Supreme Court on Doctrine of Frustration and Force majure

The important ruling related to Doctrine of Frustration and Force majure

Supreme court ruling quite relevant for the current time. We are already exploring the applicability of force majure over the contracts due to corona. Indian contract Act provides for the Doctrine of Frustration and Force majure. When they will be applicable. Here interpretation of a contract will play a very important role. How we read a contract. It will decide whether it is covered by the Doctrine of Frustration and Force majure or not. The judgment of the honorable supreme court in case Seamec Ltd Vs Oil India Ltd. 2020 is quite relevant. First of all, let us first try to understand the Doctrine of Frustration and Force majure.

The doctrine of frustration and the supervening impossibility

65.  Obligation  of  person  who  has   received advantage   under   void   agreement,   or contract that becomes void

When an agreement is discovered to be void, or when a contract becomes void, any person who has   received   any   advantage   under   such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.

Force Majure: 

56.   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.

Facts of this case:

A company was given a contract for the drilling of oil wells. Later on, there was an increase in the price of HSD. They asked for the increased price. The arbitral tribunal awarded an amount to be payable to the other party. The decision was set aside by the High court. Then the case was filed in SC and now let us see how it was placed there.

Clause 23 of their agreement read as follows: 

SUBSEQUENTLY ENACTED LAWS: 

“Subsequent to the date of price of Bid Opening  if   there   is   a   change   in   or enactment of any law or interpretation of  existing law, which results in additional cost/reduction in cost to Contractor on account   of   the   operation   under   the Contract,   the   Company/Contractor shall   reimburse/pay Contractor/Company   for   such additional/reduced   cost   actually incurred. “

Later on the prices of HighSpeed   Diesel   (“HSD”),   one   of   the   essential   materials   for carrying   out   the   drilling   operations,   increased.  Appellant raised a claim that increase in the price of HSD, an essential component for carrying out the contract triggered the “change in law” clause under the contract (i.e., Clause 23) and the Respondent became liable to reimburse them for the same.

The Honorable SC decided that the incidence of HSD price is not covered by Force majure and Doctrine of the frustration of contract doesn’t apply here. There are clauses in the agreement regarding both situations. Order of High court to set aside the award was upheld by SC.