The Doctrine of Frustration and Force Majeure: Disruptions in Supply Chains


December 14, 2022, 4:50 pm | Updated December 14, 2022, 4:52 pm IST
The Doctrine of Frustration and Force Majeure: Disruptions in Supply Chains
This article seeks to analyze the application of doctrine of frustration and force majeure with special reference to disruptions in supply chains.The effect of Covid-19 on supply chain contracts and how it interacts with the concepts of force majeure and frustration will be covered in a relative length in this article.
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Table of Contents

Introduction

A supply chain is a series of activities that take place from making the items to delivering them to the end client. The supply chain consists of several elements, including the procurement of raw materials, the refinement of those essential components, the creation of a product from the raw materials already present, sales, product delivery, and customer service. Supply chain interruptions were caused by COVID. The movement of commodities from production to delivery to the end consumer was hampered by many countrywide lockdowns. It was challenging for the distributors, manufacturers, and retailers to restock their machinery, equipment, and inventories. Importers and exporters found it difficult to transfer goods across international borders due to a significant disruption in all supply chain agreements, and businesses and individuals attempted to renegotiate their contracts.

Contractual concerns developed as a result of delays in contract execution or non-performance of contracts owing to unanticipated circumstances, which were brought to light through supply chain disruption. Contracts containing a "force majeure" clause have been released from execution without incurring any costs for the party that was adversely impacted. According to Black's Law Dictionary, a "force majeure" occurrence or impact is one that cannot be foreseen or controlled. However, if the parties did not include a force majeure provision, one party may seek remedy under Section 56 of the Indian Contract Act, of 1872. To do so, the party must demonstrate that the unanticipated occurrence rendered it impossible for the party to execute, which resulted in contract frustration.

 

Contracts for the supply chain during COVID-19 and the effect of the force majeure clause

The World Health Organization classified COVID-19 as a "global pandemic" in March 2020. In India, there was a complete lockdown by the third week of March. The enactment of the lockdown rendered contract execution impossible for anyone involved in the supply chain. The force majeure clause was invoked by parties looking to prevent contract fulfillment. The Indian Contract Act does not specifically address "force majeure" clauses, however, Section 32 of the Act does provide its essentials.

According to Section 32 of the Act, a contract is void if an unforeseeable event occurs during the performance that renders it impossible to carry out the terms of the agreement. The parties are free to discuss and postpone the contract to a later date that has been mutually agreed upon due to the unanticipated circumstance. However, if a contract cannot be postponed to a later time, it shall be ruled void under Section 32, and the parties shall not be obligated to carry out the terms of the agreement.

Force majeure did not excuse parties from attempting to lessen the potential loss that the affected party would sustain. After the proposal procedure, Halliburton was chosen to carry out a project that comprised drilling and completion in Halliburton vs. Vedanta Limited (2020). In this instance, the court saw that there must be a valid or justifiable basis to invoke the force majeure provision. As a violation was made by the party prior to the unknown occurrence of COVID-19 and Halliburton was warned about the breach, Halliburton was not permitted to assert an exemption under the doctrine of force majeure. Opportunities to treat the same condition were there, but they went unused. Halliburton, however, declared a case of force majeure a few days prior to the deadline. The court did not permit this, and the party was required to fulfill its obligations in accordance with the provisions of the contract.

A force majeure provision will end a time-sensitive contract if it is impossible to fulfill the contract's obligations as a result of the force majeure event. To put it another way, the party using the Force Majeure provision must demonstrate that time is of the essence of the agreement.

The party who is unable to fulfill the contract owing to ongoing lockdowns may seek remedy under the theory of frustration, which is granted by the Indian Contract Act, even if the contract does not contain a clause for force majeure.

 

Parties who are in need of relief under the Doctrine of Frustration

According to the Indian Contract Act, a force majeure provision does not require the parties to end their agreement. According to Section 56 of the Indian Contract Act, the party may seek remedies under the theory of frustration.

A contract is void, in accordance with Section 56 of the Act, if it calls for the execution of an act that has since become impossible or illegal (without the promisor's fault). A supervening, subsequent inability or unlawfulness of the conduct that was supposed to be carried out as a result of the contract is required.

The word "impossible" was defined by the Supreme Court in the 1953 case of Satyabrata Ghose v. Mugneeram Bangur & Co. According to the court, an act is still capable of being performed until it is practically impossible to do so considering the contract's intent and purpose.

Under this approach, the remedy cannot be offered to the parties in the event of a business hardship. In other words, this theory cannot be used if the contract's conduct becomes (commercially) challenging but not impractical. Therefore, the idea of frustration does not apply when the performance is only made more difficult or expensive rather than really being stopped. Justice Henderson ruled in Sanchandra Nath v. Gopal Chandra (2020) that the problem of the greater rental cost, which resulted in a reduced profit, does not frustrate the contract. In M/s Alopi Parshad and Sons v. Union of India (1960), there was a price increase as a result of the start of the global war. The contract did specify a price, though. According to the philosophy of frustration, the contractor demanded relief. The Supreme Court, however, dismissed it, holding that the parties could not avoid their responsibility just because it is difficult to carry out the terms of the agreement.

 

A party must meet certain conditions in order to cancel their responsibilities under the contract

The following prerequisites must be met by the party seeking to end the responsibilities or obligations stipulated in the agreement:

  • The other party must be informed of the force majeure event that has prevented contract execution through a notification that is sent to them.
  • If time is not a factor in the agreement, it must be specified when it will restart and each party will fulfill their commitments.
  • The occurrence must be beyond the parties' reasonable control, and the affected parties must make a reasonable effort to lessen its effects.

In the case of Lakeman v. Pollard (1857), the US Supreme Court relied on these terms and authorized the termination of the contract during the cholera epidemic, which rendered the laborer’s performance of the contract impossible. The outbreak was viewed by the Supreme Court as an "act of God" that was beyond human control to be carried out.

Impotentia Excusat Legem, which states that the law does not require a man to do what is impossible to execute, emphasizes the protection of parties. Only if the prerequisites outlined above are met may the party request relief under this maxim.

 

The Doctrine of Frustration and the Doctrine of Force Majeure differ in certain ways

The contract eventually becomes invalid because of the ideologies. Because of this, many people think they are identical, yet there are distinctions between the two, which are as follows:

  • Although it is not a legal idea in and of itself, the theory of force majeure is made legally binding when it is included in the contract. The doctrine of frustration is a legal notion per se that is included in contract law.
  • Parties may express discontent with the contract if there is no clause for force majeure.
  • The parties specifically agree in the "Force Majeure" clause on a list of unexpected events that would bring about the clause. But when an outside circumstance makes the contract difficult to carry out, dissatisfaction sets in.

 

Covid-19-related challenges to the supply chain sectors

COVID-19 had a direct influence on several supply chain segments, which had a detrimental effect on the nation's economy. Here are a few examples of the industries that were impacted by COVID-19:

Manufacturing

The development of COVID-19 made it challenging for manufacturers to distribute their goods. The price of storage has gone risen as a result of an accumulation of goods. Those manufacturers who produced perishable items sustained losses. Due to limitations, the cost of distribution is significant, which has an impact on profitability.

 

Export and Import

The percentage of imports and exports has significantly decreased as a result of border restrictions. Even though the ports were overflowing with imports and exports, they could not be cleared because of staffing shortages.

 

Retail trade

It was challenging to sell their items because of internal and external constraints, which had a detrimental influence on their overall sales. Due to the numerous lockdowns, retailers who stockpiled inventories before COVID-19 experienced severe losses. There were instances during COVID when merchants would undercut the going rate in order to lower the risk of a loss.

 

Food services

Sales of food services during the lockdown significantly decreased, especially while individuals were working from home. It was challenging for many food service companies to transition to the internet platform, which ultimately forced many out of business.

 

Logistics and transportation

Due to a decrease in sales volume, consumers had to pay more for delivery services. Due to the high operational costs, airlines and the shipping industry were compelled to fire a set number of employees. 

 

Solutions that might be used to lessen the effect of COVID-19 on supply chain agreements

Companies had been recovering from the COVID-19-related shockwaves to their profitability after multiple lockdowns. The following duties must be carried out by the company in order to further reduce the effect on sales:

  • Inform staff members about COVID-19 and make sure they are adhering to all safety rules.
  • The supply chain strategy, new trade agreements, and national incentives all need to be rethought.
  • Enhance disruption response with end-to-end supply chain visibility and monitoring in real-time, along with scenario preparation and simulations.
  • Make efforts to adopt a digitized, all-encompassing supply chain in planning, purchasing, production, and logistics. This can increase productivity and provide new income sources.

 

Conclusion

Contracts throughout the supply chain are essential for getting products to the customer. The supply chain contract would be broken if one of the essential parts of the supply chain failed to carry out its obligation. However, if all the requirements are met, the obligation is discharged owing to the contract's inclusion of a force majeure provision. There are contrasts between the philosophies of force majeure and frustration, which many people mistakenly believe to be similar. Other than the supply industry, several other industries were negatively impacted by COVID-19, and contracts were terminated as a result of non-performance on the part of the parties. The circumstance in COVID-19, therefore, illustrates the significance of the force majeure provision, which releases culpability in cases of unexpected and impossibly unlikely circumstances. 

Written By:
Anik

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