Desperate times call for desperate measures and the lockdown due to Covid-19 is one such time. As companies fail to fulfil their contract obligations, the force majeure clause can be set in force. The Supreme Court has given judgments on the matter in the past and these can show the way forward. By Dr Abhishek Atrey

May 24, 2020, 01:11 pm

The doctrine of frustration or force majeure is a common law doctrine which also finds place in the Indian Contract Act, especially in Sections 32 and 56. This doctrine means that a person cannot be compelled to fulfil his obligation under a contract if the performance of it becomes impossible due to unforeseen circumstances and such a contract becomes void at the occurrence of such an event. The present lockdown due to Covid-19 is surely an unforeseen circumstance which will make it impossible for several people and companies to fulfil their obligations under contracts as the entire business of the country has come to a standstill.

And during this lockdown, force majeure is a most searched term in Google among the legal fraternity. It is a French term which means superior force and is commonly used in contracts of big companies. Ordinary people see this term being used in insurance policies or builder agreements. During the present epidemic, builders and insurance companies will sparingly invoke this clause against the public when the issue of paying for medical bills or delivery of real estate units in time or other obligations on their part come up.

The Latin maxim, lex non cogit ad impossibilia, also expressed as impotentia excusat legem, means that the law does not compel a man to do that which he cannot possibly perform. Thus, there ought always to be an invincible disability to perform the obligation and the same is akin to the Roman law maxim, nemo tenetur ad impossibile.

Doctrine of Frustration in Indian Contract Act

Sections 31-36, Chapter III of the Indian Contract Act, 1872, deal with contingent contracts. Section 31 defines a “contingent contract” as that which is based on the happening of any event attached to that contract. For example, A contracts to pay B Rs 10,000 if B’s house is burnt. This is a contingent contract. Section 32 deals with the impossibility of a contract. According to it, when the performance of the condition attached with the contract becomes impossible, the contract becomes void. For example, A contracts to pay B a sum of money when B marries C. C dies without being married to B. The contract becomes void on the death of C.

Section 56 of the Act deals with agreements to do an impossible act and says that an agreement to do an act impossible is in itself void. Also, if the act for which the contract was made becomes impossible or unlawful in future, such a contract becomes void. There can be various examples of this. For example:

(a) A agrees with B to discover a treasure by magic. The agreement is void.

(b) A and B contract to marry each other. Before the time fixed for it, A becomes mad. The contract becomes void.

(c) A contracts to take in cargo for B at a foreign port. A’s government afterwards declares war against the country where the port is situated. The contract becomes void.

The present lockdown is also one such unprecedented situation and makes the performance of contracts impossible and Section 56 can be invoked.

Supreme Court on Doctrine of frustration

• In 1916, in the case of FA Tomplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd. ((1916) 2 A.C. 397), Lord Lorebum stated:

“A court can and ought to examine the contract and the circumstances in which it was made, not of course to vary, but only to explain it, in order to see whether or not from the nature of it the parties must have made their bargain on the footing that a particular thing or a state of things would continue to exist. And if they must have done so, then a term to that effect would be implied; though it be not expressed in the contract.”

This theory would mean that the Court has an inherent jurisdiction to go behind the express words of the contract. The House of Lords in the appeal from that decision (reported in 1952 A.C. 166), discarded the theory. Thereafter, 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. (2) formulated it in the following words:

“Frustration occurs whenever the law recognises 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.”

In fact, it is not hardship or inconvenience or material loss which brings the principle of frustration into play. There must be a change in the significance of the obligation that the thing undertaken would, if performed, be different from that which it was contracted for.

• In independent India, the doctrine of frustration came for the first time before the Supreme Court in Ganga Saran vs Ram Charan Ram Gopal (AIR 1952 SC 9), decided on November 1, 1951, in which the Court held that:

“We agree with the reasoning of the Privy Council, and it seems to us that the considerations which prevailed with them must govern the construction of the agreement with which we are concerned in this case. The agreement does not seem to us to convey the meaning that the delivery of the goods was made contingent on their being supplied to the respondent firm by the Victoria Mills. We find it difficult to hold that the parties ever contemplated the possibility of the goods not being supplied at all. The words “prepared by the Mill” are only a description of the goods to be supplied, and the expressions “as soon as they are prepared” and “as soon as they are supplied to us by the said Mill” simply indicate the process of delivery. It should be remembered that what we have to construe is a commercial agreement entered into in a somewhat common form, and, to use the words of Lord Sumner in the case to which reference has been made, “there is nothing surprising in a merchant’s binding himself to procure certain goods at all events, it being a matter of price and of market expectations.” Since the true construction of an agreement must depend upon the import of the words used and not upon what the parties choose to say afterwards, it is unnecessary to refer to what the parties have said about it. In these circumstances, this is obviously not a case in which the doctrine of frustration of contract can be invoked.”

• Thereafter, in 1968 in Naihati Jute Mills Ltd. V. Khyaliram Jagannath (AIR 1968 SC 522), the Supreme Court held that:

“Section 56 of the Contract Act inter alia provides that a contract to do an act which, after the contract is made becomes impossible, or by reason of some event which the promiser could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. It also provides that where one person has promised to do something which he knew, or, with reasonable diligence might have known, and which the promisee did not know to be impossible or unlawful, such a promiser must make compensation to such promisee for any loss which such promisee sustains through the non-performance. As envisaged by s.56, impossibility of performance would be inferred by the courts from the nature of the contract and the surrounding circumstances in which it was made that the parties must have made their bargain upon the basis that a particular thing or state of things would continue to exist and because of the altered circumstances the bargain should no longer be held binding. The courts would also infer that the foundation of the contract had disappeared either by the destruction of the subject matter or by reason of such long interruption or delay that the performance would really in effect be that of a different contract for which the parties had not agreed. Impossibility of performance may also arise where without any default of either party the contractual obligation had become incapable of being performed because the circumstances in which performance was called for was radically different from that undertaken by the contract. But the common law rule of contract is that a man is bound to perform the obligation which he has undertaken and cannot claim to be excused by the mere fact that performance has subsequently become impossible. Courts in England have however evolved from time to time various theories to soften the harshness of the aforesaid rule and for that purpose have tried to formulate the true basis of the doctrine of discharge of contract when its performance is made impossible by intervening causes over which the parties to it had no control.”

• In Industrial Finance Corporation of India Ltd. v. Cannanore Spinning and Weaving Mills Ltd. (2002 (5) SCC 54), the Supreme Court on the issue of frustration of contract held that it applies only in the case of a genuinely unexpected and unanticipated event, which could not reasonably be said to have been contemplated and which makes it impossible to carry out the terms of the contract. The words of the contract have to be carefully considered. A right conferred by a contract of guarantee is an independent right recognised by the statute and cannot be diminished without a just cause. Nationalisation of a textile company did not result in discharge of contract of guarantee on account of frustration of contract.
• In DDA V. Kenneth Builders & Developers (P) Ltd. (2016 (13) SCC 561), the grievance of the DDA was that even though the project land was “residential”, yet the High Court held that if construction activity is not permitted by the Delhi Pollution Control Committee, the developer (Kenneth Builders) would be entitled to a refund of the entire amount deposited with the DDA pursuant to the acceptance of the developer’s bid in an auction, along with interest. The DDA proposed a public private partnership project for the development of an area of 14.3 hectares of prime land at Tehkhand in South Delhi for the construction of 750 premium residential flats in a self-contained community to be sold by private real estate development on a free sale basis. In addition, the developer would have to construct 3,500 resettlement houses for the economically weaker sections of society, with each house having a super area of 26 sq m. These resettlement houses and the developed common facilities relating thereto would be handed over to the DDA for allotment. The Supreme Court held that:

“33. The interpretation of Section 56 of the Contract Act came up for consideration in Satyabrata Ghose vs Mugneeram Bangur & Co. It was held by this Court that the word “impossible” used in Section 56 of the Contract Act has not been used in the sense of physical or literal impossibility. It ought to be interpreted as impracticable and useless from the point of view of the object and purpose that the parties had in view when they entered into the contract. This impracticability or uselessness could arise due to some intervening or supervening circumstance which the parties had not contemplated. However, if the intervening circumstance was contemplated by the parties, then the contract would stand despite the occurrence of such circumstance. In such an event, “there can be no case of frustration because the basis of the contract being to demand performance despite the happening of a particular event, it cannot disappear when that event happens.

“34. In so far as the present case is concerned, the DDA certainly did not contemplate a prohibition on construction activity on the project land which would fall within the Ridge or had morphological similarity to the Ridge. It is this circumstance that frustrated the performance of the contract in the sense of making it impracticable of performance.”

• In Energy Watchdog vs Central Electricity Regulatory Commission and Ors. (2017 (14) SCC 80), the Court summarised the principle of impossibility of contract and held that abnormal rise or fall in the prices of fuel or mere incidence of expense or delay or onerousness is not a force majeure event and not sufficient to invoke the doctrine of frustration. The term impossibility is different from the term “radically difficult”. In this matter, it was nowhere written in the contract that the coal was to be purchased only from Indonesia at a particular price. From the agreement it was clear that the price for supply of coal was to be borne by the person who would set up the power plant.

Lockdown and Fundamental Rights

In the present scenario, it is necessary to understand the law under which this lockdown is declared by the central and different state governments curtailing several fundamental rights which are guaranteed by Articles 19 and 21 of the Constitution and acknowledged by the Supreme Court in different judgments.  These rights include right to life and liberty, right to live a life with human dignity, right to privacy, right to freely travel in India and abroad, right to trade, right to run a business of one’s choice, right to expression and speech, right to education, right to peaceful gathering.

All these rights have been curtailed by the centre and state governments by invoking powers given in the Epidemic Diseases Act, 1897, Disaster Management Act, 2005, and Essential Services Maintenance Act, 1968. The Epidemic Diseases Act, 1897, has been recently amended by the Epidemic Diseases Ordinance 2020, dated April 22, 2020, which includes imprisonment and fine for attacking healthcare personnel.

The lockdown across India has been ordered by the Ministry of Home Affairs, Government of India, while invoking its powers under Section 10 of the Disaster Management Act, 2005, which deals with the powers and functions of the National Executive Committee headed by the cabinet secretary, which, in turn, works under the National Disaster Management Authority, headed by the prime minister.

Conclusion

It is, therefore, clear that both the central and state governments have enough powers to impose several restrictions during Covid-19 and different notifications, circulars and guidelines issued by the Union home ministry or the National Executive Committee under the Disaster Management Act are well within their powers to do so.

Apart from this, the centre also has powers under Article 360 of the Constitution to impose financial emergency and this can be declared if the lockdown continues. Today, India is facing the worst time of its economy. All industries, railways, airlines, buses, Metro, malls, restaurants, hotels, tours and travel and any kind of movement except for essential services are shut. The effect of one and a half months of lockdown will cost the Indian economy in years. Even when life re­sumes after the lockdown, certain industries and businesses are not going to open for 2-3 years, such as cinema halls, malls, tour and travel, etc.

The virtual world will take shape and people will begin a new era of work from home through video conferencing. E-filing has already started in courts and arguments are being done through video conferencing. It requires a little more push and the entire concept of traditional practice in courts may come to an end. However, one wonders if criminal trials through video conferencing will retain their sanctity. This is because the atmosphere of courts has a psychological impact on those coming to court, either as a witness or an accused. This cannot be got through video conferencing.

Anyway, there is no doubt that several industries and companies are going to suffer heavy losses and may not be able to perform their obligations. They will try to invoke the doctrine of frustration against the general public, but the law as settled by the Supreme Court is sufficient to take care of people.