As the world-wide pandemic continues, every single activity of our day to day life is severely disrupted however with the development of vaccine; there is a slight ray of hope. The COVID-19 pandemic followed by several lockdowns across the country has had a drastic impact on every sector including businesses and other industries. These situations lead to many asking whether the pandemic comes under the purview of ‘Act of God or ‘Force Majeure’ to excuse a party from non-performance of contract and raises an issue as to what are the legal repercussions and what role can the courts play ? In this article the concepts of force majeure and frustration of contracts are explained in brief-
In simple words, force majeure means “an even or an effect which can neither be anticipated nor be controlled and thereby it prevents any person from completing something which he has undertaken to do.” Such force majeure clauses are embedded in the contracts of most modern businesses. War, epidemic, pandemic, natural calamities, labor unrest are some of the examples of force majeure. Here if in contract deeds, pandemic is cited then essentially during COVID-19 period, the force majeure clause shall be invoked. Section 32 of Indian Contract Act, 1872 deals with rules of contingent contract. Although force majeure is not directly spoken about in section 32, it can be considered as a similar provision. It says that contingent contracts are those contracts entered on the happening or non- happening of a uncertain event, if the event becomes impossible the contract becomes void.1 Therefore, force majeure can be used as a defence for breach of contract.
The Common Law of England in the beginning imposed rather a harsh principle in cases of breach of contract owing to certain external forces. The impossibility to perform was no exception. However, in the course of time, this approach was changed. Now, the settled position is that if owing to the impossibility of the event, the contract could not be performed the courts can end the contract. If the act itself becomes impossible it would be only doing severe damage to the parties to perform the same. This is based on the Latin maxim- ‘Les non cogit ad impossibilia’.2 When the discharge of a contract is rendered impossible owing to certain external factors is known as frustration and the doctrine of frustration is embedded in section 56. In the case of Taylor v. Coldwell3, it was observed that when the contract is entered between two parties and it is not unlawful then the promisor has to fulfill his duties, if he does not he will attract liability, this occurs only when the contract is positive and no other implied conditions are present.
In India the doctrine of frustration is equivalent to supervening impossibility or illegality. In the case of Satyabrat Ghose v. Mugneeram Banjur & Co. 4 , it was observed that Indian Courts must primarily look into section 32 and section 56 of the Contract Act. While section 32 covers contingent contracts, section 56 covers all other aspects. The primary focus of both is on the “impossibility” factor of an event.
The frustration of contracts automatically leads to dissolution of contract. In State of Rajasthan v. Madanswarup5, M an advocate was appointed to look after all criminal works in the High Court for Bikaner State. After merger of Bikaner to State of Rajasthan, a new High Court was established leading to termination of M’s services. M filed a suit for breach of contract and in this case the court applied the rule of frustration as the change of events were impossible to predict.
Even though Force Majeure and doctrine of frustration are inter-twined, there is a thin line of difference between them. The former is mostly a contractual provision and the other is a statutory provision. If the contract does not explicitly states the even for dissolution of contract, one can seek remedy by invoking section 56.
Consequences of Force Majeure and Frustration
In case of force majeure, it will depend on the express or implied terms mentioned in the contract. Such as termination of contract, waiver of certain rights, suspension of contract etc. Usually the parties decide what consequences are best suited for them at the time making the contract.
In case of complete frustration, the consequence of restitution will follow as per section 65. Under this principle, any benefit derived so far to any of the parties will have to be returned in case of void contract or frustration. In other words the consideration received must be reimbursed.
In some cases, the contract itself might contain provisions as to temporary suspension of contract till the situation of force majeure is resolved, or to provide time limits after which the contract can be terminated. In such cases, burden of proof lies on the party who invokes the force majeure clause.
Force majeure and frustration doctrine provides measures in case of exceptional situations. In the light of COVID- 19, the chances are more that the contracting parties invoke force majeure clause. The courts will of course decide it on the basis of merits of each case presented before it. Last year, the ministry of finance issued a office memorandum and clarified that the in the event of disruption of supply chain due to COVID-19 pandemic in China or any other country shall be considered as a natural calamity and the force majeure clause is invoked. It would be interesting to note, how the government and the courts will respond to such unpredictable situations once it is settled down. The courts will primarily try to understand the actual performance affected by COVID- 19 and how the contracting parties were disrupted by the same. Finally, the courts must consider the pandemic situation as an Act of God and grant the relief benefitting both the contracting parties.
- by Nathalia M Fenwick