Impact of Force Majeure on Contracts - P.C.

Markanda*

FORCE MAJEURE - MEANING OF

Force majeure or Act of God, has been defined as something occasioned by the elementary
forces of nature unconnected with the agency of man or other cause, and a common carrier
is entitled to immunity in respect of loss so occasioned if he can show that it could not have
been prevented by any amount of foresight, pains and care reasonably required of him. (1)
The expression force majeure is not a mere French version of the Latin expression "vis
major" and strikes, breakdown of machinery and such thing which though normally not
included in "vis major" are included in force majeure. Where reference is made to "force
majeure" the intention is to save the performing party from the consequences of anything of
the nature stated above or over which he has no control. (2)
The expression force majeure is taken from the Code Napoleon and has a more extensive
meaning than "Act of God" or "vis major", though it may be doubtful whether it includes all
"causes you cannot prevent and for which you are not responsible". (3)
The requirements of force majeure are:
a) It must proceed from a cause not brought about by the defaulting party's default;
b) The cause must be inevitable and unforeseeable; and
c) The cause must make execution of the contract wholly impossible.(4)
PROTECTION OF FORCE MAJEURE CLAUSE-WHEN NOT AVAILABLE
The party seeking protection of the force majeure clause in the contract is legally bound to
prove that he is entitled to be absolved of the contract obligations because of the supervening
event and that he could not have foreseen the event with due diligence and that despite all
care and caution could not have control over it. There may be certain situations where a party
may not be extended protection of force majeure clause.
An agreement was made whereby one party agreed to construct a Hydroelectric station on a
river and supply electricity to the other party, in return for his giving up rights over the river. A
subsequent law forbade the construction of such station except under Government authority.
Held, this did not amount to force majeure since it had not been alleged that the law has
proved an insurmountable obstacle to performance of the contract; the Government might
have been given permission for the work to be carried out, if asked. Accordingly, the
proposed builder of the power station was liable in damages. (5)
Builders agreed to carry out works at certain docks. Shortly after the contract was made, a
collective agreement resulted in increased wages being paid to workmen. The builders
sought to recover the extra wages from the employer, on the ground that the rise in rates
amounted to force majeure. It was held, by the Cour de Causation that there was no force
majeure. The rise in rates simply rendered the work more onerous, but not impossible. (6)
In Matsoukis Vs Priestman & Co. (7), it was held that in English Law, force majeure applied to
dislocation of business caused by a universal coal strike, and accidents to machinery; but that
it did not apply to a delay caused by bad weather, football matches, or a funeral. "These are
the usual incidents interrupting work and the defendants, in making their contract, no doubt

took them into account." (8)

On the other hand, it was held that shippers of goods are not relieved by a force majeure
clause simply because the price of goods was due to action by the exporting country's
Government. (9)
The appellants were liable for penalty for failing to supply electricity, but subject to inevitable
accident or force majeure. Two of the appellants' workmen had refused to do the work
necessary to maintain supply. The appellants contended that had they dismissed the
workmen, it would have probably resulted in all their employees terminating their
engagement. Held, by the Court of Appeal, force majeure applied only to physical or material
constraints, and although it applied to strike actually proceeding, it did not apply to fear,
however reasonable, of the consequences of threatened action. Per BANKES L.J., "The
appellants yielded to a threat, and so failed to persist in an attempt to do the work which
might have been successful." (10)
ACT OF GOD
The expression "Act of God" has been variously defined as a circumstance "which no human
foresight can provide against, and of which human prudence is not bound to recognise the
possibility";(11) "such an operation of the forces of nature as reasonable foresight and ability
could not foresee or reasonably provide against";(12) "events which cannot be foreseen, or
which, if they can be foreseen cannot be guarded against".(13)
High winds have been rejected as Acts of God when put forward as a defence by contractors
in construction contracts.(14)
Where a newly constructed road had collapsed in the face of exceptional rainfall damaging
adjoining property, ATKIN J. said:
"I do not think that in a case of this kind it is strictly correct to introduce the notions connoted
by the phrase 'Act of God'. The term is appropriate where liability is sought to be imposed
upon a person who, by reason of his calling or otherwise, such as that of a common carrier,
has assumed as absolute liability to see that the plaintiffs' property is left free from harm.
Such absolute liability may be subject to an exception in respect of damage caused by 'Act of
God', which would ordinarily be defined as such an operation of the forces of nature as
reasonable foresight and ability could not foresee or reasonably provide against. But where
the liability sought to be imposed arises only from negligence, it becomes unnecessary to
consider whether all the requirements of the above definition have been fulfilled. All that is
necessary for the defendants is to negative the plaintiffs' allegation that there has been an
absence of reasonable care and skill on the part of the defendants".(15)
FRUSTRATION - MEANING, SCOPE AND APPLICABILITY
Section 56 of the Indian Contract Act, 1872 stipulates:
"Agreement to do impossible act: An agreement to do an act impossible in itself is void.
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.
Compensation for loss through non-performance of act known to be impossible or unlawful:
Where one person has promised to do something which he knew, or, with reasonable
diligence, might have known, and which the promisee did not know, to be impossible or

unlawful, such promisor must make compensation to such promisee for any loss which such
promisee sustains through the non-performance of the promise."
Frustration may be defined as the occurrence of an intervening event or change of
circumstances so fundamental as to be regarded by the law both striking at the root of the
agreement, and as entirely beyond what was contemplated by the parties when they entered
into the agreement. If an event which could not be foreseen by both parties supervenes,
frustration would apply. Section 56 of the Indian Contract Act, 1872 does not deal with the
cases in which an event, the parties took it for granted will never happen does happen and
makes the performance of the contract impossible. If it be held that this Section is exhaustive,
no relief can be granted to any of the parties on the happening of such an event, but this
would be against the very principle underlying the Section.(16)
If the inability to perform the contract is due to the fault of one of the parties, he cannot
successfully plead frustration. It is also true that if the parties expressly contract with
reference to the occurrence of the supervening events, frustration is inapplicable. But there is
another type of case outside these rules. The parties when they made the contract, may have
foreseen the supervening event as probable, but may have made no express provision with
respect to it. Here, if such event occurs, frustration can be pleaded.(17)
LORD RADCLIFF has succinctly summarised the law relating to frustration of contracts as
under:
"....frustration occurs whenever the law recognises that without default of either party, a
contractual obligation has become inapplicable of being performed because the
circumstances in which the performance is called for would render it a thing radically different
from that which was undertaken by the contract. '....It was not this that I promised to do.'
There is, however, no uncertainty as to the materials upon which the Court must proceed.
'The data for decision, on the one hand, the terms and conditions of the contract, read in the
light of the then circumstances and, on the other hand, the events which have occurred.' In
the nature of thing there is often no need for any elaborate enquiry. The Court must act upon
a general impression of what its rule requires. It is for that reason that special importance is
necessarily attached to the occurrence of an unexpected event that, as it were, change the
face of the things. But even so, it is not hardship or inconvenience or material loss itself which
calls the principle of frustration into play."(18)
LORD RADCLIFF, in the same judgment, further states:
"There must be as well such a change in the significance of the obligation that the thing
undertaken would, if performed, be a different thing than that contracted for."(19)
Frustration is a developing concept; like negligence, its categories are never closed but are
as wide as the categories of human conduct. Its effect is immediate, automatic, it guillotines a
contract without the option of either party which becomes dissolved. If the parties later purport
to act under it they are really making a new contract. The Court supplying enlightened
common sense to do justice, decides whether the contract is at an end. The doctrine is
invented by the Court in order to supplement the defects of the actual contract. The theory of
the implied condition has never been acted on by the Court as a ground of decision, but is
merely stated as a theoretical explanation.(20)
IMPOSSIBILITY OF PERFORMANCE AMOUNTS TO FRUSTRATION
A man can be expected to do what is humanly possible but he cannot be expected morally or
legally to do what is not physically possible. It cannot be disputed that when a thing is beyond
the human control it cannot be expected from the party which had undertaken to do the work
to suffer the consequences of not proceeding with the contract work and in such a situation

both the parties are relieved from their contractual responsibilities.

The word "impossible" in Section 56 of the Indian Contract Act, 1872 has not been used in
the sense of physical or literal impossibility. The performance of an act may not be literally
impossible, but it may be impracticable and unless from the point of view of the object and
which the parties had in view; and if an untoward event or change of circumstances totally
upsets the very foundation upon which the parties rested their bargain, it can very well be
said that the promisor finds it impossible to do the act which he promised to do. (21)
If the performance of a contract becomes impracticable or useless having regard to the object
and purpose the parties had in view then it must be held that the performance of the contract
has become impossible. But the supervening event should take away the basis of the
contract and it should be of such a character that it strikes at the root of the contract.(22)
The essential principles on which the doctrine of frustration is based is the impossibility, or,
rather, the impracticability in law or fact of the performance of a contract brought about by an
unforeseen or unforeseeable sweeping change in the circumstances intervening after the
contract was made. In other words, while the contract was properly entered into in the context
of certain circumstances which existed at the time it fell to be made, the situation becomes so
radically changed subsequently that the very foundation which subsisted underneath the
contract as it were gets shaken, nay, the change of circumstances is so fundamental that it
strikes at the very root of the contract, then the principle of frustration steps in and the parties
are excused from or relieved of the responsibility of performing the contract which otherwise
lay upon them.(23)
Whether the contract has become impossible of performance can be determined with
reference to the terms of the contract and the supervening circumstances. If the supervening
circumstances are such which were within the contemplation of the parties at the time of the
contract or which could reasonably be within their contemplation, it could take the case out of
the purview.(24)
HAPPENING OF UNPRECEDENTED EVENTS CAUSES FRUSTRATION
To attract the plea of frustration, it must be shown that the situation has changed so
drastically and so radically that neither party to the contract could have at all foreseen that
because of something happening at another place which may be a foreign country would
result in execution of the contract almost as good as an impossibility. The impact which the
market receives due to an event happening elsewhere in the guiding factor for determining
whether or not frustration has occurred.
Where after the firm price contract for supply of transformers there was a subsequent 400%
rise in price of transformer oil due to the war, there was frustration of contract. The abnormal
increase in price due to war condition, was an untoward event or change of circumstances
which "totally upset the very foundation upon which the parties rested their bargain."
Therefore, supplier could be said to be finding itself impossible to supply the transformers
which it promised to do.(25)
The parties to an executory contract are often faced, in the course of carrying it out, with a
turn of event which they did not at all anticipate - a wholly abnormal rise or fall in prices, a
sudden depreciation of currency, an unexpected obstacle to execution, or the like. Yet this
does not in itself affect the bargain they have made. If, on the other hand, a consideration of
the terms of the contract, in the light of the circumstances existing when it was made, shows
that they never agreed to be bound in a fundamentally different situation which has
unexpectedly emerged, the contract ceases to bind at that point - not because the Court in its
discretion thinks it just and reasonable to qualify the terms of the contract, but because, on its
true construction it does not apply in that situation.(26)

COMMERCIAL UNPROFITABILITY NO GROUND FOR FRUSTRATION

There is no frustration where performance of the contract remains physically and legally
possible though commercially unprofitable. The law is well settled that the doctrine of
impossibility of performance or frustration cannot be applied to cases of commercial
transaction. Impossibility of performance or frustration cannot be called commercial
impossibility. Mere commercial impossibility will not excuse a party from performing the
contract. Mere increased cost of performance or losing in a transaction does not make the
contract impossible. A man is not prevented from performing his contract by mere economic
unprofitableness.(27)
The impossibility referred to in Section 56 of the Indian Contract Act, 1872 is not what may be
called "commercial impossibility". An absolute contract involving unconditional terms by way
of obligation undertaken by one of the contracting parties may, if enforced, result in hardship,
prejudice, loss or detriment to the promisor. But the loss or damage suffered by the promisor
in the course of fulfilling the obligations cannot absolve him from liability in the least degree.
The mere fact that the contract has been rendered more onerous does not of itself, give rise
to frustration.(28)
Where the parties entered into a contract of sale of material, the contract does not get
frustrated by a subsequent Government notification fixing a higher price for that material,
when the notification specifically mentioned that it had no retrospective effect and also since
there was no term in the contract indicating that the rate was to depend upon changes made
by the Government in the price from time to time. (29)
EVENTS LEADING TO FRUSTRATION
In commercial contracts, where the contract becomes impossible of performance by reason
of a state of war or by an act of the executive Government, or the contract which would
otherwise be expected to be ordinarily performed, is delayed by reason of certain regulations
imposed by the Government making the performance of such contract dependent upon the
grant of license or permit, the parties need not wait for an indefinite period in the hope of the
relaxing of the control orders or the granting of license and permit.(30)
Performance of a contract may become impossible because of the destruction of subjectmatter or of anything essential to the performance of the contract or, in case of contract of
service, by death or illness of the party concerned. A contract may become impossible by
change in law which has the effect of rendering a contract, which was lawful at the time it was
made unlawful. A contract may also become impossible of performance because a state of
things which was the basis of the contract had ceased to exist and finally a contract may
become impossible of performance in the sense that circumstances have intervened which
render the performance within the time, in the way contemplated, impossible.(31)
2. The provision under the New Act that the award to become a decree naturally without In
the context of building and engineering contracts, frustration will normally arise by reason of
some supervening event such as destruction of the entire site by fire or flood, or the passage
of legislation rendering the work illegal. It is important to appreciate that the supervening
event must so unexpected and beyond the control of the parties, even as a possibility, that
neither party can be said to have accepted the risk of the event taking place when
contracting. It is precisely for this reason that frustration can only rarely come about in
building and engineering contracts, since their performance is, as a matter of reasonable
foresight, hedged about with many uncertainties and far more likely to be prevented by
physical difficulties than in the case of the other types of contract. In general, the contractor is
taken to have assumed the risk of the many uncertainties and difficulties associated with the
work in this field. The difficulty of the work is not in general a valid excuse for nonperformance of a contract, nor is a contractor entitled to abandon work which proves

unexpectedly onerous.(32)
FRUSTRATION CAUSES AUTOMATIC DISSOLUTION OF CONTRACT
The discharge of a contract by frustration is not the result of an act or volition of a party to it.
However, the presence of already existent or supervening of certain set of circumstances,
which excused the performance of the contract amounts to an automatic dissolution of the
contract not dependent upon the attitude of the parties to the contract.(33)
When frustration occurs, it avoids the contract itself and discharges both parties
automatically. In this situation, a plaintiff suing upon the contract can only succeed if he can
show that the even which would otherwise have frustrated the contract was due to the
defendant's default. It is for the plaintiff who seeks to avoid the legal result of an otherwise
frustrating event to establish that the destruction of the subject-matter of the contract was due
to the neglect or default of the defendant.(34)
When people enter into a contract which is dependent for its performance on the continued
availability of a specific thing (Railway wagons) and that availability comes to an end by
reason of circumstances beyond the control of the parties (e.g., Governmental actions), the
contract is dissolved.(35)
FRUSTRATION MUST NOT BE SELF-INDUCED
The essence of 'frustration' is that it should not be due to the act or election of the party and it
should be without any default of either party and, if it was party's own default which frustrated
the adventure, he could not rely on his own default to excuse him from liability under the
contract.(36)
A contracting party cannot be relieved from the performance of his part of the contract if the
frustration of the contract is self-generated or the disability is self-induced.(37)
PHYSICAL IMPOSSIBILITY
In commercial contracts which become impossible of performance by reason of a state of war
or by an act of the executive Government or the contract which would otherwise be expected
to be ordinarily performed, is delayed by reason of certain regulations imposed by the
Government making the performance of such contract dependent upon the grant of licence or
permit, the parties need not wait for an indefinite period in the hope of the relaxing of the
control orders or the granting of licence and permits. (38)
An indefinite stoppage of work pursuant to a Government order coupled with a compulsory
sale of plant has been held to be sufficient to cause frustration.(39)
ARBITRATION CLAUSE SURVIVES WHEN CONTRACT FRUSTRATES
In cases of frustration, it is the performance of the contract which comes to an end but the
contract would still be in existence for purposes such as the resolution of disputes arising
under or in connection with it. The question as to whether the contract becomes impossible of
performance and was discharged under the doctrine of frustration would still have to be
decided under the arbitration clause which operates in respect of such purposes. (40)
Russell (41) states:
"The test in such cases has been said to be whether the contract is determined by something
outside itself, in which case the arbitration clause is determined with it, or by something
arising out of the contract, in which case the arbitration clause remains effective and can be

enforced"
In Chitty on Contract (42) it has been stated as under:
"So that the law must be now taken to be that when an arbitration clause is unqualified such a
clause will apply even if the disputes involve an assertion that circumstances had arisen
whether before or after the contract had been partly performed which has the effect of
discharging one or both the parties from liability, e.g. repudiation by one party accepted by
the other, or frustration."
ARBITRATION CLAUSE WHEN DOES NOT SURVIVE ON FRUSTRATION
Before the partition of India, the applicants had entered into a contract with the respondents,
both residing in Amritsar. One of the terms of the contract was that any dispute or claim of
whatever nature relating to or arising our to the contract should be referred to arbitration of
two European Merchants at Karachi, one to be appointed by each party and in accordance
with the provisions of the Arbitration Act. Karachi subsequently became a part of foreign
Dominion, which contingency was never contemplated by the parties. It was held that due to
change of circumstances, the contract of arbitration was frustrated and must, therefore, be
held to have been dissolved as a whole. (43)
CONCLUSION
Promises and reciprocal promises under a contract come to an end when force majeure
conditions occur. Force majeure, or Act of God, occurs when:
1. The cause is not created by the defaulting party's fault;
2. The cause must be inevitable and unforeseeable; and
3. The cause must make execution of the contract wholly impossible.
The net effect of force majeure is that it is the performance of the contract which comes to an
end but the contract would still be in existence for purposes of the arbitration agreement. The
essential element of frustration is that it must not be self-generated or the disability selfinduced. Mere rise in prices cannot attract conditions of force majeure.