Applicability Of Force Majeure And Doctrine Of Frustration During COVID-19: An Interpretation
16 April 2020 8:26 AM GMT
The two views
The devil is, as they say, in the detail
The day is done when we can excuse an unforeseen injustice by saying to the sufferer, 'It is your own folly. You ought not to have passed that form of words. You ought to have put in a clause to protect yourself.' We no longer credit a party with the foresight of a prophet or his lawyers with the draftsman ship of a Chalmers.
The clause of force majeure must be one of the many controversial matters in the times of Covid-19. This WHO declared pandemic might head to frustration of a lot of contracts with a question on its universal applicability.
The cardinal decision on 'force majeure' was opined in the English case by McCardie J. in Lebeaupin v Crispin, where it was held that the scope of the term will depend on the context in which it is used:
'A force majeure clause should be construed in each case with a close attention to the words which precede or follow it, and with a due regard to the nature and general terms of the contract. The eﬀect of the clause may vary with each instrument.'
The term "force majeure" is not a mere French version of the Latin expression "vis major". It is undoubtedly a term of wider import raising legitimate questions on its ambit.
Operating as an expressed risk allocation mechanism in situations which are beyond the control of parties includes the instances such as outbreak of war, strikes and so-called Acts of God. Eminent lawyers and scholars have concluded that "force majeure" involves strikes, breakdown of machinery. Where "force majeure" is mentioned, the intention is to save the performing party from the repercussions of anything over which it has no control.
The Indian Contract Act, 1872 governs the expression of "Force Majeure" under Chapter III and more specifically, Section 32. Insofar as a force majeure case arises dehors the contract, a substantive rule of law is dealt with in compliance with Section 56 of the Contract Act. Section 32 addresses compliance of contracts based on an incident happening and section 56 sets out contracts for an unlikely act. Section 56 is mainly based upon the maxim "les non cogit ad impossibilia" which means that the law will not compel a man to do what he cannot possibly perform.
The doctrine of frustration is valid only in cases of subsequent failure and where the contract has not been executed from the very beginning, where this doctrine has no effect, this doctrine would also not be valid in situations where there has been a mere pause in the execution and the contract can still be executed.
Under the English Law, the common rule of Law of Contract can be understood as that a man is bound to perform the obligations which he has undertaken and cannot claim to be excused by the mere fact that performance has subsequently become impossible.
Different theories have been propounded by the Courts in England in order to soften the harshness of the aforesaid rule. Some of the theories are as follows:
- Theory of Implied Term
In F.A. Tamplin Steamship Co. Ltd. v. Anglo Mexican Petroleum Products Co. Ltd. the Lord Loreburn stated:
"It is in my opinion the true principle, for no court has an absolving power, but it can infer from the nature of the contract and the surrounding circumstances that a condition which was not expressed was a foundation on which the parties contracted … Were the altered conditions such that, had they thought of them, they would have taken their chance of them, or such that as sensible men they would have said, "if that happens, of course, it is all over between us."
- Theory of Disappearance
Lord Watson said in Dahl v. Nelson, Donkin & Co. in the following words:
"The meaning of the contract must be taken to be, not what the parties did intend (for they had neither thought nor intention regarding it), but that which the parties, as fair and sensible men, would presumably have agreed upon if, having such possibility in view, they had made express provision as to their several rights and liabilities in the event of its occurrence."
Lord Atkin advocated the theory of the disappearance of the contract foundation, stating that he could see no reason why, if the parties had to consider certain circumstances which the court would find to be essential to the performance of the contract, the continuation of which had to be considered essential to the contract; the court can't conclude that the contract ceases to work when certain conditions cease to exist.
- Theory of Power of Court
Denning, L.J. in British Movietones Ltd. v. London and District Cinemas Ltd. expounded this theory as follows:
"Even if the contract is absolute in its term, nevertheless, if it is not absolute in intent, it will not be held absolute in effect. The day is done when we can excuse an unforeseen injustice by saying to the sufferer, 'It is your own folly. You ought not to have passed that form of words. You ought to have put in a clause to protect yourself.' We no longer credit a party with the foresight of a prophet or his lawyers with the draftsmanship of a Chalmers."
This theory concludes that the Court has inherent jurisdiction to go behind the express words of the contract and attribute to the Court the absolving power, a power consistently held not to be inherent in it.
On the third theory, House of Lords said otherwise –
The House of Lords in the appeal from that decision discarded the theory. In more recent times the theory of a change in the obligation has come to be more and more generally accepted. Lord Radcliffe, the author of this theory, in Davis Contractors v. Fareham U.D.C. formulated it in the following words:
"Frustration occurs whenever the law reorgonises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would tender it a thing radically different from that which was undertaken by the contract."
"It is not hardship or inconvenience or material loss which brings about the principle of frustration into play. There must be a change in the significance of obligation that the thing undertaken would, if performed, be a different thing from that which was contracted for."
Neither of the above arguments was completely agreed with and the court interpreted the contracts coming before them to enforce one or the other of them as being more logical than the other, the conclusions drawn were similar.
In an instructive English judgment, namely, Tsakiroglou & Co. Ltd. v. Noblee Thorl Gmbh , 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 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.
In Sea Angel case [Edwinton Commercial Corpn. v. Tsavliris Russ (Worldwide Salvage & Towage) Ltd. (The Sea Angel)], the modern approach to frustration is well put, and the same reads as under:
"111. In my judgment, 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."
The Indian Perspective
The second paragraph of Section 56 has been adverted to in Satyabrata Ghose v. Mugneeram Bangur & Co., and it was stated that this is exhaustive of the law as it stands in India. What was held was that "the word "impossible" has not been used in the section in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties. If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do."
In Alopi Parshad & Sons Ltd. v. Union of India, the Supreme Court, after setting out Section 56 of the Contract Act, held that it is only when a consideration of the terms of the contract, in the light of the circumstances existing when it was made, showed that they never agreed to be bound in a fundamentally different situation which had unexpectedly emerged, that the contract ceases to bind. It was further held that the performance of a contract is never discharged merely because it may become onerous to one of the parties.
Similarly, in Naihati Jute Mills Ltd. v. Khyaliram Jagannath, the Supreme Court went into the English law on frustration in some detail, and then cited the celebrated judgment of Satyabrata Ghose v. Mugneeram Bangur & Co. and 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.
In Mary v. State of Kerala, the Supreme Court held that the doctrine of frustration excludes ordinarily further performance where the contract is silent as to the position of the parties in the event of performance becoming literally impossible. However, in our opinion, a statutory contract in which party takes absolute responsibility cannot escape liability whatever may be the reason. In such a situation, events will not discharge the party from the consequence of non-performance of a contractual obligation. Further, in a case in which the consequences of non-performance of contract is provided in the statutory contract itself, the parties shall be bound by that and cannot take shelter behind Section 56 of the Contract Act, 1872.
Conclusion – As a general concept, force majeure or the Theory of Indignation can't be enforced, the interpretation will depend on the facts and circumstances of each case. The present ensuing situation of the WHO-declared pandemic COVID-19 will slip between the two phrases that the devil is, as they say, in the description and the third principle in English law. A targeted response must come in. Getting any blanket requirement is going to be incorrect and such an interpretation would lead to repudiation and demand for damages. Even this concept does not apply in situations, where there has been a simple pause in performance and contract, may still be executed or due to difficulty or inconvenience or lack of content.
Siddharth Batra is an Advocate-On-Record at the Supreme Court of India. The author's views are personal.
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