Distinctions between Force Majeure vs. Frustration of Contract

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Introduction

Today the world economy is struggling to deal with the effect of pandemic Covid-19 and India is not an exception to the same. Covid-19 was declared as pandemic by WHO on 11th march 2020.this has led to lockdowns and financial slowdown in all sectors in India and worldwide. Some businesses are going to find it difficult or impossible to fulfill their contractual liabilities and perform contracts entered into before the outbreak of the Covid-19 pandemic.

There are possibilities that in many contracts, parties will be seeking to delay and/ or to avoid their contractual obligations/performances. The parties will be further taking defense of force majeure and doctrine of frustration wishing not to be held liable for their non-performance of contractual obligation.

The impact on the businesses has been severe, and the force majeure clauses will play a crucial role if the businesses are not able to perform their contractual obligations amidst this crisis. Under this article we are going to explain the force majeure and frustration in the context of covid-19.

Force majeure

The ‘force majeure’ is the French term which means ‘superior force” or we can say “forcemeat”. With accordance’s to the Black’s Law Dictionary, the term ‘force majeure’ is an event or effect which neither anticipated nor controlled. The term includes both acts of nature and acts of individuals.

The Hon’ble Supreme court of India in case of Dhanaramji Gobindram v. Shamji Kalidas & Co. (1961) 3 SCR 1020, said that the expression force majeure isn’t merely a translation of the Latin expression which means ‘vis major’ and held that the intention to protect the performing party from the results of anything over which he has no control.

The Force Majeure Clause may be a common clause in the contracts that essentially frees both parties from the liability or form the obligation when an extraordinary or unprecedented event or the circumstance beyond the control of the parties, prevents one or both parties from fulfilling their obligations under the contract.

In absence of a Force Majeure clause, one may seek relief under the ‘Doctrine of Frustration” wherein there is an impossibility to fulfill either party’s performance under the contract due to the occurrence of subsequent events. This is the doctrine given under the Indian Laws which primarily falls under the Section 56 of the Indian Contract Act, 1872. It’s an important to notice that the frustration of contract cannot result out of the willful intention of the parties.

A broad difference between the interpretation of a contract with and with and without force Majeure clauses has been summarized below: (This is however not a ‘one size fit all ‘situation and varies on a case – to-case basis.)

It is associated with the thought of an act of god, no party will be held accountable for an event, like a hurricane or a tornado, floods, earthquakes’ and other different “acts god” further as well as uncontrollable events like as war or terrorist attack.

Force majeure clause may be a provision during a contract that excuses a party from not performing its contractual obligations that becomes impossible or impracticable, due to an event or effect that the parties couldn’t have anticipated or controlled. Typically speaking, for events to constitute force majeure:

It must be unavoidable and beyond control of the parties to the contract.

a. It has prevented or hindered the party’s contractual obligation.
b. The parties to the contract have taken all reasonable steps with due diligence and care to avoid/minimize the negative consequences of the event.

In energy watchdog vs. central electricity regulatory commission and ors. (2017) SCC14 1 the hobble supreme court of India has held that the contract wherein force majeure clause is explicitly mentioned are out of the purview of section 56 of the Indian contract act, 1872.

Force majeure clause present in contract-

The language of the clause in the contract / Agreement will define the scope of applicability of the principle of Force Majeure.
The clause could either list a number of events in which it could be applicable or it could provide a broad interpretation of what events come under the ambit of this clause.
There is a need for thorough review of the Contract/ Agreement to determine the exact applicability on a case to case basis.

 No force majeure clause in contract

In such conditions, one may rely on Section 56 read with section 32 of the Indian Contract Act, 1872.
Upon taking into consideration the nature of Contract / Agreement, appropriate review and also the circumstances under which the force majeure event has occurred, it will be determined whether the Contract is void, Frustrated or whether compensation is to be provided to say one of the parties.
To take shelter under Section 56 of the Indian Contract Act, it must be ensured that the parties have entered into a Contract Agreement wherein the force majeure event has disrupted the performance of its Terms.

The Hon‘ble Apex Court of India in Energy Watchdog and Ors. Vs Central Electricity Regulatory Commission and Ors. (2017) 14 SCC 80 held that

“In so as a force majeure event occurs de hors the contract.It is dealt with a rule of positive law under Section 56 of the Contract Act. The performance mayn’t be literally impossible but it may be an impracticable and useless from the point of view.” the key takeaways from the judgment are as below;

Results if a force majeure clause is triggered:

If the force majeure clause is triggered, the contract will generally get suspended, and a party who has failed to perform its contractual obligation will usually be excused from any fine of penalty. Some clauses are drafted in such a way that they will allow one or both the parties to suspend the contract immediately or after some period. The force majeure clause might also contain a general or specific provision to solve the problem amicably. A carefully drafted clause will always be helpful while dealing with exceptional results.

Doctrine of frustration

A party who is unable to perform its written agreementobligations within the absence of the force majeure clause, might seek to rely upon a common law concept, Doctrine of Frustration and it may further prove that the pandemic Covid-19 is a Supervening event which has rendered it impossible to perform that the pandemic Covid-19 is a Supervening event which has rendered it not possible to perform the contract, that ultimately releases each the parties from more performance of the same contract . Frustration: impossibility under S. 56 doesn’t mean literal impossibility to perform (owing to strikesCommercial hardships etc.) however refers to those cases wherever a supervening event on the far side Frustration:impossibility under S. 56 doesn’t mean literal impossibility to perform (owing to strikes. Commercial hardships etc.) Howeverrefers to those cases wherever a supervening event on the far side the contemplation and management of parties (like the modification of circumstances) destroys the terribly foundation upon which the contract rests. Thereby rendering the contract impracticable ‘ to perform , and substantially useless in view of the object and purpose which the intended to achieve through the contract.2 it is to be noted that the contract will not be frustrated if the event which has occurred has been predicted at the time of entering into the  contract . In the current situation (Pandemic Covid-19), the event is unlikely to have foreseen by party in advance (Except in recent Agreements)

A contract will be frustrated when the event Occurs, whichrenders the performance of the contract impossible or transfers the agreed obligation of the contract into some different obligation (which was duly agreed by the parties at the time of entering into the contract) without any party’s fault, then the contract will be said to be frustrated. It is immaterial if the Contract has become more expensive or more difficult. Delay caused in performance of the contract by Pandemic COVID -19 could be a frustrating event. (Depending upon nature of the contract in question and the length of the delay)

A Supervening Event One of the requirements of the Doctrine of Frustration is that the (supervening event) must not be the fault of the non-performing party. in current situation of Pandemic COVID -19, the parties to the contract cannot be heldresponsible for the spread of the same but the court may nevertheless take the view that a failure to fulfill the contractual obligation by performing a contract is a result of the non-performing party’s acts or decision .

If once the party’s have entered into a contract, there are changes in legal implementations because of that the performance of a contract has become unlawful, then it’ll be thought about as a frustrating event. Therefore in copying with Pandemic COVID-19, if the government passes any law/notification that renders the performance of the Contracts unlawful, then those contracts are going to be same frustrated.    

The impact of frustration

After the frustration, the contract involves a finish while not selection or election of each the parties. It’s not necessary to issue a notice or inform alternative party just in case of frustration of a contract. The contracting parties are discharged from their respective contractual and legal liabilities and also from future performance and any future obligations. It is to be noted that the amount paid /cost incurred /Benefit incurred by the party to the contract before the frustrating event shall be repayable (Subject to the courts discretion). The amount which is to be duly payable at time of completion of the contract will be no longer pays. In Satyabrata Ghose v. Mugneeram Bangur three war conditions was acknowledged to the parties whereas moving into the contract specified that they were aware of the possible difficulty within the performance of the contract, in such circumstances, the requisition of property didn’t affect the root of the contract. Secondly, no stipulation as to time was provided in the agreement such that the work was to be completed within a reasonable time. Still, having regard to the development contract and the knowledge of the war conditions prevailing during the contract, such a reasonable time was to relax. Therefore, the contract had become impossible of performance under S. 56 of the Contract Act. A Typically, Force majeure and Frustration appears to be similar. However, the consequences of the both events are different. In case of Force Majeure, the contract is usually may get suspended, but if the contract is a frustrated the contract comes to an end and the parties to the contract are completely released from their contractual obligations. The position can be differently applicable to different contracts. A well-written Force Majeure clause will deal with all the mandatory points. Including how to divide the losses and costs incurred by the parties due to supervening event. However, once there’s lacuna in Force majeure Clause, the party might choose for Doctrine of Frustration. Well-drafted Force Majeure clauses can agitation with all the mandatory points.

Comparison between Force Majeure and Doctrine of Frustration:

The concept of doctrine of frustration is incredibly common wherein the force majeure clause is a part/creature of contract. Force Majeure has no legal concept as such and it has to be expressly outlined during a contract.  An Occurrence of an unforeseen event is directly linked with the impossibility to perform the contract under Doctrine of Frustration.

However, beneath the Force Majeure clause, contracting parties sometimes predict/identify a list of the events which can attract the force Majeure impact.

Under the doctrine of frustration, the contract subsequently becomes void and all the parties to the contract are released from their respective contractual obligations.

When a contract doesn’t contain a force majeure clause, the contracting parties might claim a frustration of a contract. And if the supervening event is roofed within the force majeure clause in a contract, the frustration of such contract can’t is claimed.

Conclusion

The rise of the Pandemic COVID -19 is going to affect the Financial Market. All businesses should consider the impact of the COVID -19 crises with due diligence whether they or their counterparties will be able to/ are going to continue to perform their contractual obligations. If it appears that the performance of the contract is going to affect significantly. If is vital to review the terms of the contracts so to understand the rights and obligations which will allow deal with crisis accordingly. The whole impact of this outbreak is currently not known and is likely to vary greatly on a project-by –project and market-by –market basis. 

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