Law of Contracts

SEMESTER: 2
SUBJECT: CONTRACTS
A PROJECT ON:
Force Majeure vs Frustration and its Implication in Commercial
Contracts Considering COVID-19 and Beyond

SUBMITTED TO: Prof. Anu Mishra

SUBMITTED BY: SARTHAK JAIN

Roll No.: - A038

Batch: B.A. L.L.B.(Hons.)
Division A

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Table of Contents
Abstract......................................................................................................................................3

Introduction: Construction of Force Majeure clause in commercial contracts..........................4

Research Methodology...............................................................................................................5

Indian Jurisprudence on Force Majeure and Doctrine of Frustration........................................7

UNDROIT Principles and construction of Force Majeure clause...........................................12

COVID 19 and non-performance in Commercial Contracts....................................................14

Findings and Suggestions.........................................................................................................16

Conclusion................................................................................................................................19

References................................................................................................................................20

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Abstract

The ioutbreak iof ideadly ivirus iCOVID-19 ioriginating ifrom iChina iin ia ismall itown iof
iWuhan iengulfed ithe icountries iacross ithe iglobe. iDespite igovernment's iprofound
isteps ithe iglobal imarkets iand ibusinesses iare ifacing iits iwrath ipost iits ioutbreak. iThis
ihas ilead islew iof iconfrontations iand iconcerns iamongst iIndian iInc. iacross iall ithe
iboards.

An iimportant iquestion ifor iIndian iInc, ilawyers iand ischolars iwhich ineeds
idetermination iupfront iis itheir iobligations ito icounter iparties ias ito iperformance iof
irespective icontracts. iThe ifocus iin ithis iarticle iis ito ireview ion ijudicial iinterpretation
ion idoctrine iof ifrustration iand iconstruing icurrent istatus iquo ias ito ithe isuspension iof
icommitments, idelays iin itransactions iand iother irights iand iobligations iin ifinancing
iand iother icommercial icontracts.1 iIt iis iimperative ito ilook iat ithe icurrent iepidemic
isituation ithrough ia ilegal iprism iand iits ilegal iimplications ion icommercial iprivate
icontracts.

1
Non-Performance of contract due to force majeure events, acts of god, earthquake, volcano, etc. Intention
herein is to look beyond conventional obligations such as the outbreak of unprecedented pandemics like
COVID-19

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Introduction: Construction of Force Majeure clause in commercial

contracts
The itraditional iapproach iaccepted iin iboth icivil ilaw iand icommon ilaw icountries ito icontracts
i has ibeen ithe ibinding icharacter iof ithe icontract, i‘pacta isunt iservanda’. iA icommercial icontract
i would ibe inothing ibut iallocation iof iforeseen iand iunknown irisks iamongst ithe iparties. iThus, iif
i the irisk iis iknown iat ithe itime iof icontract iparties iwould iprovide ifor isuch irisk iex-ante iin ithe
i contracts. iIf iit iis iotherwise, iit imeans iparties ihave iimpliedly iunder ithe icontract itaken ithose
i risks. iHowever, iproblem iarises iin icontracts iwherein, ipost isigning iof icontract iunforeseeable
i situations ior ievents iarises iduring ithe ilife iof isuch icontract. i i

For ithe ipurpose iof isimplicity iherein icontract iis idivided iinto itwo iparts; ithe iperformance ipart
i and inon-performance isection. iThe iperformance isection iconstitutes imajor ipart iof ithe icontract
i wherein irights iand iobligations iamongst ithe iparties iincluding irepresentations iand iwarranties
i along iwith iterms iof iperformance iare idetermined iin idetail iupfront. iWhereas ithe inon-
i performance isection iis igenerally icarved iout iin ia icontract ias; iexception iclauses i(such ias inon-
i fulfilment iof icondition iprecedent ior ilong istop idate) ior iMaterial iAdverse iChange i(MAC) ior
i through iubiquitous iforce imajeure iclause.2 iThough ithese above mentioned exceptional
clauses are mostly used in PE/VC funding contracts, however similar exceptional clauses
with transaction specific commercial terms are used in other commercial contracts such as
sales of goods and etc. The very nature and purpose of these clauses is to excuse from the
performance of the contract idue ito ihappening iof isuch iexceptional ievent. iThe iidea iis ithat ithe
i non-performer iis iexcused ifrom iperformance iand icounterparty ishall inot iclaim iany idamages
i or ispecific iperformance iof ithe icontract. iThe iprimary ifocus iherein iis ion iforce imajeure iclauses
i and itheir iexpress iand iimplied iinterpretation iby icourts. iPart iII iof ithis ipaper ifocuses ion
i judicial ipronouncements iand iinterpretation iof iforce imajeure iclause iby icourts iin iIndia. iPart
i III iemphasizes ion iconstruction iof iforce imajeure iclause iunder iUNDROIT iprinciples iwhile
i drawing iparallels ibetween ithe iIndian ijurisprudence ion iforce imajeure. iThe iremaining ipart
i concludes iwith igeneral iapplication iof iforce imajeure iand ifrustration idoctrine iin icommercial
i contracts.

2
These standard clauses are taken for understanding the context and structure of contracts.

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Research Methodology

Research Objectives
 To differentiate between Force Majeure Clause and Doctrine of Frustration
 To understand what is the implication of Force Majeure Clause and Doctrine of
Frustration on Commercial Contracts
 To study the impact of Covid-19 on Commercial Contracts

Research Questions
 What is force Majeure Clause?
 What is doctrine of Frustration?
 What is the implication of Force Majeure Clause and Doctrine of Frustration on
Commercial Contracts?
 What is the impact of Covid-19 on Commercial Contracts?

Review of Literature
 Aadarsh iLunia iin ihis iresearch ipaper, i“Doctrine iof iFrustration iunder iIndian
iLaw i& iEnglish iLaw”, icritically ianalyses ithe ipresent isituation iof iFrustration
iof iContract iin ithe ilight iof ithe iarticles iand icases iunder ithe iDoctrine iof
iFrustration. iThe iresearch ipaper ideals iwith ispecific igrounds ifor iFrustration iof
iContract, iFrustration iof iContract idue ito iIntervention, icases iwhich iaren’t
icovered iunder ithe iDoctrine iof iFrustration.
 Renjith iMathew iin ihis iarticle, i“Force-Majeure iunder iContract iLaw iin ithe
iContext iof iCovid-19 iPandemic”, idiscusses iabout iForce-majeure iand
iFrustration, iare icontract iprinciples, iwhich iare ivery isignificant iin ithe ipresent
icontext iof iCovid-19 ipandemic. iThe iarticle iis ia istudy ion ithe isaid icontract
iprinciples iwith ivarious ijudicial ipronouncements ion ithe iapplicability iof iforce-

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majeure iand ifrustration.

 Ram iMohan iMP iand iPromode iMurugavelu iin itheir iarticle, i“The idoctrine iof
ifrustration iunder isection i56 iof ithe iIndian iContract iAct”, idiscusses iabout
ithe iperformance iof iobligations iunder ia icontract imay ibe ihindered iby
iunexpected isupervening ievents, ileading ito icontractual iuncertainties. iThe
idoctrine iof ifrustration ipaves ithe iway ifor ia ijust iconsequence iof isuch ian
iunfortunate ievent, iwhich ihas ihappened iwithout iany ifault iof ithe icontracting
iparties. iThe idoctrine ifills ithe ivoid iin ia icontract iregarding isupervening ievents,
ibased ion iprinciples iof ifairness iand iequity. iConsidering ithe ilarge iimplications
ion ithe iobligatory iand ibinding inature iof ia ivalid icontract, iit ibecomes
iimportant ito ianalyse ithe ifactors ithat iguide ithe icourts ito idetermine iits
iapplication. iUnlike icommon ilaw, ithe iIndian iContract ilaw iexplicitly
iincorporates ithe idoctrine iof ifrustration iunder isection i56 iof ithe iContract iAct.
iHowever, ithe ievolution iof ithis idoctrine iin iIndia ihas ibeen igreatly iinfluenced
iby iEnglish ilaw.
 Ambica iBatas iand iMeet iShah iin itheir iresearch ipaper, i“The iEffect iof
iOutbreak iof iCOVID-19 ion iForce iMajeure iClause iin iCommercial
iContracts: iAn iIndian iPerspective”, ianalyses ithe iapplicability iof i‘Force
imajeure’ iclause iincorporated iin icommercial icontracts iduring ithe icurrent
ipandemic ioutbreak iof iCOVID-19. iIt ifurther ievaluates ithe icontracts iwhich ido
inot ihave isuch iclause iand ithe iconsequences ion ithe ibusiness itransactions
ithereof. iLastly, ithe iextent iof ilimitation iperiod iof ia icontract iis ialso icritically
ianalyzed.

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Indian Jurisprudence on Force Majeure and Doctrine of Frustration

Force imajeure iis inot idefined iunder iIndian idomestic ilegislations.3 iThe iearly itheory ion
i ‘doctrine iof ifrustration’ iwas iadopted iand iapplied iby iHon’ble iSupreme iCourt iof iIndia iin
i Naihati iJute iMills icase.4 iThe ijudgement idiscussed icommon ilaw itheories ipropounded iby
i English icourts. iThe ifirst itheory idiscussed iby icourt iwas iof iimplied iterm,5 "para 7…..A court
can and ought to examine the contract and the circumstances in which it was made, not of
course to vary, but only to explain it, in order to see whether or not from the nature of it the
parties must have made their bargain on the footing that a particular or a state of things
would continue to exist. And if they must have done so, then a term to that effect would be
implied; though it be not expressed in the contract." This itheory iwas irejected iout irightly ion
i the ibasis iof iargument ithat iif iparties ito icontract icould iforesee irisks, ithey iwould ihave iprovided
i for iit iin icontract ior ielse, ithey iare iwilling ito iassume ithat iimplied irisk.6 iThe icourts ipurpose iis
i not ito iestablish ior iabsolve iequal ifooting iex-post iin icontracts iamongst icompetent iparties.

Another itheory ibased ion i'just iand ireasonable iin ithe inew isituation' iin contracts was given by
Denning L.J, "Even if the contract is absolute in its term, nevertheless, if it is not absolute
in intent, it will not be held absolute in effect. The day is done when we can excuse an
unforeseen injustice by saying to the sufferer. It is your own folly. You ought not to have
passed that form of words. You ought to have put in a clause to protect yourself." 7
This
theory might hold firm grounds based on public policy conferring to equity and justice. This
theory is very similar to above stated theory of implied term, and hence has its own

3
For the purpose’s inclusion of force majeure in domestic legislation is not endorsed. It is argued that force
majeure is privately negotiated clause and would materially differ from case to case basis; therefore it is best to
be left parties to the contract.
4
The Naihati Jute Mills Ltd.Vs. Khyaliram Jagannath AIR 1968 SC 522, [1968]1SC R821
5
F.A. Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd. [1916] 2 A.C. 397
6
Russkoe v. John Strik & Sons Ltd. I.L.R. [1922] 10 214; in ‘Anson's Law of Contract’, 22nd ed. p. 466
7
Movietones Ltd. v. London and District Cinemas Ltd. [1951] 1 K.B. 190

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shortcomings. Such a theory would mean inherent power of courts to go beyond express
words of the privately agreed contract among ithe iparties.8

The iwidely iaccepted idoctrine iof ifrustration itheory iwas igiven iby iLord iRadcliffe iin, iDavis
i Contractors iv. iFareham iU.D.C. i[1956] iA.C. i166 iformulated iit iin ifollowing iwords:-
"Frustration occurs whenever the law recognises that without default of either party a
contractual obligation has become incapable of being performed because the
circumstances in which performance is called for would render it a thing radically different
from that which was undertaken by the contract." It iis iimportant ito inote ihere ithat ithe ithrust
i of ithe idoctrine iis ion i'radically idifferent' iwhich iis idiscussed isubsequently iherein.9

In iIndia iclosest igoverning isection ito ithis iregime iof iprivate ilaw icould ibe ifound iunder isection
i 32 iand i56 iof ithe iIndian iContract iAct, i1872 i(hereinafter i'the iAct'). iSection 31 of the Act
defines ‘contingent contract’- “…is a contract to do or not to do something, if some, event,
collateral to such contract, does or does not happen”. Section 32 of the Act deals with
enforcement of contingent icontract iwhich istipulates, ia icontingent icontract icannot ibe
i enforced iby ilaw, iuntil isuch iuncertain ifuture ievent ihas ihappened. iWhile ibare ireading iof
i section i56 iof iIndian iContract iAct igoverns iimpossible iagreements. iThat iis ian iagreement ito
i do ian iact iimpossible iin iitself iis ivoid.

In iNaihati iJute iMills iLtd i(Supra), iwherein ithe iAppellant icontented ithat idue ito isubsequent
i imposition iof iban ion iimport ilicense ifor iimporting iJute ifrom iPakistan ihas ifrustrated ithe
i contract iand ihence ivoid. iThe iSupreme iCourt irefrained ifrom iapplying iEnglish idoctrine iof
i frustration ito ithe isaid ifacts iof ithe icase. iSuch ia irestriction iis ialso ienshrined ias ia iprecedent iby
i Supreme iCourt iwherein iit iis inot ipermissible iby icourts ito itravel ioutside ithe iprovisions iof
i statutory isection iand iimport ithe iprinciples iof iEnglish ilaw ide ihors.10 iThe icourt iiterated iits
i own ijudgement, iGanga iSaran iv. iRam iCharan,11which ilaid iprinciple ito iinvoke isection i32 iand
i 56 iof ithe iAct iwhen iany iparty iclaims ia icontract to be frustrated. The court further went on to
explain that promise may be expressed or implied. On happening of the event as a matter of
construction of terms of contract the obligation would stand discharged on happening of
such event. The contract would dissolve under its own terms, and such cases would be

8
Such a stance was also refuted by Supreme Court in Satyabrata Ghose v. Mungneeram Bangur, AIR 1954
SC 44.
9
See n(20) Infra
10
Satyabrata Ghose v. Mugneeram Bangur & Co, AIR 1954 SC 44
11
[1952] S.C.R. 36; See para 12-13

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outside the purview of section 56. That is there should be an express iterm iin icontract isuch ias
i a iforce imajeure iclause istipulated iin icontract ito itrigger isection i32 iof ithe iAct.12 iFor ithe
i contracts iwhich ido inot ihave iany iof isuch iexceptional iclauses ior iforce imajeure iclauses ithe
i excuse ifrom inon-performance iof isuch icontracts icould ibe isought iunder isection i56 iof ithe iAct
i on igrounds iof iimpossibility. iWhere isubsequent irelief iof iimpossibility iis igranted ithere iis ino
i need ito iinvestigate iimplied iterms iof ithe icontract isince iparties icould inot ihave ithink iof isuch
i circumstance ior isituation iat itime iof ithe icontract.13

It iwould inot ibe iwrong iin isaying ithat ithe iSupreme iCourt iin iits ijudgement ihas inarrowed idown
i the iscope iof idoctrine iof ifrustration iof icontact. iThe icourt idismissed ithe idefence ion ithe
i grounds ithat neither the contract contained any express nor implied term to dismiss the
contract on non- approval of import license, additionally there was an intention contrary to
it. Further neither the contract was iimpossible ito iperform isince ithe iban iwas ito iboost iIndian
i jute imarket, ithe ipossibility iof iwhich iappellant iwas iwell iaware iof iduring ientering iinto
i contract iand icould ihave isourced iits isupply ifrom iIndian imarket.14

Thus, ithe icourt imade iit ievidently iclear ia inon-performance iof ithe icontract iis ionly iexcused
i under itwo icircumstances. iFirstly, iunder isection i32 iof ithe iAct iwherein iparties iexpressly ior
i impliedly ion ihappening iof isuch ian ievent iexcuses ithemselves iin ithe iterms iof icontract iitself.
i Secondly iwhere i the i contract i becomes i impossible i or i unlawful i to i perform i under i section
i 56 i of i the i Act, ihere icourt ineed inot ilook iexpress ior iimplied iterms iunder ithe icontract ii.e. icourts
i can ilook ibeyond iintention iof iparties iand iterms, i'de ihors' ithe icontract. iFor icases iwhere iany
i event imakes ia icontract iimpossible ior iillegal ito iperform iwould ibe iautomatically icovered
i under isection i56 iof ithe iAct. iTherefore, iit ibecomes imore iimperative ifor ithe iparties ito icontract
i to iconstrue inon-performance isection iof icontract icovering iforeseeable iand iunforeseeable irisks
i to iterminate ithe icontract iunder isection i32. iThe icontracts ishould iprovide ifor iunforeseen ievent
i which iis ibeyond ithe icontrol iof iparties iin isuch ia imanner iwhich ikeeps iboth ithe iparties ion
i equal ifooting iand ido inot irender iinjustice ion ieither ipart. iAlso, iwhere parties could see
forthcoming risks but are beyond their control obligations should be determined in
‘exception clause’. For example; government approvals, licenses, change in law and etc.

For the purpose of unforeseen events beyond the control of parties such as fire, earthquake,

12
This brings back the debate on powers of court 'de hors' the contract. See n (16) - infra
13
Naihati Jute Mills Ltd. Vs. Khyaliram Jagannath, n(8), para 14
14
Id. paras 16-18

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floods or even an outbreak of pandemic such as corona virus (COVID-19) the list is
exhaustive by ithe ivery inature iof ithese ievents.

The icourts iin iIndia ihave itaken idifferent ilegal iapproach iby iinvoking isection i32 iand i56 iof ithe
i Act ito idoctrine iof ifrustration iand iforce imajeure. iYet iIndian ijurisprudence ihas ibeen
i following iline iof icommon ilaw iEnglish icourts, ifundamentally ithe irationale iand iguiding
i principles ihave ibeen isimilar. iAn iinteresting iapproach icould ibe itaken ifrom ithe icase iof
i Energy iWatch idog.15Though ithe iissue iin ihand iin ithe icase iwas inot ito irescind ithe icontract ibut
i the ione iwherein iappellant idemanded icompensatory iprice i(renegotiation) iof ia iPPA i(Power
i Purchase iAgreement) ifrom icentral icommission ion igrounds iof imaterial ichange iin iprice iof
i imported icoal ifrom iIndonesia. iThe iPPA icontained ian ielaborative iforce imajeure iclause; ithe
i construction iof ithe iclause iwas itaken iin ilight iof isection i32 iof ithe iAct. iFor ithe ipurpose iof
i argument iherein, iif ia iclause iis iconstrued ito ithe ione iunder isection i32 ithan isection i56 iof ithe
i Act idoes inot iapply.16

The imaterial ipart iof iforce imajeure iclause iunder iPPA i“41…Force Majeure' means any event
or circumstance or combination of events and circumstances including those stated below
that wholly or partly prevents or unavoidably delays an Affected Party in the performance
of its obligations under this Agreement, but only if and to the extent that such events or
circumstances are not within the reasonable control, directly or indirectly, of the Affected
Party and could not have been avoided if the Affected Party had taken reasonable care or
complied with Prudent Utility..”

The icourt idid inot iconsider ithe iforce imajeure iclause iunder iPPA ias ione ito ibe iactivated, idespite
i accepting ithat ithe idefinition iof iforce imajeure iclause iis iinclusive iand inot iexclusive.17 iThe
i court iinterpreted ithe iword i‘hindered’ iwhich ioccurred iat imany iplaces iin ithe iclause ithat imere
i rise iin iprice iof iimported icoal icannot ibe ihindrance ior istop iparties ifrom iperforming itheir ipart
i of iobligation. iFurther ithe icourt iinterpreted ithe irise iin iprice iof iimported icoal icovered iin ithe
i expressly istated inon iforce imajeure ievents iin ithe iPPA. iThe imere ifact ithat iperformance iof
i contract ihas ibecome ierroneous ion ione iparty idoes inot ichange ithe imaterial iobject iof ithe
i contract.

15
Energy Watchdog Vs. Central Electricity Regulatory Commission & Ors. (2017)14 SCC 80
16
Id. para 45; also see Satyabrata Ghose v. Mugneeram Bangur & Co, AIR 1954 SC 44
17
Id. para 42

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The icourt ias ifollowing iits iearlier iprecedents idid inot ichange iits istance. iHowever, ian
i interesting iinsight iwas igiven iby ithe icourt iin iits ijudgement iby iway iof iobiter idicta.18 iIn iwhich
i it icited iPeter iDixon i& iSons iLtd iv. iHenderson, iCraig i& iCo. iLtd.19 iIn ithe isaid icase iBritish
i ships iwere inot iavailable iat ibeginning iof iFirst iWorld iWar, ialthough ithere was an option to
avail foreign ships, but it could have meant such ships liable to capture by enemy, destroyed
through mines or sub-marines. The rationale adopted by the court from deviation from
contract was that the sellers therein ‘hindered’ or ‘prevented’ from performing their
obligation not merely on price. But they have shown much more than that, the whole trade
was dislocated by the reason of difficulty.

The iSupreme iCourt ialso icited iSea iAngel icase, i2013 i(1) iLloyds iLaw iReport i56920 iwherein
i the idoctrine iof ifrustration iwas iput ito itest. iA imultifaceted iapproach iwas igiven ito ithe idoctrine,
i wherein i‘radically idifferent’ itest iwas ilaid.21 iThe iEnglish icourt iargued ithat imultiple ifactors
i such ias iterms iof icontract, iexpectations, imatrix ior icontext, iassumptions iand icontemplations
i as ito irisks iat ithe itime iof icontract. iThe inature iof isupervening ievent, iparties ireasonable iand
i objective icalculations ias ito ipossibilities iof ifuture iperformance iunder inew icircumstances.
i Contracts iare iallocation iand iassumption iof irisks, iand iit iis inot imatter iof iimplied ior iexpress
i provision ibut iless ieasily idefined ithe icontemplation iof iparties. iThus, iradically idifferent itest
i would ihave ito iprovide ifor ibreak iin iidentity ibetween icontract ias iprovided ifor iand
i contemplated iand iits iperformance iin inew icircumstances. iMere iincidence iof iexpense ior idelay
i or iburdensome iis iinsufficient ito iinvoke ifrustration.

Thus, iparty iclaiming inon-performance iunder iforce imajeure ihas ito ishow ithat ithe isupervening
i event ihas iradically ialtered iwhat iparties iinitially iconsented ifor. iThat iis ieither isubstance iof ithe
i contract i(purpose) iis idefeated ior ihas irendered iit ithe ione ito iwhich iarties idid inot iconsented
i for. iIt iis iargued ithose iforce imajeure iclauses ior iother iexception iclauses isuch ias iMAC iin
i private ifinancing ideals ior iin iother icommercial icontracts iwould istrictly idepend ion ilanguage
i of ithe iclauses. iThat iis iinclusiveness ior iexclusiveness iof ilanguage iand iother icontemplations
i and iobjective iof iparties iat itime iof ientering iinto icontract isuch ias itime iis iof iessence iclause ior
i objective ito iprocure iany igoods iand imany iother icontracts iwhere iprimary iobjective iis ito iearn
i profit iwould ibe icrucial iand iat ithe ihelm iof ijudicial iinterpretation.

18
Id. para 43
19
Peter Dixon & Sons Ltd v. Henderson, Craig & Co. Ltd. 1919 (2) KB 778.
20
Id para 39
21
See n(9); Refer to the main text on definition of frustration of contract.

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UNDROIT Principles and construction of Force Majeure clause

It ihas ibeen iargued ithat ithe iexcuse ifor inon-performance iare iusually icarved iout ias iforce
i majeure iclause iin icommercial icontracts iwherein iparties imutually iagree ito isituations iwere
i rights iand iobligations icreated iunder ithe icontract iwould ibe inon-binding. iThat iis ia iforce
i majeure ievent iwould idischarge ithe idefaulting iparty ifrom iits iobligations ito iperform.
i However, iintuitively iowing ito iits iprivate icharacter iforce imajeure ido inot ifind iplace iin iUN
i Convention ion iContracts ifor ithe iInternational iSales iof iGoods i(CSIG) inor iit iis ispecifically
i defined iin idomestic ilegislations iof ithe icountries. iThe iwide iuse iand ipractice iof ithis idoctrine iin
i commercial icontracts iinternationally inecessitates iassigning ilegal idefinition ito iit. iThe iclosest
i reference ito iforce imajeure ifor ithe ipurpose iof iincorporation iof iforce imajeure iclause iin
i commercial icontracts iand iits interpretation is found in UNDROIT Principles of
International Commercial Contracts 2016 ‘herein after, the principles’. Article 7 of the
principles enshrined under Chapter 7 defines Non- Performance in general as failure by a
party to perform any of its obligations under contract including defective or late
performance.22 The principles in its Article 7.1.7 (force majeure) stipulates "Non-
performance by a party is excused if that party proves that the non- performance was due
to an impediment beyond its control and that it could not reasonably be expected to have
taken the impediment into account at the time of the conclusion of the contract or to have
avoided or overcome it or its consequences."23

The iArticles ifurther irequires iwhere iimpediment iis itemporary ithe iexcuse ifor inon-
performance ishall ihave ieffect ifor isuch ireasonable iperiod iand ithe iparty ifailing ito iperform
i must igive ia inotice ito iother iparty iof iimpediment iand ieffect ion iability ito iperform. iSuch ian

22
UNDROIT Principles of International Commercial Contracts 2016, Article 7.1.1
23
Id. Article 7.1.1 para 1.

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i inclusive idefinition iof iforce imajeure icould ibe iincorporated iin icontracts ialong iwith
i procedure iof inotices ito ithe icounterparty ion ihappening iof isuch ievent. i In icase iof inon-receipt
i of isuch inotice ithe ifailing iparty ishould ibe iliable ifor idamages, imoreover iwhile inothing ishall
i prevent ithe iright iof ithe iparty ito iterminate, iwithhold, ior irequest iinterest ion imoney idue.24 iThe
i word iright iof ithe iparty iwould imean iany iof ithe iparty ihave iright ito iterminate ithe icontract,
i withhold ior irequest iinterest ion imoney idue. iIn ithe icomments ito ithe iArticle iit iis ipurported ithat
i the idefinition iis igrounded ion ithe idoctrine iof ifrustration iand iimpossibility iof iperformance
i under icommon ilaw iand idoctrine iof iforce imajeure ideveloped iby icivil ilaw icountries.

It iis iimportant ito imark ia icaveat iin ithe iterm i‘impediment’ ishall inot ibe iconfused iwith
i ‘hardship’, iwhich ifinds ia iseparate iplace iunder ithe iprinciples, iArticle i6.2.2 i“There is
hardship where the occurrence of events fundamentally alters the equilibrium of the
contract either because the cost of a party’s performance has increased or because the
value of the performance a party receives has diminished, and (a) the events occur or
become known to the disadvantaged party after the conclusion of the contract; (b) the
events could not reasonably have been taken into account by the disadvantaged party at the
time of the conclusion of the contract; (c) the events are beyond the control of the
disadvantaged party; and (d) the risk of the events was not assumed by the disadvantaged
party”.

The ihardship iclause iis ivery isubjective, iparties icould iincorporate istandard iclause ior ielaborate
i specific iclause ias ito iwhat iwould iamount ito ihardship. iThere iis ihardship iwhen ifundamental
i alteration iin iequilibrium iof icontract. iThat iis iincrease iin icost iof iperformance ifor ione iparty ior
i decrease iin ivalue iof iperformance ireceived iby iother. iThere icould ibe ifactual icases iwhich igive
i rise ito iboth ihardship iand iforce imajeure. iHowever iguiding iprinciple iin isuch icases icould ibe
i where ihardship iis iinvoked ias ifirst iinstance iwould icall ifor ire-negotiation iwhile ion iother ihand
i if iforce imajeure iis iinvoked ithe iprimary imotive ibeing iexcuse ifrom inon-performance.25 iThe
i parties imay inegotiate ithe iterms iof icontract iin ihardship ieither ithemselves ior ion idirection iby
i court ias ito iperformance. iHowever, icourts icould iterminate ithe iagreement ias iunder iforce
i majeure iclause ior distribute the losses amongst parties (restoring equilibrium).26

Though these principles are non-binding and soft law in nature, however they play a

24
Id. Article 7.1.1 paras 2-4;
25
Id. ARTICLE 6.2.1
26
Id. Article 6.2.3 para 7

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Law of Contracts

guiding framework for legislators and judges to have judicial uniformity and follow
internationally accepted ibest ipractices iby imember inations.27 iIndia iis ia isignatory ito ithe
i principles itherefore ian iattempt iis imade ito idraw iparallels iwith iinternational ibest ipractices. iIn
i Naihati iJute iMills iLtd iand ienergy iwatch idog icases ithe icourt iinterpreted ithe ifacts iand
i circumstances iof ithe icase ias ione iof ihardship iand itherefore idid inot iexcuse ithe inon-
performance iin ieither iof ithe icases. iIn ithe iformer icase ithe icourt iensured ithe iperformance
i while iin ithe ilatter icase ithe icase iwas idirected ifor ire-negotiation.

COVID 19 and non-performance in Commercial Contracts

The ifrustration iis iinvoked ion iequity iprinciples, iwherein ithe iparty iclaiming iexcuse ifrom
i performance imust inot ihave iany irole ior icause isuch ifrustration ito icontract.28 iThat iis icause iof
i frustration imust ibe iexogenous i(beyond ithe icontrol iof iparties). iThis iis iof iimportance ibecause
i there imight ibe isituations ior icircumstances iendogenous i(by iparties’ iown idefault ior iunder
i control). iFor ithe ipurposes iof iprivate ifunding itransactions, iwhere ithe ipandemic ihas ilead
i triggering iof iexception iclause isuch ias inon-fulfilment iof icondition iprecedent ior ifailure ito
i close iwithin ispecific itime iperiod. iThe iparty iclaiming isuch idefence ihas imore ichances ito
i excuse ior iwalk iaway ifrom ideal ior itransaction. iThe ilock idowns iand iclosure iof ibusiness
i operations ihave ialtered ithe ieconomic isituation idrastically iwith idrain ion isupply-demand iand
i value iof ibusinesses. iSuch irisks iare ihedged ithrough igeneral iMAC iclauses; idrop iin ivalue iof
i assets, idecrease iin irevenue, iclosure iof ioperations iand ietc. iA irecent ifall iof iSycamore ipartners
i over iL iBrands iVictoria isecrets deal over triggering of MAC cause is at the centre of contest.
Though the MAC clause in transaction document stipulated that pandemic would not be
cause MAC to trigger. But the deal fell apart and parties went for settlement without
litigation.29

There is a strong argument for not interpreting MAC clause as one of frustration. Firstly,
the frustration doctrine calls for unforeseeable event whereas the MAC clauses does not
27
For argument on uniformity of law in cross border transactions See, Roy Goode, Herbert Kronke et.al.,
'Transnational Commercial Law', 2007 OUP
28
Equity does not relive person through his or her own fault. See, Mark P. Gergen, A Defense of Judicial
Reconsnuction of Contracts, 71 IND. LJ. 45, 71
29
Lisa Fickenscher, Drawer slams shut on Victoria’s Secret acquisition, NY Post, May 4, 2020.<
https://nypost.com/2020/05/04/deal-to-buy-victorias-secret-falls-through/> Last accessed May 22, 2020

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Law of Contracts

provide for such condition. Secondly the secondary purpose of contract (to earn future
revenue and profit) is defeated while the primary purpose to acquire the target might still
persist.30 Therefore the standard rule being exogenous risk should be on the acquirer while
the endogenous risks on the target. Thus, it does not make commercial sense to equate
MAC with frustration doctrine or force majeure clause.

The iforce imajeure isituation i(outbreak iof iCOVID i-19) ihas ialso igiven irise ito iother iexogenous
i risks isuch ias iglobal icapital imeltdown iand ivarious isystemic irisks. iIf iradically idifferent
i approach iis iinvoked ifor idetermining ifrustration iof icontracts iwhile ithe itargets ibearing iall ithe
i burden iof iexogenous irisks. iIt iis iargued ithat icourts iwould ihardly itake isuch ian iapproach isince
i contemplation iof iparties iare inot imaterially ialtered irather icould isuch ia isituation ibe iaddressed
i as ia ihardship. iWhere iequilibrium iof icontract ihas ichanged iin isuch ia imanner ithat ivalue iof
i performance ireceived iby ione iparty idecreases i(not idestroyed icompletely) iand isuch iforce
i majeure ior iMAC icould ibe iused ias ia ibargaining ichip ito irestore iequilibrium.

In icontrast icommercial iagreements irelated ito isupply ichain isuch ias ienergy, iinfrastructure iand
i others. iIt iwould ibe imaterial ion ithe inon-performing iparty ito ishow ito icourts ithat ioutbreak iof
i COVID-19 ihas imaterially ialtered ithe isituation igoverning ithe icontract. iThe ionus iis ion iparty
i claiming isuch idefence ito ishow ithat ithe ipandemic ihas ieither ifrustrated ithe icontract i(as iunder
i section i32 iof ithe iAct) ior iits iperformance ihas ibecome iimpossible i(as iunder iSection i56 iof ithe
i Act). iThe isubstance iof ithe icontract iwould iflow ifrom ithe iobligation icreated iunder ithe
i contract. iThat iis ireal iobligation ior personal obligation.31 For example in Naihati Jute Mills
Ltd. had the contract provided for jute to imported has to be only from Pakistan or similarly
Energy Watch dog case coal has to be imported from Indonesia specifically. A subsequent
ban on import or interruption in supply chain from those countries would have discharged
party from performing its obligation as it would be rendered the performance impossible.

30
Ronald J. Gilson & Alan Schwartz, Understanding MACs: Moral Hazard in Acquisitions, 21 J.L. ECON.
& ORG. 330 (2005)
31
The argument takes it rationale from the discussion on real right (right in corporeal or tangible property)
and personal right. See Ewan McKendrick, Roy Goode, Goode on Commercial Law, Lexis
NexisButterworths (5.ed 2017), See part 1 s

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Law of Contracts

Findings and Suggestions

FINDINGS

Force imajeure iis ian ioccurrence ithat icannot ibe ianticipated, ipreventing ia iparty ifrom icompleting
i something ithat ithey ihad iundertaken ito ido. iIt iincludes iboth iacts iof inature, isuch ias ifloods iand
i hurricanes, iand iacts iof iman, isuch ias iriots, istrikes iand iwars. iA iforce imajeure iclause irelieves ithe
i defaulting iparty iof iits iobligations iunder ithe icontract iwhen ia iforce imajeure ievent iprevents ithe
i performance iof ithe icontract.

The ilaw iaccepts ithat ia iforce imajeure iclause iis ibinding ialthough iforce imajeure iis inot istatutorily
i defined iand ithe iparties iare ifree ito iagree icontractual iterms. iHowever, isection i32 iof ithe iIndian
i Contract iAct, i1872 i(Act), iwhich iprovides ifor icontingency icontracts, imay ibe iconsidered ia
i statutory istarting ipoint. iCovid-19 imay ibe iconsidered ia iforce imajeure ievent iif:

 the iclause idefines iepidemics ior ipandemics ias isuch;

 the iclause iis imerely iindicative iand idoes inot iprovide ian iexhaustive ilist iof ievents; ior

 when ithe iclause iuses igeneric iwords ior iphrases isuch ias igovernment idecision, inational
i interest, itravel irestrictions ior inatural icalamity.

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Law of Contracts

The igovernment iissued ioffice imemoranda idated i19 iFebruary iand i20 iMarch i2020 itreating ithe
i spread iof iCovid-19 ias ia iforce imajeure ievent iapplicable ito icontracts ito iwhich iit iis ia iparty. iThe
i memoranda ido inot ibind iparties ito iprivate icommercial icontracts, ibut imay ibe iof ipersuasive
i value. iThe iconsequences iof iinvoking ia iforce imajeure iclause ishould ibe iset iout iin ithe iclause
i itself, iand imay iinclude ithe isuspension iof icontractual iobligations iduring ithe icurrency iof ithe
i force imajeure ievent, ithe itermination iof ithe icontract, iand ithe isuspension iof icontractual
i obligations iwith itermination ishould ithe iforce imajeure ievent icontinue ibeyond ian iagreed
i period.

Where ia icontract idoes inot iinclude ia iforce imajeure iclause ior iwhere iit icannot ibe iconstrued ito
i cover iCovid-19, ia iparty iunable ito iperform iits iobligations imay ihave irecourse ito is56 iof ithe iAct,
i which icodifies ithe icommon ilaw idoctrine iof ifrustration. iThe idoctrine imay ibe iinvoked iprovided
i that ithree iconditions iexist:

 there iis ia ivalid iand isubsisting icontract ibetween ithe iparties;

 there iis isome ipart iof ithe icontract iyet ito ibe iperformed, iand

 impossibility iof iperformance iafter iit iis ientered iinto ifor ireasons ibeyond ithe iparty’s
i control.

Accordingly, iit imay ibe icontended ithat icontracts, ieven ithose inot icontaining ia iforce imajeure
i clause iare iconsidered ifrustrated iby ivirtue iof is i56 iof ithe iAct, idue ito ithe ispread iof iCovid-19.
i Where ia icontract iis iheld ito ibe ifrustrated, iit ishall ibe iconsidered ivoid iand itherefore
i unenforceable.

SUGGESTIONS

Whether ia icontracting iparty imay iinvoke ia iforce imajeure iclause ior ithe idoctrine iof ifrustration,
i will idepend ientirely ion ithe ifacts iof ieach icase iand ithe iterms iof ithe icontract, iincluding ithe iforce
i majeure iclause iagreed iby ithe iparties iand iwhether ithe idefaulting iparty ihas ito irely iupon ithe
i doctrine iof ifrustration. iThe idefaulting iparty ishould:

 Consider ithe iconsequences iof iinvocation iof ithe iforce imajeure iclause.

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Law of Contracts

 Consider iadopting imitigation imeasures ithat ibest iserve itheir icommercial iinterests.

 Consider iwhether ithere iare iany ipreconditions ithat ihave ito ibe ifulfilled ibefore iinvoking
i the iforce imajeure iclause ior ithe idoctrine iof ifrustration.

 Issue inotices iin ithe imanner iand iby ithe imode iprescribed iin ithe icontract. iUsually,
i contracts icontain ia iclause isetting iout ithe iway iin iwhich ithe idefaulting iparty imust igive
i notice iof iclaiming iforce imajeure ior ifrustration, iincluding ithe imode iof iservice, isuch ias
i email, icourier ior iin iperson, iand ian iaddress ifor iservice.

 Consider ithat ithe iburden iof iproof iof iestablishing ithe iforce imajeure ior ifrustrating ievent
i is ion ithe idefaulting iparty.

 Consider iwhether iprovisions isuch ias iprice iadjustment, imaterial iadverse ichange ietc. iare
i incorporated iin ithe icontract iand iavailable, iin iaddition ito iforce imajeure.

 Ensure ithat iall icommunications iwith ithe iother iparty iare irecorded iand ireduced iinto
i writing ias ifar ias ipossible.

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Law of Contracts

Conclusion

The icourts iin iIndia ihave ivery irarely ior isparingly iinvoked idoctrine iof ifrustration. iThe imere
i fact ithe iperformance iof ithe icontract ihas ibecome ionerous, ior imaterial iloss, iincidence iof
i expense ior idelay icaused iby ione iparty iis inot isufficed ito iinvoke ithis idoctrine. iIt ihas ito ibe
i shown imuch imore ithan ithat, isuch as dislocation of whole trade, loss of stratum or subject
matter of contract. The newly adopted approach to doctrine of frustration by English courts
by proposing 'radically different' approach. The contemplations as to risks allocation at the
time of contract is well founded but does not provide for obligations in financing
transactions. Though the obligation and remedies available on parties on occurring of such
MAC or FM event would be subject specific, on the basis of implied and express terms to
the contracts amongst the parties, i.e. to terminate the contract/ re-negotiate the terms/
deferment of the performance and etc.

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Law of Contracts

References

Cases
 Energy Watchdog Vs. Central Electricity Regulatory Commission & Ors. (2017)14
SCC 80
 Satyabrata Ghose v. Mugneeram Bangur & Co, AIR 1954 SC 44
 Peter Dixon & Sons Ltd v. Henderson, Craig & Co. Ltd. 1919 (2) KB 778.
 The Naihati Jute Mills Ltd.Vs. Khyaliram Jagannath AIR 1968 SC 522, [1968]1SC
R821
 F.A. Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd.
[1916] 2 A.C. 397
 Russkoe v. John Strik & Sons Ltd. I.L.R. [1922] 10 214
 Movietones Ltd. v. London and District Cinemas Ltd. [1951] 1 K.B. 190

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 Additional informationFundingThis work was supported by the Indian Institute of
Management Ahmedabad [IIMA Faculty Grant]. (n.d.). The doctrine of frustration
under section 56 of the Indian CONTRACT ACT. Taylor & Francis.

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Law of Contracts

https://www.tandfonline.com/doi/abs/10.1080/24730580.2019.1709774?
journalCode=rilw20.
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https://www.lawyerservices.in/Energy-Watchdog-and-Others-Versus-Central-
Electricity-Regulatory-Commission-and-Others-2017-04-11.
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of Hope Prudhomme company on 02 November 1924 - judgement -
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Prudhomme-under-the-name-and-style-of-Hope-Prudhomme-Company-1924-11-02.
 Advocatekhoj.com. (n.d.). Energy watchdog vs. Central ELECTRICITY regulatory
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india.html.
 Nathan, P. S. (2020, April 23). Legal principles in invoking force majeure clauses -
case law analysis. Lexology. https://www.lexology.com/library/detail.aspx?
g=27195bef-c753-4544-b315-d5ce65c1faaf.
 Batra, S. (2020, April 16). Applicability of force majeure and doctrine of frustration
during covid-19: An interpretation. Live Law.
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of-frustration-during-covid-19-an-interpretation-155326.
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on-contracts-from-an-indian-law-perspective-154698.

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