Force Majeure and Frustration of Contract: A Scholarly Analysis under Indian Law

Introduction

The principles of force majeure and frustration of contract are critical in determining the enforceability of contractual obligations when supervening events, beyond the control of the contracting parties, render performance impossible or radically different from what was originally contemplated. In Indian jurisprudence, these concepts are primarily governed by Section 56 of the Indian Contract Act, 1872, and specific contractual provisions agreed upon by the parties. This article undertakes a scholarly analysis of these doctrines, drawing upon seminal case law and statutory provisions to elucidate their scope, application, and judicial interpretation in India.

The doctrine of frustration addresses situations where a contract becomes void due to subsequent impossibility or illegality (Satyabrata Ghose v. Mugneeram Bangur & Co. And Another, 1954 SCC 0 310 (Ref 1)). Force majeure, while related, typically refers to specific clauses within a contract that excuse non-performance upon the occurrence of stipulated events. Understanding the nuanced distinction and interplay between statutory frustration and contractual force majeure is essential for legal practitioners and scholars. As observed by the Madras High Court, "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," while a "Force majeure Clause is a Clause in a Contract specifying certain events which would excuse the non-performance of a contractual obligation" (R. Narayanan v. Government of Tamil Nadu, 2021 SCC ONLINE MAD 5644 (Ref 18); K.Ganeshkumar v. The Commissioner / Special o, 2022 (Ref 19)).

The Doctrine of Frustration: Section 56 of the Indian Contract Act, 1872

Section 56 of the Indian Contract Act, 1872, codifies the doctrine of frustration. The second paragraph of Section 56 states: "A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful." The Supreme Court in Satyabrata Ghose v. Mugneeram Bangur & Co. (Ref 1, 15) clarified that Section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties, distinguishing it from the English "implied term theory" (Mugneeram Bangore And Co. v. Satyabrata Ghosh, 1950 (Ref 13)). The Calcutta High Court noted that Sections 32 and 56 of the Contract Act embrace the whole of Indian law on the subject of frustration (Mugneeram Bangur And Co. v. Sardar Gurbachan Singh, 1959 (Ref 12)).

The term "impossible" under Section 56 is not confined to physical or literal impossibility. The Supreme Court, in Satyabrata Ghose (Ref 1, 15), held that "impossible" has not been used in the sense of physical or literal impossibility. Performance may be impracticable and useless from the point of view of the object and purpose which the parties had in view; if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, the contract can be said to be frustrated (Satyabrata Ghose (Ref 1, 15); Krishna Kilaru And Another v. Maytas Properties Ltd., 2012 (Ref 7); Delhi Development Authority v. Kenneth Builders And Developers Private Limited And Others, 2016 (Ref 10)). This broad interpretation encompasses situations where performance becomes "radically different" from that which was undertaken by the contract (Davis Contractors Ltd. v. Fareham Urban District Council (1956) A.C. 696, as cited in R. Narayanan (Ref 18) and Naihati Jute Mills Ltd. v. Khyaliram Jagannath, 1968 AIR SC 522 (Ref 5)). The doctrine applies when a "violent outside force suddenly dashes against the adventure which forms the basis of the contract" (Firm Bachhraj Amolakchand And Another v. Firm Nandlal Sitaram And Others, 1962 (Ref 8)).

The doctrine of frustration can be invoked in various instances, such as destruction of the subject matter, non-occurrence of a particular state of things, or death or incapacity for personal service (C.T Xavier And Others v. P.V Joseph And Another, 1994 (Ref 9)). However, the courts have no absolving power to modify or alter contracts simply because performance has become difficult (Firm Bachhraj Amolakchand (Ref 8)).

Distinguishing Frustration from Commercial Hardship and Onerous Performance

A crucial aspect of the doctrine of frustration is its distinction from mere commercial hardship or onerousness of performance. The Supreme Court has consistently held that a contract is not frustrated merely because its performance has become more expensive or burdensome. In Alopi Parshad And Sons, Limited v. Union Of India (1960 AIR SCC 588 (Ref 2)), the Court emphasized that a contract is not discharged simply because it becomes onerous to one of the parties. Parties cannot unilaterally alter their obligations based on unforeseen circumstances without mutual agreement if the fundamental basis of the contract remains intact.

This principle was strongly reiterated in Energy Watchdog v. Central Electricity Regulatory Commission And Ors. (2017 SCC ONLINE SC 378 (Ref 3, 6)). The Court, citing English authorities like Chitty on Contracts and Treitel on Frustration and Force Majeure, affirmed that a rise in cost or expense does not frustrate a contract (Ref 6). The mere fact that performance becomes more onerous or expensive than anticipated is not sufficient to invoke frustration (Energy Watchdog (Ref 3, 6), citing Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH (1962)). The modern approach, as articulated in the Sea Angel case (2007 EWCA Civ 547), requires a multi-factorial approach considering the contract's terms, context, parties' knowledge and expectations as to risk, the nature of the supervening event, and reasonable calculations as to future performance (cited in Energy Watchdog (Ref 6)).

Force Majeure Clauses: Contractual Governance of Supervening Events

Parties to a contract may explicitly provide for contingencies and supervening events through force majeure clauses. These clauses define specific events (e.g., acts of God, war, strikes, governmental actions) that would excuse non-performance by one or both parties. When a contract contains a force majeure clause, the applicability of Section 56 of the Contract Act may be circumscribed, as the parties have themselves allocated the risk of such events.

The interpretation of force majeure clauses is paramount. In Energy Watchdog (Ref 3, 16), the Supreme Court meticulously examined the force majeure clauses in Power Purchase Agreements (PPAs). It held that an increase in coal prices due to changes in Indonesian law did not qualify as a force majeure event under the specific terms of the PPA, which excluded cost increases due to fuel price hikes from the ambit of force majeure. This underscores that the express terms of the contract will govern, and a force majeure clause will not normally be construed to apply where the contract provides for an alternative mode of performance, or where the event merely makes performance more expensive (Energy Watchdog (Ref 6), citing Treitel).

The term "usual Force Majeure Clause" was considered in Dhanrajamal Gobindram v. Shamji Kalidas And Co. (1961 SCC 0 1285 (Ref 4)), where the Court, emphasizing commercial context, found that such a term implies a standard, well-understood clause within the industry, thus providing sufficient certainty. A force majeure event is generally understood as one which is beyond the control of the contractor and "not foreseeable" (Pasithea Infrastructure Limited v. Solar Energy Corporation Of India & Anr., 2017 SCC ONLINE DEL 12562 (Ref 17)). The distinction between the English law doctrine of frustration (which brings the contract to an end automatically) and the French law concept of force majeure (which may excuse non-performance of a particular obligation without necessarily ending the contract) has been noted, with force majeure clauses in English law (and by extension, Indian law influenced by it) being creatures of contract (R. Narayanan (Ref 18), citing Goode on Commercial Law).

Judicial Pronouncements: Shaping the Landscape of Frustration and Force Majeure

Several landmark judgments have shaped the understanding and application of these doctrines in India.

Satyabrata Ghose v. Mugneeram Bangur & Co. (1954): The Locus Classicus

This Supreme Court decision (Ref 1, 15) is foundational. It established that Section 56 of the Indian Contract Act is the governing provision for frustration, applying a practical interpretation to "impossibility." The case involved a contract for the sale of land for development, which was subsequently requisitioned by the government during wartime. The Court held that the requisition orders, being temporary in nature and not rendering the contract's ultimate object impossible, did not frustrate the contract. It also affirmed that Section 56 applies to contracts for the sale of land. The Punjab & Haryana High Court in Gurdarshan Singh And Another, . v. Bishen Singh, . (1961 (Ref 14)) reiterated that Indian courts should primarily look to Sections 32 and 56 of the Contract Act, referencing Satyabrata Ghose.

Alopi Parshad & Sons Ltd. v. Union of India (1960): Sanctity of Contractual Terms

In Alopi Parshad (Ref 2), the Supreme Court reinforced the principle that a contract does not become frustrated merely because its performance becomes commercially onerous or unprofitable. The appellants, contracted to supply ghee, faced altered conditions due to World War II and sought increased remuneration. The Court held that the contract, having been modified by mutual consent to address wartime exigencies, remained binding, and unforeseen difficulties did not absolve the parties from their contractual obligations unless the very basis of the contract was destroyed.

Energy Watchdog v. Central Electricity Regulatory Commission (2017): Interpreting Force Majeure in Modern Commercial Contracts

This case (Ref 3, 6, 16) is significant for its detailed analysis of force majeure clauses in the context of PPAs. Adani Power sought relief under force majeure due to increased coal prices resulting from changes in Indonesian law. The Supreme Court, reversing the Appellate Tribunal for Electricity, held that the PPA's specific exclusion of fuel price hikes from force majeure events was determinative. The judgment emphasized that mere price fluctuations or economic unviability, unless specifically covered by the force majeure clause or rendering performance radically different, do not constitute force majeure or frustration. The decision also touched upon the limited scope for invoking regulatory powers to grant compensatory tariffs when a PPA under Section 63 of the Electricity Act, 2003, governs the relationship (Ref 3, 16, 21).

Naihati Jute Mills Ltd. v. Khyaliram Jagannath (1968): Self-Induced Frustration and Arbitrability

In Naihati Jute Mills (Ref 5), the Supreme Court dealt with a claim of frustration where the appellants failed to procure an import license for jute. The Court found that the inability to obtain the license was due to the appellants' own stock levels and not an external, unforeseeable event qualifying as force majeure or frustration under Section 56. This highlights the principle that frustration cannot be self-induced. The Court also affirmed that an arbitration clause remains effective to cover disputes relating to alleged frustration of the contract.

Specific Considerations in Applying the Doctrines

Impact of Governmental Actions and Policy Changes

Governmental actions, such as policy changes or refusal of licenses, can sometimes lead to frustration. In Firm Bachhraj Amolakchand (Ref 8), the Madhya Pradesh High Court cited with approval a case where a subsequent prohibition on sending goods outside a state, closing railway bookings, was held to frustrate the contract under Section 56. However, as seen in Naihati Jute Mills (Ref 5), not every failure to obtain a license due to governmental policy will frustrate a contract, especially if the failure is attributable to the party's own circumstances or if the risk was implicitly assumed. In Energy Watchdog (Ref 3, 16), changes in foreign law affecting costs were held not to be a force majeure event under the specific contract terms.

Foreseeability and Contractual Stipulations for Supervening Events

The foreseeability of an event is a relevant factor. If parties contemplate the possibility of an intervening circumstance and expressly stipulate that the contract would stand despite such circumstance, there can be no case of frustration (Delhi Development Authority v. Kenneth Builders (Ref 10), citing Matthey v. Curling (1922)). A force majeure event must generally be one that the party did not foresee and could not, with reasonable diligence, have foreseen (Pasithea Infrastructure (Ref 17)). If a party takes upon itself an obligation, such as obtaining permissions, it may be difficult to plead force majeure if such permissions are delayed or rejected, as this could be considered a foreseeable part of the contractual undertaking (Ref 17).

Consequences of Frustration: Restitution under Section 65

When a contract becomes void under Section 56, Section 65 of the Indian Contract Act, 1872, comes into play. Section 65 mandates that any person who has received any advantage under such a void contract is bound to restore it, or to make compensation for it, to the person from whom he received it. The Supreme Court, as noted by the Calcutta High Court in PRAKASH KUMAR THAKER v. THE JHARKHAND STATE COOPERATIVE LAC MARKETING AND PROCUREMENT FEDERATION LIMITED (2023 (Ref 11)), has elucidated that Section 65 provides the basis for restitution for "failure of basis" when a contract becomes subsequently void. If an advantage derived under the contract is returned, further compensation may not be mandated under this section (Ref 11).

It is noteworthy that the application of common law remedies like frustration or force majeure may be excluded or modified in specific statutory regimes, such as the Insolvency and Bankruptcy Code, 2016, with respect to CoC-approved resolution plans, due to the overriding nature and specific mechanisms of such statutes (Ebix Singapore Private Limited v. Committee Of Creditors Of Educomp Solutions Limited And Another, 2022 SCC 2 401 (Ref 20)).

Conclusion

The doctrines of frustration and force majeure play a vital role in Indian contract law by providing a framework for addressing supervening events that fundamentally alter the performance of contracts. Section 56 of the Indian Contract Act, 1872, provides the statutory basis for frustration, interpreted by courts to mean not just literal impossibility but also practical impossibility that upsets the very foundation of the contract. However, the threshold for proving frustration is high; mere commercial hardship, increased expense, or onerousness of performance are generally insufficient grounds, as established in landmark cases like Alopi Parshad and Energy Watchdog.

Force majeure clauses, when included in contracts, allow parties to define and allocate risks associated with specific supervening events. The interpretation of these clauses is strictly based on their wording and the commercial context. Indian courts, while drawing from English common law principles for interpretative guidance, ultimately ground their decisions in the provisions of the Indian Contract Act and the specific terms agreed by the parties. The judiciary consistently emphasizes the sanctity of contracts, intervening only when performance becomes genuinely impossible or radically different from what was originally undertaken, thereby ensuring a balance between contractual certainty and equitable relief in unforeseen circumstances.