COVID-19 - Its Impact on Contracts in India

INTRODUCTION

The Coronavirus or the COVID – 19 has created a havoc in the life of the people worldwide. The COVID – 19 has been declared as pandemic by the World Health Organization, which has resulted in serious impact on the health of the people and economy of several countries worldwide. One of the important aspects that has been neglected by the people is the effect of COVID- 19 on the performance of the contracts in our country. With the announcement of the total lockdown of the country amidst the COVID – 19 crises, several commercial contracts have been impacted adversely and the parties are unable to execute them. There are several apprehensions over the legal aspects of such contracts and the implication that shall follow the same.

FORCE MAJEURE AND FRUSTRATION OF CONTRACT

As defined by Black’s Law Dictionary, Force Majeure, a French expression, refers to a superior or irresistible force. But in the terms of the contract law, Force Majeure means an occurrence of an event or circumstance that is not reasonably within the control of and would not have been avoided or overcome by a party, which prevents or delays that party from performing some or all of its contractual obligations, that party will be relieved from liability which might otherwise arise as a result of that party’s failure to perform those affected obligations. The common law system generally did not recognize doctrine of force majeure as a standalone legal concept.[i] It is also noteworthy that applicability of force majeure depends upon the commercial agreement between contracting parties in various cases.[ii] Force Majeure as such is not defined anywhere under the Indian Contract Act,1872. Even though the contract may be having a clause for force majeure, much of it depends upon section 56 of the Indian Contract Act, 1872.

Section 56 of the Indian Contract Act, states that “any act which was to be performed, and after the contract is made, it becomes unlawful or impossible for him/her to perform, and which the promisor could not prevent, then such an act which later becomes impossible or unlawful will become void.” This section is based on doctrine of frustration. It is important to note that that it should be an unforeseeable or unexpected event which was not contemplated by either of the parties and main purpose for which the contract was entered became impossible to be performed. The impossibility depends upon the facts and circumstances of each case. The very source of doctrine of frustration is the English case of Taylor v. Caldwell. It has also been accepted by the courts that section 56 is wide enough to include within its ambit acts of force majeure.

To sum up, there are basically two aspects that are to be looked into while incorporating defense of force majeure and doctrine of frustration while interpreting contracts:

· First step is to check whether there is any clause in the contract which talks about the effect of Force Majeure on the contract. If such clause is enforceable, then such option can be exercised.

· If there is no such Force Majeure clause present or even if such clause exists and is inadequate, then it has to be examined whether Section 56 of Indian Contract act, which speaks about doctrine of frustration can be applied or not.

CASES ON THE APPLICABILITY OF FORCE MAJEURE AND DOCTRINE OF FRUSTRATION IN INDIA

In the case of Ganga Saran v. Ram Charan , it has been stated by the Hon’ble Supreme Court that “It seems necessary for us to emphasize that so far as the courts in this country are concerned, they must look primarily to the law as embodied in sections 32 and 56 of the Indian Contract Act, 1872.” Section 32 of the Indian Contract Act states about discharge of liabilities due to the impossibility of an express contingency. But this judgment, indicated that doctrine of frustration is an implied factor under section 56 of the Indian Contract Act.

Further, the Hon’ble Supreme Court in various cases have interpreted the term Force Majeure. In the case of Dhanrajamal Gobindram v. Shamji Kalidas And Co. it was stated that “The expression “force majeure” is not a mere French version of the Latin expression “vis major”. It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in “force majeure”. Judges have agreed that strikes, breakdown of machinery, which, though normally not included in “vis major” are included in “force majeure”. An analysis of rulings on the subject into which it is not necessary in this case to go, shows that where reference is made to “force majeure”, the intention is to save the performing party from the consequences of anything over which he has no control. This is the widest meaning that can be given to “force majeure”, and even if this be the meaning, it is obvious that the condition about “force majeure” in the agreement was not vague. The use of the word “usual” makes all the difference, and the meaning of the condition may be made certain by evidence about a force majeure clause, which was in contemplation of parties.” On the similar lines it was also stated in the case of Alopi Parshad & Sons Ltd. v. Union of India, that “the Act does not enable a party to a contract to ignore the express covenants thereof and to claim payment of consideration, for performance of the contract at rates different from the stipulated rates, on a vague plea of equity. Parties to an executable contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate, for example, a wholly abnormal rise or fall in prices which is an unexpected obstacle to execution. This does not in itself get rid of the bargain they have made.”

The Hon’ble Madras High Court in the case of Narasu Pictures Circuit v. P.S.V. Iyer and Ors. observed that “Where it appears from the nature of the contract and the surrounding circumstances that the parties have contracted on the basis that some specified thing without which the contract cannot be fulfilled will continue to exist or that a future event which forms the foundation of the contract will take place, the contract, though in terms absolute, is to be construed as being subject to an implied condition that if before breach, performance becomes impossible without default of either party and owing to circumstances which were not contemplated when the contract was made, the parties are to be excused from further performance."

One of the major concerns that majority of the parties must be having is with regard to the absence of force majeure clause in the contract, whether they have any legal recourse to ensure that their business is not affected adversely. This issue has been dealt in the case of Industrial Finance Corporation of India Ltd. v. The Cannanore Spinning & Weaving Mills Ltd. and Ors. The Hon’ble court in this case stated that “ It may be noticed here that the Statute itself has recognized the doctrine of frustration and encompassed within its ambit an exhaustive arena of force majeure under which non-performance stands excused by reason of an impediment beyond its control which could neither be foreseen at the time of entering into the contract nor can the effect of the supervening event could be avoided or overcome. The decision of the Court of Appeal in F.A. Tamplin Steamship Co. Ltd. v. Anglo Maxican Petroleum Products Co. Ltd. (which stands quoted (with approval by this Court) in Naihati Jute Mills v. Khyaliram, seems to have settled the law on the same. on a true perspective of Section 56 of the Contract Act, three essential conditions appear to be the realistic interpretation of the Statute. The conditions being (i) a valid and subsisting contract between the parties; (ii) there must be some part of the contract yet to be performed; and (iii) the contract after it is entered into becomes impossible of performance.” The same stand has been taken in the case of Energy Watchdog and Ors.vs. Central Electricity Regulatory Commission and Ors, wherein the Hon’ble Court stated that “In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract.” Thus, indicating that even in the absence of the force majeure clause in totality of the contract, it is not the intention of the parties that mattered, rather the contract is governed by the Section 56 of the Contract Act.

CONCLUSION

The Ministry of Finance, Department of Expenditure and Policy of Expenditure Procurement Policy Division released an Office Memorandum on 19 February 2020, which states that “A doubt has arisen if the disruption of the supply chains due to spread of coronavirus in China or any other country will be covered in the Force Majeure Clause (FMC). In this regard it is clarified that it should be considered as a case of natural calamity and FMC may be invoked, wherever considered appropriate, following the due procedure as above”. Thus, indicating that the Central Government has considered the spread of COVID – 19 as Force Majeure. It is felt that the parties to a contract must ensure that the contracts that they have entered into with certain parties must be properly drafted and must comply with all the essential conditions for making the contract valid, to successfully plead the defense of Force Majeure in the court of law.

ENDNOTES

[i] Navrom v Callitsis Ship Management SA (The Radauti) [1987] 2 Lloyd’s Rep 276 at 282 per Staughton J.

[ii] Plaimar Ltd v Waters Trading Co Ltd (1945) 72 CLR 304.