"Force Majeure" or "Act of God" - this standard clause present in most contracts, which is not commonly invoked, is in the minds of most corporates and commercial lawyers, as economic activities and commercial transactions world over have come to a standstill in the wake of COVID-19 pandemic.
In simple terms, 'Force Majeure' clause is a provision in a contract that exempts a party from performing his contractual obligations which have become impossible or impracticable due to an event or effect which the parties could not have foreseen or controlled. This clause is usually couched in general, inclusive terms to cover unforeseeable incidents such as natural calamities, war, sudden change of government policies etc.
It will be interesting to note that the Indian Contract Act, 1872 - the 148 year old law governing contracts in India - does not expressly refer to 'Force Majeure'.
However, there are two Sections which can become relevant in such situations - Section 32 and Section 56.
Section 32 deals with "contingent contracts", in which the performance of the contractual obligations is contingent on the happening or non-happening of an event. If the event becomes "impossible", the contract becomes "void" under this Section.
As far as general contracts are concerned, Section 56 is relevant. This provision embodies the "doctrine of frustration". It says :
Two illustrations from that Section may be relevant in the present context :
Roots in English law
The roots of this doctrine of frustartion are in the common law decision Taylor vs. Caldwell, (1861-73) All ER Rep 24.
Prior to this decision, the law of contracts in England was extremely rigid. A contract had to be performed, no matter what the unforeseen circumstances which render its performance impossible.. This rigidity 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.
Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310
This a landmark Indian decision which explains the ambit of Section 56.
Here, the defendant was a company, which was engaged in the construction and development of house plots. There was an agreement for sale of a plot between the plaintiff and the defendant. Meanwhile, during the second world war, the plots were compulsorily acquired by the military.
The issue was whether the agreement was frustrated due to requisition by military. On facts, the Court held that the contract cannot be held to be frustrated, as its performance was possible even after the war-time.
"In our opinion, having regard to the nature and terms of the contract, the actual existence of war conditions at the time when it was entered into, the extent of the work involved in the development scheme and last though not the least the total absence of any definite period of time agreed to by the parties within which the work was to be completed, it cannot be said that the requisition order vitally affected the contract or made its performance impossible", the Court held.
Few principles stated by the Court in the decision are :
In this case, the Court found that the delay was not of the character which "totally upset the basis of the bargain and commercial object which the parties had in view".
The Court also held that the if the contract has an express or implied "force majeure" clause, then the situation will be analysed on the basis of that, and not through the application of principles under Section 56.
"According to the Indian Contract Act, a promise may be express or implied(1). In cases, therefore, where the court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances the dissolution on of the contract would take place under the terms of the contract itself and such cases would be outside the purview of section 56 altogether".
M/s Alopi Parshad & Sons Ltd. v. Union of India, 1960 (2) SCR 793 - Contract not frustrated merely because its performance has become onerous
This case concerned with an agreement to supply ghee to army personnel. The parties sought enhanced rates citing the outbreak of World War II. The contractor claimed that it was entitled to amounts over and above the rates revised as per agreement in 1942.
The Court rejected the claim, noting that the contract was revised three years after the hostilities commenced, and that the party was fully conscious of the circumstances.
"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 his part of the contract merely because its performance has become onerous on account of an unforeseen turn of events", the bench observed.
Naihati Jute Mills Ltd. v. Hyaliram Jagannath, 1968 (1) SCR 821
In this case, the Court held that even if a contract is held to be void under Section 56, it will not affect the arbitration clause contained in it.
"Even if the appellants had established frustration, it would not be as if, the contract was ab initio void. In cases of frustration it is the performance of the contract which comes to an end but the contract would still be in existence for purposes such as the resolution of disputes arising under or in 'connection with it: and the question whether the contract was discharged under the doctrine of frustration would still have to be decided under the arbitration clause which operates in respect of such purposes."
The Court also held that to hold a contract as frustrated, the change in events or circumstances must be "so fundamental as to be regarded by law as striking at the root of the contract".
On facts, the Court held that the change in government policy on jute import did not frustrate the contract in question.
Sushila Devi vs. Hari Singh AIR 1971 SC 1756
The case concerned the lease of a property, which went to Pakistan after partition.
"The impossibility contemplated by Section 56 of the Contract Act is not confined to something which is not humanly possible., If the performance, of a contract becomes im- practicable 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", the Court observed, holding the lease agreement as frustrated.
Ultimately, the Court concluded that 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.
Energy Watchdog v CERC (2017) 14 SCC 80
This decision given by a bench comprising Justices P C Ghosh and R F Nariman summarizes the jurisprudence on the doctrine of frustration.
Some key points from this judgment are :
One of the issues in this case was whether the rice of prices of coal imported from Indonesia would frustrate the Power Purchasing Agreements (PPA).
The Court held that price rise was not an event which frustrated the contract.
"Alternative modes of performance were available, albeit at a higher price. This does not lead to the contract, as a whole, being frustrated", observed the judgment authored by Justice R F Nariman.
In this case, the Court applied the principle in Satyabrata Ghosh that a contract with an implied or express 'force majeure' clause will be outside the purview of Section 56.
Referring to Satyabrata Ghosh case, the judgment observed :
"It was further held that where the Court finds that the contract itself either impliedly or expressly contains a term, according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under S.32 of the Act. If, however, frustration is to take place de hors the contract, it will be governed by S.56".
Hence, the judgment analyzed the case through the lens of the 'force majeure' clauses in the PPA. The argument for applying the principles under Section 56 was rejected.
"Dr. Singhvi, however, argued that even if clause 12 is held inapplicable, the law laid down on frustration under S.56 will apply so as to give the respondents the necessary relief on the ground of force majeure. Having once held that clause 12.4 applies as a result of which rise in the price of fuel cannot be regarded as a force majeure event contractually, it is difficult to appreciate a submission that in the alternative S.56 will apply. As has been held in particular, in the Satyabrata Ghose case, when a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, S.56 can have no application. On this short ground, this alternative submission stands disposed of", the court said.
In this case, the Court also applied the opinion expressed in 'Treitel on Frustration and Force Majeure', that a force majeure clause will not normally be construed to apply where the contract provides for an alternative mode of performance.
The principles of this case were applied by the Delhi High Court in the 2019 case Coastal Andhra Power Ltd v Andhra Pradesh Central Power Distribution Co Ltd to hold that escalation of price of coal and change in law abroad will not amount to "force majuere" under the agreement, so as to absolve the power generating company from its obligations.
As a caveat, this article should not be construed as hinting that COVID-19 pandemic will qualify as a 'force majeure' event with respect to all contracts. This is a broad summation of judicial principles on 'force majuere' and 'doctrine of frustration'. The application of these are subject to the facts and circumstances of each contracts.
Addendum : Few more judgments
The Supreme Court in Industrial Finance Corporation of India vs. Cannanore Spinning & Weaving Mills Ltd. (2002) 5 SCC 54 held that any impediment beyond one's control which was unforeseen and unavoidable in nature shall attract the force majeure clause in the contract viz.: -
"40. 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."
Courts have adopted a wide connotation to the term 'force majeure'. The main intention behind force majeure clauses is to save the contracting party from any event over which he has no control. In this regard, see decision of the Supreme Court in Dhanrajamal Gobindram vs. Shamji Kalidas & Co. AIR 1961 SC 1285, wherein the following observation was made: -
"17. McCardie, J. in Lebeaupin v. Crispin [(1920) 2 KB 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."
The Supreme Court in its judgment dated 05.04.2018 in Madhya Pradesh Power Co. Ltd. vs. Renew Clean Energy Pvt. Ltd. (2018) 6 SCC 157 held that time taken by the contracting party on account of 'unavoidable' circumstances (RoW issues) is a relevant factor to be kept in mind while ascertaining the overall delay in commissioning of projects [Note- In Power Purchase Agreements/Transmission Service Agreements, delay in commissioning of projects results in payment of liquidated damages by the developer. Therefore, if there is a supervening event beyond developer's control on account of which the project gets delayed, such period of delay is ideally condoned by the Courts.]viz.: -
"11. …According to Respondent 1, upon initiation of measurement and demarcation exercise by the revenue officials, the land was found to be heavily encroached and there was stiff resistance which continued every time Respondent 1 tried to approach the said land and therefore, Respondent 1 could not access the project site and commence any construction activities. On request by Respondent 1 by its letter dated 29-9-2016, Respondent 1 sought for change of location of the project...
12. Even when Respondent 1 has undertaken the constrution activities in the changed location and informed the appellant that the expected date of commissioning of the project is 31-8-2017, the appellant terminated the contract by its order dated 11-8-2017. As pointed out by Respondent 1 in its counter-affidavit, on 6-6-2016, Respondent 1 has got sanction of the term debt facility of Rs 267.37 crores from PTC India Financial Services Ltd. and has spent huge amount in purchasing the land to an extent of 253 acres in Ashok Nagar District. Respondent 1 has also spent substantial amount in development of the project in the changed location and reached an advanced stage of commissioning the project by 31-8-2017. The delay in commissioning the project appears to be due to unavoidable circumstances like resistance faced at the allotted site in Rajgarh District and subsequent change of location of the project. These circumstances, though not a force majeure event, time taken by Respondent 1 in change of location and construction of the plant have to be kept in view for counting the delay. Having invested huge amount in purchasing the land and development of the project at Ashok Nagar District and when the project is in the final stage of commissioning, the termination of the contract is not fair."
The Supreme Court in Gujarat Urja Vikas Nigam Ltd. vs. Tarini Infrastructure Ltd. & Ors. (2016) 8 SCC 743, recognized an 'uncontrollable' event as a factor that would qualify as an event of force majeure. The relevant observation is quoted herein-under: -
"14. Any force majeure is considered as an uncontrollable factor. In fact Regulation 23 provides that the approved aggregate gain or loss on account of uncontrollable factor shall be passed through as an adjustment in the tariff over such period as may be specified in the order of the Commission."
[The judgments in the addendum are based on the inputs from Ms. Poonam Verma, Partner, J. Sagar Associates & Mr. Saunak Kumar Rajguru, Associate, J. Sagar Associates].