THE DOCTRINE OF FRUSTRATION AND FORCE MAJEURE: COVID 19

Covid-19 or the Corona Virus was declared as a pandemic on March 11, 2020. This has led to
lockdowns and financial slowdown across the country in all sectors. The impact on the
businesses has been severe, and the force majeure clauses will play a crucial role if the
businesses are not able to perform their contractual obligations amidst this crisis.
In the aftermath of the closedown, many suppliers would not be able to perform their
contractual obligations and, to say the least, they would be delayed. The suppliers are seeking
to delay and/ or avoid contractual obligations/ performance. They wish not to be held liable
for their contractual non- performance. The companies might not be able to honor their
customer agreements. The same is true for the consideration, which either of the party to a
contract might not be able to fulfill under the terms of the contract. Under such scenarios, the
force majeure clause would be a determining factor to understand the implications of these
events.
“On Feb.17, 2020, the China Council for the Promotion of International Trade (CCPIT),
revealed that it had already issued over 1,600 „Force Majeure certificates‟ to firms in 30
sectors, covering contracts worth over $15 billion.”1
On February 19, 2020, the Department of Expenditure, Procurement Policy Division,
Ministry of Finance issued an Office Memorandum with respect to the „Manual for
Procurement of Goods, 2017‟, which serves as the dictum for procurement by the
Government of India.
This memorandum, in essence, states that the Covid- 19 could effectively be covered under
force majeure clause because it is a „natural calamity‟ and all the departments who should
invoke it by following the „due process.‟
But this implication of Covid- 19 cannot be upheld for every contract, and the clause needs to
be interpreted based on different circumstances.

Force Majeure and the doctrine of frustration: “Frustration is an English contract

law doctrine that acts as a device to set aside contracts where an unforeseen event either
renders contractual obligations impossible, or radically changes the party's principal
purpose for entering into the contract.”2

Force Majeure (S.56 of the Indian Contract Act, 1872.): A force majeure clause relieves one
or both parties from liability to perform contract obligations when performance is prevented
by an event or circumstance beyond the parties‟ control. Typical force majeure events may
include fire, flood, civil unrest, or terrorist attack. Force majeure is a term used to describe a
"superior force" event. The purpose of a force majeure clause is two-fold: it allocates risk and
puts the parties on notice of events that may suspend or excuse service.

1
https://www.bloombergquint.com/opinion/coronavirus-key-legal-issues-for-india-inc-with-covid-19
2
Taylor v Caldwell (1863) 3 B & S 826;
The doctrine of frustration (S.56 of the Indian Contract Act, 1872.): The essential idea upon
which the doctrine of frustration of contract is based is that of the 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 it as
they did not promise to perform an impossibility.
The parties shall be excused if substantially the whole contract becomes impossible of
performance or, in other words, impracticable by some cause for which neither was
responsible. The spirit of force majeure and the doctrine of frustration have been embodied in
sections 32 and 56 of the Indian Contract Act.

While the doctrine of frustration is a common law principle, the force majeure clause is a
creature of contract. It is a civil law concept that has no settled meaning in the common law.
It must be expressly referred to and defined in a contract.

The entire jurisprudence on the subject has been stated by Justice RF Nariman of the
Supreme Court in the case of Energy Watchdog vs. CERC (2017).3
“Force majeure” is governed by the Indian Contract Act, 1872. In so far as it is
relatable to an express or implied clause in a contract, it is governed by Chapter III
dealing with the contingent contracts, and more particularly, Section 32 thereof. 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. Sections 32 and 56 are set out herein:

“Section 32: Enforcement of Contracts contingent on an event happening -

Contingent contracts to do or not to do anything if an uncertain future event happens,
cannot be enforced by law unless and until that event has happened. If the event
becomes impossible, such contracts become void.”

“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 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 promise for
any loss which such promisee sustains through the non-performance of the promise.”4

3
Supreme Court of India: Civil Appeal Nos.5399-5400 of 2016
4
The Indian Contract Act, 1872
Prior to the decision in Taylor vs. Caldwell, (1861-73) All ER Rep 24, the law in England
was extremely rigid. A contract had to be performed, notwithstanding the fact that it had
become impossible of performance, owing to some unforeseen event, after it was made,
which was not the fault of either of the parties to the contract. This rigidity of the common
law in which the absolute sanctity of contract was upheld was loosened somewhat by the
decision in Taylor vs. Caldwell in which it was held that if some unforeseen event occurs
during the performance of a contract which makes it impossible of performance, in the sense
that the fundamental basis of the contract goes, it need not be further performed, as insisting
upon such performance would be unjust.

„Impossibility‟ under S.56 doesn‟t mean literal impossibility to perform (owing to strikes,
commercial hardships, etc.) but refers to those cases where a supervening event beyond the
contemplation and control of the parties (like the change of circumstances) destroys the very
foundation upon which the contract rests, thereby rendering the contract „impracticable‟ to
perform, and substantially „useless‟ in view of the object and purpose which the parties
intended to achieve through the contract. In Satyabrata Ghose v. Mugneeram Bangur5, war
condition was known to the parties while entering into the contract such that they were aware
of the possible difficulty in the performance of the contract, in such circumstances, the
requisition of property did not affect the root of the contract. Secondly, no stipulation as to
time was provided in the agreement such that the work was to be completed within a
reasonable time. Still, having regard to the nature of the development contract and the
knowledge of the war conditions prevailing during the contract, such a reasonable time was
to be relaxed. Therefore, the contract had not become impossible of performance under S.56.
“A contract is not frustrated merely because the circumstances in which it was made
are altered. The Courts have no general power to absolve a party from the
performance of its part of the contract merely because its performance has become
onerous on account of an unforeseen turn of events.”6
It has also been held that applying the doctrine of frustration must always be within narrow
limits. In an instructive English judgment namely, Tsakiroglou & Co. Ltd. v. Noblee Thorl
GmbH7, despite the closure of the Suez canal, and despite the fact that the customary route
for shipping the goods was only through the Suez canal, it was held that the contract of sale
of groundnuts, in that case, was not frustrated, even though it would have to be performed by
an alternative mode of performance which was much more expensive, namely, that the ship
would now have to go around the Cape of Good Hope, which is three times the distance from
Hamburg to Port Sudan. The freight for such a journey was also double. Despite this, the
House of Lords held that even though the contract had become more onerous to perform, it
was not fundamentally altered. Where performance is otherwise possible, it is clear that a
mere rise in freight price would not allow one of the parties to say that the contract was
discharged by the impossibility of performance.
This view of the law has been echoed in „Chitty on Contracts‟, 31st edition. In paragraph 14-
151, a rise in cost or expense has been stated not to frustrate a contract. Similarly, in „Treitel
on Frustration and Force Majeure,‟ 3rd edition, the learned author has opined, at paragraph

5
Satyabrata Ghose v. Mugneeram Bangur 1954 AIR 44
6
Naihati Jute Mills Ltd. v. Hyaliram Jagannath, 1968 (1) SCR 821
7
1961 (2) All ER 179
12-034, that the cases provide many illustrations of the principle that a force majeure clause
will not normally be construed to apply where the contract provides for an alternative mode
of performance. It is clear that a more onerous method of performance is not sufficient to
invoke the doctrine of frustration.
“The application of the doctrine of frustration requires a multi-factorial approach.
Among the factors which have to be considered are the terms of the contract itself, its
matrix or context, the parties‟ knowledge, expectations, assumptions and
contemplations, in particular as to risk, as at the time of the contract, at any rate so
far as these can be ascribed mutually and objectively, and then the nature of the
supervening event, and the parties‟ reasonable and objectively ascertainable
calculations as to the possibilities of future performance in the new circumstances.
Since the subject matter of the doctrine of frustration is contract, and contracts are
about the allocation of risk, and since the allocation and assumption of risk is not
simply a matter of express or implied provision but may also depend on less easily
defined matters such as “the contemplation of the parties”, the application of the
doctrine can often be a difficult one. In such circumstances, the test of “radically
different” is important: it tells us that the doctrine is not to be lightly invoked; that
mere incidence of expense or delay or onerousness is not sufficient; and that there has
to be as it were a break in identity between the contract as provided for and
contemplated and its performance in the new circumstances.”performance by itself
would not amount to an frustrating event. The same learned author also states that a
mere rise in price rendering the contract more expensive to perform does not
constitute frustration.”8 9

The most generic clause under most force majeure clauses is the „Act of God‟, and the Covid-
19 can be brought under the ambit of the same. But the effect of this clause can be mitigated
through the „duty to mitigate‟ and „exercise due diligence clause.‟ The subjective standards
on the case to case basis have to be applied in order to determine their effect on the overall
contract. The „best endeavor‟ clauses might also play a crucial role in order to define the
ambit and implications of the force majeure clause, as the presence of the same might end up
mitigating the effects of force majeure clauses. The foreseeability of the event has to be
gauged too, especially for the contracts entered after the month of December 2019 as for the
force majeure clauses to become effective, the event must not be foreseeable in essence, and
the Covid-19 outbreak had effectively begun from December 2019 onwards.

The wordings of the clause(s) also becomes very important. Some contracts provide that it
can be put on hold until the force majeure event is resolved. Some contracts provide for
limitations in time, after which either party may cancel the agreement with written notice to
the other. Others require the contract to remain in effect until the force majeure event is
resolved. The burden of proof lies with the party who wants to invoke the force majeure
clauses, and the Courts have traditionally interpreted these clauses in a very strict manner.

8
Supra, note 3
9
Ibid.
And if the party wishes to invoke the force majeure clause, the dispute resolution clause of
the contract shall be checked and the appropriate adjudicatory mechanism shall be adopted by
the procedure mentioned under the terms of the clause, or the law of the land, whichever is
applicable.
In the absence of a force majeure clause, any party could also invoke the doctrine of
frustration under Section 56 of the Indian Contract Act, 1872. In order to invoke the same,
parties must show that the performance of a contract has become impossible, and the
arrangements and conditions have become fundamentally different from those envisaged in
the contract. The parties also have the option to invoke several clauses such as price
adjustment clauses, limitation or exclusion clauses, material adverse change clauses, and
many others such clauses in order to limit the liabilities arising from non-performance or the
partial performance of the contractual obligations. The ability to invoke such grounds would
depend on the wording of the Contracts, the application of case-laws on these clauses, and
how these clauses would be interpreted by the tribunals, courts, and other adjudicatory
bodies.

Keeping the above discussion into consideration, the implications of the Covid- 19 would
have to be decided on the case by case basis.

By
Vijay Pal Dalmia, Advocate
Supreme Court of India & Delhi High Court
Partner Vaish Associates
Email id: vpdalmia@vaishlaw.com
Mobile No.: +91 9810081079
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