Doctrine of Frustation and its legal implication

Historical Background

The principles behind the force majeure clause originated in England. In Taylor v. Caldwell (1861-73) ALL ER REP 24, an English court decided that circumstances beyond the control or fault of two contracting parties excused performance under their contract.

Present Scenario

Currently, 210 countries around the world are passing through the global crisis on account of Covid-19. COVID-19/corona virus has been officially declared as a pandemic by the World Health Organization on March 11, 2020. This pandemic has not just resulted in the loss of lives but has had an adverse impact on business, commerce and the global economies on account of lockdowns and restricted movement. This pandemic, therefore, has its varied implications on the commercial world. There have been certain disruptions to the economy in the past as well comprising of, but not limited to Gujarat earthquake in 2001 and the Indian Ocean Tsunami in 2004. The outbreak of Covid-19 however has brought the economies around the world to a halt.

The bottom line for any business or commerce to grow is the contracts entered into between the parties. The law of contracts lays down the reciprocal obligations of the parties. As per Section 37 of the Indian Contract Act, 1872, the parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. On account of this pandemic, the situations may arise in a catena of commercial contracts wherein a party, without any fault on its part, is not able to perform its part of the contract.

In the light of the foregoing, it is important to access and analyze the commercial ramifications of Covid-19, whether the current situation of lockdowns can be considered as force majeure, closely analyze the concept of Force Majeure in the light of current jurisprudence and the distinction between force majeure and the doctrine of frustration of contract.

From a contractual perspective, a force majeure clause provides temporary reprieve to a party from performing its obligations under a contract upon the occurrence of a force majeure event.

The essential ingredients of force majeure clauses are as follows:

-An unexpected/unforeseen intervening event occurred;

-The parties to the agreement assumed that such an event will not occur;

-Such an event has made the performance of the obligations under the contract impossible or impracticable;

-The parties have taken all such measures to perform the obligations under the agreement or at least to mitigate the damage; and

-The affected party claiming relief under force majeure will have the burden of proof to show that the force majeure event has affected such party’s performance of the contract.

Whether the outbreak of Covid-19 and the ensuing lockdowns ordered by the Central and State Government would be sufficient to invoke the force majeure clause in the contract would depend on the following factors:

-Establishing the causal connection between the force majeure event and a hindrance to the performance of the contract;

-Harmonious construction with all the provisions; and

-Compliance with the condition precedents contained in the force majeure clause.

Section 56 of the Indian Contract Act, 1872 reads as follows:

56. Agreement to do impossible act. 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 an 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 non-performance of the promise.

Section 56 deals with two distinct levels-

It renders void all agreements to do impossible acts, and

It envisages a situation wherein a lawful act has subsequently become impossible or unlawful to perform.

Cardinal ingredients of Section 56 of the Indian Contract Act, 1872 :

-There must be a valid contract;

-The performance of the contract is yet to be made or is ongoing; and

-The aforesaid performance becomes impossible by way of facts or law.

It is not possible to lay down an exhaustive list of situations in which the doctrine of frustration is to be applied to excuse performance. Yet certain grounds of frustration which are well established are as follows:

-Destruction of subject matter;

-Death or incapacity for personal service;

-Non- existence or non- occurrence of a particular state of things;

-Intervention by legislative or executive authority;

-The intervention of war; and

-Change of circumstances of a particular state of things.

Indian Precedents

Satyabrata Ghose v. Mugneeram Bangur & Co.[1]

The relevant portion of this judgement reads as follows:

“16…..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 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. Although in English law these cases are treated as cases of frustration in India they would be dealt with under, Section 32 of the Indian Contract Act which deals with contingent contracts or similar other provisions contained in the Act.”

“23…..But when there is no time limit whatsoever in the contract, nor even an understanding between the parties on that point and when during the war the parties could naturally anticipate restrictions of various kinds which would make the carrying on of these operations more tardy and difficult than in times of peace, we do not think that the order of requisition affected the fundamental basis upon which the agreement rested or struck at the roots of the adventure.”

“24……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.”

“25……In our opinion, the events which have happened here cannot be said to have made the performance of the contract impossible and the contract has not been frustrated at all……..”

The dispute between the parties in this matter revolves around a short point as to whether a contract for the sale of land to which the litigation relates, was discharged and came to an end by reason of certain supervening circumstances which affected the performance of a material part of it. Judiciary examined the nature and terms of the contract and the circumstances under which it was entered into to determine whether or not the supervening circumstance, which is alleged to have happened here, has substantially prevented the performance of the contract as a whole. The contract involved in the present case is an ordinary contract of sale and purchase of a piece of land and is one of the many contracts entered into by the defendant company with many persons. The most material point which was considered by the Hon’ble Court in the present case was that there was absolutely no time limit within which roads and drains were to be made and there was no understanding between the parties with respect to the same either. Hon’ble Court in the light of the provisions of the contract considered the question finally whether the passing of the requisition orders affected the performance of the contract? Hon’ble Court observed that the existence of war conditions has made the performance of the contract more tardy and difficult than in times of peace but the order of requisition has not affected the fundamental basis of the contract. Therefore, it was observed that the performance of the contract in question is not impossible, so the contract is not frustrated at all.

Justice Mukherjee in this illuminating judgement laid down the following points of Indian law:

The Indian Law of frustration which term is interchangeable with supervening impossibility is embodied in Section 56 of Indian Contract Act, 1872 as a positive rule of law which does not leave the matter to the intention of the parties and casts the duty on the court to decide whether the contract is ended by frustration;

To the extent the Indian Contract Act deals with a particular matter, it is exhaustive and it is not permissible to import English principles dehors the provisions in the Act. The English decisions have persuasive value but the several theories of the frustration of English law do not bind us;

When the whole purpose or basis of the contract is frustrated by the intrusion or occurrence of an unexpected or change of circumstances beyond the contemplation of the parties, it is the duty of the court to give relief and hold the contract frustrated and ended as it is really a rule of positive law under Section 56 of the Indian Contract Act, 1872;

Section 56 of the Indian Contract Act, 1872 lays down the rule of positive law, not dependent on the intention of the parties but only evidence and the court has to form its own conclusion by examining the contract and the circumstances; and

When there is frustration, the contract is dissolved automatically and does not depend on rescission or repudiation or breach or choice or election of either party, and the court has to decide ex post facto.

M/S Alopi Parshad & Sons, Ltd v. The Union of India[2], held that 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. Commercial hardship will not by itself support frustration and excuse performance., the only conditions for invoking sec 56 Only consideration is whether parties never agreed to be bound in a fundamentally different situation which had unexpectedly emerged, in the light of circumstances existing when it was made.

ENERGY WATCHDOG v. CERC[3], the court observed that in Power Purchase Agreement (PPA) risk was known to the party and electricity could be given at a high rate of charges. So, could not invoke sec 56 of the Indian Contract Act, 1872.

1. P. Power Management Company v. Renew Cleans Energy Pvt. Ltd. Civil Appeal No. 3600 of 2018 D-O-O- 5-04-2018, Mere the contract had become more onerous to perform but not fundamentally altered, one cannot be absolved from their responsibility to perform.

Conclusion/Remark

The following are the pertinent points which need to be taken into consideration in order to access and analyze whether force majeure clause is attracted or not:

Whether a contract contains force majeure clause or not?

If the contract contains Force Majeure clause, Section 32 of the Indian Contract Act, 1872 is attracted.

A party which successfully establishes the force majeure clause is relieved of its obligations to perform its obligations under the contract during the time the supervening force majeure event subsists, the performance of the obligations under the contract is suspended and is relieved of its liability to pay damages for breach of contract.

Invoking a force majeure clause could result in the right to the other party to terminate a contract if the force majeure event lasts longer than a particular period as stipulated in the contract.

If the contract does not contain the Force Majeure clause, Section 56 of the Indian Contract Act, 1872 is attracted.

The three important parameters which help in determining whether there is frustration of contract or not are:

Has the contract allocated the risk of the particular event occurring?

Has there been a radical change in obligations?

Was the radical change due to the fault of one party?

Mere difficulty or inconvenience of a party is not force majeure.

The situation on account of the outbreak of coronavirus, the subsequent lockdowns and restriction on movement as declared by the Government and a halt to the economic activities is something which no reasonable and average contracting party could have foreseen. Based on the current jurisprudence as it stands, the aforesaid exceptional circumstances may only result in litigation in a catena of commercial contracts. It is then a matter of interpretation by the courts whether a contract containing force majeure clause would cover such restrictions in movement and lockdowns imposed by the Government. The recent interim Order of the Hon’ble High Court of Delhi in M/s Halliburton Offshore Services Inc. v. Vedanta Limited[4] is certainly a step in evolving the jurisprudence in this direction. However, the need of the hour is that instead of having piecemeal notifications, we need to have a codified law which exempts an affected party from performing its obligations under the contract during the period of such lockdowns and such lockdowns have to be considered as force majeure. The time has come that we should have a law related to force majeure rather than only drawing light from Section 32 of the Indian Contract Act or the contractual provisions.

                             – SAURAV KUMAR

                                                                                                                Central University of South Bihar

[1] AIR 1954 SC 44. (FULL BENCH)

[2]AIR 1960 SCR (2) 793

[3] 2017(14) SCC 80

[4] O.M.P. (I) (COMM) & I.A. 3697/2020

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