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Frustration of Contract due to COVID-19: A Swing Too Far

Shobhit Singhal, Student, University of Petroleum & Energy Studies, Dehradun

Introduction

The world is facing an unprecedented health crisis in the form of the COVID-19 pandemic. As Governments around the world are busy tackling the pandemic, its impact on the commercial sector is indeed a matter of serious concern. Almost all businesses are facing severe hardships due to the necessary quarantining measures undertaken by the government and almost all the market players, across all the business sector, are sceptical about the execution of their contractual obligations, and this has (as rightly noted by Economist)[1] has resulted in a tidal wave of firms who have invoked their force majeure clause in order to avoid penalties for non-performance of the contract. However, it shall also be taken into consideration that many contracting parties do not have an explicit force majeure clause in their contract.

Thus the article tries to analyze, whether, in the absence of an explicit agreement, a party can be exempted to perform its contractual obligation due to COVID -19 pandemic, as per the statutory provision of frustration enshrined under section 56 of the contract act.


The Doctrine of Frustration

In a nutshell, the doctrine of Frustration is an exemption to perform a contractual obligation when it is found that the whole purpose of the contract is frustrated or destroyed by an intrusion of an unexpected event resulting in the change of circumstances which were so fundamental to that contract that the change strikes at the very root of it, and these events were beyond the contemplation of parties when they entered into the agreement.[2] Unlike the English laws of frustration, the Indian Contract Act lays down a statutory provision under section 56 of the Act which provides for an exhaustive code pertaining to automatic termination of a contract in cases of supervening events[3].


1. Impossibility to perform, the wider ambit

As per the doctrine of frustration, parties shall be excused to perform the contractual obligation due to subsequent impossibility. Here, it becomes significant to note that the ambit of impossibility is not limited to physical or literal impossibility but wide enough to include events which strike at the basis of the contract so as to destroy the particle purpose of it.[4] This was correctly observed Supreme Court in the landmark case of Satyabrata Ghose v Mugneeram Bagur[5], wherein the Hon’ble court noted that:

“The performance of the act may not be literally impossible but it may be impractical or useless from the point of view of the object and purpose which the parties had in view and If an untoward event or change of circumstances have totally upset the very foundation upon which the parties rested their bargain it can very well be said parties found it impossible to do an act which he promised to do” [6].

It is thus appropriate to conclude that law of frustration is a rule of equity and is based on the rudimentary principle of balancing the interest of the parties, and therefore when the risk could have been reasonably contemplated of the parties at the time of signing the contract[7], or an event could have been reasonably foreseen by due diligence, the contract cannot be allowed to be discharged by supervening impossibility.[8] Furthermore, if the parties though unaware, willingly undertook the risk in order to present a better deal they are precluded to exempt their performance due to a subsequent supervening event[9]. The fact that whether a party has agreed to undertake that risk or have reasonably foreseen the uncertainty is determined by courts primarily by the construction of contract[10].


2. Difficulty to perform, no excuse

The doctrine of frustration cannot be lightly invoked so as to dissolve a contract, and must strictly be applied in narrow limits, and therefore to successfully raise a plea of the frustration of a contract, the party shall prove that the changed circumstances ( which was beyond their contemplation) have destroyed the very root or intention with which the parties have entered into the contract. At this juncture, the performance though still may be physically possible but the intention under which the parties have agreed to perform has been destroyed or frustrated[11] The Supreme Court therefore rightly noted that:

“..a contract is only said to be frustrated when a party who, but for impossibility by the reason of circumstances beyond his control was in willing and was in a position to fulfil his obligation.”[12]

Therefore it can safely be assumed that the real test here is the destruction of intention and not the difficulty in performance.

Frustration amidst COVID-19


1. Frustration versus force majeure

While frustration is a common law principle based on equity, force majeure is based on the creation of a contract. In other words, force majeure is a situation wherein the contract itself contains provisions according to which it would stand discharged[13] and hence force majeure clause is an enhanced contingency clause which discharges a party from performance on the happening or certain expressly provided situation. Frustration is often referred to as a remedy of the last resort in the list of doctrine to excuse performance of a contract and does not require a prior agreement for its invocation. Further, the test to invoke frustration is that the intention to contract has been destroyed (that is however decided by the courts) due to supervening events,[14] whereas force majeure provides that the intention is deemed to be destroyed if a pre-specified (which was not contemplated by parties have) situation has arisen.


2. The frustration of contract due to COVID-19: the legal conundrum

In the aftermath of the pandemic, many suppliers would be unable to perform their contractual obligation, creating an adverse situation for the parties who do not have an explicit force majeure clause in their contract, so it becomes significant to analyses whether COVID-19 is a valid justification for the frustration of contract. Though there is no denying to the fact that COVID-19 has caused an unprecedented economic slowdown ever caused by a pandemic, creating numerous implication like import-export restriction resulting in a labour crisis and hence making the performance of the contract difficult. But it shall be illusionary to expect or assume (in the absence of an express provision) that any of these factors have totally destroyed the intention of parties to enter in a contract. Further, the Supreme Court has in numerous instances noted that abnormal rise in prices due or ban on trade routes shall not be valid grounds for frustration under section 56[15].

However with all the major supply chains at a halt, delay in performance is almost inevitable and Contract Act via virtue of its section 46 read with section 55[16] specifies that time is an essential element of a contract. Furthermore, in the commercial sector, it is not uncommon to see that delay in time often destroys the very purpose of the contract. Hence, taking that into consideration if the construction of the contract is such that it clarifies that any delay shall destroy the purpose of the contract, it shall not be wrong to invoke the plea of frustration.


Balancing the Interests: Conclusion

There is probably no denying to the fact that COVID-19 has possessed an unprecedented crisis in the commercial sector which in its true terms was beyond the contemplation of any party, which has undoubtedly made the performance of the contractual obligation difficult, but in absence of any predefined condition it shall again be arbitrary to frustrate the contract, for the simple reason as the lockdown measures (which are primarily the cause of difficulty in performance) are temporary and once lifted, all the difficulty possessed by the pandemic can be tackled, even in cases where time is crucial to intention the burden of proof is very heavy in the absence of a predefined condition, hence it shall not be incorrect to conclude that exemption of performance in absence of a force majeure clause is a step too forward.

[1] The Economist, “A force to be reckoned with: Chinese firms use obscure legal tactics to stem virus losses”, dated 22-2-2020 [2] Madhub chunder v Raj Coomar Das (1874) 14 BLR 7 [3] Boothalinga Agencies v V.T.C Poriswami Nadar , AIR 1969 SC 110 ,see also Daany Mott And Dickson Limited V James.B Fraser and Co (1994) AC 265 [4] DDA v Kenneth builders and developers (P) Ltd (2016) 13 SCC 561 [5] Satyabrata Ghose v Mugneeram Bagur 1954 AIR 44 [6] (1954) SCR 310. See also Suhsila Devi v Hari Singh AIR 1971 SC 1956,Energy Whatchdog v CERC 2017 (4) SCALE 580. [7] Ashraf MM Tacki v Dharamsay Trichumdas AIR 1947 Bom 98. [8] Man Singh v Khazan Singh AIR 1961 Raj 277. [9] Kesari Chand v Governor General in Council (1950) Nag Lj 323. [10] Goculdas Madhavji v Narsu Yenkuji (1889) 13 Bom 630. [11] Caril v Henry [1930] KB 740. [12] Ezekiel Abraham Gubray v Ranjusoroy Golabroy, AIR 1921 Cal 305 . [13] Durga devi v JP advani co ltd , 76 CWN 528. [14] Supra note 6 [15] Tsakiroglou Co Ltd v Noblee and thron GMl [1862] AC 93, supra note 6,7,8. [16] Indian Contract act of 1872, § 55 and 46.

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