Importance of Force Majeure and the Doctrine of Frustration in COVID 19

Importance of Force Majeure and the Doctrine of Frustration in COVID 19
Loading...

“It is obvious that any civilized system of law is certain to provide remedies for cases of what has been called unjust enrichment or unjust benefit that’s to forestall a person from retaining the cash of or some benefit derived from another which it’s against conscience that he should keep.”

– Lord Wright

The “Doctrine of Frustration” and “Force Majeure” has become very crucial facets of law in the time of global Pandemic of COVID-19, and also become a crucial facet of accountability and the contracts. The COVID 19 was declared as a pandemic on 11 March 2020 and it has affected every sector of the country. It has not only affected India’s economy but also affected other countries’ economies too like the United Kingdom and many more countries.

The Spread of the Corona Virus has become a tremendous act in almost every sector of India. Every contractual obligation including sponsorship contracts is also being affected by COVID-19. If any person is unable to perform any contractual duty, they will not be liable for not fulfilling those duties if they have a valid defense under the concept of force majeure or the common law doctrine of frustration.

Force Majeure

It is also known as the Act of God. Under Contract law, force majeure is a provision that absolves a party from non-performance of contractual obligations which is caused by circumstances or events out of the parties’ control and makes performance impossible. These events may include war, floods, drought, civil unrest or terrorist attack, or sudden natural calamities and many more. The determination that the COVID 19 is a force majeure event will depend on the specific wording and scope of the clause. The clause usually contains a list of events that can be treated as force majeure events.

This list often expressly lists ‘epidemic’, ‘Pandemic’, ‘Disease’, etc as the events of force majeure. In such cases, COVID 19 is likely to qualify as force majeure and so parties can claim a defense under force majeure. This clause needs to be re-examined because else Covid-19 could be upheld for every contract.

Loading...

Black’s Law Dictionary explains that a force majeure clause “is meant to shield the parties within the event that a contract cannot be performed because of causes which are outside the control of the parties and will not be avoided by the exercise of ordinary care.”

Section 32 and 56 of the Indian Contract Act are relevant provisions for Force Majeure.

 

Section 32 of the Indian Contract Act, 1872 states about the enforcement of contracts contingent on an event happening i.e. contingent contracts to do or not do anything based on if an uncertain future event happens, cannot be enforced by law unless and until the event has happened. If an event becomes impossible in itself, the event becomes void. The intention is to save a contract performing party from such consequences that may arise over which the party has no control. The pandemic of COVID 19 is one such event that no one would have even thought of lasting for such a long time all over the world. It led to a lockdown and hence, various contracts were not able to be performed.

In the case of Energy Watchdog v. CERC & Ors., the Supreme Court observed that the force majeure clause could also be a contingency contract in terms of Section 32 of the Indian Contract Act. The Supreme Court also held that Section 56 of the Contract Act would also apply in cases where a force majeure event occurs outside the contract.

According to Section 56 of the Indian Contract Act, 1872, an agreement to do an impossible act in itself is void. A contract to try an act which, after the contract is formed, becomes impossible, or, because of some event which the promisor couldn’t prevent, unlawful, becomes void when the act becomes impossible or unlawful. Where one person has promised to try and do something which he knew, or, with reasonable diligence, might need to be known, and which the promisee failed to 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.”

Loading...

The various elements necessary for COVID 19 to be considered as force majeure are the following:

  1. It must be unavoidable and beyond the control of parties to the contract. There is no doubt that the pandemic of COVID 19 is unavoidable and beyond control.
  2. It has prevented or hindered the party’s contractual obligation. The pandemic of COVID 19 has led hindrance to the parties to the contract to perform the promise. This can be said because COVID 19 led to lockdown in all the parts of the country and this is the major hindrance in the performance of the contract.
  3. The parties to the contract have taken all reasonable steps with due diligence and care to avoid/ minimize the negative consequences of the event.
  4. The force majeure clauses should have ‘Epidemic’ or ‘Pandemic’ in it so that the party can include COVID 19 in it.

This can be said that the pandemic of COVID 19 is force majeure. In the case of M/s Halliburton Offshore Services Inc. v. Vedanta Limited and Anr. The Delhi High Court observed that COVID 19 is a force majeure event. But, the question of whether COVID 19 would justify non-performance or breach of contract or not, depends on the facts and circumstances of each case. Every breach of contract or non-performance cannot be justified or excused merely on the invocation of COVID 19 as a force majeure condition.

The various things that the court has to see while assessing that COVID 19 is a force majeure are ‘conduct of parties before the outbreak’, ‘deadlines of performance of a contract’, and ‘the genuine reason is COVID 19 for non-performance or not’.

Whether Abortion laws are women-centric?

Force Majeure in Commercial Lease Agreements in the pandemic of COVID 19 has been given under Section 108 of the Transfer of Property Act. The Supreme Court in ‘Ramanand & Ors v. Dr. Girish Soni & Anr. held that the Doctrine of Force Majeure for commercial lease agreements has been provided under Section 108 of the Transfer of Property Act and not under Section 56 of the Indian Contract Act, 1872.

Loading...

Doctrine of Frustration

If the performance becomes impossible due to a supervening event, the promisor is excused from the performance of the contract. When the contract performance becomes impossible, the purpose of the contract gets frustrated. This is called the doctrine of frustration. In the case of Satyabrata Ghose v. Mugneeram, the basis of the doctrine of frustration was explained by Justice Mukherjea. The Supreme Court observed that the doctrine of frustration is a part of the law that can discharge contract because of impossibility within the purview of Section 56 of the Indian Contract Act.

Section 56 is based on the legal maxim, ‘les non-cognit ad impossibilia’. This legal maxim refers that the law does not compel a man to do what he cannot possibly perform. Section 56 states about the initial impossibility and subsequent impossibility. Impossibility in the contract refers to when a contract cannot be performed. Impossibility refers to both legal and physical impossibility.

In the pandemic of COVID 19, various contracts cannot be fulfilled and hence, have become impossible to be performed. The contracts that were entered into before the pandemic have become impossible to perform because of the COVID 19 pandemic now. This is known as a subsequent impossibility.

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. To invoke the doctrine of frustration in the pandemic of COVID 19, the essential elements that are required are:

  1. The parties have to show that the performance of a contract has become impossible due to COVID 19. The lockdown and imposition of Section 144 of the Code of Criminal Procedure, 1973 in various parts of the country are very much evidence of the fact that the contract may not be performed.
  2. The purpose or object of the contract has been frustrated due to COVID 19. Frustration can occur due to the change in circumstances.

The President of India- Powers, and Functions

Loading...

Conclusion

In the pandemic of COVID 19, everything has come to a still. Everything has paused and this is has affected every sphere of life. In the sphere of contractual obligation, the concept of force majeure and the doctrine of frustration can be invoked. In this scenario, force majeure will be the determining factor to understand the significance of these circumstances. The situation of India in case of force majeure will vary from case to case depending on the facts and circumstances of each case. Under Indian Law, there is no allowance to escape from any contractual obligation and any party still faces strict liability. So, force majeure and the doctrine of frustration play very crucial roles in the non-fulfillment of performance of contracts. At last, I want to end with a quote based on the doctrine of Frustration.

“The remedial rigidity of the doctrine of frustration contrasts unfavorably with the flexibility which can be obtained by drafting an appropriate force majeure clause”

Prof. McKendrick

 

Books Referred:

  • Mulla ‘The Indian Contract Act’ 15th Edition
  • Bangia R.K ‘The Indian Contract Act’ 7th Edition

Written by– Tanya Singh, Banasthali University.

Loading...

Leave a Comment

Your email address will not be published. Required fields are marked *