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.

  • 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.
  • Compensation for loss through non-performance of 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 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

Case Law Para No.
Industrial Finance Corporation of India Ltd. V. The Cannanore Spinning & Weaving Mills Ltd. and Ors,
(2002) 5 SCC 54)

Section 56 of the Contract Act, three essential conditions appears to be the realistic interpretation of the statute. The conditions being: There should be a valid and subsisting contract between the parties, There must be some part of the contract yet to be performed, The contract after it is entered, becomes impossible to be performed
42,
Naithati Jute Mills Ltd. V. Khyaliram Jagannath,
AIR 1968 SC 522

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
7

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

  • When the act becomes impossible to do after the contract is made, or
  •  The act becomes unlawful by reason of some events which the promisor could not prevent
Case Law Para No.
Shree Krishen v. Gambhirmal,
A.I.R. 1955 Hyd. 233

In this case, under consideration the contract was made on 29-12-1942 for supplying certain goods at a place outside the State of Hyderabad when there was no restriction against sending of goods outside that State. Later, such a restriction was imposed and the railway booking was closed and it remained so for a considerable time.

HELD: that this supervening event had made the contract impossible and discharged the defendant from performing the contract.
21
Dominion of India v. Bhikhraj Jaipuria,
A.I.R. 1957 Pat, 586

It is well settled that where the performance of the contract is made impossible due to unexpected emergence of a fundamentally different situation which no party have foreseen and which happened in spite of that, frustration of the contract occurs and the contractor is absolved from liability  
85
M.D., H.S.I.D.C. V. Hari Om Enterprises
2009 (16) SCC 208

A law, far less a contract, does not warrant compliance with contractual or statutory obligations where it is otherwise impossible to do
30

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

  1. He knew, or
  2. He, with reasonable diligence might have known to be impossible or unlawful, and

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.

Case Law Para No.
Alluri Narayana Raju v. Dist. Collector, Visakhapatnam Dist., A.I.R 2008 A.P. 264

Section 56, which is reproduced hereinabove, exhaustively dealt with the doctrine of frustration. It contains three limbs.

Under the first limb, it declared an agreement to do an act impossible in itself as void.

Under the second limb, it renders the contract void on account of subsequent events which the promisee could not prevent rendering the performance of contract either impossible or unlawful.

Under the third limb, the promisor is fastened with the liability of payment of compensation to the promisee for the loss suffered by him, if the promisor knew or with reasonable diligence he might have known which the promisee did not know that performance of the contract would be impossible or unlawful.
23

Frustration of Contract:

  • The term ‘frustration of contract’ clearly, is not found in the Contract Act. The Doctrine of Frustration has been envisaged/introduced under Section 56 of the Contract Act.
  • If a contract becomes void because of the reasons stipulated in section 56 of contract Act, in normal parlance it is called as frustration of the contract.
  • The term frustration has been defined in the Black’s Law Dictionary (9th Edition) as, “ The prevention of the attainment of a goal such as contractual performance”
  • In relation to ‘contracts’ the term has been described as the doctrine that if a party’s main purpose is substantially frustrated by unpredictable/unforeseen change in circumstances, that party’s duties are discharged and the contract is considered terminated.
  • Section 56; comprehensively deal with the ‘doctrine of frustration’. The principle underlying the section is that performance of contract can be avoided if on account of happening of an event, which is not the result of action of either of the parties, the performance of the contract becomes impossible.

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

  • It was held that the essential idea upon which the doctrine of frustration is based is that of impossibility of performance of the contract; in fact impossibility and frustration are often use as interchangeable expressions.
Case Law Para No.
Dominion of India v. Bhikhraj Jaipuria,
A.I.R. 1957 Pat, 586

That there was frustration of the contracts as the imposition of control over the prices of food grains under the Defence of India Rules made it illegal and thus impossible for the railway to perform the contracts, as the contractual rate of price was higher than the control rates. (Para 8)

It is well settled that where the performance of the contract is made impossible due to unexpected emergence of a fundamentally different situation which no party have foreseen and which happened in spite of that, frustration of the contract occurs and the contractor is absolved from liability (Para 85)

In the present case, the frustration of the contract arose because of the imposition of control over the prices under the Defence of India Rules, which the parties did not know, and must not have known, with any amount of diligence. (Para 7)

Their Lordships further observed that the doctrine of frustration is really an aspect or fart of the law in discharge of the contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of Section 56 of the Contract Act. There is, therefore, no dispute and Mr. P.R. Das did not contest the proposition that any subsequent change in law rendering the performance of the contract illegal would frustrate the contract automatically. (Para 89)
8, 85, 87, 89
Satyabrata Ghose v. Mugneeram Bangur and co.,
A.I.R 1954 S.C. 44

In fact impossibility and frustration are often used as interchangeable expressions. (Para 10) 

The courts in India have held that the word ‘ impossibility’ used in Section 56 must be understood in a practical form and not in its literal sense. (Para 15)
10, 15
Sushila Devi v. Hari Singh
AIR 1971 SC 1756

It was observed that the impossibility contemplated by section 56 is not confined to something, which is not humanly possible.  
11
Nirmala Anand v. Advent Corporation Pvt. Ltd.,
AIR 2002 SC 2290

SC held that unless the competent authorities have been moved and the application for consent or sanction have been rejected once and for all and such rejections made finally became irresolutely binding and rendered impossible the performance of the contract resulting in frustration as envisaged under section 56.
17
DDA v. Kenneth Builders
2016(13) SCC 561

“Impossibility”/ frustration of performance of contract

It was held by this Court that the word “impossible” used in Section 56 of the Contract Act has not been used in the sense of physical or literal impossibility. It ought to be interpreted as impracticable and useless from the point of view of the object and purpose that the parties had in view when they entered into the contract. This impracticability or uselessness could arise due to some intervening or supervening circumstance, which the parties had not contemplated. However, if the intervening circumstance was contemplated by the parties, then the contract would stand despite the occurrence of such circumstance. In such an event, “there can be no case of frustration because the basis of the contract being to demand performance despite the happening of a particular event, it cannot disappear when that event happens”. (Para 30)
25 – 36
Executive Director, Steel Authority of India V. Tycoon Traders 2015 (5) SCC 767  

In our opinion, the contract is unenforceable and further, the contract is also hit by Section 38(v) of the Wildlife (Protection) Act, 1972 as amended in 2006. Therefore, the object of the contract is forbidden by law. Hence, the said contract is unlawful and cannot be given effect to. (Para 7)
5, 7, 8
Mary V. State of Kerala
2014 (14) SCC 272

Doctrine of Frustration – Performance of contract becoming impossible.

A contract in which a party takes absolute/unconditional responsibility cannot escape liability whatever may be the reason (Para 18)
15 – 18
M.D., Army Welfare Housing Organization v. Sumangal Services 2004 (9) SCC 619

Frustration of contract – Principle of impossibility in contract and burden of proof

(viii) The finding of the arbitrators that the frustration was a self-induced one is not based on any pleadings or materials on record. In any event, collusion between Sumangal and the municipal authorities was neither pleaded nor proved.

(ix) In any view of the matter, the learned arbitrators committed a legal misconduct insofar as they applied a wrong principle of law as regards determination of the quantum of damage “This rule, that a party cannot claim to be discharged by a frustrating event for which he is himself responsible, does not require him to prove affirmatively that the event occurred without his fault. The onus of proving that the frustration was self-induced rests upon the party raising this allegation. (Para 121)
32 (viii) and (ix) , 118- 121,

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

Case Law Para No.
Joseph Constantine SS Line Ltd v. Imperial Smelting Corp Ltd, [1942] AC 154

A ship was rented to load a cargo but an explosion occurred in the auxiliary boiler, which made it impossible to undertake the voyage at the scheduled time, the House of Lords held that frustration had, in fact, occurred in the 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:

  • a wholly abnormal rise or fall in price,
  • a sudden depreciation of currency,
  • an unexpected obstacle to execution, or alike circumstances
Case Law Para No.
The Supreme Court laid down this principle in Alopi Parshad v Union of India AIR 1960 SC 588

Performance of the contract had not become impossible or unlawful; the contract was in fact, performed by the Agents, and they have received remuneration expressly stipulated to be paid therein. The Indian Contract 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 some vague plea of equity. “The parties to an executory contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate — a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like. Yet, this does not in itself affect the bargain they have made. If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point — not because the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation. (Para 21)  
21
Energy Watchdog and Ors. v. Central Electricity Regulatory Commission and Ors.
2017(14) SCC 80

Frustration/ Force Majeure/ unexpected hike in coal prices: Unexpected hike in coal prices due to change in Indonesian law – frustration of contract? Party liable to compensation?

– Force Majeure
– Available relief for a force majeure event
– Force Majeure exclusions
34, 36, 39, 41, 42, 43, 44, 45, 46, 47  

Escalation

Case Law Para No.
Tarapore & Co v Cochin Shipyard Ltd.
AIR 1984 SC 1072

Once the rates became irrelevant on account of circumstances beyond the control of the contractor, it was open to him to make a claim for Compensation. (Para 38)

It was further stated in para 13 that the contract provides for escalation in certain respects and that is the only escalation, which is admissible in terms of the contract, and the claim made by the appellant does not come within the escalation clause nor in the agreed formula relating to such escalation. (Para 44)    
38, 44
General Manager Northern Railways V. Sarvesh Chopra
2002(4) SCC 45

Escalation and compensation – due to delay in performance of contract, entitlement contract, entitlement

In Continental Construction Co. Ltd. v. State of M.P. [(1988) 3 SCC 82] the contract provided for the work being completed by the contractor in spite of rise in prices of material and labour charges at the rates stipulated in the contract. It was held that on the contractor having completed the work, it was not open to him to claim extra cost towards rise in prices of material and labour. An award given by the arbitrator for extra claim given by the contractor was held to be vitiated on the ground of misconduct of the arbitrator. There were specific clauses in the agreement, which barred consideration of extra claims in the event of price escalation. (Para 11)  
11,
Travancore Devaswom Board v. Thanath International
2004 (13) SCC 44

Frustration of contract – escalation of price — as a result of Gulf war
 
The trial court concluded that this indicates that there was an agreement to vary price. The trial court has completely misdirected itself. It has passed a decree on no material before it and on a basis, which was not even the case of the party before it. (Para 8)

The appellants then filed an appeal. The High Court by the impugned judgment has partly allowed the appeal. The High Court has concluded that there was an oral variation of the contract. However, it has reduced the amount awarded to the respondent. (Para 9)  

The judgment of the trial court and the High Court cannot be sustained. They need to be and are hereby set aside to the extent that they award to the respondent enhanced price for the supply made. (Para 15)
8 to 10, 11 to 14

(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.

Case Law Para No.
Satyabrata Ghose v Mugneeran Bangur &. Co.
AIR 1954 SC 44

Held: The SC stated that the contract was not frustrated, as there was no time limit agreed to by the parties within which the construction work was to be finished. The delay caused in the performance due to the Government orders would not be so great and of such a character as to totally upset the basis of the bargain and commercial object that the parties had in view Because of this indefiniteness of time period, it could not be said that performance of the contract had become impossible. 

 – The doctrine of frustration, yet the essential idea upon which the doctrine is based is that of impossibility of performance of the contract; in fact impossibility and frustration are often used as interchangeable expressions. The changed circumstances, it is said, make the performance of the contract impossible and the parties are absolved from the further performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform impossibility.  (Para 10)    

Undoubtedly the commencement of the work was delayed but was the delay going to be so great and of such a character that it would totally upset the basis of the bargain and commercial object which the parties had in view? The requisition orders, it must be remembered, were, by their very nature, of a temporary character and the requisitioning authority could, in law, occupy the position of a licensee in regard to the requisitioned property. The order might continue during the whole period of the war and even for some time after that or it could have been withdrawn before the war terminated. If there was a definite time limit agreed to by the parties within which the construction work was to be finished, it could be said with perfect propriety that delay for an indefinite period would make the performance of the contract impossible within the specified time and this would seriously affect the object and purpose of the venture. (Para 23)
10, 22, 23, 24, 25
Naihati Jute Mills Ltd v Khyaliram Jagannath
AIR 1968 SC 522

The SC held that the effect of an government intervention has to be viewed in the light of the terms of the contract, and, if the terms show that the parties have undertaken an absolute obligation regardless of administrative changes, they cannot claim to be discharged.

“Buyers shall not however be held responsible for delay in delivering letters of authority or opening letters of credit where such delay is directly or indirectly caused by sod by or due to act of God, war mobilization, demobilization, breaking off trade relations between Governments, requisition by or interference from Government or force majeure. (Para 2)

The question then is, was there a change in the policy of the Government of India of a total prohibition of import of Pakistan jute as contended by the appellants which was not foreseen by the parties and which intervened at the time of performance and which made the performance of their stipulation to obtain a license impossible? (Para 8)

As already stated when the appellants applied for the license, the authorities refused to certify their application because they held at that time stock for more than 2 months. It is therefore manifest that their application was refused because of a personal disqualification and not by reason of any force majeure. Since this was the position there is no question of the performance becoming impossible by reason of any change in the Government’s policy, which could not be foreseen by the parties. No question also would arise of importing an implied term into the contract. (Para 9)
2, 3, 7, 8, 9,

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

Case Law Para No.
Boothalinga Agencies v V T C Poriaswami Nadar
AIR 1969 SC 110

The defendant had a license to import chicory for manufacturing coffee powder. The license was subject to the condition that he would use it only in his factory. He agreed to sell the whole shipload. Before the arrival of the ship, the sale of such imported goods was banned. The contract was accordingly held to have become void.

 – The doctrine of frustration of contract is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of Section 56 of the Indian Contract Act. It should be noticed that 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. (Para 9)

“It is now I think well settled that where there is frustration a dissolution of a contract occurs automatically. It does not depend, as does rescission of a contract on the ground of repudiation or breach, on the choice or election of either party. It depends on what actually has happened on its effect on the possibility of performing the contract. (Para 10)
8, 9, 10,

(5) Intervention of War

Case Law Para No.
A.F. Ferguson and Co. v. Lalit Mohan Ghosh,
AIR 1954 Pat 596

In a case before the Patna High Court, the further performance of a contract of life insurance had become impossible because the insurer was a German company and on the outbreak of war the Government of India closed its business and the disposal of pending policies was handed over to a firm of chartered accountants. The assured was allowed to recover the money paid under the policy.

– It has been argued on behalf of the plaintiff that due to the outbreak of war the performance of the contract by the plaintiff by making payments of the premiums became impossible, and, therefore, the contract became frustrated and void. Section 56 of the Contract Act is perfectly clear on the point, and, if the performance of the contract after the outbreak of war became impossible or unlawful, the contract of insurance became void. (Para 53)  
52, 53

(6) Application to Leases

Case Law Para No.
Raja Dhruv Dev Chand v Raja Harmohinder Singh
AIR 1968 SC 1024

By its express terms Section 56 of the Contract Act does not apply to cases in which there is a completed transfer. The second paragraph of Section 56, which is the only paragraph material to cases of this nature, has a limited application to covenants under a lease. A covenant under a lease 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. But on that account the transfer of property resulting from the lease granted by the lessor to the lessee is not declared void. (Para 10)  
10
Sushila Devi v Hari Singh
AIR 1971 SC 1756

The Supreme Court held that an agreement of lease ended by frustration where before completing it the parties had to run away and could not go to Pakistan to give or take possession.

If the performance of a contract becomes impracticable 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. But the supervening events should take away the basis of the contract and it should be of such a character that it strikes at the root of the contract. (Para 11)

– From the facts found in this case it is clear that the plaintiffs sought to take on lease the properties in question with a view to enjoy those properties either by personally cultivating them or by sub-leasing them to others. That object became impossible because of the supervening events. Further the terms of the agreement between the parties relating to taking possession of the properties also became impossible of performance. Therefore we agree with the trial court as well as the appellate court that the contract had become impossible of performance. (Para 12)  
11, 12
Hari Singh v Dewani Vidyawati
AIR 1960 J&K 91

– The recovery of rent paid in advance under a lease, which could not be completed on account of partition. The recovery was allowed under Section 65 as benefits received under a contract, which became void.

– The next point that arises is whether the plaintiffs are entitled to be restituted for the benefit received by the defendant under the contract. It is admitted that the defendant received a sum of Rs. 34,000/- as advance money for the contract, which eventually became void due to frustration.

It is well settled that where a contract becomes void the principle embodied in Section 65 of the Contract Act at once comes into play and a party who has reaped benefit under the contract is bound to restore it to the other party. Section 65 of the Contract Act runs as follows:

“When an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.” (Para 41)
41, 42, 43, 44

(7) Frustration of contract of sale

Case Law Para No.
Eureka Builders v. Gulabchand
2018 (8) SCC 67

In such eventuality and subject to any terms and conditions, if agreed between the parties, a buyer will have a right to claim refund of sale consideration from his seller, which he paid for purchase of the property under the law of contract. The reason is that the contract to purchase has failed and, therefore, the parties have to be restored back to their original positions, which existed at the time of execution of the contract. (Para 37)
37 – 40

(8) Frustration of contract? Award on Interest

Case Law Para No.
Gian Chand v. York Exports Ltd.
2015 (5) SCC 609

Even if such permission was not granted and permission was specifically refused, the contract between the parties would not stand frustrated. It is further rightly held by the Division Bench of the High Court that the parties at the time of agreement could not have presumed that the permission must be granted. Further it has observed that supposing the State Government refused to grant permission for purchase of land, then obviously, it would be a case of the contract not being able to be performed. But, when the State Government grants the permission for a lesser area of land than the agreed upon area in the agreement by the defendants, the plaintiffs could not (sic) have elected to purchase the lesser area i.e. 145 bighas, for which the permission was granted. (Para 13)
13 – 15, 16, 17

(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

Case Law Para No.
Indian Oil Corporation Ltd. v. Raja Transport
2009 (8) SCC 520

No party can say he will be bound by only one part of the agreement and not the other part, unless such other part is impossible of performance or is void being contrary to the provisions of the Act, and such part is severable from the remaining part of the agreement. The arbitration clause is a package which may provide for what disputes are arbitrable, at what stage the disputes are arbitrable, who should be the arbitrator, what should be the venue, what law would govern the parties, etc. A party to the contract cannot claim the benefit of arbitration under the arbitration clause, but ignore the appointment procedure relating to the named arbitrator contained in the arbitration clause. (Para 14)
14
   

(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

Case Law Para No.
National Agricultural Co-op. Marketing Federation India v. Gains Trading Ltd.
2007 (5) SCC 692           
            
Even if the performance of the contract comes to an end on account of repudiation, frustration or breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract.

(Vide Heyman v. Darwins Ltd. [1942 AC 356: (1942) 1 All ER 337 (HL)], Union of India v. Kishorilal Gupta & Bros. [AIR 1959 SC 13] and Naihati Jute Mills Ltd. v. Khyaliram Jagannath [AIR 1968 SC 522] .) (Para 6)  
6

(11) Delay in performance of contract

Case Law Para No.
State of Kerala v. M.A. Mathai
2007(10) SCC 195

– In our country question of delay in performance of the contract is governed by Sections 55 and 56 of the Indian Contract Act, 1872. If there is an abnormal rise in prices of material and labour, it may frustrate the contract and then the innocent party need not perform the contract. So also, if time is of the essence of the contract, failure of the employer to perform a mutual obligation would enable the contractor to avoid the contract as the contract becomes voidable at his option. (Para 7)  
6, 7, 8

(12) Forfeiture of earnest money

Case Law Para No.
HUDA v. Babeswar Kanhar
2005 (1) SCC 191

The underlying object of the principle is to enable a person to do what he could have done on a holiday, on the next working day. Where, therefore, a period is prescribed for the performance of an act in a court or office, and that period expires on a holiday, then the act should be considered to have been done within that period if it is done on the next day on which the court or office is open. The reason is that law does not compel the performance of an impossibility(Para 5)  
5

(13) Specific Performance of contract

Case Law Para No.
HPA International v. Bhagwandas Fateh Chand
2004(6) SCC 537
Pg. 538
Nirmala Anand v. Advent Corporation Pvt. Ltd.
2002 (5) SCC 481

Unless the competent authorities have been moved and the application for consent/permission/sanction has been rejected once and for all and such rejection made finally became irresolutely binding and rendered impossible the performance of the contract resulting in frustration as envisaged under Section 56 of the Contract Act, the relief cannot be refused for the mere pointing out of some obstacles. Since the agreement to sell, in this case, relates to an immovable property, which indisputably is of special value, having regard to its location and special importance of the area, it cannot be readily assumed or taken for granted that the respondents opposing the claim of the appellant have discharged their burden to displace the initial statutory presumption engrafted in Explanation (i) to Section 10 of the Specific Relief Act. (Para 17)
17
K. Narendra v. Riviera Apartments
1999(5) SCC 77

Decree Specific Performance – Refusal – Frustration – Compensation in spite of specific performance being refused

In the facts and circumstances of the case we do not think it appropriate to extend the benefit of the subsequent event of repeal of ULCRA in favour of the respondent-plaintiffs after a lapse of 16 years from the date of the contract. Permission for constructing a multi-storeyed complex on the premises was refused time and again by NDMC until the suit for specific performance came to be decreed by the trial court. On none of the two events either of the parties had any control. We are clearly of the opinion that at one point of time the contract had stood frustrated by reference to Section 56 of the Contract Act. We do not think that the subsequent events can be pressed into service for so reviving the contract as to decree its specific performance. (Para 36)  
36
Rozan Mian V. Tahera begum and Ors.
2007 (12) SCC 175

The question to be determined in this appeal is as to whether the specific performance of the agreement for sale becomes impossible of performance by reason of promulgation of the West Bengal Thika Tenancy, during the pendency of the suit. (Para 7)
By reason of operation of law, the contract has become void, the plaintiff is entitled to the refund of the consideration (Para 11)
7 – 12

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

Case Law Para No.
Jai Durga Finvest Pvt. Ltd v. State of Haryana
2004 (3) SCC 381

 – Payments of compensations to landowners.
—The contractor shall make and pay reasonable satisfaction and compensation for all damages or disturbance which may be done by him in exercise of the powers granted by this contract and shall indemnify and keep indemnified fully and completely the Government against all claims which may be made by any person or persons in respect of any such damage, injury or disturbance and costs or any expenses in connection therewith. (Para 3)
3

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

Case Law Para No.
Ganga Retreat & Towers v. State of Rajasthan
2003 (12) SCC 91

 – It has to be noted that the doctrine of frustration can only apply to executory contracts and not the transactions, which have created a demise in praesenti.

(See H.V. Rajan v. C.N. Gopal [(1975) 4 SCC 302 : AIR 1975 SC 261] , AIR at p. 265.) In Raja Dhruv Dev Chand v. Raja Harmohinder Singh [AIR 1968 SC 1024 : (1968) 3 SCR 339] Their Lordships held: (AIR p. 1026, para 10)

“There is a clear distinction between a completed conveyance and an executory contract, and events which discharge a contract do not invalidate a concluded transfer.” (Para 34)  
34,

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

Case Law Para No.
Industrial Finance Corporation of India v. The Cannanore Spinning & Weaving Mills Ltd. and Ors
2002(5) SCC 54  

As a matter of fact by reason of the non-availability of the security in terms of Section 141, the contract of guarantee cannot but be termed to stand frustrated and it is in this context, Section 56 of the Contract Act has been taken recourse to. It may be noticed here that the statute itself has recognised the doctrine of frustration and encompassed within its ambit an exhaustive arena of force majeure under which non-performance stands excused by reason of an impediment beyond its control which could neither be foreseen at the time of entering into the contract nor can the effect of the supervening event be avoided or overcome. (Para 40)

In Davis Contractors’ decision (Davis Contractors v. Fareham U.D.C. [1956 AC 696 : (1956) 2 All ER 145 : (1956) 3 WLR 37] ), an oft-cited decision as regards the doctrine of frustration, Lord Radcliffe formulated the doctrine of frustration in the following manner: (All ER p. 160 D-E) “Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.” (Para 41)
40, 41,

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 19th 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?

  • Force majeure means extraordinary events, situations or circumstances beyond human control such as an event described as an act of God or superior force. They obstruct the continuation or lawful existence of a contract amidst the parties.
  • A force majeure clause in a contract is an expressed provision to identify those circumstances or situations in which performance under the contract by either one or both the parties become impossible to be carried out.
  • In other words, a force majeure clause in the contract frees both parties from contractual liability or obligation when prevented by stipulated or specified events from fulfilling their obligations under the contract.
  • Parties to the contract mutually decide over the list of events to be categorized under this clause which includes acts of war, riots, fire, flood, hurricane, earthquake, explosion, strikes, lockouts, slowdowns, prolonged shortage of supplies, governmental action prohibiting or impeding any party from performing its respective obligations under the contract causing its frustration.
  • It is pertinent to note that a force majeure clause does not excuse a party’s performance entirely, but only suspends it for the duration of the force majeure.
  • However, if the force majeure clause provides that where force majeure continues for more than a stipulated period then either party may at its own option terminate the contract without any financial repercussion on either side.

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

  • The provision of force majeure is provided under Section 56 of the Indian Contract Act, 1872 (‘the Act’). The relevant portion of the Section 56 is reproduced as under:

“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:

  1. an existence of a valid contract between the parties;
  2. the contract is yet to be performed; and
  3. the contract after it is entered into becomes impossible to perform due to fact or law.

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.

  • Under Indian law, one of the first decisions to deal with the concept of force majeure was the Madras High Court decision in Edmund Bendit And Anr. vs Edgar Raphael Prudhomme. In this case, the Court cited with approval the passage from Matsoukis v. Priestman and Co, wherein the definition given by an eminent Belgian lawyer of force majeure as meaning “causes you cannot prevent and for which you are not responsible“, was adopted. 
  • Under both Indian and English law, force majeure does not simply mean anything outside the control of the parties to a contract. Its meaning, and applicability, depends on the particular contract, and the particular wording used. It is contractual language intended to anticipate unforeseen events and provide for what happens on their occurrence [Chitty on contracts, Volume I, (31st Edition), Sweet & Maxwell].

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.

  • In Energy Watchdog vs Central Electricity Regulatory, Civil Appeal Nos.5399-5400 of 2016, the Supreme Court held that,

“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”.

  • Similarly, in Alopi Parshad & Sons Ltd. v. Union of India,[1960 (2) SCR 793], the Supreme Court observed that,

“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.

4. What are the essentials for invoking Force Majeure defense?

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.

PRINCIPLES IN OTHER JURISDICTIONS:

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.

Illustrations: When Is An Event Not Considered As Force Majeure?

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:

  • In the case of Dorn v. Stanhope Steel, Inc., 534 A.2d 798, 586 (Pa. Super. Ct. 1987), it was observed as follows:

“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.”

  • In Aquila, Inc. v. C.W. Mining 545 F.3d 1258 (2008), Justice Neil Gorsuch authored an opinion for the U.S. Court of Appeals for the 10th Circuit, which excused a coal mining company’s deficient performance under a coal supply contract with a public utility only to the extent that partial force majeure, namely labor dispute, caused deficiency.
  • In  OWBR LLC v. Clear Channel Communications, Inc., 266 F. Supp. 2d 1214, it was observed- “To excuse a party’s performance under a force majeure clause ad infinitum when an act of terrorism affects the American populace would render contracts meaningless in the present age, where terrorism could conceivably threaten our nation for the foreseeable future”.
  • In Transatlantic Financing Corp. v. U.S. 363 F.2d 312, the D.C. Circuit Court of Appeals affirmed a finding that there was no commercial impracticability where one party sought to recover damages because its wheat shipment was forced to be re-routed due to the closing of the Suez Canal. The Court of Appeals held that because the contract was not rendered legally impossible and it could be presumed that the shipping party accepted “some degree of abnormal risk,” there was no basis for relief.

JUDGMENTS

S.No Case name, Citation, Brief Para No
1. Edmund Bendit and Anr v. Edgar Raphael Prudhomme AIR 1925 Mad 626 Bench – Spencer, J.

Under  Indian law, this case was one of the first case relating to the concept of force majeure . The Madras High Court, in this case, held that force majeure does not simply mean anything outside the control of the parties to a contract. Its meaning, and applicability, depends on the particular contract, and the particular wording used. It is a contractual language intended to anticipate unforeseen events and provide for what happens on their occurrence.
 
2. Dhanrajmal v. Shamji Kalidas
AIR 1961 SC 1285

“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.

Reason why relief was rejected
– No unusual or unavoidable event was found as to which obligations of the contract remained unfulfilled.    

FACTS:
The facts of the case are,

In this case the petitioner entered into a contract with the respondent for purchase of 500 bales of African raw cotton.[3]
The respondent by way of letter confirmed their acceptance and petitioner gave list of certain terms and conditions to be followed where it was clearly stated that it will be duty of buyer to look for the contracted supplier and on this note the petitioner send sample cotton to the respondent.[4],[5] The respondent wrote back to the petitioner about selling of the sample but the petitioner never reverted then respondent sold the sample and kept the money.[11]

Petitioner when got to know this filed the case.

The respondent pleaded defence under the Force Majeure clause that was present in the contract.

HELD: 
The court held that,

The clause in the contract was addressed as “usual force majeure clause” and the term usual was not clear. The contract was held void but on the grounds of illegality, vagueness and not on account of Force Majeure.

In this case, the court held that force majeure will not include economic problems like insufficient funds, it will only include unforeseeable and unpredicted circumstances.
4, 6, 16, 17, 18, 19, 21
3. Re: Presidential Poll v Unknown
(1974) 2 SCC 33, 1975 1 SCR 504
Bench – A Ray, D Palekar, H Khanna, K Mathew, M Beg, P J Reddy, Y Chandrachud

In this case, the Supreme Court has observed the “Latin maxim impotentia excusat legam” which means that law will excuse a default if a party is unable to perform the contract or duty created by law without any fault of its own.
15
4. Standard Retail Pvt. Ltd vs Gs Global Corp And 3 Ors Bench – A.A. Sayed

– The Bombay High Court, in this case, has held that court has rightly refused to grant the benefit of force majeure to the Petitiners and rejected the grant of ad-interim relief to the Petitioners against the Respondent Bank holding that force majeure clause cannot be invoked against the Respondent Bank, the latter not being a party to the sale contract between Petitioners and Respondent No. 1.

– The Court’s view that the Petitioners cannot use the situation of lockdown to avoid their obligations under the contract with the Respondent No. 1 and that the Respondent Bank is well within its rights to encash the letters of credit, which otherwise is also an independent transaction with the Respondent Bank, is to re-emphasise the established principle that to claim the benefit of a force majeure event the performance of the party should be adversely impacted by the force majeure event itself.

– While the notifications/advisories issued by the government suggest that the distribution of steel has been declared as an essential service during the lockdown, the Petitioners had little ground to claim frustration and impossibility of contract.
 
Given the above, there are two possible instances, which may suggest that a force majeure clause covers a pandemic:  

– If the definition of a force majeure event in the contract expressly includes a ‘pandemic’. In such an instance, the inclusion of ‘pandemic’ to the list of events of a ‘force majeure’ clause in the contract would make it clear that the outbreak of Covid-19 would trigger a force majeure clause; or

 – (ii) If the given force majeure clause encompasses the extraordinary events or circumstances beyond the reasonable control of the parties. In such an instance, such ‘force majeure’ clause may be invoked if it is determined that the factual circumstances caused by the pandemic i.e. Covid-19 are beyond the reasonable control of the affected party
4, 5,
5. Satyabrata Ghose v. Mugneeram Bangur and co.,
A.I.R 1954 S.C. 44

In fact impossibility and frustration are often used as interchangeable expressions. (Para 10)        

The courts in India have held that the word ‘ impossibility’ used in Section 56 must be understood in a practical form and not in its literal sense. (Para 15)
10, 15
6. Sushila Devi v Hari Singh
AIR 1971 SC 1756

The Supreme Court held that an agreement of lease ended by frustration where before completing it the parties had to run away and could not go to Pakistan to give or take possession. If the performance of a contract becomes impracticable 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. But the supervening events should take away the basis of the contract and it should be of such a character that it strikes at the root of the contract. (Para 11)

– From the facts found in this case it is clear that the plaintiffs sought to take on lease the properties in question with a view to enjoy those properties either by personally cultivating them or by sub-leasing them to others. That object became impossible because of the supervening events. Further the terms of the agreement between the parties relating to taking possession of the properties also became impossible of performance. Therefore we agree with the trial court as well as the appellate court that the contract had become impossible of performance. (Para 12)
11, 12
7. Energy Watchdog and Ors. v. Central Electricity Regulatory Commission and Ors.
2017(14) SCC 80

Frustration/ Force Majeure/ unexpected hike in coal prices: Unexpected hike in coal prices due to change in Indonesian law – frustration of contract? Party liable to compensation?

– Change in fuel is no excuse to apply Force Majeure as the parties knowingly took the risk in bidding

– It is clear that an unexpected rise in the price of coal will not excuse the generating companies from performing their part of the contract for the very good reason that when they submitted their bids, this was a risk they knowingly took.

– Changes in the cost of fuel, or the agreement becoming onerous to perform, are not treated as force majeure events under the PPA.

– Therefore, the fundamental basis of the contract was neither removed nor there was any frustration, except for a rise in the price of coal. Alternative modes of performance were available 

– This does not lead to the contract being frustrated.

Hence, Adani Enterprise can claim no relief.
34, 36, 39, 41, 42, 43, 44, 45, 46, 47  
8. Progressive Construction v. NHAI
(2009) 157 DLT 537

– Courts held that climate conditions that are predictable does not fall under Force majeure.

– As the contractor was well known of the fact that winter month do some time have extreme weather conditions and fog, visibility condition due to fog may also be deteriorate.

– The Court held that the contractor couldn’t take shelter of these extreme conditions, which are foreseeable.
3, 4, 8
9. Surya International v. UOI
2014 SCC All 15192

– Force Majeure was unforeseeable (District Magistrate Order)
– Hence applied

Para 30 explains the procedure of Force Majeure

– Respondent invited bid via tender for the purpose of collection of user fee
– Petitioner was selected as the bid found to be the highest
– Private bus operators resisted paying the user fee on account of some order of the District Magistrate.
– District Magistrate directed the respondents to stop the collection of the toll fee as it was found that the toll plaza was against the rules.

– The petitioner sent a notice to the respondent stating that they are unable to collect and consequently, in view of this unforeseen event, the petitioner would pay 50% of the agreed collection user fee till such deficiency is not removed.

– In response the respondent said invoking force majeure and paying less is a violation of the provisions of the contract. Cancelled the contract. 

– Petitioner pleaded that there application invoking FM be decided and restrain the respondent from enchasing the deposit.

– Court held in favour of the petitioner stating that the establishment of the toll plaza was at a wrong location and it was in the personal knowledge of the respondent and still they went ahead with the collection and giving contracts. Moreover, the respondent did not mention anything about the order Magistrates order in the bid documents and bidders had no idea about the same.
16, 18, 19 21, 30, 50 – 56
10. TGV Projects v. NHAI
(2019) 173 DRJ 717

– Heavy rainfall
– Unable to collect toll due to less of traffic
– Held, Force Majeure clause way too remote

3 types – Direct, remote, too remote

– The court held that the facts of the present case, circumstances warranting invocation of force majeure do not at all arise.

– In any event, considering the distance between the appellant’s toll plaza and the places affected by heavy rains and floods, to invoke force majeure would be to grossly over-stretch the concept, since even assuming there was some drop in traffic by reason of the natural calamity in a distant place, one is unable to discern a cause-and-effect nexus between the calamity and the drop in traffic. At best, the force majeure event was too remote.

– If events as remote as the ones in the present case are accepted as basis for a force majeure claim, then surely excessive rains and flooding in parts of Southern India must also, indirectly and consequentially, have affected trade and commerce throughout the country in some way.

– In our view however, such indirect or consequential impact on trade and commerce cannot justify a force majeure claim. We may also add that nothing was cited or brought before the Arbitral Tribunal to show that the natural calamity in remote locations was the only reason for drop in the volume of traffic at the appellant’s toll plaza.
6 – 10, 12, 13, 16, 23, 25, 26
11. Industrial Finance Corporation of India Limited vs Cannanore Spinning & Weaving Mills Limited and Others 2002(5) SCC 54  

The Supreme Court of India (“Supreme Court”), has held that ‘where the event is of such a character that it cannot reasonably be supposed to have been in contemplation of the contracting parties when the contract was made, they will not be held bound by general words, which though large enough to include, were not used with reference to the possibility of that particular contingency which afterwards happened. It is on the principle that the act of God is in some cases said to excuse the breach of a contract. The Latin maxim lex non cogit ad impossibilia means that the law does not compel a man to do that which he cannot possibly perform.’ This defence is thus available even in the absence of a force majeure clause in the contract.

As a matter of fact by reason of the non-availability of the security in terms of Section 141, the contract of guarantee cannot but be termed to stand frustrated and it is in this context, Section 56 of the Contract Act has been taken recourse to. It may be noticed here that the statute itself has recognised the doctrine of frustration and encompassed within its ambit an exhaustive arena of force majeure under which non-performance stands excused by reason of an impediment beyond its control which could neither be foreseen at the time of entering into the contract nor can the effect of the supervening event be avoided or overcome. (Para 40)  
40, 41
13. Markfed Vanaspati v. UOI
(2007) 7 SCC 679

Force Majeure clause could not be attracted in the facts and circumstances

– Before the Division Bench, the appellant sought the benefit of the force majeure clause because the government had banned the use and process of rapeseed oil by manufacturers.

– On the basis of the documents referred to the court by the learned counsel for the appellant, it is clear that the ban was imposed for the use of rapeseed oil for manufacturing Vanaspati but manufacturing of rapeseed oil was not debarred or restricted. 

– Therefore, even the plea of force majeure clause taken by the appellant was found to be totally devoid of any merit.
3, 5, 8
14. Rajindra Nath Kundu And Sons Vs. Union of India

Reason why relief is granted
Due to the unavailability of raw material the obligations were not fulfilled by the party and it came into the domain of unavoidable circumstance.  

FACTS:
In this case,
A Tender was issued to the appellant by the respondent and a contract was entered between the parties for the supply of 120 sets of roof trough at a fixed price. the supply had to be completed by 30.11.1983. [6],[7]

The appellant secured the sum of money in the form of bank guarantee, however so sample was received by him the contract was not completed past the due date and even sample was sent after the due date of completion of contract. [8]

After some more time when the contract was not completed the appellant filed for recovery, where the respondent pleaded defence under S.56 of the Indian Contract Act ,1872.[10],[11]

HELD:
The court in this case held that,

The respondent’s plea was accepted on grounds that the unavailability of raw material was not caused by the respondent and it was unavoidable circumstance and, on this note, relief was granted to the respondent. [22]
6,7, 8, 10, 11, 22,

UNITED KINGDOM

  • Unlike many civil law countries, there is no implied application of the doctrine of force majeure under English law. Rather, the treatment of an event of force majeure comes from the contract.
  • It is usual for English courts to apply contracts strictly, according to their wording and respecting the parties’ freedom to contract on terms they see fit. The parties may choose a broad or narrow definition of force majeure, depending on their needs. Accordingly, careful and comprehensive contract drafting is particularly important.
  • Thus, the fact that a contract has become uneconomic or commercially impractical will likely not be considered a force majeure event unless expressly provided for. The issue becomes one of proof – that is, whether the party relying on the force majeure clause can show that the event on which it relies is included in the clause.
  • In this respect, because the clause is seen as a commercial solution rather than a legal one, it will be read in a natural way and not subject to the limitations that are used to reduce the scope of an exclusion clause.
  • In some (strictly limited) circumstances, the English law doctrine of frustration may provide relief where the force majeure clause does not. In brief, this doctrine provides that if an event makes performance of a contract impossible, illegal or pointless, the contract is ‘frustrated’ and can be set aside. However, the criteria for this are difficult to meet and the consequence of bringing the contract to an end may not be desirable.
  • 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.
EXPRESS FORCE MAJEURE CLAUSES CONTAINED IN ENGLISH LAW CONTRACTS

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: 

  • Set out a list of matters that qualify as force majeure.
  • Explain the consequences of any of these force majeure events (e.g. whether the contract is delayed or can be terminated).
  • May also set out what happens to payments made and services delivered prior to the force majeure event.

UNITED STATES OF AMERICA

  • Under New York law, a non-performing party seeking to avoid its contractual obligation must demonstrate the existence of a force majeure event and that the party was unable to fulfill its contractual obligation despite reasonable efforts to do so.
  • It is usually not enough to claim that performance was simply hindered because of a listed event. The invoking party must further show that the event was unforeseeable and was the direct cause of the party’s inability to perform.
  • In very limited circumstances, courts applying New York law have allowed a party to invoke force majeure in instances of indirect causation (for example, shipping delays resulting from congestion caused by a hurricane, rather than by the hurricane itself).
  • A party seeking to invoke force majeure usually must also show that there is no alternative means for performing under the contract. Increased costs or other difficulties in performing will not be sufficient under New York law because force majeure clauses are not intended to buffer a party against the normal risks of contracting.
  • California law similarly requires that parties invoking force majeure demonstrate that they made “sufficient” or “reasonable” efforts to avoid the consequences of the force majeure event, such as by providing cover or sourcing means of performance from external providers.
  • California courts have found, for example, that force majeure does not excuse a drilling company from its contractual obligations where the company could not obtain necessary tools because its supplier was on strike. Although strikes were among the force majeure events enumerated in the clause, the court found the company was obliged to source the tools from an alternate supplier, even though doing so would cause the company to incur additional expense.
  • Mathes v. City of Long Beach, 121 Cal. App. 2d 473, 477, 263 P.2d 472, 474 (1953). Even in the case of a force majeure provision in a contract, mere increase in expense does not excuse the performance unless there exists extreme and unreasonable difficulty, expense, injury, or loss involved. 
  • Ultimately, whether disruption caused by COVID-19 rises to the level of a force majeure event under US law will largely depend on the language of the applicable contract, the nature and scope of the effect on a party’s ability to perform its obligations under the contract, and (under some state’s laws) the steps the invoking party took to avoid the negative consequences of the virus.
  • In Gulf Oil Corp. v. FERC 706 F.2d 444 (1983)[7], 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.

CANADA

  • Canadian courts are unlikely to find an implied force majeure provision notwithstanding the occurrence of a likely force majeure event.
  • You may be able to rely on the doctrine of frustration.

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

  • Force majeure is usually exercised under political and non-political circumstances. Political events state the risks associated with changes in the political scenario. However, non-political activities deal with physical risks impacting a business.
  • Under Articles 117 and 118 of the PRC Contract Law along with Article 180 of the General Rules on the Civil Law, force majeure exists as a doctrine covering diseases, pandemics as well as epidemics. Since these are unforeseeable, impossible to overcome and unavoidable situations, an affected party can claim force majeure. Coronavirus (COVID-19) is a naturally occurring event (the virus) and also has governmental restrictions put into place. So, it qualifies as a force majeure event. COVID-19 itself will not count as the relevant FM event, but the consequences that lead to the inability to fulfill the contractual obligations deem it as one.

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.

  • According to the China Council for the Promotion of International Trade, China has issued 4,811 force majeure certificates as of Mar. 3 due to the epidemic, state media Xinhua reported. Those contracts were worth 373.7 billion Chinese yuan ($53.79 billion), according to the report.
  • While such documents will help entities claiming against one another in the Chinese domestic markets, most claims will not hold up internationally, said international law firm Holman Fenwick Willan.

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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

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