DR RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY
LUCKNOW

CONTRACT PROJECT

FRUSTRATION OF CONTRACT WITH REFERENCE TO

THE ONGOING COVID CRISIS.

Submitted To- Submitted By-

Ms. Priya Anuragini Abhishek Kumar

Assistant Professor (Law)
200101007
Dr Ram Manohar Lohiya National
Anushikha Pokhriyal
Law University, Lucknow
200101032

Debjyoti Sammadar

200101057

Akash Gulati

200101015
 CONTENTS

INTRODUCTION..............................................................................................2

HISTORICAL EVOLUTION OF CONTRACT LAW..................................3

CONCEPT AND CONTEMPORARY JURISPRUDENCE..........................4

DIFFERENCE BETWEEN FORCE MAJEURE AND FRUSTRATION

OF CONTRACT.................................................................................................5

FRUSTRATION OF CONTRACTS IN LIGHT OF PANDEMIC...............6

CONCLUSION...................................................................................................9
 INTRODUCTION

The notion of frustration, defined as acts that cannot be done, is addressed in Section 56 of
the Indian Contract Act of 1872. A promisor is absolved of any obligation under a contract
under this concept if the contract is breached, and the contract is considered void.

A contract may be frustrated if circumstances change after the contract is made, which is not
due to either party's fault and renders the contract either impossible to fulfill or deprives the
contract of its economic purpose. If a contract is deemed to be frustrated, each party is
released from future duties under the contract, and neither party may sue for violation. Such a
contract must also specify how the loss will be compensated.

Section 56 is based on the maxim "les non cogit ad impossibilia," meaning that
the law won't force people to do something they can't possibly perform
or accomplish.

The Supreme Court deciphered the doctrine of frustration in the case of Satyabrata Ghose v.
Mugneeram1, in which Justice Mukherjee opined that the basic premise on which the
doctrine is based is that of the impossibility of contract performance and that the terms
frustration and impossibility can be used interchangeably and synonymously.
There are two predefined events in which the Doctrine of Frustration is applicable:
- If the object of the contract has become impossible to perform
- An event has occurred making the performance of the contract to be impossible beyond the
Control of the promisor.

In the context of this paper, one characterization that could be given to the Covid crisis could
be that it essentially is an event that took place without the a priori knowledge of people and
it indeed made the performance of numerous contracts impossible. Based on the above
conditions, Covid19 becomes an event that calls for the implication of Doctrine of
Frustration, especially where the fulfillment of the contract is hampered by any government-
imposed subsequent order, legislation, policy, or statutory ban. One easy example is when the
contract is due for completion within the Restriction of Movement Order (RMO) term.

1
Satyabrata Ghose v Mugneeram 1954 AIR 44
 HISTORICAL EVOLUTION OF CONTRACT LAW

The Contract Act is one of the most important pieces of legislation that governs all
contractual relationships, not just in the corporate sector but also in everyday life. It is one of
the most significant pieces of British legislation, and the principles imposed therein are little
more than the definition of the basic concept regulating transactional relationships, as a result
of which it has seen very little change.

The underlying idea of contract law has remained consistent throughout the world, with only
minor differences in details. Prior to the legislation, contractual relationships were controlled
by the personal laws of various faith communities, such as Hindu and Muslim personal laws.

The sources of Indian Contract Law can be traced way back to the Roman Empire period, the
earliest common law principle to contract law where the twelve tables were the law. This was
followed by the Mahomedan period, which deemed unlawful contracts void and gave context
on contracts of transactions. And finally, The Hindu Law. The jurisprudential element of
Hindu law is essentially different from the jurisprudence of English law. Hindu law is the
product of the collection of diverse conventions and works of Smritikaras, who interpreted
and studied Vedas to construct Hindu law in its different aspects. Titles were used in Hindu
law to deal with contract law. In terms of contract law, Manusmriti dealt with the inability to
engage in a contract. It established the idea, which is now maintained in the Indian Contract
Act, that a contract entered into by a juvenile, an inebriated person, an elderly person, or a
mentally unsound individual is not legal.

The Indian Contract Act, as it is used now, was drafted by the third Indian Law Commission
in England in 1861. The Indian Contract Bill attempted to clarify the rules governing
contracts, the sale of moveable property, indemnity, guarantee, agency, partnership, and
bailment. The bill's purpose was to align the Indian Contract Act with English law on the
same topic, as established by recognized practice, statutes, and court judgments. The act went
into force in 1872, but shortly after, modifications were made that removed sections 76 to
123 of the act dealing with sales of products, and another law called the "Sales of Goods Act
1930" was created to control that sector. In addition, sections 239 to 266 of the Indian
Partnership Act of 1932 were abolished, and new law named the "Indian Partnership Act of
1932" was created.
 CONCEPT AND CONTEMPORARY JURISPRUDENCE

The term frustration in the context of contracts means the impossibility of the performance of
an existing contract in the agreed manner without the fault of either party. The impossibility
of the performance is the key factor here, which occurs due to an event/situation outside the
control of either party. The event/situation had to be unforeseen at the time of the
formation of the contract. The termination of such a contract can opt via the doctrine of
frustration of contract, which in effect relieves both the parties of their contractual obligations
agreed upon in that specific contract.

The doctrine of frustration as in Section 56 of the Indian Contract Act:

 A contract to do an act which, after the contract is made, becomes impossible, or,
because of some event which the promisor could not prevent, unlawful, becomes void
when the act becomes impossible or unlawful.
 The event should be not anticipable to the promisor at the time contract is made.

In Joseph Constantine Steamship Line Limited v. Imperial Smelting Corporation Ltd.2,

Viscount Maugham observed that the “doctrine of frustration is only a special case of the
discharge of contract by an impossibility of performance arising after the contract was made”

The impossibility is not limited to physical impossibility but also rather the practical
impossibility in the discharge of the duties as intended by the parties. As Lord Wright
observed in the same case: “In ascertaining the meaning of the contract and its application to
the actual occurrences, the court has to decide, not what the parties actually intended but what
as reasonable men they should have intended. The court personifies for this purpose the
reasonable man.”. This practical impossibility, however, is not measured by assessing the
profitability of the obligation if at the time of the contract the promisor was reasonably aware
that such circumstances might arise. In Deokabai v. Uttam3, (1993) 4 SCC 181 the Supreme
Court had clarified that “contract is not discharged merely because it turns out to be difficult
to perform or is onerous”.

2
Joseph Constantine Steamship Line Limited v Imperial Smelting Corporation Ltd (1941) 70 Ll.L Rep 1.
3
Deokabai v Uttam (1993) 4 SCC 181.
In Satyabrata Ghose vs. Mugneeram Bangur & Co.4, the position was consolidated
regarding the doctrine of frustration as an impossibility to fulfill the contractual obligations
both in terms of physical and practical aspects. The impossibility has to be beyond the
contemplation of both the parties, as in this case the temporary impossibility was actually a
real possibility at the time the contract was formed which led the court to rule that in this
particular case the doctrine of frustration was not applicable as both the parties could have
reasonably known that such a situation might arise. The impossibility should be of the
achievement of the objective of the contract, where due to the supervening event either party
is unable to fulfill the obligations necessary to fulfill the core intent of the contract to the
point where the contract stands “useless” in view of object and purpose which the parties
intended to achieve through the contract.

DIFFERENCE BETWEEN FORCE MAJEURE AND

FRUSTRATION OF CONTRACT

The concept of Force Majeure has been a fervently debated topic in recent times due to the
COVID-19 pandemic. The pandemic has resulted in the breach of many contracts due to
delays in payments or completing conditions precedent or any other terms agreed by the
parties to contracts. Due to COVID-19, parties to contracts have been unable to discharge
their obligations within the contract despite wanting to, and thus they have tried to use Force
Majeure to safeguard their own interests. Also, on 20 February 2020, the Ministry of Finance
by way of an office memorandum (O.M. No. 18/4/2020-PPD) clarified that the disruption of
the supply chains due to the spread of coronavirus in China or any other country should be
considered as a case of natural calamity and "force majeure clause" may be invoked,
wherever considered appropriate, following the due procedure. One thing to be noted is that it
does not apply in all scenarios and will apply on a conditional basis.

As per Black’s law dictionary, ‘Force Majeure’ is an event or effect that can neither be
anticipated nor controlled. It is a contractual provision allocating the risk of loss if
performance becomes impossible or impractical, especially because of an event that the
parties could not have anticipated or controlled. 

The doctrine of Force Majeure is often intertwined and overlapped with the doctrine of
frustration of contract or inability to perform. A contract is typically said to have been
4
Satyabrata Ghose v Mugneeram 1954 AIR 44.
frustrated if the performance of the contract becomes impossible. The word "impossible"
was held not to be restricted to physical or literal impossibility. The performance of an act
may not be literally impossible, but it may be impracticable and useless from the point of
view of the object and purpose which the parties had in view (thus, the contract becomes
‘frustrated’).
Hence, frustration is the happening of an act outside the contract and such an act makes the
completion of performance of a contract impossible.

The doctrine of contract frustration is a part of the law of contract discharge due to a
supervening impossibility or illegality of the act agreed to be done. Unlike the Force
Majeure clause which is typically in the form of a contractual provision, frustration of
contract or impossibility to perform is statutorily provided under Section 56 of the
Contract Act. Therefore, if the contract does not expressly or impliedly contain exemptions
for non-performance in the nature of Force Majeure, a party seeking to set up a
defense dehors the contract can place reliance on Section 56 of Contract Act.

The intention of Force Majeure, in both cases, is to save the performing party from the
consequences of some event beyond its control – affecting the performance of a contract.

FRUSTRATION OF CONTRACTS IN LIGHT OF PANDEMIC

Covid-19 has affected India's cross-border trade, real estate market, homebuyers, particularly
developers, and EPC (engineering, procurement, and construction), joint-venture agreement
deals. Constraint in movement, stoppage of production, increase in costs due to scarcity of
raw materials components, labor shortages, shortage of funds, and disruption in the supply
chains have all affected the parties' ability to meet their contractual obligations. The outbreak
has slowed worldwide economic activity and shaken the positions of businesses of all sizes –
large, medium, and small – though the full impact has yet to be assessed. Many are unable to
fulfill contractual responsibilities because of the outbreak.

With widespread disruption in business, manufacturing, and transport, due to COVID-19,

there has been a flood of Force Majeure invocations in India. If the situation remains
unchanged, over a period of time more and more Indian companies may invoke Force
Majeure clauses in their contracts resulting perhaps in a spew of litigations should parties not
come to a workable understanding.
The following points may be noted while claiming relief on account of
force-majeure/frustration:

 An affected party must ensure compliance with procedures stated in the force-majeure
clause. Most force-majeure clauses prescribe issuance of notice as a condition
precedent for claiming relief. Such contractual notification requirements are usually
time-bound, failing which parties may be barred from claiming relief.
 Typically, the force-majeure provisions require an affected party to show that it has
taken all reasonable efforts to avoid or mitigate the event and its effects.
 The language of the force-majeure clauses will determine the remedies available to
the parties. Some contracts may provide for immediate termination of the contract
upon the happening of the force majeure event. Others may provide that the contract
will be put on hold until the force majeure event is resolved.
 As a part of social distancing measures, most states in India had issued regulations
invoking the Epidemic Diseases Act, 1897 severely restricting commercial activities
and movement of the public. The resulting disruption in workforce and materials may
be interpreted as a change in law event if the contract provides for a change in law
provision. The relief for change in the law can extend to price adjustment or extension
of a time period for completion of obligations or both
 Pursuant to the standard financing documents, a force majeure event may not exclude
debt servicing obligations and a borrower is expected to service the debt under the
relevant financing documents. Hence, parties may report the effects of the pandemic
to the lenders and initiate discussions for rescheduling of re-payment installments and
waiver for any breach of covenants or financial ratios due to the pandemic.
 Counterparties may also attempt to invoke other contractual clauses like price
adjustment clauses, material adverse change clauses, limitation or exclusion clauses,
to limit or exclude liability for non-performance. The ability to invoke such other
grounds will depend on the wording of the relevant clause, and how the clause is
construed by courts.
 CONCLUSION

In this project we have briefly discussed the frustration of contracts with reference to the
ongoing COVID crisis, emphasizing historical evolution, the concept, and the contemporary
jurisprudence for the same, the difference between Force Majeure and Frustration of
Contract and frustration in light of the pandemic. We have seen the relationship between
force majeure and frustration of contract and how Force Majeure has always been a crucial
and essential aspect of law due to the protection that it provides when used by the parties to a
contract. However, due to the disruption created by the COVID-19 pandemic, Force
Majeure has gained a considerable amount of attention. It has become the vital ground based
on which parties obligated to perform under a contract are trying to protect themselves as the
fulfillment of such obligations has been impossible due to the various lockdowns and
restrictions.

Going by the global treatment of non-performance of contracts during such outbreaks - such
as COVID, SARS, etc., the threshold to establish the defense of frustration of contract
effectively is very high, with no straight jacket formula. While more disputes pertaining pleas
of frustration of contract and invocation of Force Majeure clauses in commercial contracts
are likely to mount eventually, it would be an interesting development in the field of contract
law in India – bearing in mind epidemics such as the Covid-19 are unusual in this modern
age.
Several proactive steps were taken by the Governments - such as the issuance of Force
Majeure Certificates by China and Russia and inter-department advisory circulars in India to
recognize the Covid-19 pandemic under the ambit of 'natural calamity' in government
contracts, are also noteworthy. Such measures are forthcoming to inculcate confidence and
protect the interests of parties in testing times like these.

It is beyond doubt that contracts will be impacted by the pandemic and the current lock-down
situation. However, in the times to come, we may be witnessing varied interpretations of
clauses, terms, and parameters of performance of contracts under these unforeseen
circumstances coupled with notifications and directives by the Government in this respect.
The law relating to Force Majeure is likely to undergo a massive evolution in view of this
pandemic, due to the Court assessing these cases more dynamically. A clear understanding
will only appear once judgments are delivered, until then, the court's application of Force
Majeure will vary on a case-by-case basis. Thus, it will be best for the parties to draft proper
Force Majeure clauses to include events precluding them from performing contracts.