Doctrine of Frustration and The Force Majeure ‘Excuse’ – By Preeti Ahluwalia

Abstract

This article elucidates the general meaning, idea, and extent of the legal doctrine of ‘frustration’ and clause of ‘force majeure’ in regard to section 56 of the Indian Contract Act, 1972. It deals briefly with the concept and submission of force majeure in India along with other jurisdictions’ and addresses what can amount to force majeure excuse. There is always a sense of confusion when it pertains to ‘Doctrine of Frustration’ and clause of ‘Force Majeure’ in an operating contract. This uncertainty sometimes brings either of the parties of the agreement, to the court of law and brings an end to the contract. Therefore both Doctrine of Frustration and clause of Force Majeure is comprehensively analyzed and interpreted herein.

Keywords

Force Majeure; Frustration of contract; concept; Section 56; Indian Contract Act; Application; reasons; case laws[1]

1. INTRODUCTION

The principle of freedom to contract is a founding principle upon which the world of commercial contracts operates. This strictly means that the parties to a contract are free to agree on their own rights and obligations to be included in their agreement. Problems can occur however, where one party is prevented from, or unable to, carry out his/her obligations under the contract due to a supervening events beyond their control. As a result, a doctrine has accordingly emerged in the law of contract to provide for situations where such an eventuality occurs.

Under the doctrine of frustration, a promisor is relieved of any liability under a contractual agreement in the event of a breach of contract where a party to the agreement is prevented from performing their obligations, due to some event, which become impossible to perform and outside their control. In such circumstances, the law deems it unfair to compel the injured party to comply with the terms of the agreement. Hence, the law relieves this person from their obligations by regarding the contract as frustrated for all purposes.

Therefore, structurally this article will proceed in three parts. Part I will discuss about the notion behind doctrine of frustration with the help of judgments’. The second part deals with the explanation behind Force Majeure in India along with other jurisdictions’ followed by a conclusion.

I. Section 56 of Indian Contract Act, 1872

Agreement to do impossible act – An agreement to do an act impossible in itself is void. —An agreement to do an act impossible in itself is void.

Section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. (Naithati Jute Mills Ltd. V. Khyaliram Jagannath, AIR 1968 SC 522) (Para 7)

To attract and apply Section 56, the following conditions must be filled:

(a) There should be a valid and subsisting contract between the parties,

(b) There must be some part of the contract yet to be performed,

(c) The contract after it is entered, becomes impossible to be performed,

(d) The impossibility is by reason of some events which the promisor could not prevent, and

(e) The impossibility is not induced by the promisor or due to his negligence

Paragraph 2 of section 56 makes the contract to do an act void on account of following events:

Paragraph 3 of section 56 postulates that where a person has promised to do something, which –

Which promisee did not know to be impossible or unlawful, such promisor will be held liable to make compensation to the other party for any loss sustained through non-performance of the promise.

Frustration of Contract:

(U.P. State Electricity Board v. Kanoria Chemical, AIR 1986 SC 156) (Para 41)

Specific grounds of frustration

The principle of impossibility/frustration of contract of performance is applicable to a great variety of contracts. The following grounds of frustration have become well established:

(1) Destruction of Subject-Matter

The doctrine of impossibility applies where the actual and specific subject matter of the contract has ceased to exist.

(2) Change in Circumstances

Similarly, the contract may be declared as frustrated by the courts if the parties to an executory contract, which is not fully performed or fully executed face in the course of carrying it out with a turn of events, which they did not anticipate prior to the execution of the contract like the following:

Escalation

(3) Death or incapacity to perform

A party to a contract is excused from performance if it depends upon the existence of a given person or becomes too ill to perform.

For example:

(a) A contract 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. (Section 56 Illustration (e) from the Contract Act)

(4) Government or Legislative Intervention –

(i) A contract will be dissolved when legislative or administrative intervention has taken place.

(ii) Where the intervention makes the performance unlawful, the courts will have no choice but to put an end to the contract.

(5) Intervention of War

(6) Application to Leases

(7) Frustration of contract of sale

(8) Frustration of contract? Award on Interest

(9) No party can say they will be bound by only one part of the agreement and not the other part, unless such other part is impossible of performance

(10) If the performance of the contract comes to an end on account of repudiation, frustration or breach of contract, arbitration agreement would survive for the purpose of resolution of disputes

(11) Delay in performance of contract

(12) Forfeiture of earnest money

(13) Specific Performance of contract

(14) Doctrine of frustration – Induced frustration – whether contract stood frustrated due to non- performance of obligation by the other party

(15) Doctrine of frustration can apply only to executory contracts and not the transaction which have created a demise in presenti

(16) Contract of Guarantee – Doctrine of Frustration, inapplicability

II. FORCE MAJEURE: A DETAILED ANALYSIS

Some events are unavoidable, nobody can dodge them and no specific class of people can avert its effects by using any power be it of money, strength etc. Everybody gets affected, some more than the others.

The following report will make your understanding better about this concept.

COVID- 19 has been declared as a pandemic by the World Heath Organisation, and the Ministry of Health and Family Welfare has issued an advisory on social distancing, w.r.t. mass gathering and has put travel restrictions to prevent spreading of COVID-19.

On 19^th February, 2020, vide an office memorandum O.M. No. 18/4/2020-PPD, the Government of India has clarified that the disruption of the supply chains due to spread of coronavirus in China or any other country should be considered as a case of natural calamity and “force majeure clause” may be invoked, wherever considered appropriate, following the due procedure.

In view of the current situation where COVID- 19 has a global impact, and is resulting in a continuous sharp decline in the market, it is important to understand the relevance of force majeure clauses, and the effect thereof.

INDIA

1. What’s Force Majeure in Indian law?

2. What is the legal provision of claims for Force Majeure in Indian law?

“Section 56. Agreement to do impossible act—An agreement to do an act impossible in itself is void.

Contract to do 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.”

Invocation of force majeure

The sine qua non for invocation of Section 56 is as below:

It is imperative to note that force majeure is present in common law as the doctrine of contract. In other words, Doctrine of Frustration is an inbuilt factor in Section 56 of the Act. However, it can neither be invoked in case of commercial hardship nor can be used as a device to avoid a bad bargain.

In Ganga Saran v. Ram Charan AIR 1952 SC 9, where Fazl Ali J speaking for the three member bench of Supreme Court held that;

“It seems necessary for us to emphasize that so far as the courts in this country are concerned, they must look primarily to the law as embodied in sections 32 and 56 of the Indian Contract Act, 1872.”

The heart to the Doctrine of frustration travels through Section 32 and hence it should be read together for the purpose of Section 56.

3. How do the Indian precedents define Force Majeure?

Over the years, Courts in India have dealt with various situations where they have defined force majeure in different manners. Some of those are enlisted below.

Force majeure clauses vary. They can be specific (a list of specific events that are treated as being force majeure, such as fire, flood, war or similar) or general (referring simply to events outside the reasonable control of a party to the contract), or a combination of both.

“19. McCardie J. in Lebeaupin v. Crispin ([1920] 2 K.B. 714), has given an account of what is meant by “force majeure” with reference to its history.

The expression “force majeure” is not a mere French version of the Latin expression “vis major”. It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in “force majeure”.

Judges have agreed that strikes, breakdown of machinery, which, though normally not included in “vis major” are included in “force majeure”.

An analysis of rulings on the subject into which it is not necessary in this case to go, shows that where reference is made to “force majeure”, the intention is to save the performing party from the consequences of anything over which he has no control.

This is the widest meaning that can be given to “force majeure”, and even if this be the meaning, it is obvious that the condition about “force majeure” in the agreement was not vague. The use of the word “usual” makes all the difference, and the meaning of the condition may be made certain by evidence about a force majeure clause, which was in contemplation of parties.

In this case, the court held that force majeure will not include economic problems like insufficient funds, it will only include unforeseeablt and unpredicted circumstances.

“Force majeure” is governed by the Indian Contract Act, 1872. The Supreme Court held: “In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view”.

“the Act does 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. Parties to an executable contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate, for example, a wholly abnormal rise or fall in prices which is an unexpected obstacle to execution. This does not in itself get rid of the bargain they have made.”

At various points of time, different Courts of India and England have dealt with the subject matter but the concept and substance of the entire concept more or less remains the same subject to facts and contracts, which vary from case to case.

a. The event shall render the contract impossible to perform –

b. The event shall be unavoidable and economic hardship alone cannot result in Force Majeure – a rise in cost or expense has been stated not to frustrate a contract.

c. The event must be unforeseeable – the event must be incapable of being anticipated or predicted by common due diligence. An advance warning for an expected Force Majeure event, shall not trigger the Force Majeure clause.¹⁶

d. Causal test or ‘but for’ test – The event shall have occurred not by default of the party but only as a result of the supervening event. This is referred to as the “causal test” where the Court examines whether the non-performance is a direct result of a supervening event; and “but for” such supervening event, the contract would have otherwise been performed. This causal test is the most crucial test, which shall be satisfied by adducing evidence. In a situation where Force Majeure event has indeed occurred, and if such event did not preclude the party from performing the contract, such party cannot take benefit of Force Majeure clause.

e. Conditions precedent must be fulfilled – Most Force Majeure clauses provide that a non-performing party seeking benefit of Force Majeure clause in the contract, shall put the other party to such notice. These terms are conditions precedent for invocation, failing compliance of such clauses, a party may not be able to take shelter under Force Majeure.

f. Duty to mitigate – A party relying on Force Majeure clause is supposed to take all the necessary measures to mitigate the loss caused due to its non-performance.

g. The party seeking to rely on the clause may also need to show it was not aware, at the time of entering the contract, that the circumstances giving rise to the event of force majeure was likely to occur.

In Taylor vs. Caldwell, (1861-73) All ER Rep 24, the law in England was extremely rigid. A contract had to be performed after its execution, notwithstanding the fact that owing to an unforeseen event, the contract becomes impossible of performance, which was not at the fault of either of the parties to the contract. This rigidity of the common law was loosened somewhat by the decision in Taylor (supra), wherein 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.

In Gulf Oil Corp. v. FERC 706 F.2d 444 (1983), the U.S. Court of Appeals for the Third Circuit considered litigation stemming from the failure of the oil company to deliver contracted daily quantities of natural gas. The court held that Gulf- as the non- performing party- needed to demonstrate not only that the force majeure event was unforeseeable but also that the availability and delivery of the gas were affected by the occurrence of a force majeure event.

Inability to sell at a profit is not the contemplation of the law of a force majeure event excusing performance and a party is not entitled to declare a force majeure because the costs of contract compliance are higher than it would have liked or anticipated. In this regard, the following cases are relevant:

“Performance may be impracticable because extreme and unreasonable difficulty, expense, injury, or loss to one of the parties will be involved. A severe shortage of raw materials or of supplies due to war, embargo, local crop failure, unforeseen shutdown of major sources of supply, or the like, which either causes a marked increase in cost or prevents performance altogether may bring the case within the rule stated in this Section. Performance may also be impracticable because it will involve a risk of injury to person or to property, of one of the parties or of others, that is disproportionate to the ends to be attained by performance. However, “impracticability” means more than “impracticality.” A mere change in the degree of difficulty or expense due to such causes as increased wages, prices of raw materials, or costs of construction, unless well beyond the normal range, does not amount to impracticability since it is this sort of risk that a fixed-price contract is intended to cover.”

JUDGMENTS

UNITED KINGDOM

Given the relatively narrow scope of the doctrine of frustration, parties who find they are unable to perform their contractual obligations due to the COVID-19 outbreak, quarantine measures or other government actions should consider whether their contracts contain express force majeure or similar clauses and whether they fall within the protection offered by the relevant clause. Typically, a force majeure clause in a contract will: 

UNITED STATES OF AMERICA

CANADA

The key criteria for establishing frustration: the occurrence of an unforeseen event that causes a radical change in performance of contract for the relying party.

This radical change is generally one that makes performance under existing circumstances impossible, impractical or frustrates the original purpose of the agreement. The onus would be on the party alleging frustration of the contract to prove these elements.

Despite the occurrence of an extreme and impairing event, Canadian courts (excluding Quebec) have not implied a force majeure provision in common law. This infers the standard rules of force majeure interpretation would not apply if there is no force majeure clause expressly written in the contract. However, there have been some cases where courts have pondered the applicability of force majeure in contracts missing such express provisions.

In Royal Bank v. Netupsky, the court acknowledged the novel question of whether a force majeure term could be implied or operate as a matter of law.  In this case, the Royal Bank of Canada had negotiated a line of credit agreement without a force majeure clause with a company that had substantial ties to Iraq.

At the time of contract, the bank was aware that Canada had set trade prohibitions with Iraq; i.e. the alleged force majeure event that led to the borrowing company’s credit default.  Although the court did not decide on the issue of whether a force majeure provision could be implied, analysis was conducted on the foreseeability of the alleged force majeure event.

It was held that there was no basis for a force majeure argument because both parties had agreed to a contract that did not contemplate the effects of the trade prohibitions despite having full knowledge of the inhibition.

In Naylor Group Inc. v Ellis-Don Construction Ltd., the doctrine is applied where, “a situation has arisen for which the parties made no provision in the contract and the performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract.’ ” This statement can be broken down into three considerations:

The Situation: Similar to how force majeure clauses trigger upon force majeure events, the doctrine of frustration is activated by a supervening event that occurs through no fault of either party. Furthermore, according to Capital Quality Homes Ltd. v Colwyn Construction Ltd. and Gerstel v Kelman the event must not have been contemplated by the parties or foreseeable at the time of contracting.

The Absence of Contractual Provision: The lack of a contractual provision, generally referring to an express force majeure clause, is a prerequisite for the general doctrine of frustration to apply. This means that courts will choose to apply either frustration or force majeure—parties are not meant to rely on both.

The Radically Different Performance of Contract: According to a case of Bang v Sebastian, this consideration can be interpreted as a situation, which “renders the performance of the contract substantively different than the parties had bargained for”.  As McLean v Miramichi (City) further elaborates with reference to legal scholarship, the basis of changing circumstances can be categorized into three types of circumstances: (1) where the frustrating event has rendered performance impossible; (2) cases in which performance remains possible, but the purpose for which one or both parties entered the agreement has been undermined; and (3) cases where temporary impossibility has grounded discharge for frustration. 

CHINA

The China Council for the Promotion of International Trade (CCPIT) is offering force majeure certificates enabling Chinese companies, seeking to rely on such provisions, to suspend their contractual obligations after the submission of relevant documents.

According to the Contract Law of The People’s Republic of China, Article 117, and Article 118 state the situations under which a party can invoke force majeure. It is only in case of any unforeseeable, unavoidable, as well as impossible to overcome events, that a firm can do so.

But, any company invoking FM must establish a link between the non-performance of their contractual duties and the FM event. The FM event must result in non-performance directly and must be occurring during the performance period of the contract, i.e., after signing and before termination. Just because the process might have gotten a bit more time-consuming or costlier, the contractor may not be excused from their obligations. The affected party must produce sufficient evidence to prove that their working is impacted.

Under PRC General Provisions of the Civil Law, FM is an excuse for non-performance of the civil obligations. If a contract does not have the provision for FM, it is automatically implied. But, in case the clause is enlisted, the affected party can depend on it. However, any dispute that arises out of contractual non-performances, the final decision will be made by the court or an arbitrary body.

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Preeti Ahluwalia is an Advocate, who is currently practicing under a Senior Advocate at the Delhi High Court. She  graduated from the University of Leeds, the United Kingdom with a specialisation in International Business Law (LL.M) in 2018 and from Amity University, Noida with a specialisation in Commercial Law (BA LL.B) (Hons.) in 2017. She is a highly qualified Legal Researcher with impeccable editing and legal citation abilities to support comprehensive and readable research outcomes. She is also well-versed in Civil, Arbitration, and Company’s law and skilled in case analysis.

[1] Fareya Azfar, ‘The Force Majeure ‘Excuse” [2012] 26(2) Arab Law Quarterly 249-253

Disclaimer: The views or opinions expressed are solely of the author.