The Covid-19 pandemic and the related lockdowns have resulted in major disruptions to business and life as we know it. It raises serious questions of whether a party who's non-performance/performance of contractual obligations arising out of the lockdown can be held liable in contract or whether the defense of 'Force Majeure' is available? This article traces the development of this area of law to present day and examines the scope of Force Majeure particularly in an Indian and English law context.
Definition
The term Force Majeure as per Black's Law Dictionary is defined as 'any event or effect that can neither be anticipated nor controlled.' In another dictionary it is defined as 'a supervening event over which none of the performers have any control'.
Background
Although the concept of non-performance of an obligation due to incapacity or incompetency has existed for much longer, the idea of non-performance owing to unforeseen circumstances was not developed until trade and commerce really gained momentum in the Fifteenth and Sixteenth century however even then the positions really varied. In Greece, Force Majeure was very much accepted to plead nonperformance of contractual obligations. The Romans, however, were not ready to recognise this aspect in their business contract and were more inclined to follow the practice prevailing in the United Kingdom at that time, where strict compliance of contract and its obligations was observed. In the Latin part of the world, the prevailing practice was that once an agreement has been done it must be performed. The principle of pacta sunt servanda (contract must be honoured) was applied strictly.
Gradually however, a global trend emerged in the 19th century where it could be seen particularly in one-off cases that impossibility to perform due to change of circumstances was gradually being recognized by the Courts. The underlying idea was that if the circumstances surrounding the contract have changed between the date of contract and its performance then non-performance of obligations as a result of that change may be accepted. On a general perusal of legal history from those times, the picture that emerges is that the usual pleading in most cases was that a drastic change of circumstances leading to impossibility of performane was akin to the erosion of the substrata of the contract and therefore valid grounds for non-performance.
The major change in this area came from France. Interestingly, French businessmen often found it difficult to adhere to the maxim of pacta sunt servanda at times. The larger issues was that all contracts at that time (that were largely oral) stemmed from different circumstances and that required different principles to be applied to them. There was a need to come up with a uniform code that would apply to all parties at an equal footing. The 1804 Code Of Civil De Francias, that came into existence after the French Revolution, was the first piece of legislation that gave statutory recognition to Force Majeure in legal texts. Later on, the French Civil Code or popular known as the Napoleonic Code reinforced it and in an approximate translation, Article 1218 of the French Civil reads as follows 'Force Majeure in contractual matters exists where an event beyond the control of the debtor which could not have been reasonably foreseen at the time of contract was entered into and whose effects can not be avoided by appropriate measures, prevents the performance of its obligations by the debtor .'
Taylor v Caldwell
The case of Taylor v Caldwell (1861-1873) All ER Rep 24 is seminal in the common law world. It was the first time when the English courts loosened the old approach as per which a contract has to be performed regardless of the fact that it has become impossible to perform due to some unforeseen circumstances. Judge Blackburn (who gave the judgment in this case) recognized the impossibility to perform but at the same time did not reject the ratio underlying pacta sunt servanda altogether. His reasoning was on the lines that the existence of circumstances that would allow contractual obligations to be fulfilled was an implied condition in any contract. Post Taylor v Calkdwell, courts in common law jurisdictions started adopting a softer approach in adherence of the contract by the obligation debtor. It seems this case gradually paved the way for recognition of the concept of factual and legal impossibility. It also needs to be mentioned that judges have been keen to point out that impossbility of performance and impracticability are two different things.
A Litigator's View On Difference Between Frustration and Force Majeure
The current position of impossibility to perform under contract in Indian law is similar to English Law. Contractual performance in common law is usually only excused due to unexpected circumstances only if they fall within the relatively narrow Doctrine of Frustration. In Indian Law, Section 56 of the Indian Contract Act 1972 contains the this doctrine. Section 56 renders a contract void in a range of situations where the act itself becomes impossible or by reason of an event becomes impossible to perform.
The Supreme Court in Industrial Finance Corporation of India Ltd. v. Cannanore Spinning and Weaving Mills Ltd. (2002) 5 SCC 54 held that there are three conditions are required to trigger doctrine of frustration under section 56 of the Contract Act - firstly, there should be a subsisting contract; secondly, some part of the contract is still to be performed; and thirdly, after the contract is entered into it becomes impossible of performance.
An important thing to note about Doctrine of Frustration is that this doctrine applies even if no express provision is made to this effect in a contract; it applies by default. If parties however wish to include a wider set of circumstances (when failure to perform a contract will be excused and the consequences of failure) these clauses are called Force Majeure or hardship clauses.
Force Majeure clauses, on the other hand, are incorporated into a contract to excuse non-performance if the performance becomes impaired due to the occurrence of an act/event in the future (the specific Force Majeure event specified in the clause), the non-performance is then excused. Force Majeure clauses are 'forward-looking' and usually specify an act such as a war or an epidemic to be a contingency on the occurrence of which non-performance is excused. Force Majeure clauses are therefore incorporated to widen the scope of situations and introduce more scenarios where non-performance can be excused. Therefore, there is a minor but significant difference between Frustration and Force Majure clauses.
The main reason why parties incorporate express Force Majeure clauses is because the Doctrine of Frustration has a relatively narrow scope. It is premised on the idea that the act itself has become impossible to perform. Typically, a force majeure clause in a contract will set out a list of events that qualify as Force Majeure 'events', explain the consequences, and potentially set out future obligations and processing of payments and return of goods/services.
When it comes to drafting and pleading for excusing non-performance, the Supreme Court's decision in Energy Watchdog v Central Electricity Regulatory Commission (2017) 14 SCC 80 is crucial. It was held that pleading frustration as per Section 56 has no application when a Force Majeure clause is incorporated and the case is pleaded on those facts.
To summarize, if parties do not have an existing 'Force Majeure' clause in their contract that either lists or specifies that a pandemic/public health crisis is a Force Majeure event or if the clause is not inclusive and wide enough to cover acts/events that are outside the control of parties as a 'Force Majeure' event, then parties may have no option but to rely particularly on Section 56 of the Indian Contract Act.
The Court's View On Force Majeure
There have been numerious judgments on this issue in various jurisdictions but the discussion here is limited to the jurisprudence of the Courts of India. In India, there have been many cases on the issue of impossibility to discharge obligations where frustration and Force Majeure are surprisingly pleaded simultaneously altering the boundaries between Frustration, 'Force Majeure' as an event and 'Force Majeure' clauses. The judgments as a result have in many cases used the terms interchangably as well and there remains to be some uncertainty in that regard.
The Delhi High Court in 2017 in Pasithea Infrusture Ltd v Solar Energy Corporation of India 2017 SCC OnLine Del 12562 examined the scope of 'Force Majeure'. It was observed by the Court that the term 'Force Majeure' has a more extensive meaning than 'Act of God' or 'Vis Majeure'. The requirement for an event to be 'Force Majeure' are as follows: it must proceed from the cause not brought about by the defaulting parties default, the event/cause must be inevitable and unforseeable, and the cause must make execution of the contract wholly impossible.
Arbitration
An Arbitral Tribunal is very likely to follow the same jurisprudence as that of the Courts in this regard. A similar view was taken in an ad-hoc commercial arbitation in India in an recent arbitral award (May 2020) delivered by Mr Justice Kailash Gambhir (Former Judge, High Court of Delhi) where he presided as the sole arbitrator.
Where Frustration/Force Majeure May Not Be Pleaded
Onerous performance: Courts have also time and again observed that onerous performance due to unforseen turn of events is no excuse from performance of a contract. Consequently, parties that could have potentially discharged their obligations as per the contract during the Covid-19 lockdown are not excused from their obligations simply because the performance was onerous or more difficult than usual.
Economic burden: The Supreme Court of India in Energy Watchdog v Central Electricity Regulatory Commission considered whether an increase in coal prices (due to a change in Indonesian law) could be cited as a Force Majeure event by certain power-generating companies that were sourcing coal from Indonesia. The Supreme Court held that if the fundamental basis of the contract remains unchanged and no frustrating event occurs, except for a rise in coal prices, it could not be held that a mere increase in prices constituted a force majeure event and as such held that when a contract contains the force majeure clause which in construction / interpretation of the court in held attracted to the facts of the case, section 56 of the contract act has no application.
Temporary difficulty is not Force Majeure: The Supreme Court of India in the Satyabrata Ghosh versus Mugneeram Bangur & Co. [1954] SCR 310 observed (among many other principles) that temporary harship is not a ground for pleading impossibility to discharge contractual obligations.
Covid-19
Covid-19 has been declared to be a 'natural calamity' and as a 'Force Majeure' event by several official Government memorandums issued by the Ministry of Finance and other agencies and departments. These notifications direct relevant departments to invoke 'Force Majeure' clauses where they exist.
It is important to note that although the Government of India Ministry of Finance (office memorandum dated 20th February 2020) has considered the Covid-19 lockdown as a case of natural calamity (and observed that the the Force Majeure clause can be invoked) this defense may only be available to parties that can prove that the lockdown has effected the performance of the contract in its entirety, causation exists, duties of mitigation were observed, the substrata of the contract was affected by the lockdown and therefore the contract stands frustrated.
If an existing Force Majeure clause exists in the contract it must be seen whether the scope of the clause is inclusive i.e. it is on the lines that allows on an ejusdem generis interpretation anything out of the control of parties as a Force Majeure event.
Ultimately, given the factual complexity of each case, it remains for the interpretation of the Court/Arbitral Tribunal to consider whether non-performance may be excused and contract considered discharged.
K K Sharma is a Senior Advocate practising at the Supreme Court of India and the High Court of Delhi specialising in commercial litigation, mediation and abitration. Mr. Sharma is also a Door Tenant at The 36 Group set of barristers chambers in London, UK.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
