NAME: PRABHSIMRAN SINGH

BATCH: 2020-2023
SEMESTER: Ist (LLB- Weekend)
COURSE CODE: K-1005
TOPIC: The Doctrine of Frustration & its
Applicability in times of COVID-19
Contents:
1. What is the Doctrine of Frustration?
2. Act of GOD
3. Impact of outbreak and consequent lockdown
4. English Law Perspective:
5. Does Spread of COVID-19 in the Aggregate Qualify as an Act of
God?
6. Conclusion
 What is the Doctrine of Frustration ?

Frustration in general scenario means defeated and this term has been widely used in
agreements and contract between parties. The term frustration is being used to deal with
unsuccessful transactions which could not be completed due to any reason. In law of
contracts doctrine of frustration has emerged as one of the most common issues which have
arrived to deal with failed contracts

Section 56 deals with the doctrine of frustration as being acts which cannot be performed.
Under this doctrine a promisor is relieved of any liability under a contract in the event of the
breach of contract and contract will be deemed to be void.
Section 56 is based on the maxim “ les non cogit ad impossibilia” which means that the
law will not compel a man to do what he cannot possibly perform. The doctrine of
frustration is however applicable only in 2 cases
 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 promisor.

Generally, frustration of contract can be in the following cases

1. Death or incapacity of a party:- Where a party to the contract has died after entering
into contract or the party is incapable of performing the contract, in such a situation
the contract will be void.
2. Frustration by virtue of legislation:- Where, a law promulgated after the contract is
made, makes the performance of the agreement impossible and thereby the agreement
becomes void .
3. Frustration due to change of circumstances:- This particular situation deals with
those cases where there was no physical impossibility of performance of the contract,
but because of the change in circumstances, the main purpose for which the contract
was entered has been defeated

“The “doctrine of frustration” have become crucial facets of law in the time of the
global pandemic, COVID-19, and have become crucial facets of contracts and
accountability. Section 32 and section 56 of Indian Contract Act, 1872 play an
important role in this”.

Act of God

Under contract law, force majeure is a provision which absolves a party from non-
performance of contractual obligations which is caused by circumstances or events out of the
parties’ control and makes performance impossible. These events may include war, floods,
drought, civil unrest or terrorist attack, or sudden natural calamities. Covid-19 could
effectively be covered under natural calamities and so parties can claim a defense under force
majeure. This clause needs to be re-examined or else Covid-19 could be upheld for each and
every contract.
The 148-year-old law, Indian Contract Act, 1872 controlling Indian contracts has not
expressly referred to force majeure. But, Section 32 and Section 56 of Indian Contract Act,
1872 have relevancy in such a circumstance.

Section 32 of ICA,1872 talks about the enforcement of contracts contingent on an event

happening i.e. contingent contracts to do or not do anything based on if an uncertain future
event happens, cannot be enforced by law unless and until the event has happened. If an event
becomes impossible in itself the event becomes void under this section. Here are some
illustrations:

Illustration: 1) A, a person, contracts with another person, B, that A will pay B if B marries
C. If C then dies without marrying B. Now this contract becomes void.

Illustration: 2) A, a person, makes a contract with another person, B, for buying B’s horse if
A survives C. This contract of obligation cannot be enforced unless and until C dies in A’s
lifetime.

Section 56 talks about agreements to do impossible acts: An agreement to do an impossible

act is void in itself. And impossibility of contract or performance of contract is the central
idea upon which the Doctrine of Frustration is based. And both these words are used as
convertible expressions. Generally, Doctrine of Frustration can be applied in many cases but
mostly applicable in two cases which are:

1) When the object of a contract becomes impossible to execute,

or,

2) When any unforeseen event occurs which is beyond the control of the bound party and
which makes the performance of the contract impossible.

Section 56: Contract to do act afterwards becoming impossible or unlawful.—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.

Where a contract itself either impliedly or expressly contains a term, according to which
performance would stand discharged under certain circumstances, the dissolution of the
contract would take place under the terms of the contract itself. If, however, frustration is to
take place dehors the contract, it will be governed by Section 56 of the Contact Act. In other
words, if a contract has an express or implied ‘force majeure’ clause, it will apply over the
principles under Sec 56 of the Contract Act.

The doctrine of frustration of contract is not to be lightly invoked; mere incidence of

expense or delay or onerousness is not sufficient; and there has to be, a break in identity
between the contract and in its performance in the new circumstances, for such doctrine to be
applicable. It is clear from the above that the doctrine of frustration cannot apply to the cases
where the fundamental basis of the contract remains unaltered.
 .

IMPACT OF OUTBREAK AND CONSEQUENT LOCKDOWN:

1. Loans

To ease impact of lockdown, the Reserve Bank of India (RBI) has announced a series of
measures in the Monetary Policy Committee (MPC) meeting held on 27 March 2020. As part
of the measures, the RBI has imposed a 3 month moratorium/temporary halt on all term loans
(on home, personal, agriculture, auto, crop loans) outstanding as on 1 March 2020 and
allowed banks to defer payment of installments on loans including EMI, credit card dues,
principal or interest payments, bullet payments, until 31 May 2020. This means, that the
tenure of such loans will be extended by 3 months after the moratorium. However, interest
shall continue to accrue on outstanding portion of the term loan during the moratorium period
i.e. at the end of three months, the interest will be added to the outstanding term loan and will
have to be paid.

In addition to the above, the repo rate and reverse repo rates have been reduced, cash
reserve ratio (CRR) of banks and marginal standing facility have also been reduced apart
from long term repo auctions to inject liquidity of 3.74 lakh crore into the system.

2. Government Contracts:

i. The Ministry of Finance, Department of Expenditure, Procurement Policy Division on

19 February 2020 issued an Office Memorandum No. F. 18/4/2020-PPD (‘O.M.’) clarifying
that disruption of supply chains due to spread of Corona virus in China and other countries
shall be regarded as a Force Majeure event i.e. a case of natural calamity and be covered
under the Force Majeure clause referred in Para 9.7.7 of the ‘Manual of Procurement of
Goods, 2017’ issued by the Department. The OM clarifies that on disruption of supply chain,
the force majeure clause in Para 9.7.7 of the Manual of Procurement of Goods, 2017 may be
invoked whenever appropriate following due procedure, as prescribed. This will provide
relief to those companies affected by such disruptions having Central Government contracts.
[5].

ii. Para 9.7.7 of the Manual of Procurement of Goods, 2017 inter alia states that a force
majeure event does not excuse a party’s non- performance entirely, but suspends it for the
duration of the force majeure event. The clause requires a party to give notice of the force
majeure event as soon as it occurs and cannot be claimed ex post facto/with retrospective
effect.

3. Private Contracts

i. In case of private contracts, if the contract has an express or implied Force Majeure
Clause, the obligation of the parties will be determined by the consequences specified in the
force majeure clause. In such a case, the terms of the contract would have to be examined to
determine what events enable parties to invoke the Force Majeure clause and whether
outbreak of a pandemic constitutes a force majeure event, subject to compliance of
requirements of notice etc., if any, as specified under the contract.
 ii. However, if there is no force majeure clause in a contract, or on occurrence of an event
dehors the contract, such as the outbreak of Covid-19, the common law principle of
‘frustration of contracts’ which is embodied in Section 56 of the Indian Contract Act 1872
shall govern the contract.

iii. In determining whether a contract is frustrated, an assessment of all relevant factors is

necessary i.e. the terms of the contract; factual background to the contract; parties knowledge
and expectations about risk when entering into the contract; the parties ability to perform the
contract in the circumstances which are said to have frustrated the contract.

4. Lease Agreements

i. The relationship between a Lessor and Lessee are governed by the Lease Agreement. In
absence of a force majeure clause in the Lease Agreement, the general law of Contract and
Transfer of Property will govern.

ii. Courts in India have generally taken the view that Section 56 of the Contract Act is not
applicable when the rights and obligations of the parties arise under a transfer of property
under a lease. Under a lease agreement, there is a transfer of right to enjoy that land/property.
If any material part of the property be wholly destroyed or rendered substantially and
permanently unfit for the purpose for which it was let out, because of fire, tempest, flood,
violence of an army or a mob, or other irresistible force, the lease may, at the option of the
lessee, be avoided. This rule is incorporated in Section 108(e) of the Transfer of Property Act
and applies to leases of land, to which the Transfer of Property Act applies, and the principle
thereof to agricultural leases and to leases in areas where, the Transfer of Property Act is not
extended. Where the property leased is not destroyed or substantially and permanently unfit,
the lessee cannot avoid the lease because he does not or is unable to use the land for purposes
for which it is let out to him.

iii. The fundamental basis of a lease agreement is possession of the leased premises by the
lessee. The question whether the outbreak of Covid-19 can be said to fall within the
expression ‘or other irresistible force’ in Section 108(e) is a question to be determined the
courts. However, presently, even though an unforeseen event not in contemplation of the
parties has occurred i.e. the outbreak of Covid-19, the event being temporary and transitory in
nature, till the time it is not shown that the fundamental basis of the contract i.e. the
possession of premises of the Lessor, is destroyed, or the leased premises has become
permanently unfit for use, the contract cannot be said to be frustrated and the Lessee is bound
to pay rent in terms of the Lease Agreement.

5. Employment/ Service/Retainer Agreements

i. In case of employment agreements, in order to determine whether the doctrine of

frustration of contracts as embodied in section 56 of Indian Contract Act would apply, in
absence of an express or implied clause in the agreement, what has to be considered is
whether at the time of entering into the contract, the parties could have reasonably anticipated
the occurrence of the force majeure event i.e. in the present scenario- outbreak of Covid-19.
Whether, such event is beyond the affected contracting party’s control and whether
performance of the contract/service/job becomes ‘impossible’ or ‘unlawful’ due to the
occurrence of the event.

ii. Subject to the intention of the parties, term/duration of the employment agreement and
the fundamental basis/ foundation of the agreement, the outbreak of Covid-19, being
temporary and transitory in nature, is a temporary alteration of circumstances in which the
contract was made and even though it may be financially unfavorable or impractical or lead
to leading to monetary hardship for the employer it will not amount to frustration of a
contract of long term employment.

Illustration: 1) A, a person, contracted to sell the horse to B on 1st January 2020. But the
horse died on 31st Dec. Therefore, the previously made contract between A and B becomes
void because the object of the contract is not in existence.

Illustration: 2) A, a resident of India, entered into a contract with B, a resident of another

country i.e. China. Some portion of the contract was performed but a major portion was still
to be performed and the Government of India declares war on China and suspends all
transaction with China. After this the contractual obligation becomes void and party who is
unable to perform his obligation can claim the defense of impossibility of contract.

Illustration 2 is more relevant to the present context.

There are some specific situations in which the doctrine of frustration applies:

• Change of circumstances: A contract will frustrate where circumstances arise which make
the performance or fulfillment of contact impossible in the manner and the time
contemplated.
• Death or incapacity of Party: A party to a contract is excused from performance of the
contract if it depends upon the existence of the given person and that person dies or becomes
too ill to perform.
• Government, Administrative or Legislative Intervention: A contract will perish when
legislative or administrative intervention has so directly operated upon the specific
performance of the contract as to change the contemplated conditions of fulfillment.

The ongoing Covid-19 pandemic meets the first situation, making doctrine of frustration a
defense against the obligations to fulfill a contract. Hence, the World Health Organization
declared Coronavirus an Act of God and parties to a contract can use Coronavirus as a
defense or protection from legal consequences.

English Law Perspective:

The roots of the common law doctrine of frustration come from the decision in the case
Taylor VS. Caldwell, (1861-73). In this case it was held that if some unforeseen circumstance
occurs during the performance of a contract which makes it impossible to perform, in the way
that the fundamental basis of the contract requires, it need not be further performed, as
insisting upon such performance would be unjust. Prior to this decision, a contract had to be
performed no matter what unforeseen events came. So, previously the law of contracts in
England was extremely rigid.
The Supreme Court of India explained the ambit of Section 56 of ICA, 1872 in
the case Satyabrata Ghose v. Mugneeram Bangur and Co., 1954. The Court established a few
principles in this decision. The court held that he word ‘impossible’ in Section 56 does not
mean physical or literal impossibility. And a contract will be held impracticable or impossible
based on the purpose and object of the promissor. The court additionally held that if
unforeseen events upset the very foundation upon which the parties entered their agreement,
the contract can be said to be frustrated. So, in this case, war conditions were known to both
the parties and while making the contract both the parties were aware of the difficulty. In
such a situation, the requisition of property did not affect the root of the contract. Hence, the
contract between Bangur and Ghose wasn’t possible due to the prevalent conditions of war.
Bangur sought defense or protection under Section 56 of ICA,1872.

Does Spread of COVID-19 in the Aggregate Qualify as an Act of God?

For any act to be considered an Act of God, it must be unusual, extraordinary, grave and
sudden such that it is very hard to foresee such a turn of events. Conclusively, COVID-19
cannot be considered an Act of God by the court. This is a decision the court will soon have
to face.

Conclusion

On March 11, 2020, COVID-19 was declared a pandemic. This affects all the sectors across
the country and various countries’ economies. In this scenario, force majeure will be the
determining factor to understand the significance of these circumstances. The scenario of
India in case of force majeure will vary from case to case depending on the facts and
circumstances of each case. Under Indian Law and English Law both there is no allowance to
escape from any contractual obligation and any party still faces strict liability. So, force
majeure and the doctrine of frustration play very crucial roles in non-fulfillment of
performance of contracts.