Force Majeure Clause: Facing the Eccentric Reality of 21st Century, the Global Covid 19 Pandemic
Dealing with the Notion of Hardship and Force Majeure Clause in the Unforeseen Events, wherein Section 56 of the Indian contract act, 1872 talks about the agreement to do impossible acts. The first part of this section says “An agreement to do an act impossible in itself is void.” The above statement in the Indian contract act 1872 reflects… Read More »
Dealing with the Notion of Hardship and Force Majeure Clause in the Unforeseen Events, wherein Section 56 of the Indian contract act, 1872 talks about the agreement to do impossible acts. The first part of this section says “An agreement to do an act impossible in itself is void.”
The above statement in the Indian contract act 1872 reflects about an agreement that is based on an impossible or unlawful act will be void:
For example, D comes under an agreement with B that he would fill his cupboard with gold by doing some sort of magic in exchange of B’s mobile phone this type of agreement is a void agreement because it is based on something which is
The second part of section 56 of the Indian contract act, 1872 says, “Contract to do an act afterwards becomes impossible or unlawful ”.[1]
These words of the section clearly depict that any agreement formed for a possible or lawful act turned out to be impossible and unlawful after the formation of contract will be considered as a void contract. For example, A and B enter into a contract to get married after two days but subsequently before the marriage A turns into a person with unsound mind, the contract of marriage eventually becomes a void contract.
The last part of this section talks about the “compensation for loss through non-performance of act which is known to be unlawful or impossible”
A forms an agreement that if B takes care of A’s dog for 1 week then A will in gift him a latest phone, worth rupees 89,000. Due to some issues A’s credit card was blocked and he couldn’t fulfil his promise, in this case A will be held liable to compensate B for his service to take care of A’s
The doctrine of frustration is a “doctrine of a special case of the discharge of contract by an impossibility to perform it.”
The Indian Contract Act, 1872 does not define the term frustration but Black’s Law Dictionary defines frustration in relation to contracts as “the doctrine that if a party’s principal purpose is substantially frustrated by unanticipated changed circumstances, that party’s duties are discharged and the contract is considered terminated,” also termed as the frustration of purpose. This doctrine is a device to reconcile the rule of absolute contracts with a special exception which is demanded in certain circumstances in the name of justice.
Case Laws Illustrated:
- Taylor v. Caldwell, (1863) 3 B & S 826
The first landmark judgment was held under the doctrine of frustration in the year 1863. The case concentrated on a music hall which was agreed by the claimant to hire from the defendant. The hall was to be used for ‘grand concerts’ and fests. The hall was caught on fire and it faced massive destruction before the event. It was held that there was no breach of contract as it had become impossible to perform the contract in absence of the very subject matter on which the contract was based. The contract was therefore frustrated by no fault of the defendant.
- Maritime National Fish v. Ocean Trawlers Ltd., (1935) 51 Ll L Rep 299
Lord Wright said that the essence of ‘frustration’ is that it should not be due to the act or election of the parties. Frustration should arise without blame or fault on either side. Reliance cannot be placed on self-induced frustration.
In this case, the appellants hired the respondents’ trawler, called ‘St. Cuthbert to be employed in the fishing industry only. Both parties knew that the trawler could be used for that purpose only under a license from the Canadian Government. The appellants were using five trawlers and, therefore, applied for five licenses. Only three were granted and the Government asked the appellants to name the three trawlers and they named trawlers other than St Cuthbert. They then repudiated the charter and pleaded frustration in response to the respondents’ action for the hire.
The Interpretation of Doctrine of Frustration
The Doctrine of Frustration is very clearly codified in India under Section 56 of the Indian Contract Act, and this eliminates the dependency on various theories to justify the application of the doctrine. It lays down a positive rule relating to the frustration of the contract and does not leave the matter to be determined according to the intention of the parties or the choice of theory to be applied by the court. The relief under this section is given by the court on the ground of subsequent impossibility when it finds out that the whole purpose or the basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances that was beyond the control of the parties.
Section 56 of the Indian contract act states that an agreement to do an act that becomes impossible or unlawful is void. A thorough explanation of the section can be sought from the celebrated and groundbreaking decision of the Court.
“In this case, the defendant company promised to sell the plaintiff plot of land after the development relating to the construction of the roads and However, some portion of the area included in the scheme was sequestered for military purposes. The Supreme Court, while applying the doctrine, held that the requisitioning of the area had not substantially prevented the performance of the contract as a whole and therefore, the contract had not become impossible within the meaning of section 56.”
The Line of Difference Between Section 32 & Section 56 of the Indian Contract Act, 1872.
Under the Indian Contract Act, both sections 32 and 56 apply to the case of frustration of contacts and it is important to understand the difference between section 32 and section 56. The parties may see a provocation to go under section 56 instead of section 32. This incentive is the compensation under the third paragraph of section 56 that a loss-incurring party may receive compensation from the loss through non-performance of an act known to be impossible or unlawful.[2]
Under both these Sections 32 and Section 56, the contract can be discharged on the impossibility of certain events in the future. Section 32 deals with a contingent contract, which is dependent on the fulfilment of a condition for its survival. A contingent contract will dissolve under its own force if the condition is not satisfied, whereas, section 56 is attracted when a contract becomes impossible to perform because of an outside force.
Therefore, it can be said that “it is sometimes a matter of doubt whether a contract falls under section 32 or Section 56.”
Section 32 will not only apply to a contract that expressly provides a condition on which performance is dependent, but also to a contract where such condition is implied.
Covid 19, Lockdown in India
The COVID-19 pandemic has intrinsically led to a disastrous & immeasurable loss of human life all over the world which caused the worst of the losses over all the industries. The World Health Organization has declared the new coronavirus (COVID-19) a global epidemic; a state of public health exigency has been declared in utmost countries worldwide. There’s no mistrustfulness that COVID-19 has had, and will continue to have, an adverse impact on the global frugality and on the performance of contracts.
The COVID 19 has shifted the attention back to the concept back dated then ‘Force Majeure’, looking at the magnitude of uncertainty around the supply chains.
As per the Black’s Law Dictionary, force majeure is an event or effect that can be neither anticipated nor controlled. The term includes both acts of nature (for instance, floods and hurricanes) and acts of people (for instance, riots, strikes, and wars). The Supreme Court of India has observed that the expression force majeure is not a mere French version of the Latin expression ’Vis major’. It is a term of wider import. It is acknowledged that strikes, breakdown of machinery, which, though normally not included in vis major are included in force majeure.
Frustration of Contract
A frustrated contract is a contract that, posterior to its conformation, and without fault of either party, becomes insolvable to perform in the manner that was contemplated by the parties to the contract. In other words, ‘frustration of contract’ occurs whenever, without dereliction of either party, a contractual obligation becomes unable of being performed because the circumstances in which performance is called for would give it a thing radically different from that which was accepted by the contract.
The basic Principle in Law, regarding the Frustration of Contracts, is laid in Section 56 of the Indian Contract Act, 1872.
Section 56: Contract to do an act afterwards becomes 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.”
Where a 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. However, still, frustration is to take place in the contract, If.
In other words, if a contract has an express or inferred ‘force majeure’ clause, it’ll apply over the principles under Sec 56 of the Contract Act.
Impossibility and frustration are used as exchangeable expressions. The principle of frustration is an aspect of the discharge of a contract. Under the enactment, the doctrine which Courts borrow in India is that of intermediating impossibility or illegality as laid down under Section 56 of the Act.
Per-contra, if the contract contains inferred or expressly a term according to which it would stand discharged on the passing of certain contingencies, the dissolution of the contract would take place under the terms of the contract itself and similar cases would be outside the horizon of Section 56 of the Act. Thus, the event of force majeure must pass the following tests-
- Externality – The cause isn’t created by the defaulting party’s fault
- Unpredictability – The cause must be ineluctable and unforeseeable; and
- Irresistibility – The cause must make prosecution of the contract wholly insolvable.
Impact of Outbreak and Consequent Lockdown:
Government/Private Contract
In the case of private contracts, if the contract has an express or implied Force Majeure Clause, the obligation of the parties will be determined by the consequences specified in the force majeure clause. In such a case, the terms of the contract would have to be examined to determine what events enable parties to invoke the Force Majeure clause and whether the outbreak of a pandemic constitutes a force majeure event,
Subject to compliance of requirements of notice etc., if any, as specified under the agreement. However, if there is no force majeure clause in a contract, or on the occurrence of event despair’s the contract, such as the outbreak of Covid-19, the common law principle of ‘frustration of contracts’ which is embodied in Section 56 of the Indian Contract Act 1872 shall govern the contract.
In determining whether a contract is frustrated, an assessment of all relevant factors is necessary i.e. the terms of the contract; factual background to the contract; parties’ knowledge and expectations about risk when entering into the contract; the parties’ ability to perform the contract in the circumstances which are said to have frustrated the
Cases Illustrated
- Bombay High Court’s Order passed in Rural Fairprice Wholesale Ltd. & Anr. v. IDBI Trusteeship Services Ltd. & Ors. on 3 April 2020
In this case, the Bombay High Court honoured the request situation pursuant to the COVID-19 and observed that the share request had collapsed due to COVID-19, thus, it was a fit case to restrain the bank from acting upon the trade notices and a direction to withdraw any pending trade orders for the pledged shares.
- Bombay High Court’s Order passed in Standard Retail Pvt. Ltd v. GS Global Corp & Ors on 8 April 2020
In a departure from its 3 April 2020 Order, the Bombay High Court refused to grant interim measures to the Petitioner observing that the commodity in question was an essential item and lockdown is only for a limited period.
Accordingly, Petitioner cannot resile from its contractual obligation of making payments to the Repliers.
- Delhi High Court’s Order passed in M/s. Halliburton Offshore Services Inc. v. Vedanta Limited & Anr. 20 April 2020
The case pertained to restrain on incantation of bank guarantees. While granting interim relief on the incantation of bank guarantees, the Delhi High Court observed that the countrywide lockdown was prima facie, in the nature of force majeure. Thus, it could be said that special equities do live, as would justify entitlement of the prayer, to the injunction of the bank guarantees.
- Delhi High Court’s Order passed in Indrajit Power Private Limited. v. UOI & Ors on 28 April 2020
The Petitioner sought interdiction of the Bank Guarantee Inter-alia on account of the lockdown in the country due to the spread of the COVID-19 epidemic, which could drive the Petitioner towards being declared an NPA.
The Court, while observing the Petitioner’s conduct i.e. despite the extension of 12 months, couldn’t fulfil its obligation under the Contract, refused to grant relief to the Petitioner. The Court observed that Petitioner’s position under the contract was innocent by the duty of the lockdown.
Conclusion
Deeper scrutiny of the approach espoused by Courts on the issue of force majeure suggests that there are no straight jacket principles with respect to the connection of the conception of force majeure to save a party from the performance of contracts.
The approach of the Courts has been to examine the issue grounded on the data of each case and relief has been granted to parties consequently. Thus, parties should steer down from trying to demonstrate frustration in a case where performance is else possible. Further, what attains significance is the propinquity of the event with the perpetration which isn’t attributable or foreseeable by the parties and therefore, falls within the three tests stressed over.
The COVID-19 situation could be viewed as temporary, making it delicate for parties to put an end to contracts solely due to frustration or impossibility of performance.
REFERENCES:
- Indian Contract Act, 1872 Section 32
- Indian Contract Act, 1872 Section 56
- The Coronation Cases. I – Jstor https://www.jstor.org
- Maritime National Fish Ltd v Ocean Trawlers Ltd – Wikipedia https://en.wikipedia.org › wiki
- Satyabrata Ghose v Mugneeram Bangur and Co.1954 SCR 310 : AIR 1954 SC 44
AUTHOR(S)
- Amisha Priyadarshini Dash: Student of School of Law Christ (Deemed to be University), Delhi NCR
- Aastha Sinha: Student of School of Law Christ (Deemed to be University), Delhi NCR
[1] Section 56 of the Indian Contract Act, 1872.
[2] Section 32 of the Indian Contract Act, 1872.
