Notified Disaster w.e.f 17.01.2020. Post these pertinent notifications, the country has been in a nationwide lockdown since 25.04.2020. As of now the lockdown seems to be till 03.05.2020 with certain relaxations being allowed by the MHA in regions which are not ‘hotspots’.

In the days of uncertainty that lies ahead, it is safe to assume one thing i.e. that due to the pandemic the economies of countries globally including India have been disturbed. This simply for legal parlance, translates to several contractual obligations being hampered due to the pandemic and consequent financial turbulence. 

In this backdrop, it is of utmost importance to understand the doctrine of frustration of contract and the force majeure clauses found in almost all major contracts. 

Chitty on Contracts, describes Force Majeure as “contractual language intended to anticipate unforeseen events and provide for what happens on their occurrence.” Force majeure clauses are contractual clauses which alter parties' obligations and/or liabilities under a contract when an extraordinary event or circumstance beyond their control prevents one or all of them from fulfilling those obligations. Depending on their drafting, such clauses may have a variety of consequences, including: excusing the aggrieved party from performing the contract in whole or in part; excusing that party from delay in performance, entitling them to suspend or claim an extension of time for performance; or giving that party a right to terminate.

Doctrine of frustration of contract applies to the impossibility of performance of the contract as a whole or of certain contractual obligations. Due to an unforeseen event, the performance of the contract becomes impossible.

Under Indian Law force majeure (and doctrine of frustration) is not given a statutory status and is majorly read as a part of Section 56 of the Indian Contract Act. 

Section 56 of the Contract Act:

“56. Agreement to do impossible Act. —An agreement to do an act impossible in itself is void.

Contract to do an 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 impossible or unlawful.

Compensation for loss through non-performance of act known to be impossible or unlawful. — Where 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 nonperformance of the promise”

Therefore, it can be said that the doctrine of Frustration would apply when an unforeseen event makes it impossible at no fault of either party to perform the contract. The unforeseen event strikes at the root of the contract and far beyond what was contemplated by the parties when they entered the contract. It renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of signing the contract.

In a landmark judgement titled Energy watchdog Vs. Central Electricity Regulatory Commission reported at 2017 (4) SCALE 580, Justice R.F. Nariman of the Supreme Court opined that the event leading to frustration which is relatable to an express or implied clause in a contract, is governed by Section 32 of the Act and if it occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Act. 

While Section 56 states impossibility of performance being such that it leads to avoidance of the contract, it does not statutorily state the concept of unforeseen contingencies which result in temporary suspension of performance and resumption of the contract. In such scenarios force majeure clauses of contracts come into play. The difference is that in a force majeure clause where the affected party/party is unable to perform needs to elect or choose to invoke the clause, either by means of a notice or otherwise, under the doctrine of frustration of contract envisaged under Section 56 operates immediately from the date of the impossibility and puts the contract to an end.

Thus, primarily the language of the force majeure clause will determine the remedies available to the parties as some contracts may provide for immediate termination of the contract upon the happening of the force majeure event, while others may state that the agreement will be required to be postponed until the force majeure event is settled. The notification of the Ministry of Finance whereby it stated that the disruption of supply chains due to spread of COVID-19 shall be construed as a force majeure event and shall be considered as a natural calamity in relation to procurement of goods as per the Manual for Procurement of Goods, 2017 is important in the present context to argue that COVID-19 is a force majeure event. However, despite this notification it will be hard to argue that due to COVID-19 pandemic and treating the same as a Force Majeure event, the performance of the entire agreement has become impossible to carry out and hence the same should be terminated

At best COVID-19 and any difficulties faced in executing contractual obligations thereof like shortage of workers/laborers, difficulty in meeting timelines for completion of project, difficulty in meeting financial obligations etc., can be held to be a valid defense to justify delay in timelines either for payments or for completion of contract and consequently fresh timelines can be sought either under the valid clause if the agreements provide for it or can be by way of request for addendum due to a special unforeseen circumstance subject to mutual consent.