Force majeure and frustration of a contract
Force majeure and frustration of a contract
The pandemic novel coronavirus (COVID-19) has a difficult repercussion on both human life and industry. COVID-19 has also impacted business operations and contracts to a greater extent. The status quo has adversely disrupted the supply chain resulting in delay, interruption, or cancel of contracts. In such a scenario, the contractual obligations are to be dealt with by keeping in mind the clause force majeure and/ or frustration of a contract. The present article tries to explain the term ‘force majeure’ and ‘frustration of a contract’ concerning the contract.
Force majeure vis-à-vis contract-
In simple terms, ‘force majeure’ describes those unforeseen circumstances that prevent someone from fulfilling a contract. Interestingly, the term ‘force majeure’ has neither been defined nor have been dealt with in the Indian law.
However, relevant to force majeure, provisions of section 32 of the Indian Contract Act, 1872, state that if the contract is dependent on the happening of an event, which event becomes impossible, then the contract becomes void.
From a contractual viewpoint, a force majeure clause in a contract provides temporary relief to a party in case of occurrence of the force majeure event. In general, events like an act of God, an act of government, war, earthquakes, fire, etc. are covered as the force majeure event in the contract. The contract usually includes the exhaustive list of events being defined as the force majeure event.
It is important to note that the force majeure clause will become applicable only when the occurrence of the force majeure event is beyond the control of the parties to the contract. Thus, the requirement of force majeure is-
- The occurrence of an event should be beyond the control of the parties,
- The cause of the event must be inevitable/ unforeseeable, and
- The cause of the event makes the execution of the contract wholly impossible.
Usually, on the force majeure event’s occurrence, the affected party is required to formally issue a notice to the other party’s intimating event occurrence and invocation of the force majeure clause. Based on the provisions of the contract, activation of force majeure clause will result in the following two possibility-
- The affected party will be relieved from performing their contractual obligation during the period the force majeure event continues.
- The parties may be permitted to terminate the contract, in case the force majeure event continues for a prolonged period.
In case the event doesn’t fall within the ambit of force majeure clause, the affected party may consider invoking the ‘frustration of contracts’ clause covered under section 56 of the Indian Contract Act. The provisions of ‘frustration of contracts’ is explained hereunder.
The frustration of contract vis-à-vis contract
The frustration of contract, also known as ‘doctrine of frustration’, is covered under section 56 of the Indian Contract Act, 1872. The frustration of contract signifies-
- A particular set of event/ circumstances which arise after the formation of a contract,
- The promiser cannot prevent the occurrence of such event, and
- The occurrence of event renders the performance of the contract reasonably impossible.
Thus, the frustration of contract covers the happening of an event beyond the control of parties, making the completion of performance of the contract impossible. Invocation of the frustration of contract renders the contract void, and accordingly, all the contractual obligations of the parties to the contract ceases to exist.
Differentiating the terms ‘Force majeure’ and ‘Frustration of contract’-
|Force majeure||Frustration of contract|
|The contract covers the exhaustive list of events that would attract the applicability of the force majeure clause. Thus the force majeure events are pre-anticipated at the time of execution of the contract.||Impossibility of the party to perform under a contract is linked with occurrence of an event, such event is not anticipated at the time of execution of the contract.|
|Applicability of the force majeure clause relieves the performing party from their contractual obligation during the period the force majeure event continues.||Applicability of frustration of contract renders the entire contract void.|
|If the contract covers the force majeure clause, the same is applied first upon the unforeseen event.||Only if the force majeure clause cannot be applied or the contract doesn’t cover the force majeure clause, the affecting party can depend upon the frustration of contract.|
‘Force majeure’ and ‘Frustration of contract’ in connection with COVID-19
In February 2020, the Ministry of Finance clarified that the disruption of the supply chain due to the outbreak of coronavirus in China or any other country should be considered as a case of natural calamity and, accordingly, the ‘force majeure clause’ may be invoked.
However, the clarification was in the early stage of the COVID-19 outbreak, and that to only in connection with the disruption of the supply chain. The terms of the contract will be the deciding factor for invocation of force majeure provision during COVID-19.
In case the invocation of force majeure provision is not possible, or the contract doesn’t cover the force majeure clause, the affected party may take shelter of the provisions of the doctrine of frustration.
Post by poonamgandhi
CA Poonam Gandhi is a Chartered Accountant and a Lawyer. With a wide practice experience and deep understanding of different laws and taxes, she has been an independent professional writer in the field of taxation, finance and laws.