Force Majeure, Frustration and the Buyer's Cover Purchase
In April 2020 a supplier contracted with a State medical services corporation to deliver 50,000 N95 masks at Rs 42 per unit by 30 June 2020, with a force majeure clause excusing delay or default caused by acts of God, war, riot, epidemic, pandemic or any order of a competent authority, provided the affected party notified the other within seven days of the occurrence and used best efforts to mitigate. The corporation paid a 20% advance. On 20 May 2020 a district administration order restricted operations at the supplier's Kanchipuram unit, and 60 of its 210 workers left for their villages. The supplier sent no notice. It delivered 18,000 masks by 30 June and asked for six more weeks. The corporation terminated on 6 July and, on 20 July, bought 32,000 masks from a trader at Rs 78 per unit, when the prevailing wholesale rate in Chennai for equivalent masks was Rs 58. The contract provides liquidated damages of 0.5% of the value of the delayed goods per week, capped at 5%. The corporation claims Rs 11,52,000 as the price differential and Rs 67,200 as liquidated damages.
1. Is the supplier excused by the force majeure clause or by Section 56 of the Contract Act? Reason through the clause first and the doctrine second.
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Clause first, doctrine second. Where the parties have expressly provided for the event that has occurred, the contract governs and Section 56 is not lightly invoked (Satyabrata Ghose v. Mugneeram Bangur; Naihati Jute Mills v. Khyaliram Jagannath). Frustration is a residual doctrine for cases the parties did not address.
Does the event fall within the clause? The clause covers an epidemic and an order of a competent authority, and the district order of 20 May prima facie qualifies. But the relief is conditional on three matters, and the supplier fails each.
First, notice within seven days. No notice was sent at all, and the supplier communicated only on 30 June, when it asked for an extension. A notice period of this kind is a condition of the excuse, not a formality; it allows the buyer to arrange alternative supply and thereby mitigate, which is precisely what happened at a higher price.
Second, the clause excuses a party prevented from performing, not one whose performance became more difficult. Forty-two workers remained, and 18,000 of 50,000 masks were in fact produced, which demonstrates capacity to perform at least in part. The supplier must show which part of the obligation the order made impossible, and by when.
Third, best efforts to mitigate. The record shows no attempt to source from other units or to subcontract, though the trade was full of suppliers at the time.
Section 56. Commercial hardship, increased cost and labour shortage do not render performance impossible; the foundation of the contract must be destroyed. The foundation here survived, as the part-supply shows. The defence fails.
2. How should the corporation's damages be quantified? Address the cover purchase, mitigation and the advance.
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Measure of loss. Section 73 compensates the loss which naturally arose in the usual course of things from the breach, or which the parties knew would likely result. Where a buyer has to buy substitute goods, the extra cost of the cover purchase is the natural measure, subject to the rule of mitigation in the Explanation to Section 73: the buyer must take reasonable steps to minimise the loss, and cannot recover what was avoidable.
The cover purchase is evidence, not proof. The price of Rs 78 is a starting point but is rebuttable. The prevailing wholesale rate for equivalent masks in Chennai was Rs 58. Buying at Rs 78 when the market offered Rs 58 is not reasonable mitigation, and the corporation cannot throw the excess on the supplier. The recoverable differential is therefore (58 minus 42) multiplied by 32,000, that is Rs 5,12,000, not Rs 11,52,000.
The 18,000 delivered. No differential is recoverable on those units, which were accepted; the corporation must pay for them at the contract rate, and any question of late delivery on that tranche is governed by the liquidated damages clause.
The advance. The 20% advance was paid on the whole contract. On termination the corporation must account for it against the price of the 18,000 masks supplied and the damages found, and refund the balance, or adjust the sum awarded; it cannot retain both the advance and full damages for the same shortfall.
3. How should the liquidated damages claim of Rs 67,200 be dealt with under Section 74, given that the price differential is also claimed?
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Section 74 is a ceiling, not an automatic entitlement. The section allows reasonable compensation not exceeding the sum named, whether or not actual loss is proved. It also permits relief from a penalty. The court must therefore assess what is reasonable in the facts, and not multiply percentages mechanically.
What is the breach the clause addresses? The clause is directed at delay: 0.5% of the value of the delayed goods per week, capped at 5%. After 30 June, the corporation allowed no further time and terminated on 6 July. The period of delay attributable to the supplier on the undelivered 32,000 units is therefore short, and the full 5% cap is not justified merely because the cap exists.
Double recovery. The price differential compensates the corporation for the same shortfall in supply. If the court also awards the full liquidated sum for the same undelivered goods, the corporation recovers twice for one loss. Section 74 awards compensation, not a windfall. The award must be limited to the period of delay actually suffered on goods that were ultimately supplied late, or, on the undelivered units, refused altogether because the differential already makes the corporation whole.
Working figure. If one applies 0.5% for one week to the value of the delayed goods, Rs 13,44,000 multiplied by 0.5%, the figure is Rs 6,720, well below the cap. That, and not Rs 67,200, represents reasonable compensation, subject to adjustment against the differential to avoid duplication; and the corporation is also under a duty to prove the loss it actually suffered.