Since the onset of COVID-19 outbreak in India and the entire nation going under lockdown, the Country has experienced an unprecedented catastrophic disruption in the economy with trade and commerce coming to a halt. Government of India too has recognized the outbreak as a natural calamity and has even declared that a Force Majeure Clause maybe invoked wherever considered appropriate.
Ever-since many commercial contracts have been rescinded or performance thereunder has been postponed. But in this scenario a common question that arises is what if the Contract does not have a “Force Majeure Clause”?
In cases where contracts/agreements do not contain “Force Majeure Clause”; the common law – ‘Doctrine of Frustration’ comes to the forefront which is also explicitly provided under Section 56 of the Indian Contracts Act 1872. Section 56 of the Indian Contract Act provides: “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”. Thus any contract, performance of which becomes impossible or unlawful subsequent to entering into contract, such contract would become void and the parties thereof would stand discharged from the liability to perform their respective obligations.
During more than 140 years of existence in the Indian statute, the doctrine has undergone multiple judicial interpretations, and has thereby brought clarity in its application. The test of applicability and enforcement of doctrine can broadly be categorized and explained as below:
- Impossibility may be in law or in fact: Section 56 makes no distinction between contracts which become impossible in law and those which become impossible in fact or in other terms, the word impossible is not used in literal or physical sense only. The performance of the contract need not be exactly or factually impossible but may be impracticable or useless in terms of the object of the Contract defeating the basic purpose and foundation of the contract. It can be owing to several reasons like changes in circumstances, destruction of the subject matter of contract, change in government policy or intervention by government or authority, the party to the contract becoming incapable of performance etc.
- Contracting party must not be in default: For the enforcement of doctrine of frustration, it is important that performance of the contract has become impossible due to reasons/events beyond control of the performing party. The provisions cannot be made applicable to save oneself from contractual liability if the performance of the contract becomes impossible due to the default of the contracting party itself.
- Commercial Impossibility and unprofitability not Frustration: Another criteria which has to be seen before the doctrine can be invoked is that it must be shown that the event which has produced the impossibility was an event which the parties to the contract did not foresee and could not with a reasonable diligence, have foreseen. Likewise, impossibility must be physical or legal impossibility and impossibility (as discussed in clause 1 above) and merely the circumstances or “commercial impossibility” i.e. extreme or unforeseen cost or difficulty or performance cannot be made an excuse to enforce Frustration.
- Other cases, where Section 56/Frustration could not be applied: To attract impossibility and frustration, it is paramount to establish that the same is for the reasons beyond the control of parties. In cases where frustration is self-induced or by choice of one of the party, Section cannot be invoked.
- Refusal by a third party also cannot be applied to invoke frustration: It has been decided in a plethora of cases that refusal by a third person/executant to execute the part of contract cannot make the performance of the agreementimpossible. Although the same shall depend on case to case basis and have to be analysed based upon the facts.
Also, as discussed above, the impossibility must be such not foreseen by the Parties, at the time of entering into contract. If the event could be reasonably foreseeable by either party as on the date of the Agreement, Frustration shall not apply.
Similarly, in cases where contracts contain the specific/express provision dealing with a specific eventuality, the provision of Section cannot be invoked.
While the Covid-19 outbreak is something for which the entire world was not prepared, the present situation is appropriately covered under the statutes by way of Section – 56 & the common law courts through the Doctrine of Frustration. Thus, the Corporate Contracts have adequate remedies either by way of Force Majeure or through Doctrine of Frustration and Section 56 to ensure that principles of equity and justice are not compromised at these times of uncertainty.
Should you have any further queries or need any discussion on the aforesaid subject please feel free to discuss:
Ms. Deepika Vijay Sawhney