DOCTRINE OF FORCE MAJURE IN TIMES OF COVID 19 – AN ANALYSIS

INTRODUCTION

"Force Majeure" or "Act of God" - this standard clause present in most contracts, which is not
commonly invoked, is in the minds of most corporates and commercial lawyers, as economic
activities and commercial transactions world over have come to a standstill in the wake of
COVID-19 pandemic.

In simple terms, 'Force Majeure' clause is a provision in a contract that exempts a party from
performing his contractual obligations which have become impossible or impracticable due to an
event or effect which the parties could not have foreseen or controlled. This clause is usually
couched in general, inclusive terms to cover unforeseeable incidents such as natural calamities,
war, sudden change of government policies etc.

It will be interesting to note that the Indian Contract Act, 1872 - the 148 year old law governing
contracts in India - does not expressly refer to 'Force Majeure'.

However, there are two Sections which can become relevant in such situations - Section 32 and
Section 56.

Section 32 deals with "contingent contracts", in which the performance of the contractual
obligations is contingent on the happening or non-happening of an event. If the event becomes
"impossible", the contract becomes "void" under this Section.

As far as general contracts are concerned, Section 56 is relevant. This provision embodies the
"doctrine of frustration". It says :

1. An agreement to do an act impossible in itself is void.

2. 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.

Two illustrations from that Section may be relevant in the present context :
  A contracts to take in cargo for B at a foreign port. A's Government afterwards declares
war against the country in which the port is situated. The contract becomes void when
war is declared.

 A contracts to act at a theatre for six months in consideration of a sum paid in advance by
B. On several occasions A is too ill to act. The contract to act on those occasions
becomes void.

ROOTS IN ENGLISH LAW

The roots of this doctrine of frustartion are in the common law decision Taylor vs. Caldwell 1.

Prior to this decision, the law of contracts in England was extremely rigid. A contract had to be
performed, no matter what the unforeseen circumstances which render its performance
impossible. This rigidity was loosened somewhat by the decision in Taylor vs. Caldwell 2in
which it was held that “if some unforeseen event occurs during the performance of a contract
which makes it impossible of performance, in the sense that the fundamental basis of the
contract goes, it need not be further performed, as insisting upon such performance would be
unjust.”

JUDICIAL STANCE

1. Satyabrata Ghose v. Mugneeram Bangur & Co.3

This a landmark Indian decision which explains the ambit of Section 56.

Here, the defendant was a company, which was engaged in the construction and development of
house plots. There was an agreement for sale of a plot between the plaintiff and the defendant.
Meanwhile, during the second world war, the plots were compulsorily acquired by the military.

The issue was whether the agreement was frustrated due to requisition by military. On facts, the
Court held that the contract cannot be held to be frustrated, as its performance was possible even
after the war-time.

"In our opinion, having regard to the nature and terms of the contract, the actual existence of
war conditions at the time when it was entered into, the extent of the work involved in the
development scheme and last though not the least the total absence of any definite period of time
agreed to by the parties within which the work was to be completed, it cannot be said that the
requisition order vitally affected the contract or made its performance impossible", the Court
held.

Few principles stated by the Court in the decision are :

1
(1861-73) All ER Rep 24.
2
Ibid.
3
1954 SCR 310.
 1. The word "impossible" in Section 56 does not mean physical or literal impossibility.

2. Contract can be held to be frustrated if its performance is "impracticable" and "useless"

from the point of view of the object and purpose of the parties, though the performance is
not literally impossible.

3. If the untoward event totally upsets the very foundation upon which the parties entered
their agreement, the contract can be held to be frustrated.

In this case, the Court found that the delay was not of the character which "totally upset the basis
of the bargain and commercial object which the parties had in view".

The Court also held that the if the contract has an express or implied "force majeure" clause, then
the situation will be analysed on the basis of that, and not through the application of principles
under Section 56.

"According to the Indian Contract Act, a promise may be express or implied(1). In cases,
therefore, where the court gathers as a matter of construction that the contract itself contained
impliedly or expressly a term, according to which it would stand discharged on the happening of
certain circumstances the dissolution on of the contract would take place under the terms of the
contract itself and such cases would be outside the purview of section 56 altogether".

2. M/s Alopi Parshad & Sons Ltd. v. Union of India 4- Contract not frustrated merely
because its performance has become onerous

This case concerned with an agreement to supply ghee to army personnel. The parties sought
enhanced rates citing the outbreak of World War II. The contractor claimed that it was entitled to
amounts over and above the rates revised as per agreement in 1942.

The Court rejected the claim, noting that the contract was revised three years after the hostilities
commenced, and that the party was fully conscious of the circumstances.

"A contract is not frustrated merely because the circumstances in which it was made are altered.
The courts have no general power to absolve a party from the performance of his part of the
contract merely because its performance has become onerous on account of an unforeseen turn
of events", the bench observed.

3. Naihati Jute Mills Ltd. v. Hyaliram Jagannath5

In this case, the Court held that even if a contract is held to be void under Section 56, it will not
affect the arbitration clause contained in it.

4
1960 (2) SCR 793
5
1968 (1) SCR 821
"Even if the appellants had established frustration, it would not be as if, the contract was ab
initio void. In cases of frustration it is the performance of the contract which comes to an end
but the contract would still be in existence for purposes such as the resolution of disputes arising
under or in 'connection with it: and the question whether the contract was discharged under the
doctrine of frustration would still have to be decided under the arbitration clause which operates
in respect of such purposes."

The Court also held that to hold a contract as frustrated, the change in events or circumstances
must be "so fundamental as to be regarded by law as striking at the root of the contract".

On facts, the Court held that the change in government policy on jute import did not frustrate the
contract in question.

4. Sushila Devi vs. Hari Singh6

The case concerned the lease of a property, which went to Pakistan after partition.

"The impossibility contemplated by Section 56 of the Contract Act is not confined to something
which is not humanly possible., If the performance, of a contract becomes im- practicable or
useless having regard to the object and purpose the parties had in view then it must be held that
the performance of the contract has become, impossible", the Court observed, holding the lease
agreement as frustrated.

Ultimately, the Court concluded that a contract is not frustrated merely because the
circumstances in which it was made are altered. The Courts have no general power to absolve a
party from the performance of its part of the contract merely because its performance has
become onerous on account of an unforeseen turn of events.

5. Energy Watchdog v CERC7

This decision given by a bench comprising Justices P C Ghosh and R F Nariman summarizes the
jurisprudence on the doctrine of frustration.

Some key points from this judgment are :

1. If contract has an express or implied 'force majeure' clause, it will apply over the
principles under Sec 56.

2. Application of the doctrine of frustration must always be within narrow limits.

3. A rise in cost or expense will not frustrate a contract.

6
AIR 1971 SC 1756
7
(2017) 14 SCC 80
 4. Doctrine of frustration will not apply so long as the fundamental basis of the contract
remains the same.

5. Force majeure clause will not apply if alternative modes of performances are available.

One of the issues in this case was whether the rice of prices of coal imported from Indonesia
would frustrate the Power Purchasing Agreements (PPA).

The Court held that price rise was not an event which frustrated the contract.

"Alternative modes of performance were available, albeit at a higher price. This does not lead to
the contract, as a whole, being frustrated", observed the judgment authored by Justice R F
Nariman.

In this case, the Court applied the principle in Satyabrata Ghosh Case 8that a contract with an
implied or express 'force majeure' clause will be outside the purview of Section 56.

Referring to Satyabrata Ghosh case9, the judgment observed :

"It was further held that where the Court finds that the 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 and such cases would be dealt with under S.32 of the Act. If, however, frustration
is to take place de hors the contract, it will be governed by S.56".

Hence, the judgment analyzed the case through the lens of the 'force majeure' clauses in the PPA.
The argument for applying the principles under Section 56 was rejected.

“…..rise in the price of fuel cannot be regarded as a force majeure event contractually, it is
difficult to appreciate a submission that in the alternative S.56 will apply. As has been held in
particular, in the Satyabrata Ghose case, when a contract contains a force majeure clause
which on construction by the Court is held attracted to the facts of the case, S.56 can have no
application.”, the court said.

In this case, the Court also expressed that a force majeure clause will not normally be construed
to apply where the contract provides for an alternative mode of performance.

THE INDIAN PERSPECTIVE

The second paragraph of Section 56 has been adverted to in Satyabrata Ghose v. Mugneeram

Bangur & Co10 and it was stated that this is exhaustive of the law as it stands in India. What was
8
Supra at 3.
9
Supra at 3.
10
1954 SCR 310: AIR 1954 SC 44.
held was that "the word "impossible" has not been used in the section in the sense of physical or
literal impossibility. The performance of an act may not be literally impossible but it may be
impracticable and useless from the point of view of the object and purpose of the parties. If an
untoward event or change of circumstance totally upsets the very foundation upon which the
parties entered their agreement, it can be said that the promisor finds it impossible to do the act
which he had promised to do."

In Alopi Parshad & Sons Ltd. v. Union of India11, the Supreme Court, after setting out Section
56 of the Contract Act, held that “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. It was further held that the performance of a contract is never discharged merely
because it may become onerous to one of the parties.”

Similarly, in Naihati Jute Mills Ltd. v. Khyaliram Jagannath12, the Supreme Court went into
the English law on frustration in some detail, and then cited the celebrated judgment
of Satyabrata Ghose v. Mugneeram Bangur & Co.13 and concluded that “a contract is not
frustrated merely because the circumstances in which it was made are altered. The courts have
no general power to absolve a party from the performance of its part of the contract merely
because its performance has become onerous on account of an unforeseen turn of events.”

In Mary v. State of Kerala14, the Supreme Court held that “the doctrine of frustration excludes
ordinarily further performance where the contract is silent as to the position of the parties in the
event of performance becoming literally impossible. However, in our opinion, a statutory
contract in which party takes absolute responsibility cannot escape liability whatever may be the
reason. In such a situation, events will not discharge the party from the consequence of non-
performance of a contractual obligation. Further, in a case in which the consequences of non-
performance of contract is provided in the statutory contract itself, the parties shall be bound by
that and cannot take shelter behind Section 56 of the Contract Act, 1872.”

The application of the doctrine of frustration requires a multi-factorial approach. Among the
factors which have to be considered are the terms of the contract itself, its matrix or context,
the parties' knowledge, expectations, assumptions and contemplations, in particular as to risk, as
at the time of the contract, at any rate so far as these can be ascribed mutually and objectively,
and then the nature of the supervening event, and the parties' reasonable and objectively
ascertainable calculations as to the possibilities of future performance in the new circumstances.
Since the subject-matter of the doctrine of frustration is contract, and contracts are about the
allocation of risk, and since the allocation and assumption of risk is not simply a matter of
11
(1960) 2 SCR 793: AIR 1960 SC 588.
12
(1968) 1 SCR 821 : AIR 1968 SC 522.
13
1954 SCR 310 : AIR 1954 SC 44.
14
(2014) 14 SCC 272.
express or implied provision but may also depend on less easily defined matters such as "the
contemplation of the parties", the application of the doctrine can often be a difficult one. In such
circumstances, the test of "radically different" is important: it tells us that the doctrine is not to be
lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that
there has to be as it were a break in identity between the contract as provided for and
contemplated and its performance in the new circumstances.

CONCLUSION

Since, it depends on what has been stated and incorporated in the clause of force majeure in the
contract; it becomes utmost necessary at this point of time of pandemic situation to analyze the
key contracts and the clauses inculcated therein. Further, it would be best suitable to invoke
clauses like that of escalation, price adjustment, liquidated damages and such so as to avoid the
suffocation of the amount involved in commercial contracts and get the amount in circulation. It
is crucial that businesses and consumers are aware of their rights under the contracts they have
entered into, under the common law and under statute so that they are prepared when confronted
with an inability to perform their contractual obligations as a result of COVID-19. Of course, it is
always advisable to seek the advice of a lawyer in such circumstances.