- 1 Abstract
- 2 Doctrine Of Force Majeure
- 3 Indian Legal Regime Regulating Force Majeure Events
- 4 Force Majeure In Times Of A Pandemic
- 5 Force Majeure Clause As A Remedy
- 6 Resorting To Section 56 Of The Act
- 7 Conclusion
- 8 REFERENCES
- 9 CITE THIS WORK
- 10 AUTHOR DETAILS
The Covid-19 pandemic has created a massive global crisis claiming not only human lives but also commercial relationships. The economies of the world have come to a standstill due to imposition of lockdowns and halting of commercial activities. The strained supply lines and restriction of movement of individuals has affected contractual relationships between commercial entities. The pandemic has adversely affected the capability of various commercial entities to perform their respective contractual obligations even leading to non-performance of contracts. Generally, commercial contracts include force majeure clauses which provide for temporary suspension of performance of contracts and even frustration of the contract, in some cases, upon happening of certain listed events. In absence of such force majeure clauses, the non-performing parties can invoke Section 56 of the Indian Contract Act, 1872 which provides for frustration of contract upon happening of an unforeseen event rendering the performance of the contract either impossible or illegal. Thus, this provision provides as an alternative remedy to revoke the contract and excuse the obligations therein if the parties had omitted to include a force majeure clause in the contract albeit a strict judicial enquiry. The Courts apply strict interpretation of law in both the situations and the non-performing party must inter alia strictly prove that the force majeure event has substantially affected its capability to perform the contract. This paper concludes that the situation caused by pandemic is very unique to the Indian legal regime and owing to varying contractual terms and ground situations, disputes must be decided by the Courts on a case-to-case basis.
Doctrine Of Force Majeure
According to Black’s Law Dictionary, the term ‘force majeure’ is defined as “an event or effect that can be neither be anticipated nor controlled, is unexpected and which prevents someone from doing or completing something that he or she had agreed or officially planned to do.”Therefore, force majeure is an event which occurs due to an unforeseen circumstance and affects the ability of a party to perform its contractual obligations. The doctrine of force majeure provides a remedy to the non-performing party of a contract by excusing it from its contractual obligations due to happening of an unforeseen event which neither could have been avoided nor be controlled by it and which adversely affects its capability to perform the contract.The doctrine derives its existence from contractual innovation and its scope and classification of events is determined by the parties to a contract and not by positive law.The Indian Contract Act, 1872 under Section 32 inter alia encapsulates the principle of a force majeure clause by extinguishing the contract if any force majeure event makes its performance impossible but does not provide the option of suspension of contractual obligations for a brief period till the force majeure event subsists generally provided in a force majeure clause. Thus, a force majeure clause vis-à-vis the suspension option is a contractual innovation whereby parties are given a cooling off period and commercial relationship between them is also maintained.
As mentioned above, generally a force majeure clause temporarily suspends the performance of the contract for a brief period of time till the force majeure subsists but if such a period is indefinitely extended, the clause may also provide for frustration of the contract itself. If, the force majeure event is indefinitely extended and it does not provide for frustration of contract, the parties have to option to seek remedy under Section 56 of the Indian Contract Act, 1872. Therefore, parties which omitted to include a force majeure clause in the contract are not left remediless and can pray for frustration of contract under Section 56 of the Indian Contract Act, 1872 subject to a strict scrutiny by the Court. The applicability of the doctrine is unique to each contract and therefore any dispute regarding a force majeure clause is decided by the Courts on a case-to-case basis.
Indian Legal Regime Regulating Force Majeure Events
The Indian Contract Act, 1872 (hereinafter referred to as the Act) deals with the concept of force majeure specifically under Section 32 and provides for the ‘Doctrine of Frustration’ under Section 56. Though the kind of relief provided under both the sections is along the same lines but the rationale behind granting it varies between both the provisions.
Section 32 of the Act: Contingent Contracts
Section 32 of the Act regulates the enforceability of contracts which provide for the happening of an uncertain/contingent event in the future. It provides that a contract which promises to do or not to do anything contingent upon the happening of a future event cannot be enforced under law unless and until such an event takes place. It can therefore be safe to imply that till the happening of such uncertain event, the contingent contract remains in abeyance. The provision further provides that if the future event as provided for in the contract becomes impossible to effectuate, in such a case, the contract would become void excusing the contracting parties from their contractual obligations provided therein.
This provision specifically deals with the express force majeure clauses provided in contracts and the events listed therein. The Supreme Court in National Agricultural Co-Operative Marketing Federation of India v.Alimenta S.A.has provided that when an express force majeure clause is provided in a contract, such a contract is dealt under Section 32 of the Act and not under Section 56; it is only when the contract does not provide a force majeure clause, the parties to the contract can resort to the doctrine of frustration under Section 56. Therefore, a force majeure clause in a contract governed under Section 32 of the Act acts as an exception for breach of contract excusing the non-performing party from its contractual obligations. The law governing force majeure clause under Section 32 of the Act derives its basis from the English common law wherein a party is excused from its contractual obligations upon the happening of specified events beyond the party’s control. The non-performing party in such a case under English law akin to Indian law has to establish a direct causal link between the specified event and the inability to perform upon the occurrence of such event. Further, under the Indian law while granting relief under Section 32 of the Act, the Courts look into several factors such as the nature and general terms of the contract, the commercial environment during the negotiation of the contract and after the non-performance, and most importantly the events faced by the parties which led to the non-performance.The Supreme Court in Energy Watchdog v. Central Electricity Regulatory Commission & Others held that when umbrella terms such as ‘hinder’ or ‘prevent ’are provided in the force majeure clauses of contracts, the Courts must look into the words preceding or following them and must also make an inquiry into the nature and general terms of the contract. The non-performing party must prove that the force majeure event has forced performance of the contract in a commercial situation which is fundamentally different than which existed upon entering into the contract. Further, it must also establish that it was never the intention of the parties to carry out the performance of the contract in such altered commercial environment post the force majeure event. The non-performing party must prove that upon entering into the impugned contract, both the parties never agreed to perform in a fundamentally different situation which had been created by the force majeure event.
The dispute between parties arises when the force majeure clause does not specifically provide for the event which has been invoked by the non-performing party to be excused from its obligations. The Courts in such a case interpret the sample events provided in the force majeure clause by adopting the principle of ejusdem generis and decide whether the invoked event falls under the same species of events as provided under the contract. The Courts have applied this principle of ejusdem generis to some of the following force majeure clauses:
- Event is simplicity ‘beyond the control’ of a party.
- The non-performing party is ‘prevented’ from carrying on its contractual obligations.
- The non-performing party is ‘hindered’ from performing the contract.
- The performance of contractual obligations is ‘disrupted.’
- The performance of the contract becomes ‘impossible.’
The Supreme Court has held in Alopi Prasad & Sons v. Union of Indiathat while interpreting such wide terms used in the contracts such as ‘impossibility’ or ‘impracticality’, the Courts must strictly dwell into the objective and the nature of the entire contract before invoking the exception of force majeure clause. Further, the Supreme Court in DhanrajamalGobindram v. Shamji Kalidas held that when phrases such as “subject to the usual Force Majeure Clause” are included in force majeure clauses, only such events come under its ambit which fundamentally change the circumstance of the contractual relationship as strictly considered in the ordinary commercial environment. But at the same time, the Delhi High Court in M/s Halliburton Offshore Services Inc. v. Vedanta Ltd. & Anotherhas categorically held that force majeure clauses must be strictly and narrowly interpreted, and that non-performance of the parties must be excused only in exceptional circumstances in accordance to strict adherence to contractual terms and conditions. Further, the non-performing party must strictly prove that the force majeure event was specifically provided in the contract and the non-performance was due to a direct adverse effect or reaction of the force majeure event upon the party’s ability to perform the contractual obligations. In such an event, the remedy lies under Section 56 of the Act wherein the non-performing party can pray for frustration of the contract albeit an even stricter judicial enquiry which shall be discussed in the later part of this paper.
The force majeure clauses in contracts may also contain certain formal procedural requirements which must strictly be executed. The force majeure clauses in contracts may also contain certain formal requirements which must be met by the non-performing party for successfully invoking the clause and excuse it from its contractual obligations. Such a formal requirement can be the issuance of notice by the non-performing party informing the other party the happening of a force majeure event covered under the contract. It has been held that when the requirement of notice has been provided in the contract and the non-performing party fails to notify the other party about the occurrence of the force majeure event, the claim of force majeure exception fails and the non-performing party is not excused from its obligations.Further, another requirement which some contracts generally impose upon the non-performing party is to mitigate the effect of its non-performance to the other party under the ‘best endeavours’ clause. The non-performing party must prove that it undertook certain steps to mitigate the ill effects of the force majeure event and the subsequent non-performance to successfully invoke the force majeure exception. The exception applies when it is proved that the changed circumstances were outside the control of the non-performing party and that no reasonable man could have taken any steps which could likely overcome such an unfortunate situation.
Therefore, from the above observations, it can be safe to state that when a contract contains a force majeure clause, the non-performing party for a successful invocation of the exception under Section 32, must prove the following:
- The event which led to non-performance of the contract lies within the ambit of events mentioned in the force majeure clause.
- Such an event had a direct effect upon the ability to perform contractual obligations and eventually led to non-performance of the contract.
- The happening of the event and the subsequent non-performance of the contract was beyond its control.
- That the event was of such magnitude that no reasonable steps could have been taken to continue the performance and there was no other alternative mode of performance.
Section 56 of the Act: Doctrine of Frustration
The principles governing the concept of force majeure are encapsulated under the doctrine of frustration provided under Section 56 of the Act. The doctrine of frustration under Section 56 of the Act derives its existence from the Latin maxim “les non cogitadimpossibilia” which means that a person cannot be compelled by law to do what he cannot possibly perform. In lieu of the same, the provision states that any agreement which provides for performing an act that is impossible or illegal is void and cannot be enforced.
The relief granted under Section 56 is akin to Section 32 wherein under both the provisions the non-performing party is excused from its contractual obligations; but the grounds invoked under both the provisions vary. Section 56 of the Act is invoked by the non-performing party when the contract does not provide for a force majeure clause. Therefore, the Supreme Court in Satyabrata Ghose v. MungeeramBangur& Co.held that because Section 56 of the Act is invoked when there is no force majeure clause in a contract, it holds the status of positive law and when it comes into operation, the intention of the parties becomes irrelevant. The intention of the parties is taken into consideration by the Courts to only ascertain the objectives and the nature of the contract.
Paragraph 2 of Section 56 of the Act reads as follows:
“Contract to do an act afterwards becoming impossible or unlawful.—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”
From the provision it can be noticed that it essentially provides the same relief as a force majeure clause of a contract which is to allow a party to be excused from performing its contractual obligations due to happening of an uncertain event which renders the performance of the contract either impossible or even illegal. Doctrine of frustration under Section 56 of the Act is invoked by the Court when in its opinion the purpose or nature of the contract becomes frustrated due to the happening of an uncertain event or change in circumstances. The supervening impossibility under the provision cannot be interpreted literally as physical impossibility but should be understood as commercial impracticality.Further, the Supreme Court has opined that the performance of the contract may not be impossible to perform but when it becomes commercially impractical and “useless from the point of view of the object and the purpose which the parties had in view”then the doctrine of frustration must be applied terming the contract void. While applying the provision to the facts of each individual case, the Courts look into the belief, knowledge and intention of the parties to only ascertain whether the supervening impossibility and change circumstances frustrated the contract. The non-performing party must prove that due to no fault of its own, the unforeseen event is so fundamental that it frustrates the purpose of the contract far beyond what was contemplated by the parties when they had entered into the contract. An important aspect of relief granted under Section 56 of the Act is that it does not provide a temporary suspension of performance and subsequent resumption of the same when the uncertain event is over unlike a force majeure clause.Therefore, the relief granted under the doctrine of frustration renders the contract as void and therefore it can never be again executed. Herein lies a stark difference between the kind of remedy provided by a typical force majeure clause and Section 56 of the Act. Whereas the provision renders the contract void upon impossibility of performance thereby ending the commercial relationship between the parties, a force majeure clause may provide for a period of suspension of performance hence maintain the commercial relationship. Because the relief granted under the provision renders the contract void permanently and ends the commercial relationship between the parties, the Courts have imposed certain restrictions upon the interpretation of the provision. Some of the limitations imposed by the Courts upon invoking the doctrine under Section 56 of the Act are as follows:
- The doctrine must be strictly and narrowly interpreted to the facts of the case.
- The event which disrupted the performance of the contract must be unforeseen and the doctrine can never be applied to such risks which were already foreseen by any of the party to the contract.
- The doctrine is not applicable to acts which were self-induced by the non-performing party or when the event which led to the frustration of the contract was a result of negligence of the non-performing party.
Therefore, Section 56 of the Act though encapsulates the same kind of relief granted by a force majeure clause in a contract, it is applied when such a clause is not provided in a contract and is applied by the Courts with strict scrutiny and the same cannot be granted as a relief under minimal and trifling grounds.
Force Majeure In Times Of A Pandemic
The non-performing parties of a contract have two options under the Indian law to excuse themselves from performance of the contract due to the Covid-19 pandemic. The non-performing party can either opt to invoke a force majeure clause, if any provided in their contract or they can resort to the doctrine of frustration under Section 56 of the Act. But there lies a great lacuna in application of either of the two options as Indian law does not directly deal with frustration of a contract due to a pandemic caused by a virus. This is because the Covid-19 virus pandemic is an unprecedented event wherein the entire country was put under a lockdown with economic activities being halted for the first time in the foreseeable past. Since the inception of this pandemic there have been various restrictions on commercial activities and due to multiple waves of infection there is continuous uncertainty in the economic arena. Thus the pandemic has caused far reaching effects and uncertainty on commercial activities and therefore economic entities must make a clear assessment whether such adverse effects have caused long term or short term restrictions upon their activities which would help them identify the proper legal remedy. There can be various instances wherein the pandemic may cause only short term effects on a non-performing party’s ability to perform and in lieu of a cooling off period provided under the force majeure clause, the contract would not frustrate but there are other instances wherein several businesses have been shut down due to the economic fallout of the pandemic. Therefore, each case must be decided with respect to its peculiar set of circumstances. Further, before a non-performing party determines the kind of remedy it can resort to, it must make a clear evaluation of the economical impact of Covid-19 upon its business and its capability to perform the contract. It must make a clear assessment of the limits imposed by the pandemic upon its capability to perform the contract and determine whether there is any chance to resume the performance due to a change in circumstances after a brief time period. Thereafter, the non-performing party must look into the relief which whether lies in the contract itself in the form of a force majeure clause or under Section 56 of the Act.
Force Majeure Clause As A Remedy
The Covid-19 pandemic has raised an important question of law which is whether force majeure clauses in contracts contemplate the current pandemic as force majeure event. In certain cases, contracts may include an epidemic and / or pandemic disease as a force majeure event, then Covid-19 would definitely fall within the letter of the force majeure clause and there would not lie any dispute. In the absence of the same, to determine whether Covid-19 would become a force majeure event, it would be pertinent for the Courts to look into operational aspects of the relevant commercial transaction and the wording of the force majeure clause in the contract on a case-to-case basis.
The Courts can derive assistance from an Office Memorandum issued by the Ministry of Finance on ‘Force Majeure Clause’ on 19th February, 2020. The Office Memorandum provided that the Covid-19 pandemic should be considered as “a case of natural calamity and force majeure may be invoked.”But it is pertinent to note that the performance as a whole is not excused and only if the force majeure event exceeds a period of ninety days can any party terminate the contract. Further, any firm claiming to invoke the Covid-19 pandemic must give a notice of the same. Drawing inspiration from this, the Ministry of Road Transport & Highways also issued an Office Memorandum classifying the Covid-19 pandemic as a force majeure event. It adopted the Office Memorandum of the Ministry of Finance but it has provided that the extension of time provided due to the force majeure event in completing the performance of the contract must be done on a project-specific review of the individual contracts. Although such Office Memorandums cannot serve as binding documents in a court of law, the Memorandum issued by the Ministry of Road Transport & Highways was relied upon by the Delhi High Court in MEP Infrastructure Developers Ltd. v. South Delhi Municipal Corporation &Ors. The High Court relied upon the document and held that Covid-19 pandemic is a force majeure event and the “ground realities had substantially altered” since the incorporation of the contract. It also held that the strict time limits to complete the performance of the contract must be put into abeyance due to the force majeure event. But the interpretation of such Office Memorandums will depend on each court on a case-to-case basis. The order of the Bombay High Court in Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp &Orsgives more clarity into the need of deciding such issues on a case-to-case basis. In this instant matter, the impugned contract had provided epidemics as force majeure events and therefore the non-performing party claimed excuse of performance. The Court inter alia refused to enforce the force majeure clause and held that because distribution of steel was classified as an ‘essential service’ by the Government, invoking the force majeure clause was invalid.
Another important aspect under the same question of law is that whether the pandemic may be invoked as force majeure event under ‘Act of God’? The Supreme Court in Divisional Controller, KSRTC v. Mahadava Shetty defined ‘Act of God’ as an event wherein natural forces operate in an unforeseen manner without any human intervention. The Court held that an event could be termed an ‘Act of God’ only if it was effected by natural forces and could not have been reasonably anticipated. Drawing reference to a very old judgment by the Supreme Court of Maine in Lakeman v. Pollardwherein cholera epidemic was held as an ‘Act of God’, Indian Courts can consider the current Covid-19 pandemic as an ‘Act of God.’ An argument herein could be made that the spread of the Corona virus could have been foreseen in India due to its rapid spread in China and other countries much before it started spreading in India. But a counter argument to the same can be that the infection kept on spreading and accelerating at such a great pace that neither could its gravity be anticipated nor could have the infection be stopped. But at the same time, for a non-performing party to successfully invoke the force majeure clause, it must prove that Covid-19 pandemic had a direct impact upon its ability to perform and the subsequent non-performance of the contract and neither could it mitigate the loss and nor could it find other means to perform it.
Therefore, whether the Covid-19 pandemic can be considered as a force majeure event must be decided by the Courts on a case-to-case basis looking into the general terms and conditions of the contract and other ground situations which affect the performance of the contract.
Resorting To Section 56 Of The Act
When the defaulting party has no force majeure remedy in the contract itself, it can resort to frustrate the contract under Section 56 of the Act. The non-performing party must make an efficient evaluation of the limits imposed by the pandemic upon its performance because it can even opt for frustration of the contract under Section 56 of the Act when there is already a force majeure clause present in the contract. But it must take a very balanced view on the choice of remedy because the interpretation of frustration under the provision is very narrow and limited. Nevertheless, if there is no force majeure clause in the contract, it has no option but to opt for frustration under Section 56 of the Act. 
Section 56 of the Act provides that a contract may be termed as frustrated when the performance of the same has either become impractical or illegal. The burden of proof upon the non-performing party is higher under the provision and it must prove that the pandemic has fundamentally changed the objectives agreed upon by the parties at the time of incorporation of the contract. It must prove that if it is forced to complete the performance of the contract, it would be “useless from the view of the original intention and object of the parties to the contract”.The non-performing party must establish that the Covid-19 pandemic and the subsequent lockdown has drastically affected the relationship of the parties to the contract, and they had never agreed to enforce the contract in such a situation.Further, the defaulting party must prove that the pandemic has not merely caused a physical impracticality but it has become commercially impractical to complete the performance of the contract. This impracticality may be caused due to the imposition of lockdown by the Government and the subsequent strained supply lines or the restriction on commercial activities and movement of individuals. The provision also provides frustration of a contract on ground of illegality. The lockdown imposed by the Government had severely restricted commercial activities and movement of public through penal consequences under the Disaster Management Act, 2005 read with the Indian Penal Coode, 1860. The claim of a defaulting party under Section 56 of the Act on the ground of illegality due to restrictions and penal provisions imposed under the lockdown depends on the classification of services as essential or non-essential by the Government.
The Bombay High Court order discussed above had inter alia looked into the applicability of Section 56 of the Act to another impugned contract in lieu of the Covid-19 pandemic wherein there was no force majeure clause. The Court while dismissing the frustration of contract under the provision held that the lockdown enforced due the pandemic was imposed for a limited period and mere hardship in performing the contract in view of the pandemic was untenable. But it is pertinent to note that facts of this instant case were such that the general terms and duties of the parties were such that the pandemic had not substantially affected the performance of the contract. Further, the contract provided for distribution of steel which was classified as an essential service by the Government therefore the defaulting party could not successfully claim that performance of the contract was illegal due to the lockdown. Therefore this order cannot be a good precedent for such cases wherein the performance of the contract had become impossible due to strained supply lines or illegal due to prohibition of non-essential activities by way of Government orders. Therefore, akin to force majeure clauses, the Courts must proceed on a case-to-case basis while deciding petitions filed under Section 56 of the Act in lieu of the Covid-19 pandemic.
The Indian law in the present form either by way of legislation or judicial precedents is not very clear as to the effect of a pandemic caused by a virus like Covid-19 upon contractual relationships. The present pandemic has not only claimed human lives but also adversely affected commercial activities as a result of the lockdown imposed by the Government. The lockdown not only strained the supply lines but also restricted the movement of human workforce from engaging in commercial activities such as manufacturing and providing services. This affected the capability of various commercial entities to perform the contract sometimes even leading to complete non-performance of the contract. As a result of non-performance of contracts, commercial disputes between commercial entities are bound to rise but owing to the uniqueness of the pandemic situation, such commercial entities are clueless about the best possible remedy under the law.
As discussed earlier, the defaulting party must first make a clear evaluation of the effect of the pandemic and the lockdown upon its capability to perform the contract. It must ascertain whether its capability to perform the contract has been restricted for a brief period of time or whether the nature of the pandemic is such that its capability has been restricted for an indefinite period of time. Further, it must also make an enquiry into whether there are other possible ways which may not have been adversely affected by the pandemic to perform the contract. Upon such evaluation of the situation, if the non-performing party is ensured that it cannot perform its contractual obligations as it had aimed to achieve initially at the time of entering into the contract, it must look out for the appropriate remedy under law to excuse it from performance of the contract. The remedy can either lie in the contract itself in form of the force majeure clause where the contract may suspend the performance of the contact for a brief period of time but if the situation does not become cordial for performance even after such time period, it may also provide for frustration of the contract. If the contract does not provide for a force majeure clause, the non-performing party can invoke Section 56 of the Act for frustrating the contract on ground of supervening impossibility or illegality. There are limitations involved in invoking either of the two remedies as there may be a condition wherein the force majeure clause of the contract may not directly classify a pandemic as a force majeure event and as discussed above the interpretation of Section 56 of the Act is very narrow and limited and the burden of proof upon defaulting party is very high to prove that the situation caused by the pandemic is such that it has adversely struck at the foundation of the contract. Similarly, the courts will have to proceed on a case-to-case basis as every contract is unique in nature and therefore the ultimate fate of such claims rest on the terms and purpose of the contract and other ground realties.
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