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Force Majeure: A way around or a necessity?

Civilization among human beings has led to interaction among themselves. The passion for gaining profits has taken a business to new heights. The businessmen maintained a healthy relationship for regular transactions and often contracted with each other on certain agreed terms, the said terms regulate the circumstances which can be predicted, and in case an event occurs which canít be anticipated then force majeure clause and doctrine of frustration comes into picture.

Supervening events like Covid 19 today has resulted in shut down of many economies across the world which has led to non-performance of contract by many businessmen.

So there arises a question whether inability of performance of contract in such a situation constitutes a breach of contract?
The answer lies in the doctrine of force majeure and the doctrine of frustration which states that parties to the contract can be excused from the performance of the contract on the ground of impossibility due to any subsequent event which is unforeseen and beyond the control of parties to the contract.

Actus dei nemini injuriam- The Law hold no man responsible for the act of god. The act of god means and includes any events which are neither anticipated or nor under the control of the parties to the contract like flood, earthquake or tsunami etc. keeping in mind these uncontrollable events the two major doctrines namely force majeure and doctrine of frustration are inserted to safeguard the interest of parties to the contract.

Force Majeure
Force majeure means greater force i.e. the causes which makes the performance of the contract impossible due to which the parties to the contract are excused from their obligation.

Doctrine of Frustration
Lex non cogid ad impossibilia- the maxim means that the law will not compel a man to do what he cannot possibly perform. The maxim is found in section 56 of The Indian Contract Act, 1872 which deals with the doctrine of frustration. Frustration roughly translates to defeat, but in legal terms it is a condition when the parties to the contract are relieved from their obligations due to inability caused by unforeseen circumstances beyond their control.

Illustration:
A, a resident of India enters into a contract with B a resident of Nepal for export of 1000 wheat bags initially 300 bags were delivered, later war was announced between India and Nepal and the government of India suspended all the business transaction with Nepal and the contract becomes void.

Impossibility of performance of contract can be of two types:
  • Initial impossibility
  • Subsequent impossibility
First para of section 56 of The Indian Contract Act, 1872 deals with the subsequent impossibility which states that the performance of a contract becomes impossible after the contract has been entered into due to events which could not have been prevented by the promisor and hence, the contract is rendered void.

The second para of section 56 of The Indian Contract Act, 1872 states that when a promise is made which is known or could have been known with due diligence to be impossible or unlawful, then such agreement/contract entered into on basis of such promise is void-ab-initio and the promisor is liable to pay compensation to such promise for the loss incurred due to non-performance.

The essence of force majeure is found in Chapter 3 and 4 of The Indian Contract Act, 1872 which deals with contingent contracts (Section 32) and doctrine of impossibility (section 56).
Contingent contracts mean contracts depending upon the happening or non-happening of an uncertain future event and if the happening of the said event becomes impossible then the contract shall be rendered void on the contrary when the performance of the contract becomes impossible after entering into it due to supervening impossibility then contract shall be considered as void. In both cases the party can plead impossibility of performance.

Enforceability of Force Majeure
The principle of force majeure has no legal backing which means it is up to the parties to the contract to decide as to which event will constitute as force majeure. The fact and scope of force majeure will be decided by context of facts and circumstances of each case.

Earlier the common law regarding the performance of contract was very rigid because according to doctrine of absolute obligation the parties to the contract are bound to perform the respective task agreed between them.

In 1863 Justice Blackburn provided a liberal approach against the said rule and he stated that a party to the contract need not perform his obligation:
  • If it is impossible for any of the party to perform due to some events which is unavoidable and beyond control.
  • The event has caused hindrance in performance of the contract.
  • All the required/necessary steps are taken by the party to ensure performance but unable to do so. 
Contract cannot be avoided because of reasons like strike, lockout and other hardships. The term impossibility embodied under section 56 of The Indian Contract Act, 1872 does not allow a party to back out from the contract owing to petty reasons but only due to supervening impossibility. In this regard Supreme Court of India states that the requisition of property for military use under Rule 29 of defence of India Rules did not permit the defendant to cancel the contract by stating the doctrine of frustration.

The court held that the roots of the contract remains strong as there was no time decided in the contract that when defendant would complete his work of constructing roads and drains. Along with this the knowledge of war conditions did not make the performance of contract impossible. It has also been said that a contract is not frustrated merely because the circumstances in which it is made are altered.

The court has 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.  Frustration can also be caused by virtue of legislation, where a law is promulgated after the contract is entered into makes the performance of agreement impossible and thereby the agreement becomes void.

The principle of enforceability and force majeure clause which the company usually prefer to insert into the agreement implied not only physical impossibility but also the object/purposes undertaken by the party which it failed to materialise.

Introduction to Force Majeure:
Majeure can be applied to all kinds of the contract but surprisingly it is not the case. The parties to the contract and their lawyers generally do not use this clause for the contract. If force majeure is drafted carefully in a contract, it can help to minimize potential disputes and litigation.

Case law:
The leading case involving this principle is Atlantic paper stock ltd. V. St. Anne Nackawic

In this renounced case, a person named St. Anne who was the owner of pulp and paper mill made a contract with the appellant which requires that St. Anne will purchase all the required waste paper for its mill to produce secondary fiber from the appellants.

It was provided in the contract that every year for period of 10 years St. Anne will make a purchase of minimum 10000 tons of waste paper subject to the following conditions an act of God, authority of the law, labor strikes, non-availability of markets for pulp or corrugating medium, war

The contract was made for a period of 10 years but St. Anne refused to make the further purchase after 14 months of the contract and plea which he took for the non-performance of Contract was the non-availability of market.

Held: The court decided against St. Anne and awarded the damages to Atlantic paper stock ltd. for breach of contract.

Although St. Anne took the plea of force majeure but it was rejected because on the basis of evidence it was found that market forces were not responsible for the loss but ineffective planning and extraordinary operating caused on the part of St. Anne.

Case law: Atcor ltd. V. Continental energy marketing ltd. 
Atcor ltd. agrees to supply gas to continental energy marketing ltd. As per the contract Atcor ltd. was supposed to supply gas from a particular interconnection between the pipelines but there was a breakdown due to which the pipelines were being repaired due to which Atcor ltd. failed to supply the gas to continental energy marketing ltd. as a result of which continental energy marketing ltd. Had to purchase gas from other companies at a higher price and continental energy marketing ltd. sue Atcor ltd. For damages due to breach of contract of delivering the gas.

Held: The court held that Atcor ltd. Had validly claimed under force majeure and was not able to supply the gas for a valid reason.

Letís take the crisis of COVID 19 as an example: 
Applicability of Force majeure in crisis of COVID 19
  • Effect on hospitality sector:
    The hospitality sector is one of the most hit sectors by the pandemic COVID 19 and it is estimated to incur a loss of Rs. 500 crores in the next half year. All the businessmen in this sector shall analyze their contract and determine whether the outbreak amounts to a force majeure event or not.

    This sector is suffering a huge loss because the government has placed a ban on all travel and tourism activities and hence there are no economic activities within this sector and therefore the sector suffering with huge losses.
     
  • Effect on real estate sector:
    The real estate sector is also heavily affected by COVID 19 pandemic. The COVID 19 pandemic led to the lockdown which resulted into the losses to all the contributors of this sector such as builders and lessees. The force majeure clauses are present in buildersí agreements while they are not present in lease agreements. Therefore, the lessee could take aid from section 56 of the Indian Contract Act, 1872.

    Case law: Raja Dhruv V. Raja Harmohinder Singh 1968 AIR 1024
    In this case the Supreme Court held that Section 56 of the Indian Contract Act does not apply to the lease cases where there is a complete transfer.
     
  • Effect on aviation sector:
    The COVID 19 situation has resulted into scenario where both the domestic and international flights are banned, as a result of which there is no generation of revenue and the government decided to sell the AIR India to the private sector as it was not able to maintain a decent break-even-point and it was hard to sustain the losses in the longer run and so the Airlines can invoke the force majeure clause to avoid the payment of salary to workers and the payment of taxes.
     
  • Effect on automobile sector 
    The principle of force majeure is applied widely in the automobile industry and the government has also issued guidelines for application of force majeure on disruption of the logistic of the automobile sector and hence, the automobile sector can be relieved from the performance of contractual obligation.

Order of Indian Government during Covid 19 (Pandemic) regarding Force Majeure
  1. An order issued by the Ministry of Finance on 19th February 2020 stating that on account of present circumstances Renewable Energy Agencies are directed to consider the delay caused in disruption of supply as Force Majeure and further directed agencies to provide extension to developers.
     
  2. Ministry of Finance had also issued an order in which it was stated that Covid 19 should be treated as natural calamity and in cased of disruption in supply chain Force Majeure can be invoked and normal procedure is to be followed.

When Frustration cannot be pleaded
  • Where the parties which are ancillary (Third party or supplier of Raw Material etc.) to the main party to the contract, fails to perform their obligations, then their failures do not excuse the main parties to the contract.
  • The difficulty in performing the contract does not render the contract frustrated e.g. a contract cannot be treated as frustrated because of stoppage in production activity caused by strike of workers in a factory for two to three days. 

Conclusion
At last we can conclude that the application of Doctrine of Frustration or Doctrine Of Force Majeure depends upon case to case, there is no standard formula fixed to determine whether an event can constitute impossibility to invite the application of force majeure or doctrine of frustration, but it depends upon the intention of the parties to the contract and the intention with which the force majeure clause in the contract is interpreted.

It is the duty of the courts to determine whether the claim made by non-performing party to excuse himself from contractual obligation is valid or not.

In the present scenario due to restrictions on movements and various policies by the government as a result of the outbreak of the pandemic Covid 19 due to which many companies and businessmen are not able to fulfil their contractual obligation towards their customers or clients.

The first thing in such a case which the company or businessmen need to check is to whether they are in a position to be excused from their contractual obligation or will they have to fulfil it.
It is clear so far that there is no straightjacket formula to determine as to where and to what extent the doctrine of frustration or doctrine of Force majeure will be applicable. It is the full discretion of the court to grant the benefits of the aforesaid doctrines in the manner in which it thinks fit.

It is certain that court never intends to frustrate any contract unless it is the last resort.

It should be kept in mind that only the events which are beyond human control such as Act of God, Legislative Changes, or any unforeseen event which could not have been prevented qualify as a force majeure event.

References:
  • https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.mondaq.com/india/litigation-contracts-and-force-majeure/915780/the-doctrine-of-frustration-and-force-majeure-covid-19&ved=2ahUKEwi6-OOFt-bsAhW1guYKHYLTCU8QFjAAegQIARAB&usg=AOvVaw2hWnHz7eDdmhitgoZ73LXb
  • https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.mondaq.com/india/litigation-contracts-and-force-majeure/944732/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis&ved=2ahUKEwi6-OOFt-bsAhW1guYKHYLTCU8QFjADegQIDBAB&usg=AOvVaw0FD3fndChVA8sbJM8A2r7o
  • https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.investopedia.com/terms/f/forcemajeure.asp&ved=2ahUKEwjTppS-t-bsAhWjyjgGHTAcD1IQFjAZegQIExAB&usg=AOvVaw1dT88soaVjicydVdQmHf6x
  • https://www.google.com/url?sa=t&source=web&rct=j&url=http://www.legalserviceindia.com/legal/article-2528-doctrine-of-frustration.html&ved=2ahUKEwiKsZDSt-bsAhV5zzgGHSUyB4oQFjAKegQIDBAB&usg=AOvVaw2mm804E-5bcQtfWp7_SbUe
  • https://www.google.com/url?sa=t&source=web&rct=j&url=http://shodhganga.inflibnet.ac.in/jspui/bitstream/10603/38507/12/12_chapter%25205.pdf&ved=2ahUKEwj_7fGRuObsAhWdyzgGHXE5AgsQFjAAegQIARAB&usg=AOvVaw1fyyu2ME_JPd4sfghKZIvv
  • https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.barandbench.com/amp/story/view-point%252Fthe-viewpoint-force-majeure-in-times-of-a-pandemic&ved=2ahUKEwjUprqeuObsAhX9xzgGHa0ZDhMQFjACegQIBRAB&usg=AOvVaw0P9Fdu4_XD23X5xxEmjn6p&cf=1
  • https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.livelaw.in/amp/know-the-law/force-majeure-act-of-god-doctrine-of-frustration-under-indian-contract-act-explainer-154452&ved=2ahUKEwi0wOusuObsAhXZyzgGHUDuC3AQFjAAegQIAhAB&usg=AOvVaw25kwr96_Xtu8p_0gZBBYzq&cf=1

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