Force Majeure vs. Frustration of a Contract: Lawyers Advice
Coronavirus or Covid-19 has been declared as a global Pandemic by the World Health Organisation (WHO) on March 11, 2020 which is considered to more severe than an epidemic due to its geographical outreach. It has resulted in complete lockdown on various countries across the globe including India, which has to led to complete stop on all economic activities other than those falling under the purview of essential services.
As an aftermath of this lockdown, various businesses and companies are not able to fulfill their obligations of the contracts they have entered into. Hence, in order to prevent any liability for non-performance or breach of contract, it is important for the businesses to review their Force Majeure Clause of their contracts. Force Majeure is used to define an unforeseen, uncontrollable and irresistible event or situation such as an act of god or in the current situation a pandemic, which renders the obligation under the contract impossible to be fulfilled. Therefore, a party claiming Force Majeure is suspended temporarily from performing the contract and during such period the party cannot be held liable for the breach of contractual obligations.
Force Majeure can be claimed in two ways i.e.
- Where the contract has a specific Force Majeure Clause, it has be to invoked.
- In cases where there is no Force Majeure Clause, the party can claim Frustration of Contract under Section 56 of the Indian Contract Act, 1872.
FORCE MAJEURE UNDER SECTION 32 OF THE INDIAN CONTRACT ACT, 1872
Section 32 of the Indian Contract Act, 1872 talks about Enforcement of Contract contingent on an event happening. Therefore, when a contract has a Force Majeure Clause and an event stipulated under the clause occurs, the party is entitled to claim Force Majeure and temporarily suspend the performance of the obligation.
FRUSTRATION OF CONTRACTS UNDER SECTION 56 OF THE INDIAN CONTRACT ACT, 1872
Section 56 of the Indian Contract Act 1872 talks about agreement to do impossible acts. Therefore, in cases where no Force Majeure clause is expressly included in the contract and the contract becomes impossible to perform due to some unforeseen event, the party can claim frustration of the contract and terminate it.
Difference between Force Majeure and Frustration of Contract
When can Force Majeure Clause be Invoked: Force Majeure can be invoked when the contract includes a specific force majeure clause, whereas, Frustration of contract can be claimed when no specific force majeure clause is included.
Circumstances under which Force Majeure Clause be Invoked: Force majeure is a contractual provisions that contemplates events that can render the contract impossible to perform and relieves the party from any obligation when such an event occurs, whereas, under Frustration of contract can be claimed under any event that destroys the subject matter or very purpose of the contract.
When does Force Majeure Clause comes into Force: Force Majeure comes into force when the event claimed falls under the scope of the Force Majeure clause and a notice is sent to the other party within 30 days of happening of such an event, whereas, Frustration of Contract operated as soon as the contract becomes impossible to be performed.
End Result: Force Majeure generally leads to the suspension of the obligations of the party to perform the contract, which resumes after the event subsists, however, in frustration of contract, the contract becomes void and by virtue of which all the contractual obligations of the parties cease to exist.
In Energy Watchdog vs Central Electricity Regulatory Civil Appeal Nos. 5399-5400 of 2016, the Hon’ble Supreme Court of India categorically laid down that when an event falls under the purview of the Force Majeure Clause, then no remedy under Frustration of Contracts can be claimed, however, in cases where they is no Force majeure Clause or the event does not fall under the ambit of the Force Majeure Clause, the party can claim remedy only under Frustration of Contract. Therefore, the parties cannot seek both remedies simultaneously, but have to choose the relevant one according to the circumstances and the provisions of the contract.
However, in the light of the current situation if a contract is rendered void as a result of a claim of Frustration of Contract by a party, it would be detrimental for both the parties as entering into a new contract would be difficult in this time of depressed economy. Therefore, it would be advisable for the parties to go for Force majeure which temporarily suspends the obligations or when no such clause is included in the contract, the parties can come forward and decide on a mutual suspension of the contract. This would enable the parties to resume the normal course of business once the lockdown is lifted, rather than wasting time, money and energy in redrafting the contracts.
Authored By: Adv. Anant Sharma & Ananya Jain