Covid-19 and Force Majeure: Part IV

A recognised exception to the doctrine of frustration under Section 56 of the Contract Act is self-induced frustration, i.e. the event which is alleged to have frustrated the contract must not arise from the acts of the promisor. To illustrate, A undertakes to manufacture and supply certain goods to B but fails to do so since A’s factory caught fire. If the fire was caused due to A’s own acts, A cannot contend that the contract is frustrated. An important issue which arises in relation to the exception of self-induced frustration (‘Exception’) is its applicability to cases of discharge under Section 32.

It is well settled that if a contract contains a force majeure clause, the consequence of a force majeure event on the contractual rights and obligations of parties is governed by Section 32 of the Contract Act. Usually, such clauses would suspend or terminate parties’ obligations only if the force majeure event is not caused due to the fault of the promisor. In such cases, the Exception applicable in the context of Section 56 is contractually incorporated and will preclude the promisor from seeking discharge under Section 32. The complexity arises when a force majeure clause is silent on the Exception. In such a situation, is the promisee precluded from relying on the Exception?

This issue arose in the Supreme Court’s recent decision in National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A. NAFED had contracted to supply 5000 tons of groundnuts to Alimenta in the 1979-80 season, for which it had obtained prior government approval. The contract contained a force majeure clause which stated that if the export was prohibited by the government, the contract would be cancelled. NAFED could supply only 1900 tons in the 1979-80 season and the parties agreed in an addendum that the balance 3100 tons would be supplied in the 1980-81 season. Even though the government had allotted export quota to NAFED for the 1980-81 season, the quota was only for new contracts and did not permit carrying forward exports from previous years’ contracts. Consequently, NAFED pleaded that the contract had been frustrated. The Arbitral Tribunal held that the frustration was self-induced as NAFED had itself proposed to the government to deny permission for carrying forward previous years’ exports. The High Court did not interfere with Tribunal’s finding, but the Supreme Court set it aside. The Court cited several judgments for the proposition that where the contract contains a force majeure clause, dissolution of the contract would take place under the terms of the contract and such cases would be outside the purview of Section 56. It then observed as follows:

“52. In the present case, the High Court observed that it was a case of self-induced frustration. The High Court ignored and overlooked that it was not a case of frustration under section 56 of the Contract Act, but there was a stipulation in Clause 14 of the Agreement, the effect of which was ignored and overlooked…”

It, thus, appears that the Court’s reason for not applying the Exception was that the force majeure clause (Clause 14) in the contract did not provide for it. Consequently, according to the Court, if a force majeure is silent on the Exception, the promisee cannot rely on Section 56 and the promisor can be excused for non-performance on account of impossibility of performance even though the impossibility occurred due to the promisor’s fault.

It is submitted that this conclusion is incorrect and based on the assumption that Sections 32 and 56 are mutually exclusive in nature. Although the Supreme Court has indeed held that a contract which contains a provision for discharge on the happening of a force majeure event would be governed by Section 32 and not Section 56, it does not imply that the exceptions to the doctrine of frustration under Section 56 cease to be applicable. It simply implies that if the force majeure clause compels performance by, or discharges, the promisor, on the happening of certain events, the promisor cannot rely on Section 56 to argue the contrary. This is best explained by the Supreme Court’s decision in Energy Watchdog v. CERC. In that case, the contract contained a force majeure clause and the promisor alleged that contract was frustrated on account of rise in prices of Indonesian coal. The Court held that according to the force majeure clause, the rise in prices did not discharge the promisor from its obligations under the contract. The promisor could not, thereafter, take recourse to Section 56 to contend that the contract stood frustrated.

As I have discussed in an earlier post, the justification behind the non-application of Section 56 where the contract contains a force majeure clause is that the force majeure event has already been contemplated by the parties and therefore the contract must govern the relationship between the parties on the occurrence of that event. At the same time, the non-application of Section 56 on the ground that parties contemplated the force majeure events does not imply that Section 56 ceases to apply in its entirety on issues not contemplated by parties. As the Supreme Court observed in Energy Watchdog, force majeure clauses need not be exhaustive. The failure to incorporate the exception of self-induced frustration (or the exception contained in the third paragraph of Section 56) cannot be to the detriment of parties. A contrary interpretation would lead to exonerating the promisor for its own deliberate act (which may also constitute a breach of contract) which frustrated the contract. Taken to its logical conclusion, it would mean that an artist who has contracted to perform at a theatre may deliberately destroy the theatre by fire and successfully claim that she is discharged from performance, if the contract contains a force majeure clause but is silent on the Exception. This manifestly absurd interpretation must be rejected. It is only if the force majeure clause expressly excludes the Exception that the exception may not apply. So, for instance, in NAFED, had the force majeure clause stated that the contract would be cancelled in the event of impossibility of performance irrespective of whether either party caused or contributed to the impossibility, the Exception would not apply. The express exclusion of the Exception, however, is an unlikely scenario.