'Force Majeure', 'Act Of God' & 'Doctrine Of Frustration' Under Indian Contract Act [Explainer]

"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 :An agreement to do an act impossible in itself is void.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. Two illustrations from that Section may be relevant in the present context :A contracts to take in cargo for B at a foreign port. A's Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared.A contracts 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. Roots in English lawThe 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 310This 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 :The word "impossible" in Section 56 does not mean physical or literal impossibility.Contract can be held to be frustrated if its performance is "impracticable" and "useless" from the point of view of the object and purpose of the parties, though the performance is not literally impossible.If the untoward event totally upsets the very foundation upon which the parties entered their agreement, the contract can be held to be frustrated.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...

'Force Majeure', 'Act Of God' & 'Doctrine Of Frustration' Under Indian Contract Act [Explainer]

Manu Sebastian

A discussion on legal principles governing contractual obligations amid COVID-19 pandemic

Tags