To say that COVID-19 has adversely impacted the functioning of commercial contracts around the world would not be wrong. Starting with government orders imposing strict lockdowns, demand shocks, and acute shortages of essential supplies, raw materials, labour issues et al. deleteriously affected the supply chains globally, triggering non-performances and thereby, engendering arbitrations. Companies are unearthing and pulling-up agreements from their dusty databases and contemplating the boilerplate clauses to have a recourse in the present circumstances.
This article presents a bird's-eye view on the principles governing Frustration of contracts, Force Majeure, their relevance during COVID-19 and, perhaps, an unconventional but more effective way of bypassing the requirements for meeting comparatively higher thresholds for proving the same, chiefly in international arbitrations.
The doctrine of frustration is a narrowly interpreted concept in common law. A contract is viewed as frustrated in circumstances of 'unforeseen events' striking the contract from the hip, which are 'outside the control of the parties' and 'transmutes the contract fundamentally' to the extent that the original intent and motives are rendered nugatory, becomes impossible to perform and would be unfair to bind the parties to the obligations of performance and doing so would mean hampering the commercial business sense. According to Alliance Concrete Singapore Pte Ltd v. Sato Kogyo (S) Pte Ltd1:
"....doctrine of frustration requires a multifactorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties' knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties' reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances."
Also, per Davis Contractors Ltd v. Fareham Urban District Council2 it was held:
"Frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract."
The common law courts across the globe have mostly been reluctant in giving relief based on invocation of the doctrine of frustration. This is primarily because the courts do not want the parties to evade their obligations under the contract solely citing that the performance has become onerous. This stance has been unequivocal across all common law courts that the invocation of this doctrine cannot save the parties from performing their obligations, whatever the adversity unless there is an economic hardship clause stipulated under the contract. Secondly, where Force Majeure or like clauses have been inserted and agreed upon, it leaves a limited scope for frustration to operate and the courts rule in favour of Force Majeure, since, the contracts do not come to an end but the performance is temporarily suspended. The England and Wales High Court, Queen's Bench Division3 recently ruled against frustration and ruled against the tenants notwithstanding various governmental orders inflicting lockdowns pursuant to COVID-19.
Force Majeure is deciphered from the French Civil Code4 as a superior force. This concept has been borrowed in common law under which the courts generally interpret the Force Majeure clauses as per the specific wordings in the contract.
The Force Majeure clause generally carves out the conditions and the extent to which the affected party would be excused from its performance. In the common law regime, the Force Majeure clause must be expressly mentioned. The primary tests required to prove Force majeure are that it was beyond the contemplation of the parties to have prevented and control the happening of such an event; and it could not have been reasonably foreseen by the parties.
In Matsoukis v. Priestman,5 it was held that Force Majeure encompasses disruption in commercial activity owing to the coal strike and hindered access to the machinery.
Also, on the question whether Covid-19 would constitute as a Force majeure event, it can be said that the law was settled long back in 1920 in Lebeaupin v. Crispin,6 in which it was ruled that all those circumstances, whose happening is beyond human control, for e.g., war, flood, epidemics and strikes shall be the case of Force majeure. Thus, flowing from this interpretation, Covid-19 could be construed as a Force majeure event, notwithstanding the fact that it has not been expressly mentioned.
When a party wishes to invoke the Force Majeure provision under the contract, it is the duty of the court to ascertain the reasons for which a particular transaction could not take place and were rendered nugatory and attribute the same to the party, but if it goes beyond the control of the party, then excuse their performance, whether in entirety or partially as per the contract. The same has been ruled in Pool Shipping Co Ltd v. London Coal Co of Gibraltar Ltd7
"It is suggested that I am wrong in that, and that I ought to fix my eyes simply and solely upon this contract, and not to see even what the business of the contracting parties is. To my mind, that leads directly to an inability to fix any normal for the working of the contract. The question may arise on the day after the contract has been signed, and before this contract has ever been put into operation. When one realises, however, that the words occur in what is called in the contract itself a standard form, it seems to me that the proper way of construing it is to look at the evidence, as the defendants say one should, and see what, in normal circumstances, people do when they have this kind of contract to perform. In that way, one establishes what the normal working of this contract is. One then has to see whether or not any cause or circumstance has affected it, and, if it has, then there is another question—namely, was that cause or circumstance beyond the control of the sellers? If the answer to that, again, is in the affirmative, then the exception clause comes into operation."
THE FORBIDDEN AREA
Pure contractual obligations and the disputes arising thereto require adjudication, mainly in international arbitrations, via implementing the black letter of law. Tribunals and common law courts cannot re-write the contract beyond what has been provided for by the parties. However, an arbitrator who decides a case by reference to general notions of fairness and equity, rather than in accordance with a strict application of legal rules, is generally referred to as an amiable compositeur or as deciding ex aequo et bono. This mechanism of adjudication has been provided for in various international rules, such as the ICC 2017 Arbitration Rules vide Article 21 (3) and various national statutes. The catch here is that the parties submitting to arbitration must have expressly agreed to it and only in these circumstances that the tribunal shall be empowered to go beyond the stipulated rules and decide the case on the basis of fairness and equity, even if it goes against the strict legal principles.
During an e-convention hosted in London in October 2014 in which approximately 150 delegates from over 20 countries took part, 54 percent of the delegates falling into the category of arbitration "users" indicated that they agreed with the following statement:
"In international disputes, arbitrators should always be empowered to make binding decisions based solely on what is fair and equitable (possibly ignoring applicable laws), unless the parties expressly agree otherwise".
It is only if the tribunal assumes its authority as an amiable compositeur, suo moto, the strict rigours of the black letter could be done away with and the affected party could seek relief on the grounds of equity and fairness, even if it goes against the express terms of the contract.
Covid-19 has undoubtedly created a havoc throughout the world in several sectors and its impact has been long lasting. Commerce and economy still remains affected and will take some time to get back to its feet. In light of the pandemic, parties will need to examine the Force Majeure clauses of their existing (and future) contracts, as well as consider the relevance of the doctrine of frustration. Depending on how events unfold, there may be an opportunity for the courts to develop the legal principles beyond their historic scope, but this needs to be balanced against the risk of introducing unacceptable uncertainty into commercial arrangements. However, until such jurisprudence is born, the parties may consider agreeing to authorise the tribunals to act as amiable compositeur in their future contracts.
1.  3 SLR 857 at Para 37.
2.  AC 696 at Pg. 729.
3. Bank of New York Mellon (International) Ltd v. Cine-UK Ltd  EWHC 1013 (QB).
4. Article 1218 of the Civil Code states: "In contractual matters, there is force majeure when an event beyond the control of the debtor, which could not reasonably have been foreseen at the time of the conclusion of the contract and whose effects cannot be avoided by appropriate measures, prevents performance of his obligation by the debtor. If the impediment is temporary, the performance of the obligation is suspended unless the resulting delay would justify termination of the contract. If the impediment is permanent, the contract is automatically terminated, and the parties are free from their obligations pursuant to the conditions laid down in articles 1351 and 1351-1.
5.  1 KB 681 at Page 687.
6. 2 KB 714 at Page 719.
7.  2 All ER 432 at Pg. 436.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.