Interpretation of Force Majeure, Doctrine of Frustration and Clauses whether Express or Implied

By Siddharth Batra, Advocate-On-Record, Supreme Court of India   The force majeure clause must be ringing in the minds of lot of persons in these testing times of Covid-19. This pandemic declared by the WHO will lead to frustration of a lot of contracts but whether it has a universal application is the question.   The cardinal judgement on ‘force majeure’ in English law McCardie J. in Lebeaupin v Crispin [1920] 2 KB 714 held that the scope of the term will depend on the context in which it is used:   ‘A force majeure clause should be construed in each case with a close attention to the words which precede or follow it, and with a due regard to the nature and general terms of the contract. The e?ect of the clause may vary with each instrument.’   The expression “force majeure” is not a mere French version of the Latin expression “vis major”. It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in “force majeure”.   It operates as an express risk allocation mechanism between parties in situations that are beyond the parties' control. Examples include the outbreak of war, strikes and so-called Acts of God. Judges have agreed that strikes, breakdown of machinery, which, though normally were not included in “vis major” are included in “force majeure”. Where reference is made to “force majeure”, the intention is to save the performing party from the consequences of anything over which he has no control.   “Force majeure” is governed by the Indian Contract Act, 1872. Insofar as it is relatable to an express or implied clause in a contract, it is governed by Chapter III of the Contract Act dealing with the contingent contracts, and more particularly, Section 32 thereof. Insofar as a force majeure event occurs dehors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract Act. Sections 32 talks about enforcement of contracts contingent on an event happening and 56 sets out contracts to do an impossible act & contract to do act afterwards becoming impossible   Section 56 is based on the maxim “les non cogit ad impossibilia” which means that the law will not compel a man to do what he cannot possibly perform.   Illustration A, a resident of India entered into a contract with B, a resident of China for the export of 550 heavy Trucks. Initially, 100 Trucks were delivered, later war was announced between India and China and the Government of India suspended all the business transactions with China. Now after this contract has become void.   Doctrine of frustration is applicable only in cases of subsequent impossibility and where the contract was impossible to perform from the very beginning, where this doctrine has no application, moreover this doctrine will also not be applicable in cases where there was a mere delay in performance and contract can still be performed.    

The English Law

Common Law Rule of Contract 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.   The Theories Propounded by the Courts in England in order to soften the harshness of the aforesaid rule.   First Theory Theory of Implied Term In F.A. Tamplin Steamship Co. Ltd. v. Anglo Mexican Petroleum Products Co. Ltd. [(1916) 2 AC 397] where Lord Loreburn stated: “It is in my opinion the true principle, for no court has an absolving power, but it can infer from the nature of the contract and the surrounding circumstances that a condition which was not expressed was a foundation on which the parties contracted … Were the altered conditions such that, had they thought of them, they would have taken their chance of them, or such that as sensible men they would have said, “if that happens, of course, it is all over between us'.”   Second Theory Theory of Disappearance Lord Watson said in Dahl v. Nelson, Donkin & Co. [(1881) 6 AC 38] in the following words: “The meaning of the contract must be taken to be, not what the parties did intend (for they had neither thought nor intention regarding it), but that which the parties, as fair and sensible men, would presumably have agreed upon if, having such possibility in view, they had made express provision as to their several rights and liabilities in the event of its occurrence.”   Lord Atkin propounded the theory of disappearance of the foundation of contract stating that he could see no reason why if certain circumstances, which the court would find, must have been contemplated by the parties as being of the essence of the contract and the continuance of which must have been deemed to be essential to the performance of the contract, the court cannot say that when these circumstances cease to exist, the contract ceases to operate.   Third Theory Theory of Power of Court Denning, L.J. in British Movietones Ltd. v. London and District Cinemas Ltd. [(1951) 1 KB 190] expounded this theory as follows: “Even if the contract is absolute in its term, nevertheless, if it is not absolute in intent, it will not be held absolute in effect. The day is done when we can excuse an unforeseen injustice by saying to the sufferer, ‘It is your own folly. You ought not to have passed that form of words. You ought to have put in a clause to protect yourself.’ We no longer credit a party with the foresight of a prophet or his lawyers with the draftsmanship of a Chalmers.” This theory would mean that the Court has inherent jurisdiction to go behind the express words of the contract and attribute to the Court the absolving power, a power consistently held not to be inherent in it.     On the third theory, House of Lords said otherwise – The House of Lords in the appeal from that decision discarded the theory. In more recent times 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. [(1956) AC 166] formulated it in the following words:

“Frustration occurs whenever the law reorgnises 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.”

 

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

  None of the theories above were fully accepted and the court construed the contracts coming before them applying one or the other of them as appearing to be more rational than the other, the conclusions arrived at were the same.   In an instructive English judgment, namely, Tsakiroglou & Co. Ltd. v. Noblee Thorl Gmbh [Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH, 1962 AC 93 : (1961) 2 WLR 633 : (1961) 2 All ER 179 (HL)] , despite the closure of the Suez Canal, and despite the fact that the customary route for shipping the goods was only through the Suez Canal, it was held that the contract of sale of groundnuts in that case was not frustrated, even though it would have to be performed by an alternative mode of performance which was much more expensive, namely, that the ship would now have to go around the Cape of Good Hope, which is three times the distance from Hamburg to Port Sudan. The freight for such journey was also double. Despite this, the House of Lords held that even though the contract had become more onerous to perform, it was not fundamentally altered.   In Sea Angel case [Edwinton Commercial Corpn. v. Tsavliris Russ (Worldwide Salvage & Towage) Ltd. (The Sea Angel), 2007 EWCA Civ 547 : (2007) 2 Lloyd's Rep 517 (CA)] , the modern approach to frustration is well put, and the same reads as under: “111. In my judgment, the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties' knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties' reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances. Since the subject-matter of the doctrine of frustration is contract, and contracts are about the allocation of risk, and since the allocation and assumption of risk is not simply a matter of express or implied provision but may also depend on less easily defined matters such as “the contemplation of the parties”, the application of the doctrine can often be a difficult one. In such circumstances, the test of “radically different” is important: it tells us that the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.”  

Coming Back to the Law in India

The second paragraph of Section 56 has been adverted to in Satyabrata Ghose v. Mugneeram Bangur & Co. [1954 SCR 310: AIR 1954 SC 44], and it was stated that this is exhaustive of the law as it stands in India. What was held was that “the word “impossible” has not been used in the section in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties. If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do.” In Alopi Parshad & Sons Ltd. v. Union of India [(1960) 2 SCR 793: AIR 1960 SC 588] , the Supreme Court, after setting out Section 56 of the Contract Act, held that it is only when a consideration of the terms of the contract, in the light of the circumstances existing when it was made, showed that they never agreed to be bound in a fundamentally different situation which had unexpectedly emerged, that the contract ceases to bind. It was further held that the performance of a contract is never discharged merely because it may become onerous to one of the parties.   Similarly, in Naihati Jute Mills Ltd. v. Khyaliram Jagannath [ (1968) 1 SCR 821 : AIR 1968 SC 522] , the Supreme Court went into the English law on frustration in some detail, and then cited the celebrated judgment of Satyabrata Ghose v. Mugneeram Bangur & Co. [1954 SCR 310 : AIR 1954 SC 44] and concluded that a contract is not frustrated merely because the circumstances in which it was made are altered. The courts have 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.   In Mary v. State of Kerala, (2014) 14 SCC 272, the Supreme Court held that the doctrine of frustration excludes ordinarily further performance where the contract is silent as to the position of the parties in the event of performance becoming literally impossible. However, in our opinion, a statutory contract in which party takes absolute responsibility cannot escape liability whatever may be the reason. In such a situation, events will not discharge the party from the consequence of non-performance of a contractual obligation. Further, in a case in which the consequences of non-performance of contract is provided in the statutory contract itself, the parties shall be bound by that and cannot take shelter behind Section 56 of the Contract Act, 1872.   Conclusion – Force Majeure or Doctrine of Frustration cannot be applied as a general principle, the application will depend upon the facts and circumstances of each case. The present ensuing situation of the pandemic covid-19 declared by the WHO will fall between the two phrases the devil is, as they say, in the detail and the third theory in English Law. There will be a selective application. It will be wrong to have any blanket application, such an interpretation will lead to repudiation and claim for damages. Further this doctrine will also not be applicable to cases where there was a mere delay in performance and contract can still be performed or due to hardship or inconvenience or material loss.