ASSOCIATED LAW ADVISERS

FORCE MAJEURE & FRUSTRATION IN THE TIMES OF COVID

(Lira Goswami & Anushka Arora, Associated Law Advisers)

The COVID 19 pandemic has wreaked havoc in the lives of people throughout the world, including in India. Due to restrictions
imposed by the Government of India since March 22, 2020, the entire country is under „lockdown‟ and a population of nearly 1.3
billion has been asked to stay at home. Offices and businesses are shut; factories are closed; supply chains are disrupted; all
transportation is at a standstill (barring specified essential commodities and services).

In these times of significant business disruption, would a purchaser be justified in not performing contractual obligations by
invoking the force majeure clause in the contract or in the absence of such a provision, by relying on the doctrine of
'frustration' which discharges a contract by operation of law when a supervening event makes it 'impossible' to perform?

Let's see what the Indian law says.

Section 56 of the Indian Contract Act, 1872 (“Contract Act”) contains the concept of automatic discharge of a contract if, after
execution of the contract, performance becomes „impossible‟ due to the occurrence of an event beyond the control of the parties. In
such a situation, the law steps in and excuses performance under section 56, which inter alia provides as follows:
“56. Agreement to do impossible act-
An agreement to do an act impossible in itself is void.
A contract to do an act which, after the contract is made, becomes impossible or, by reason of some event which the promisor
could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”

In Satyabrata Ghosh v Mugneeram (AIR 1954 SC 44), the Supreme Court held that 'impossibility' is not to be understood literally “but
it may be impracticable and useless from the point of view of the object and purpose which the parties had in view; and if any 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
found it impossible to do the act which he promised to do”.

Performance of a contract may also become impossible because of the destruction of subject-matter or of anything essential to the
performance of the contract or, in case of contract of service, by death or illness of the party concerned. A contract may also become
impossible of performance because a state of things which was the basis of the contract ceased to exist.

However, mere commercial difficulty has been held by the Supreme Court in the case of Alopi Prasad v Union of India (AIR 1960 SC
588) not to constitute 'frustration'.The Court held that:

“.... parties to an executory contract are often faced, in the course of carrying it out, with a turn of events which they did not at all
anticipate--a wholly abnormal rise or fall in prices, a sudden depreciation of currency, an unexpected obstacle to execution, or the like.
Yet this does not in itself affect the bargain they have made. If, on the other hand, a consideration of the terms of the contract, in the light
of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which
has now unexpectedly emerged, the contract ceases to bind at that point.....”

Similarly, in Sri Amuruvi Perumal Devasthanam v. K.R. SabapathiPillai & Anr. (AIR 1962 Mad 132), the Madras High Court held that
commercial impossibility, howsoever serious, is not frustration.

Hence, a purchaser cannot refuse to perform merely because of a sharp decrease in the contracted price, nor is the contract
frustrated if there is a currency fluctuation or a temporary interruption or stoppage in transportation. These are business risks and
the law does not excuse performance because commercially it has become onerous or difficult to perform. It is only when the very
foundation of the contract disappears due to a supervening event occurring after executing the contract, that performance is
excused.

There could also be a situation where the contract itself contains a provision discharging performance on the happening of certain
events outside the control of the parties. Such a provision is commonly referred to as a 'force majeure' clause. Most contracts contain
such a clause which excuses or delays performance if certain events (outside the control of the parties) occur e.g. natural calamities,
epidemics etc. Many contracts permit the parties to terminate if the event of force majeure continues indefinitely (or for a specified
period).

Recently, the Finance Ministry of the Government of India issued an inter-office memo dated April 19,2020 clarifying that the
expression 'natural calamities' occurring in the Force Majeure clause contained in para 9.7.7 of its Manual for Procurement of Goods,
2017 (which applies to revenue procurements by the Government), includes supply chain disruptions caused due to
the Covid pandemic.

However, in the recent case of Standard Retail Pvt. Ltd. vs. M/s. G. S. Global Corp & Ors. (Decided on April 8, 2020), the Bombay High
Court rejected a buyer's plea of force majeure based on the current Covid-19 lockdown since the Court found that : (i) the wording
of the 'force majeure' clause in the contract only excused seller's performance ; (ii) the fact that the buyers/importers would not be
able to perform their obligations vis a vis their own customers and/or would suffer damages was held to be irrelevant and could
not held against the seller; and (iii) the lockdown in India was for a limited period and hence cannot come to the rescue of the
importers so as to resile from their contractual obligations.

Hence, if a force majeure clause favours only one party, the other party cannot claim the benefit and would need to rely on the
provisions of the Contract Act that provide for automatic discharge of the contract by operation of law -- either by invoking the
doctrine of frustration under section 56 or resorting to section 32 of the Contract Act which provides that contingent contracts
become void if the event becomes impossible.

In short, the contract is supreme and in the absence of a robust force majeure clause, disappointed commercial expectations do not
excuse performance. It is only when the very foundation of the contract is shaken (a very high threshold which may be difficult to
prove), that by law, the contract stands discharged pursuant to the doctrine of frustration.

*****

Antriksh Bhawan (6th Floor), 22 Kasturba Gandhi Marg, New Delhi - 110 001, India
Tel.: 91-11-23755511 / 91-11-23351921/ 91-11-23352226
E-mail: lira@ala-india.com
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