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Author - Apoorv Singhal

India went into lockdown due to Covid-19 pandemic from 24th March 2020. However, precursor factors in the markets were already showing. Indian Financial Markets were already sliding, and the indices were rapidly declining on Global cues. Further, as China started going into Lockdown phase supply disruptions started happening and post 24th March 2020 when India entered into complete lockdown phase.

In these circumstances, many Indian companies found it difficult, if not impossible to perform contracts or seek enforcement of contracts which were entered before onset of Covid-19 pandemic. Non performing parties may seek to rely on express Force Majeure clauses in the Contracts or on Doctrine of Frustration in the Indian Contract Act, 1872. This article seeks to provide an overview of overlapping boundaries and distinctions between express Force Majeure Clauses and Frustration of Contract.

No definition of Force Majeure has been provided in Contract Act, 1872. Black’s Law Dictionary defines Force Majeure as

“An event or effect that can be neither anticipated nor controlled. The term includes both acts of nature (e.g. Floods and hurricanes) and acts of people (e.g. Riots, strikes, and wars) - Also termed force majesture; vis major; superior force (1) Superior or irresistible force. (2) an event or effect that cannot reasonably be anticipated or controlled.”

By definition we can assume that Force Majeure means an act/circumstance of a certain nature, the nature of which can neither be reasonably anticipated by the contracting parties nor the same is under control of the parties.

Force Majeure Clause

Commonly, Force Majeure clauses are provided in the contracts where under specified exceptional circumstances, the contract between the parties may be kept in abeyance, varied or it can come to an end altogether. However, the consequences depend upon the wordings of the clause(s), its drafting and the underlying intention of the parties. This means that disputes will likely be centred around the drafting of the relevant clauses of the contracts and the facts of each case.

In this regard, certain key ingredients can be identified which a party relying on Force

Majeure clause would need to prove:

1. That the Covid-19 pandemic falls within the Force Majeure clause.
2. That the Covid-19 pandemic has affected the performance of the contract as specified by the relevant clauses in the contract. At this stage, the wordings of the relevant provisions takes a centre stage. The relevant clause(s) determine the threshold at which the Force Majeure Clause get triggered. Commonly, if the supervening conditions ‘prevent’ the performance of the Contract, as distinguished from being ‘hindered’, the defence of Force Majeure can be  successful. However, if the supervening conditions make the performance ‘onerous’, then generally, subject to the wordings of the contract, the defence of Force Majeure does not hold.
3. That the Covid-19 pandemic was the effective cause of taking out the basis of the contract and the relevant party’s failure to perform the contract. However, it is pertinent to point out that if there is an alternative method to perform the contract then, even though more onerous or costly, the contract has to be performed.

Trigger of Force Majeure Clauses

Invocation of Force Majeure provisions, subject to wordings of the contract, is generally done through a written notice by the non-performing party to the other contracting party(s), stating the occurrence of the Force Majeure event and the extent of nonperformance. The consequence is that the operation of the contract may be partially or fully suspended, and the non-performing party shall be excused from any liability till the supervening circumstances exist.

Frustration of Contract

In the absence of any express Force Majeure provisions in the Contract, a nonperforming party may seek to rely on the common law doctrine of ‘Frustration of Contract’ claiming that the Covid-19 pandemic is a Force Majeure event which has so

affected the operation of the contract, that its performance has become impossible.

However, it would be apposite to point out here that merely the performance of the contract becoming more onerous, or that the conditions that were existing at the time of entering of the contract have changed but the contract may still be performed through alternate means, shall not allow the non-performing party to take the defence of Frustration of Contract.

Doctrine of Frustration is envisaged under Section 56 of the Indian Contract Act, 1872 which states that

“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.”

Frustration is regarded as a limited concept and can be invoked in only very rare circumstances. Courts have taken a very strict view in application of Doctrine of Frustration. 

The roots of this doctrine can be found in UK decision in Taylor vs. Caldwell¹  where the opinion delivered by Justice Blackburn established the doctrine of common law impossibility.

The Hon’ble Supreme Court of India in the celebrated judgment and one of the first case Force Majeure, Satyabrata Ghose v. Mugneeram Bangur & Co.² held that

“In the large majority of cases however the doctrine of frustration is applied not on the ground that the parties themselves agreed to an implied term which operated to release them from the performance of the contract. The relief is given by the court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement.”

It was also held that when a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application.

Again in Alopi Parshad & Sons Ltd. v. Union of India3, the Hon’ble Supreme Court held that the Contract Act did not enable a party to a contract to ignore the express covenants thereof and to claim payment of consideration, for performance of the contract at rates different from the stipulated rates, on a vague plea of equity. It is only when a consideration of the terms of the contract, in the light of the circumstances existing when it was made, showed that they never agreed to be bound in a fundamentally different situation which had unexpectedly emerged, that the contract ceases to bind.

Very recently in Energy Watchdog v. CERC4, the Hon’ble Supreme Court dealt with the doctrine in detail and held that

• a) Force Majeure Clauses are to be narrowly construed.
• b) Force Majeure Clause does not exhaust the possibility of unforeseen events occurring outside natural/non-natural events but this does not include any unforeseen event which hinders the performance.
• c) Only when the fundamental basis of the contract is dislodged by the supervening event, can the defence of Force Majeure be taken.

An analysis of the above judgments would reveal that

1. If Force Majeure clause is provided in the contract, then the Courts shall first peruse the same and test the validity of the claim of the non performing party against it. No application of Section 56 can be envisaged at this stage. Rather, if impliedly or expressly, clauses are provided in the contract under which the dissolution of the Contract can take place, the application of Section 56 ought to be necessarily excluded and the contract can be suspended/dissolved only under those clauses. 
2. If in the contract no Force Majeure clause exists, the Court may apply the Doctrine of Frustration under Section 56 of the Contract Act. However, strict construction of the agreement shall be undertaken and merely an onerous performance or hindered performance shall not be treated as a valid defence. The fundamental basis of the performance of the Contract need to go due to the happening of the supervening event.

As a corollary to the above, it is necessary to keep in mind that the contract itself does not become void ab initio, even if it is held that frustration of contract has occurred. This is for the purpose of resolution of disputes arising in connection of the said contract and any arbitration clause in the said contract shall be deemed to operate. This was held in Naihati Jute Mills ltd. v. Hyaliram Jagannath 1968 (1) SCR 8215.

In conclusion, it can be said that Covid-19 pandemic can be taken as a Force Majeure event capable of being covered under Contractual terms or under Section 56 of the Contract Act, 1872. However, this does not mean an automatic application. Each case has to be judged upon its separate facts and fundamental basis of the contract has to be culled out and tested against the Force Majeure clauses in Contract or principles of Section 56 of the Contract Act, 1872.

(*The opinions in this article are of the author alone. No legal advice has been provided in the article nor the same can be treated as one. The article only covers the principles and distinctions of Force Majeure and Doctrine of Frustration.)

[1] [1863] EWHC QB J1
[2] 1954 SCR 310
[3] (1960) 2 SCR 793
[4] (2017) 14 SCC 80
[5] 1968 (1) SCR 821