Going Beyond Force Majeure - Dealing with Non-Performance of Contractual Obligations

Almost every day for the last month, we have woken up to news of yet another sector where entities are seeking to get out of contractual obligations due to difficulties caused by the ongoing pandemic and ensuing lockdown. Restaurants are seeking rent waivers from their landlords, as are multiplexes and other retailers. Steel importers moved a plea of termination on account of frustration before the Bombay High Court, albeit unsuccessfully. Several companies from the auto industry have invoked force majeure clauses in their contracts with vendors, and the oil and gas sector has reportedly seen force majeure notices being issued by commercial consumers as well as gas marketers.

While some of these cases involve a contractual force majeure clause, others merely involve the seeking of rent waivers, whether or not based on a contractual provision. Still others mention the doctrines of “frustration” and “impossibility”.

A frequent question in this regard is whether the COVID-19 pandemic is a force majeure event. There is no universal yes-or-no answer to this; the relevant question is whether the pandemic is a force majeure event with respect to a specific contract. Further, a contractual force majeure clause is not the only option available to a party that is unable to perform its contractual obligations.

Much has already been written about the defence of force majeure and the doctrines of frustration and impossibility. Therefore, this article provides limited background to these concepts, and instead lays out the options that a contracting party may have with regard to each of these.

Contractual force majeure clauses vis-à-vis Frustration / Impossibility

The objective of a force majeure (literally meaning “superior force”) clause is to save a contracting party from the consequences of non-performance of contractual obligations due to an event that the contracting party could not have anticipated or controlled. Consider the following example of a contractual force majeure clause[1]:

8.1. Force Majeure Events. —

(a) Neither party shall be responsible or liable for or deemed in breach hereof because of any delay or failure in the performance of its obligations hereunder (except for obligations to pay money due prior to occurrence of force majeure events under this Agreement) or failure to meet milestone dates due to any event or circumstance (a “Force Majeure Event”) beyond the reasonable control of the party experiencing such delay or failure, including the occurrence of any of the following:

(ii) typhoons, floods, lightening, cyclone, hurricane, drought, famine, epidemic, plague or other natural calamities;

(iii) acts of war (whether declared or undeclared), invasion or civil unrest;

(iv) any requirement, actions or omission to act pursuant to any judgment or order of any court or judicial authority in India (provided such requirement, or action or omission to act is not due to the breach by the power producer or GUVNL of any law or any of their respective obligations under this Agreement);

(v) inability despite complying with all legal requirements to obtain, renew or maintain required licences or legal approvals;

(vi) earthquakes, explosions, accidents, landslides, fire;

(vii) expropriation and/or compulsory acquisition of the project in whole or in part by government instrumentality;

(viii) chemical or radioactive contamination or ionising radiation; or

(ix) damage to or breakdown of transmission facilities of GETCO/DISCOMS;

(x) Exceptionally adverse weather conditions which are in excess of the statistical measure of the last hundred (100) years.

8.2. Available Relief for a Force Majeure Event. — No party shall be liable for (sic) breach of its obligations pursuant to this Agreement to the extent that the performance of its obligations was prevented, hindered or delayed due to a force majeure event. For avoidance of doubt, neither party's obligation to make payments of money due and payable prior to occurrence of force majeure events under this Agreement shall be suspended or excused due to the occurrence of a force majeure event in respect of such party.

Although parties to a contract can of course choose the exact phrasing of the force majeure clause, the clause extracted above is a helpful illustration of some common elements of a force majeure provision:

• Deeming fiction: The invoking party is deemed not to be in breach of contract due to non-performance of its contractual obligations.
• Non-exhaustive list of force majeure events: The clause defines a force majeure event as any event or circumstance beyond the reasonable control of the party, including the events specified in sub-clauses (i) to (x).
• Beyond reasonable control: The force majeure event should have been beyond the reasonable control of the party experiencing an inability to perform its contractual obligations
• Causal link: There must be a causal link between the force majeure event and the invoking party’s inability to perform its obligations. In this case, the clause specifies that the invoking party is not liable for delay or failure in performing its contractual obligations if such delay or failure is due to a force majeure event.

Force majeure clauses may also provide that the relevant contractual obligations may be performed belatedly, or that the contract is temporarily suspended for the duration of the force majeure event.

In contrast, pleas of “frustration” or “impossibility”, which are traceable to Section 32[2] and Section 56[3] of the Contract Act, have only one possible consequence – that of the contract being held void.

As evident from the provision itself and the Supreme Court’s interpretation in Satyabrata Ghosh v. Mugneeram Bangur Co.[4] (which has been cited in a judgment as recently as April 2020[5]), Section 32 covers situations where the very existence of the contract is contingent (either implicitly or by an express provision in the contract) on the happening of a certain event. If such an event subsequently becomes impossible, the contract becomes void. For instance, in the context of a contract for cold storage, the contract was held to be subject to an implied condition of continuous power supply. Failure of the power supply rendered the contract void.[6]

On the other hand, Section 56 covers situations where carrying out the contractual obligation subsequently becomes impossible or unlawful (without there being any express or implied provision to that effect in the contract) due to an unexpected event or change of circumstances, such that the whole basis or purpose of the contract is frustrated. In such a circumstance, the contract becomes void. As the Contract Act helpfully illustrates, if a party A contracts to take in cargo for party B at a foreign port, but A's Government later declares war against the country in which the port is situated, the contract becomes void when war is declared.

What Are Your Options?

With the background covered, we now turn to the issue of what options are available to an entity seeking relief from performing contractual obligations due to the ongoing pandemic or the ensuing lockdown.

Scenario 1: There is a force majeure clause in the contract

In such a case, the party seeking to invoke the clause should consider the following:

• Identification of triggering event: Does the clause expressly include the terms “disease”, “epidemic”, “pandemic” and/or “change in law”? If not, is the clause non-exhaustive, i.e. uses language such as “any event, including…” or “including but not limited to”?

Without at least one of these conditions being true, it may be difficult to invoke a contractual force majeure defence. If one or both of these conditions are true, the invoking party should identify the exact event that is the cause of being unable to comply with contractual obligations – this could be the pandemic itself, or the ensuing lockdown and related events such as unavailability of material or labour.

Parties should keep in mind that while COVID-19 being declared a pandemic by the World Health Organisation and the Ministry of Finance issuing an Office Memorandum dated February 19, 2020 declaring the pandemic to be a force majeure event with respect to the Manual for Procurement of Goods, 2017 may have persuasive value, it does not ensure that the pandemic or lockdown is a force majeure event for every contract.

• Linkage with non-performance: The invoking party should be able to demonstrate how the identified triggering event has resulted in the party not being able to perform its contractual obligations. The threshold for this linkage will vary depending on contractual language – while some contracts may require the triggering event to “prevent” performance of the obligation, others may only require the triggering event to “delay” performance. Additionally, if parties can show that they were compliant with their obligations until the outbreak of the pandemic or the declaration of the lockdown, as the case may be, this may be persuasive to show that the invocation of the force majeure clause is genuine and not an excuse to avoid contractual obligations.
• Effect of invoking the force majeure clause: The clause will typically provide for the effects of invocation. There may be a flat consequence, such as temporary suspension of the contract for the duration of the force majeure event, or a staggered set of consequences, such as temporary suspension of the contract for a certain capped duration, after which the contract may be terminated. In most cases, the invoking party will not be absolved from its obligations entirely, but will merely be allowed to perform them belatedly, without being held in breach of contract. The invoking party should therefore carefully ascertain what relief it is seeking, within the terms of the contractual provision.
• Compliance Requirements:Force majeure clauses may be conditional on certain compliances, such as the invoking party having taken reasonable steps to mitigate the damage caused by the force majeure event, and sending a notice to the other party within a given period of time if it intends to invoke the force majeure clause. The invoking party should therefore ensure and be able to demonstrate compliance with any such conditions.

Consider the following extract from a judgment of the Bombay High Court in Housing Development and Infrastructure Limited v. Mumbai International Airport Private Limited[7]

“Moreover, the Slum Rehabilitation Contract sets out a procedure for invoking the force majeure clause. Notice must be given of such an event no later than 15 days from its occurrence. It must be described in detail. The dates of commencement of the event and the estimated cessation of the event must be set out. The manner in which the event affects the claiming party's obligations must also be specified. Performance can only be suspended when notice of the event is delivered. Only then is time extended, and only for the duration of the event. HDIL did none of this. It claimed force majeure for the first time only in its letter of 1 st February 2013 in reply to MIAL's demand for liquidated damages on 30 th January 2013, just a few days before termination, and it claims that this is sufficient compliance with the contractual requirements, and that, in any event, MIAL was not prejudiced by the want of such notice. We disagree. HDIL claims that Annexure “N”, its tabulation of policy changes, shows a constant state of policy flux for a period of four years. So when exactly, according to HDIL, did this force majeure change-of-policy begin? We are not told. Which of the 10 “changes in policy” listed in Annexure “N” constitutes such a force majeure event? Is each one such an occurrence? The first of these “policy changes” listed is of 16 th April 2008. …”

Scenario 2: There is no force majeure clause in the contract, or the force majeure clause does not apply

This scenario also leaves multiple options open to parties:

1. Finding alternative contractual provisions: A contracting party seeking relief for non-performance of its contractual obligations in the absence of a force majeure clause should carefully ascertain what consequences it finds acceptable. As explained above, invoking S. 32 or S. 56 of the Contract Act can only result in the contract being declared void. Many entities, even without a force majeure clause, may not be happy with such a drastic consequence being the only option. Therefore, it is advisable to examine the contract for any other provisions that allow for alternatives, perhaps such as an option for delayed performance of contractual obligations in exchange for a penalty. Although not ideal, this may in many cases be preferable to the contract being held void.
2. Finding alternative statutory provisions: Stemming from the parties’ ability to negotiate, the contract in its existing form does not need to be performed if the contracting parties agree to vary the terms of the contract or if the non-invoking party agrees to wholly or partly dispense with the performance of the invoking party’s contractual obligations, allows them to be performed belatedly, or accepts an alternative to the obligation being performed. Although some contracts may have a specific provision to this effect, these negotiations can take place even without such a provision. These principles have also been codified in Sections 62 and 63 of the Contract Act.
3. Establishing impossibility of contingent event: If the contract is contingent, expressly or implicitly, on an event which has now become impossible, parties may invoke Section 32 of the Contract Act. As explained above, the contract stands discharged on such a contingent event becoming impossible. In such cases, it is necessary to identify what this contingent event is, and, if not expressly mentioned in the contract, to demonstrate how the enforceability of the entire contract is dependent on the contingent event. Significantly, invoking Section 32 involves looking into the contract itself to determine what it is contingent on.
4. Establishing impossibility of performance: If the contract has no express or implied mention of an event without which the contract cannot be performed, parties may invoke Section 56 of the Contract Act. Under Section 56, if the court finds that the entire purpose or basis of the contract has been frustrated due to an unexpected event or change of circumstances beyond what was contemplated by the parties, the contract is held void due to such subsequent impossibility or unlawfulness of the contractual obligation. Unlike a Section 32 plea, invoking Section 56 involves looking at an external event that was not anticipated by the parties, but has now made it impossible to perform the contract.

A general exception to the doctrine of frustration or impossibility is that of executed lease agreements. Given that Section 56 applies only to contracts, it cannot be pressed into service to invalidate an existing lease, which is a completed conveyance.[8] This does not take away from a lessee’s ability to invoke a contractual force majeure clause or to plead impossibility with respect to a mere agreement to lease, under which a conveyance has not yet taken place.

Interestingly, despite the contract becoming void under Section 32 or 56, any arbitration clause in the contract may continue to be valid, consistent with the understanding that an arbitration clause is a separate agreement.[9]

Relevant Considerations

The Supreme Court in Satyabrata Ghosh[10] has held that “impossibility” is not physical or literal impossibility, and may be established even if an act has become impracticable or useless from the point of view of the purpose of the parties, or if an untoward event or change of circumstances totally upsets the very foundation upon which the parties had rested their bargain. However, subsequent judgments have clarified that a contract is not frustrated merely because its performance has become onerous, or because the circumstances in which it was made are altered.[11] The doctrine of frustration does not apply if the fundamental basis of the contract remains unaltered, or if there are alternative modes of performance available.[12]

Therefore, when invoking Section 32 or 56, parties should keep in mind that the threshold to prove impossibility of the contingent event or the contractual obligation is extremely high. This high threshold also spills over to the interpretation of contractual force majeure clauses as well, in that such clauses are often interpreted narrowly by courts.

Future Steps

The preferable mode of dealing with non-fulfilment of contractual obligations is often to negotiate with the opposite party. Having a clear and detailed force majeure clause sets the tone for such negotiations if a force majeure event does occur, and can help avoid protracted litigation and souring of long-standing commercial relationships. When entering into contracts in future, parties may wish to consider the following:

• Inclusion of a force majeure clause: Despite the availability of statutory provisions of impossibility of performance, it is advisable to have a force majeure clause in any contract. This gives the contracting parties control over the consequences of an unexpected event and provides a previously agreed-upon mechanism other than merely voiding the contract.
• Contents of the force majeure clause
  • List of force majeure events: While contracting parties obviously cannot anticipate every possible force majeure event, it is helpful to have an inclusive, non-exhaustive clause, with phrasing such as “including but not limited to”. Given courts’ treatment of force majeure clauses, this is unlikely to backfire on the non-invoking party, as the invoking party would still have to establish a link between the event and its non-performance of obligations.
  • Staggered consequences: Rather than merely deeming the invoking party as not being in breach of contract, it is advisable to also provide for staggered consequences of invocation of the force majeure clause, such as suspension of the contract for the duration of the force majeure event, or suspension for a capped duration, following which the invoking party would have to pay a penalty, with termination being a last resort.
  • Burden of proof and compliance requirements: Contracting parties should aim to provide clear requirements of how to invoke the force majeure clause (such as the manner and timeframe of putting the other party to notice), and how the invoking party can establish the existence of force majeure conditions.