In the post-COVID-19 world, a lot has been written about invoking the defence of force majeure to suspend or cancel the performance of a contract, the latest of which is the decision of the Delhi high court disallowing waiver of rent on the ground of force majeure due to lockdown, unless the contract so provides.
It is well understood that the standard for invocation of a force majeure event is very narrow and some basic principles that can be derived from caselaw are:
(a) if there is a force majeure clause in the contract, as noted in this case, the invocation/notice has to be in terms thereof,
(b) a force majeure defence is viewed strictly and commercial difficulty of performance is not sufficient cause to seek invocation or vary terms of the contract and seek different payment terms (Alopi Parshad and Energy Watchdog),
(c) performance cannot be excused because the contract has become more onerous (Naihati Jute Mills),
(d) if reliance is to be placed on a “change in law” provision in the contract, then that law should be Indian and not foreign (Energy Watchdog),
(e) impossibility of performance is not a literal impossibility but an event that shakes the very basis of an agreement making it useless in the context of the object to be achieved (Satyabrata Ghose).
A number of decisions including the latest in Nafed v. Alimenta have stated that when the contract contains a force majeure clause, it is to be reviewed on the basis of Section 32 and Section 56 has no applicability (Energy Watchdog, paragraph 34). This is because the contract itself is deemed to be based on the happening or non-happening of a contingency, that is, if a given event such as a pandemic or a flood takes place, the parties agree beforehand that their contract will stand suspended or cancelled. In such a circumstance, case law suggests that Section 56 has no application.
There is an interesting question though that comes up from the Energy Watchdog case.
If your contract has a force majeure clause but the clause is limited in scope, can you argue frustration in law by relying on Section 56? The Energy Watchdog decision and other decisions before it state that if there is an existing force majeure clause then that covers the scope of a party’s entitlement to claim force majeure and no reliance can be placed on frustration generally as is defined in Section 56. The case does not go into this issue in any amount of detail (Dr Abhishek Manu Singhvi, however, argued to the contrary in Energy Watchdog and has alluded to this tricky question here.)
However, if there is no force majeure clause in the contract, then a party is free to rely on the doctrine of frustration as embodied in Section 56. This raises an interesting question: Where, in law, has it been mandated that a party must be subjected to election? That is, to elect either to define the scope of its liability on the basis of a contractual provision or the extant law.
In fact, since the provision contains no such restrictive language, nor does it begin with the words “unless otherwise agreed by the parties” (which would suggest that parties are required to elect), it can be argued that no such election can be mandated and parties should be allowed to fall back on Section 56, if their case does not fall within their contractual sphere. This is not reading an implied term into a contract, but in fact a reliance of the language of Section 56 itself. It can be further emphasised that a statute gives upon parties the right to claim frustration which is inalienable by contract.
There is another way to explain the above argument. It can be argued that if parties have chosen to enter into a contract which is contingent upon an event, then this is governed by the principles of Section 32 and for that reason Section 56 which merely discusses the consequences of frustration becomes inapplicable since the consequences have already been pre-determined by contract and if the consequences have been so pre-determined, whether or not such a contract can be enforced will be decided by the terms of Section 32.
Section 32 itself captures impossibility in the latter part where it states, “if the event becomes impossible, such contracts become void.” However, even if a contract is contingent upon an event, why can the doctrine of frustration not apply to it independently as a result of Section 56?
Section 32 is a rule of law which states that contingent contracts cannot be enforced until an uncertain future event on which they are hinged occurs. If that event is to become impossible in the future then the contract becomes void. For example, two parties agree that one party will buy 100 blue shirts from the other party if India’s GDP grows at 5% in a given quarter. In that quarter India’s GDP grows at 0.5% and therefore the contract to buy the blue shirts becomes void.
Section 56 deals with a situation where (a) either there is an agreement to do an act which is itself impossible, (b) there is an agreement to do an act which becomes impossible or unlawful and resultantly void, (c) allows compensation to the promisee from the promisor who enters into an agreement knowing (or someone who should have known with reasonable diligence) that the act promised is impossible or unlawful while the promiser does not know this.
The situation in (b) described in relation to Section 56 overlaps with Section 32. It, therefore, follows that the situation in (c) should be justiciable even if the parties may have contractually agreed to certain terms. The court in the Nafed case however held to the contrary and reasoned that Section 32 was applicable when the stipulation was within the contract and consequences were to follow whereas Section 56 applied when there was no such stipulation but the agreed act became impossible later.
The contract in the Nafed case stated that if there was a government prohibition, the contract would stand cancelled and therefore Section 32 became applicable and not Section 56 which also provides for compensation payable by a promisor who knowingly promises to do an impossible act (Nafed at paragraphs 47-48).
The court found that since both parties knew of the likely government prohibition (in exporting ground nut), they had built in Clause 14 into their contract and it was a contingent contract (Nafed at paragraph 48). What however of a situation where one party would not have known of the contingency being impossible but the other would have and yet it was built into the contract? Why wouldn’t recourse or compensation be permissible then while resorting to Section 56? This aspect of the Nafed case’s ratio leaves some unanswered questions.
In Energy Watchdog, the Supreme Court held at paragraph 48 when asked to determine if the law of frustration under Section 56 would apply if the force majeure clause through the contract did not apply:
“Having once held that clause 12.4 applies as a result of which rise in the price of fuel cannot be regarded as a force majeure event contractually, it is difficult to appreciate a submission that in the alternative Section 56 will apply. As has been held in particular, in the Satyabrata Ghose case, when a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application. On this short ground, this alternative submission stands disposed of.”
The basis of this holding suggests that the court may have been minded that once parties decide to contractually limit what may or may not amount to force majeure and the given factual situation was covered in that limited term of the contract, they cannot take recourse to general provision of law. This, however, leads to the more fundamental question, can a statutory right be circumscribed by contract?
The Energy Watchdog case was premised on two findings (1) under the contract itself a change in the cost of fuel, or performance becoming onerous did not amount to force majeure events and (2) the court concluded based on previous case law that commercial impossibility did not amount to force majeure. For this reason, it may be correct to argue that the reliance on Section 56 for that case was not useful.
What if however, parties agreed to perform a contract even upon the occurrence of an unforeseen event which made performance unlawful/impossible? Not examining for a moment matters of public policy or agreements to do an unlawful act, it is irrelevant what parties may agree, since such a contract will, in fact, become frustrated.
In law, Section 56 declares contracts of this nature void. In other words, if the court comes to a finding that a particular event frustrated the performance of a contract (even if the language of the contract states to the contrary) the court cannot nevertheless enforce such a contract because of the embargo in Section 56. If that is the case, the necessary corollary is that Section 56 becomes applicable even if there is a contractual provision of force majeure, particularly when given facts do not fall within its limits.
In fact, it may be argued that the decision of Satyabrata Ghose itself suggests this interpretation in paragraph 16 where it states, “In the large majority of cases however the doctrine of frustration is applied not on the ground that the parties themselves agreed to an implied term which operated to release them from the performance of the contract. The relief is given by the court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement.
Here there is no question of finding out an implied term agreed to by the parties embodying a provision for discharge, because the parties did not think about the matter at all nor could possibly have any intention regarding it.” However the court did not go further to state what happens in circumstances where the clause has contemplated a different set of events but the court has found, in fact, the supervening event to have frustrated the contract and rendered it impossible.
The above analysis becomes relevant in the context of extremely narrow force majeure clauses that a number of parties may be currently facing.
However, the above arguments should not be read as a licence for a party to automatically fall back on Section 56 in the face of a narrow force majeure clause. Such a reliance may be possible only if a court comes to a finding that despite a clause to the contrary, the contract, in fact was frustrated due to the happening or non-happening of a given event and therefore the party is excused from performance.
This argument is not to suggest that a party can take a back door entry to get better commercial terms or claim higher rates for performance just on “some vague plea of equity” as the Supreme Court noted in Alopi Parshad but rather, may be applied only in those situations where the court itself makes a finding of fact that performance has become impossible.
In other cases, courts will hold parties to their bargain.
Shalaka Patil is a lawyer. Views expressed here are personal.