The spread of COVID-19 has occasioned serious implications for the global economy. It has also affected, in particular, party obligations under contracts. In this light, the present note provides a broad overview of the principle of force majeure and the doctrine of frustration under Indian law. This note does not constitute legal advice.
Force majeure literally means a ‘superior force’. Broadly, it refers to circumstances where performance of a contract is prevented by an event or circumstance beyond that party’s control. Instances of such events include war, natural calamities, civil unrest. These events can also be understood as a ‘supervening impossibility’.
Under Indian contract law, two types of provisions deal with such ‘supervening impossibility’. The first, found in Section 32 of the Indian Contract Act, deals contractually agreed force majeure provisions. The second, found in Section 56 of the same legislation, deals with circumstances of frustration of a contract. Conceptually, the following broad distinction can help navigate these provisions:
Force majeure (Section 32) deals with cases where contractual provisions have been made by the parties to deal with a supervening impossibility; whilst
Frustration (Section 56) is a rule of positive law, applicable irrespective of the absence of contractual provisions, to deal with a supervening impossibility.
Given that it permits parties to escape their contractual obligations, strict rules are applicable upon frustration of contracts. For instance, a simple difficulty in performance, or reduced commercial viability, does not constitute frustration. As a rule of thumb, where alternative methods of performance are possible, or the fundamental basis of the parties’ agreement has not been eroded, frustration will be difficult to sustain. On the other hand, since force majeure deals with contractual clauses, such stipulations are more likely to be enforced on their own terms.
Consequently, it is not be wise to pre-determine whether a defence of frustration or force majeure can apply in all circumstances. On the other hand, the contract between the parties will need to be reviewed to identify (a) whether provisions have been made for force majeure events; or (b) whether, in the circumstances, the requirements of frustration have otherwise been met.
As noted above, in contrast to contractual force majeure, the principles underlying frustration do not emanate from contractual stipulations. It is therefore instructive to analyze judicial decisions to cull out the applicable standards to plead frustration. The leading judicial authority on this issue is the case of Satybrata Ghose v Mugneeram Bangur and Company and Ors1. Here, the Supreme Court explained the concept of frustration in the following terms:
“9… The performance of an act may not be literally impossible but it maybe impracticable and unless from the point of view of the object and purpose which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do.” (Emphasis supplied)
More recently, in the case of Energy Watchdog v CERC,2 while dealing with a force majeure clause in a Power Purchase Agreement (PPA), the Supreme Court placed reliance upon the principles enunciated in the case of Satybrata Ghose case, as being the “seminal decision” on the issue.
In this light, it would be advisable for parties to review their contractual documentation to ascertain if any force majeure related provisions are available. Should that be the case, contractual stipulations may guide the parties’ rights and obligations.
On the other hand, if no force majeure provisions are available, the parties may need to rely upon the doctrine of frustration of contract to avoid obligations. The applicability of this doctrine, and the parties’ remedies in this regard, would depend significantly on the fundamental commercial bargain, including the nature and purpose of the contract. These would be reviewed in light of the nature of the impossibility, i.e. the relevant COVID-19 related inability, if any.
A possible solution for parties looking for early visibility on account of COVID-19 is to agree to a fresh set of contractual stipulations to deal with the present exigencies. This could include limited or complete suspension of obligations during the affected period, extension of time under the contract, or other commercially viable solutions. In every case, it would be advisable to agree to any such fresh stipulations strictly in light of the existing contractual agreements, including any limitations contained in the existing agreements.
As noted in paragraph (1), this note does not constitute legal advice. Should you require assistance in respect of any individual contract governed by Indian law, please consider contacting Indian legal counsel.
* The views expressed are personal to the authors.
If you require future assistance on the matter, please do not hesitate to contact us at United Advocates.