Force Majeure Vs Frustration of Contract

Although they have been used separately, the intent remains to save one from the contractual obligations in the event of unforeseen and sudden occurrences which are beyond the control of the parties...

The term 'force majeure' is a French term which means 'superior force'. According to Black's Law Dictionary², the term 'force majeure' means 'an event or effect that can be neither anticipated nor controlled. The term includes both acts of nature and acts of people.

The Hon'ble Supreme Court of India in Dhanaramji Gobindram v. Shamji Kalidas& Co. (1961) 3 SCR 1020, has held that the expression force majeure is not merely a translation of the Latin expression 'vis major' and held that the intention is to save the performing party from the consequences of anything over which he has no control.

The Force Majeure Clause is a common clause in contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, prevents one or both parties from fulfilling their obligations under the contract.

In absence of a Force Majeure clause, one may seek relief under the 'Doctrine of Frustration' wherein there is an impossibility to fulfil either party's performance under the contract due to the occurrence of subsequent events. This doctrine under Indian Laws primarily falls under Section 56 of the Indian Contract Act, 1872. It is important to note that the frustration of contract cannot result out of wilful intention of the parties.

A broad difference between the interpretation of a contract with and without Force Majeure clauses has been summarised below: (This is however not a 'one size fit all'situation and varies on a case-to-case basis.)

The Hon'ble Apex Court of India in Energy Watchdog and Ors.vs. Central Electricity Regulatory Commission and Ors., (2017) 14 SCC 80 held that

"In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract Act. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view." The key takeaways from the judgment are as below:

1. Force Majeure is not exhaustive but inclusive.
2. If the contract has an express or implied 'force majeure' clause, it will apply over the principles under Section 56 of the Indian Contract Act, 1872.
3. Application of the doctrine of frustration must always be within narrow limits.
4. A rise in cost or expense will not frustrate a contract.
5. Doctrine of frustration will not apply so long as the fundamental basis of the contract remains the same.
6. Force majeure clause will not apply if alternative modes of performances are available.

In NTPC v. Voith Hydro Joint Venture O.M.P, MANU/DE/2103/2019, the Hon'ble Delhi High Court has defined the scope of Sec 56 under the Contract Act, stating that it shall not prevail over the autonomy of the parties and the terms of the Contract. In brief, it has been established that the Force Majeure Clause prevails over the provision for frustration of contract under the Contract Act.

The language of the force majeure clause will determine the remedies available to the parties. Some contracts may provide for immediate termination of the contract and others may be suspended upon the occurrence of the force majeure event. Some contracts may allow for only certain obligations to be suspended. A party may also be required to show proof of mitigation and estimated timings for dealing with the particular event of force majeure

It is to be noted that under Indian contract law, it is required that a party shall do everything within its control to mitigate the loss to the other party. Therefore, a party can propose reduced/alternative performance during force majeure period and the same can be enforced if the contract provides for it.

The Force Majeure clause and the Frustration of Contract under the Indian Contract Act, finally boils down to the interpretation of the purpose of the contract, circumstances of non- performance of obligations under it. Although they have been used separately, the intent simply remains to save one from the contractual obligations in the event of unforeseen and sudden occurrences which are beyond the control of the parties. However, the Doctrine of Frustration can be invoked in cases not just pertaining to force majeure events but also due to price adjustment clauses, limitation or exclusion clauses, material adverse change clauses etc. One cannot assert imperatively that it will be prudent to ensure that a force majeure clause is mandatory in a contract, rather than explore the ambit under the doctrine of frustration. However, one may draw out one's limitations in a well drafted clause, thus maintaining a certain level of control over the consequences of the clause. It is a matter of whether the parties need a water-tight contract or one with ambit for broad interpretation.