This article has been written by Sarthak Sood.
It has been published by Rachit Garg.
The current research is being conducted to understand the plethora of problems faced by the Indian legal system specifically in relation to the frustration of contracts when the COVID-19 pandemic that came in the year 2020. During the same period, there were several conflicts appeared and created a dilemma in the minds of the Indian judiciary. The present research aims to explain the doctrine of frustration of contract and then dives deeper into how the Indian Judicial system tackled the systematic application of the doctrine of frustration of contract to various commercial agreements during the Covid-19 pandemic. The current paper seeks to analyse the exceptions, aims, objectives and legislative intent behind the frustration of contract.
This research project focuses on a variety of aspects of frustration of contracts wherein there is a detailed explanation of the situation that was existing before the pandemic hit the Indian sub-continent and the changes that were brought about by the pandemic when the pandemic duration was at its peak. The implications the pandemic has on the current Indian legal system especially, in relation to the contracts that were freshly formed or the past contracts that were formed way before the pandemic and were not being followed through by one party that might be again due to several reasons like financial hardship being one of the most common reasons. The research paper argues from an Indian perspective in comparison with the UK perspective.
COVID-19 a big backlash to the legal system of the world had brought down a lot of conflicting cases in the face of the courts. The worldwide lockdown initiated by different governments made certain contracts that were to be performed by either of the parties rendered to be difficult or impossible to perform the contract. Thus came the doctrine of force majeure into play and the major question whether the contract is to be rendered to be impossible or to decide upon the liabilities of the parties based on the situation.
Sections 56 and 32 do not particularly define force majeure but it comes within the scope of the aforesaid sections. Along with force majeure, the doctrine of frustration is used to define whether the contract comes within the scope of force majeure or not. The frustration of contract is rendered to a contract if the performance of the contractual obligations is rendered to be ‘impossible’. But mere impossibility is not the only reason that a contract can be rendered as impossible. The constitutional courts of India have expressly stated that the frustration of a contract is an elliptical expression. The remedy under section 32 and 52 are only available when the due duties by both parties have been performed.
The chapters mentioned below focus on a variety of legal problems that came before Indian and UK courts and the future implications of the decisions given by the courts and a detailed analysis and a comprehensive comparison has been conducted for the same. Solutions along with the way forward will be given at the end of this research project.
Chapter I – Covid-19 as a force majure event
The declaration of the existence of the COVID-19 pandemic shook the government which further on led to the imposition of a nationwide lockdown in India. In such circumstances came a major doubt in the minds of the Indian legal system is whether to consider this event as a force majeure event, i.e., whether this event should be considered an unanticipated event or not.
A notification dated 19/2/2020 and titled “ OFFICE MEMORANDUM” was issued by the Ministry of Finance of India that declared COVID-19 pandemic as a force majeure event (the aforementioned memorandum was not binding), but the central question that comes is whether will consideration of the pandemic as a force majeure event render every existing or pre-existing contract as null and void. If the same is done many parties might take advantage of that fact and escape from liability even if there is an existing negligence or inability of the party to perform the obligations of the contract. So the major question that comes before us is what event can be declared as an “event that is beyond reasonable control”. To answer the scope of force majeure we can take of the following past case laws that have been decided by the constitutional courts of India:
- In the case of Alopi Parshad & Sons Ltd. v. Union of India the Hon’ble Supreme Court of India in its operative part of the judgement and while interpreting the ratio stated that even though there is an increase in the prices of ghee due to the heavy impact of the second world war, the parties often face these types of circumstances wherein they cannot predict the turn of events but still the same will not per se impact the bargain made by them. Herein the court even though there was an escalation in prices due to the war, still, did not excuse the army to be excused of the prices of ghee though the war was an unforeseeable event. Thus comparing the impact of COVID-19 and the world war we can conclude that even the pandemic is still not an excuse to bring into the scope of force majeure.
- Moreover, in the recent case of Energy Watchdog v. Central Electricity Regulatory Commission, the apex court stated that the rise in the price of coal due to a sudden change in the Indonesian law cannot come under the scope of a force majeure though an alternative remedy can be given under the performance of a contract.
In conclusion, there is no clarity or a conclusion that can be inferred on the basis of precedents that should the COVID-19 pandemic be brought under the scope of force majeure. The courts seem to take a decision on the factual matrix of the case presented before it. If the facts are in satisfaction of the court, then there is a possibility that the case might be brought under the scope of a force majeure event. The courts fail to bring out the aspect that whether this pandemic should be considered as a force majeure incident.
Chapter II- the frustration of contract post covid-19
The doctrine of Frustration of contracts established from the maxim ‘lex non cogit ad impossibilia’ is covered under S. 56 and 32 of the Indian Contract Act, 1872 ( herein referred to ICA,1872/ ICA), it occurs mainly due to the destruction of the subject matter of the contract which compels the contract to be held impossible to be performed thus the contract is rendered to be ‘frustrated’. Under S. 56 and 32 of ICA, the scope of an agreement that will be held to be void due to an impossibility of the contract to be performed has been envisaged. The word impossibility itself is a very wide term in law. An impossible event can be characterized as an unlawful agreement mentioned in the contract or an impossible event that might be by a reason of an event that neither the promisee or the promisor could not prevent. In India, the word impossibility has to be interpreted more in the ‘practical’ form rather than the ‘literal’ sense.
Before the onset of the COVID-19 pandemic, the courts of India were mainly faced with the challenge of interpreting the feasibility of a contract that can be frustrating and what type of contract and on what basis is the contract to be rendered impossible and henceforth declared to be frustrated. To understand the impact of COVID-19 on the frustration of contracts it is more important to envision the dilemma the courts faced post-COVID-19 period. To illustrate the same there are a variety of cases that display the basic conception of frustration of a contract and these cases enlighten us with the concept of the same. The following cases can be of help:
- One of the problems that came up before the Supreme Court relating to the sale of land and the main question that came before the court in the case of Satyabrata Ghose versus Mugneeram Bangur & Co & Anr was related to the unexpected events which affected the substance of the contract and will those events lead to the contract getting frustrated and hence lead to the discharge of the contract on the basis of the same. The Hon’ble Supreme Court in the judge ruling against the respondent and in favour of the appellant stated that the principle of Frustration of contract was not applicable here since the performance of the said contract has not been rendered as impossible and henceforth it was ruled that the contract fails to come within the purview of section 56 of the ICA 1872.
- The case of Ganga Saran versus Firm Ram Charan Ram Gopal decided by the Supreme Court of India said that the doctrine clearly falling under the purview of section 56 of ICA has a restriction attached alongside it. The parties cannot simply take the plea of a supervening event that could not have been reasonably foreseen by them. They should take precautions or safeguard themselves for any surprising or unexpected event.
- In the case of Naihati Jute Mills Ltd vs Hyaliram Jagnnath the Apex court ruled that a contract cannot be rendered to be frustrated on the grounds that there was an alter in the happening of the events or there is a turn of events because of some situation. Hence clarified the stance that a turn of events cannot be considered as a force majeure event.
- In Satyabrata Ghose vs Mugneeram Bangur & Co the Supreme court did the interpretation of the word ‘impossible’. The court held that for a performance to be held impossible it is not important that the performance should be literally or physically impossible.
- The High Court of Orissa in Sri Ananda Chandra Behera vs Chairman, Orissa State Electricity Board established that ‘immediate and direct cause’ of the happening of the situation will be taken into consideration for deciding whether there is an existence of an act of god or the act has been done by a man and further to render the contract as frustrated the immediate and direct cause of the act must be an act of god.
It can be seen from the aforementioned cases that there was a wide interpretation done for the frustration of contracts before the onset of the COVID-19 pandemic. But still, there is no precise interpretation done for the different types of issues that came before the court. The courts failed to give a precise understanding of acts of God, impossible events and foreseeability and under what all circumstances can these words be used and then a contract be rendered as frustrated. In conclusion, we can say that the scope of S. 56 r/w 32 has been decided on a case-to-case basis, hereby a restrictive interpretation has been given to the provisions of frustration of the contract, it is observed that the court has shied away from giving a wide interpretation but instead applied a stricter interpretation to the said provisions of the ICA in context of frustration of contract. Since frustration of contract can be attributed to an unforeseen event thereby from the aforesaid cases, we can conclude that there is no specific rule or principle to the applied throughout all arising causes of action falling within the purview of S. 56 ICA and S. 32 ICA but instead application differs on a case basis, in simpler words, there is no specific rule of interpretation but the application is mainly based upon different factual matrixes and causes of action.
Chapter III- Covid 19 and frustration of contracts
The COVID-19 pandemic had a heavy impact on the Indian economy and furthermore, the impact of the pandemic on the diverse nature of contracts that existed or were freshly introduced was heavy. Suppliers had difficulty performing the contracts because of the economic shutdown the Central government had imposed. Not only the suppliers the enforcement of rent deeds during the same time was a big issue that the courts were facing at that point of time. The doctrine of Force majeure played a major role in the performance of contracts throughout the Indian territory during the same time. The Delhi High court in Ramanand & Ors vs Dr Girish Soni & Anr laid down unequivocally that section 56 of the ICA 1872 will not apply to claim waiver, suspension or the claim of exemption of rent agreement the only claim that the aggrieved party can take is of financial difficulty due to the extreme changes in the circumstances.
A major issue during COVID-19 was bringing the pandemic under the ambit of Force Mjaure clause. In the case of National Agricultural Cooperative Marketing Federation of India vs Alimenta S.A a case that was decided by the Supreme Courts in 2020 during the COVID-19 pandemic, the Courts, in this case, introduced the concept of “self-induced frustration”, wherein the courts mentioned that the principle of frustration of contract will not be induced in contracts that are self-frustrated or where the party introduces frustration by election by one party. Here in the contract, the appellant had no option except selling of chicory to the respondents, there was a licence preventing the appellant to sell the product to anybody else except the respondent and was only allowed to use it as a raw material for his own factory.
Foreign legislations and courts also introduced a lot of new interpretations to the scope of the doctrine of frustration and the clause of force majeure. In the case of Bank of New York Mellon (International) v. Cine-UK Ltd, the courts rejected the tenant’s plea on the point of temporary frustration due to the impact of the COVID-19 pandemic. The court said that a 15-year-old contract cannot be rendered to be void just because of the closure brought down by the government for the COVID-19 pandemic. Furthermore, in Dwyer (UK Franchising) Ltd v. Fredbar Ltd, the franchisor was given the power to establish an event as a supervening event because it was impossible to take into consideration that the defendant had to self-isolate himself merely due to a reason that one member of the household was clinically extremely vulnerable. This gave the franchisor the discretion to render an event a supervening event, in this particular case the event was not declared supervening by him since the business could still be continued during lockdowns, but it can be inferred that there was a wide amount of power given to the franchisor in this case.
There should have been a wider interpretation done by the courts for the same terms and by the UK courts the power given to the franchisor was too wide which should have been culled and therefore looked after thereon. On a comparative analysis of British approach and the Indian Approach, we can see that the Indian Approach has been liberal and accommodating whereas the English approach has been stricter and restrictive because England tries to preserve the sanctity of a contract and in India apex court has adopted a more humanitarian approach.
There is a uniform approach that can be observed in the context of the Indian courts wherein the courts took a humanitarian and factual approach to decide the cases that came forward during the COVID-19 pandemic. The constitutional courts failed to define the scope of frustration of a contract and the events that can be brought under the scope of force majeure. During the course of the pandemic, the declaration of the COVID-19 pandemic as a force majeure was a major question that came before the Indian legal system, but the courts did not give a clear and precise interpretation of the nature of cases that could be frustrated on the basis of the principle of force majeure but instead, the principle was applied on a case-to-case basis.
It can be inferred that though there is no clear definition given by the Indian courts it is still a more viable option that was selected by the courts. The constitution of India has established a strong and independent judiciary under the scheme of checks and balances which follows the rule of law and separation of powers. Though giving a precise and clearer interpretation looks like a tempting option in the short term, it will be harmful to the concept of separation of powers in the long term. Since a force majeure event itself carries extreme ambiguity within itself and giving it a precise definition might have backfired on the Indian legal system. It might result in restricting the discretionary powers of the judiciary in the near future, if a new exceptional case comes in front of the courts, due to the precedent and the precise interpretation a wrong decision might be given out by the courts which might affect the legal system in the near future.
When we see the interpretation done by the constitutional courts of the UK it can be felt that a stricter interpretation has been carried out by them but as mentioned in the aforementioned case there has been a lot of power given to the plaintiffs in that case thereof we can seek to draw an inference that it seems like a big fault of the court on giving the franchisor the power to decide whether to render an event as a supervening event is something that is the court’s duty and something that should not have been given to the franchisor thus a big fault from the side of the UK courts.
- Indian Contract Act, 1872
- A Tale of Two Things of Frustration and Force Majeure Clauses in the Time of Covid-19, 2020 SCC OnLine Blog Exp 1
- Applicability of Force Majeure and Frustration to Lease Deeds: A Critical Analysis in Light of Covid-19, 2020 SCC OnLine Blog OpEd 26
- Intertwining of Force Majeure, Frustration and Contingency, 2020 SCC OnLine Blog OpEd 104
- Force Majeure- The Sudden Uprising 2020 SCC OnLine Blog OpEd 77
- Applicability of Force Majeure and Frustration to Lease Deeds: A Critical Analysis in Light of Covid-19 2020 SCC OnLine Blog OpEd 26
Reported case laws
- Alopi Parshad & Sons Ltd. v. Union of India, 1960 (2) SCR 793
- Energy Watchdog v. Central Electricity Regulatory Commission, (2017) 14 SCC 80
- Satyendra Bose v. Mugneeram Bangur & Co & Anr ,AIR 1954 SC 44
- Ganga Saran v. Firm Ram Charan Ram Gopal, AIR 1952 SC 9
- Naihati Jute Mills Ltd v. Hyaliram Jagnnath, 1968 (1) SCR 821
- Satyabrata Ghose v. Mugneeram Bangur & Co, 1954 SCR 310
- Sri Ananda Chandra Behera v. Chairman, Orissa State Electricity Board, 1998 85 CLT 79
- Ramanand & Ors v. Dr Girish Soni & Anr 2020 SCC OnLine Del 635
- National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A 2020 SCC OnLine SC 381
- Bank of New York Mellon (International v. Cine-UK Ltd  EWHC 1013
- Dwyer (UK Franchising) Ltd v. Fredbar Ltd  EWHC 1218
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