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COVID-19 AND CONTRACTS


Introduction Throughout and history, the worst fear of humans is war. But have you ever thought what is worse than the war? What the soldiers from so many years are trying to fight from? It’s the infectious disease that has wiped out half of the human race throughout history. It is the best bio-weapon anybody could have to win the war without even starting the one. The coronavirus outbreak is not new to the human race. Before coronavirus, so many viruses and flues that have taken the lives of humans more than any world wars. We have seen from 1918 – the influenza pandemic that took lives of 50-100 millions of people, the number surpasses the death toll of World War-1.

As we know the coronavirus is spreading rapidly throughout the world which started from Wuhan, China and now its claws have reached out to almost every part of the world. Its outbreak has shunned us from the core, the most predictable solution we can have is to shut our countries down, to halt the markets, international ports, cinemas, malls etc. So the question arises what happens to the contracts at such times? Do the force majeure clause is used as a defence? Or the liability clause is activated for non-completion of the contract? Or the impossibility for the contract or unforeseeable act is used as a defence in case of absence of force majeure clause? Or will it lead to frustration of contract?


Indian Jurisprudential Contracts during pandemic times-

One cannot simply get out of a legally binding agreement easily or on whims as Contact laws based on the principle of “pacta sunt servanda” (Latin for “agreements must be kept”), but again exceptions do exist and two of the most common way to get out of a contract is through force majeure events and doctrine of frustration.



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Concept of Force Majeure

“Force majeure” or in simple terms “Supreme force” is a clause usually present in contacts describing an unexpected, external event which renders performance of contractual obligation impossible. This particular term as such is absent and not specifically defined in the Indian Contract Act, 1872, but section 32 and section 56 both together govern the same. Section 32 deals with the compliance of the agreed terms in case of happening of an incident whereas section 56 set aside contacts for an unlikely event. This clause usually includes natural disasters such as floods, earthquakes, weather disturbances and human activities such as war, political instability, terrorist attack etc.

Court usually construed force majeure clause narrowly. It only tends to cover those cases which are listed. For example in 2016, when the government of India, without any prior notice declared the demonetization of the Indian currency notes and due to it, the economy was badly stroked. The parties tried to terminate the contract and termed demonetization as the force majeure. The Central Electricity Regulation Committee (CERC) recently held “demonetization” as a valid threshold to invoke the force majeure clause that was entered upon by the party[1]. After that, a new dimension to interpret the clause was recognized.


In the case of Energy Watchdog v. Central Electricity Regulatory Commission & Ors.[2] the Supreme Court of India restated the law of force majeure and laid down the following guidelines to be mindful of while invoking a force majeure clause:

1. The very basis of such clauses is that the events are beyond the reasonable control of the parties and in such conditions, parties cannot be held liable for non-performance of obligations under the contract.

2. While analyzing the force majeure clause, it is also necessary to analyze if best endeavours have been taken to mitigate the force majeure event.

3. For an event to qualify as a force majeure, the same must be unforeseeable by the parties.

4. The event has rendered the performance impossible or illegal.

Thus, if the force majeure clause is already in the contract then the party can go to the court and prove they don’t have any other option left to fulfill the contract but, to apply for the force majeure clause.

Whether Force Majeure clauses can be invoked in light of current pandemic?

Being contractual in nature the scope of Force Majeure clauses to a large extent depend upon the wording of such clauses. In the case Lebeaupin v. Crispin[3] where court while discussing the extent of such clauses held that “A force majeure clause should be construed in each case with the close attention to the word which precedes or follow it and with due regard to nature and general terms of the contract.”Thus where such clauses contain the situation of an epidemic or pandemic as force majeure event, COVID 19 seems to fit very well given the WHO's announcement of it as a pandemic.


Next up is the situation where a Force majeure clause contains words such as “extraordinary event or circumstances beyond the reasonable control of the party, etc," where incorporating them makes this particular clause wide in nature. It may give an edge to the party approaching the court to invoke the clause but it will eventually boil down upon the courts to how to construe them in line with the current circumstances.


Another potential option can be the invocation of phrases such as “governmental action or order, etc.” For example, recently The Ministry of Finance, Government of India vide an office memorandum dated 19.02.2020 recently clarified with respect to 'Manual for Procurement of Goods, 2017', and declared that in the event of any disruption in the supply chains due to spread of coronavirus in China or any other country, such situation will be covered in the Force majeure Clause (FMC) in the contract. It is further clarified that such a situation should be considered as a natural calamity and Force Majeure clause may be invoked, wherever considered appropriate, following the due procedure.[4]


Now if we look the judicial response towards this situation, Delhi High Court vide order dated 21.4.20 observed that “Lockdown prima facie in nature of Force majeure” where it put a stay on Bank guarantee invocation[5]

Thus by the above discussion, we can conclude that having the term "pandemic" or "epidemic" in force majeure clause does make the invocation of such easier but again as we all are in a certain extraordinary situation certain other ways can also be opted to convince the courts.

Doctrine of Frustration

The concept of Force Majeure is present in common law as the doctrine of frustration which is based on the maxim "less non cogit ao impossibilia” which means that law will not compel a man to do what he possibly can’t perform. The source of the doctrine of frustration in English Law is the case of Taylor v. Caldwell[6] where opera house, which was rented for organizing concerts was destroyed by fire, the contract was frustrated. This was because the very thing on which the contract depended on ceased to exist or if a certain thing happened. Thus it was held that for the doctrine of frustration it must be so that the nature of the contract is such that it would not operate if a thing ceased to exist.


Thus even if the force majeure clause is absent, the party can approach the court under this doctrine which is imbibed in section 56 of ICA. Our Supreme Court while interpreting the same on a number of cases explained that for invocation of this doctrine the whole purpose of the contract must be a frustrated and mere change in circumstances will not suffice. In the case of Satyabrata Ghose v. Mugneeram Bangur & Co.[7] it was held that "If an untoward event or change of circumstance upsets the very foundation of the agreement it can be said that the promisor finds it impossible to do the act which he had promised to do.” Again in Naihati Jute mills ltd v. Khyaliram Jagannath[8] concluded that mere change in circumstances will not suffice.


Thus Courts must be satisfied that the whole purpose of the contract is frustrated and not just the current pandemic has altered the circumstances. This was evident when recently Bombay high court in Standard Retail Pvt. Ltd vs M/s G. S. Global Corp & Ors,[9] held that-“Current Lockdown mere change in circumstance and be for a limited period. Thus cannot come to the rescue of the Petitioners to resile from its contractual obligations with the Respondent No. 1 and (sellers) of making payments.”

Conclusion

Thus from above all discussion we can conclude that since force majeure depends on the terms what has been incorporated in it and doctrine of frustration on whether the purpose of the contract be fulfilled or not, an absolute dilution of all the contracts is not possible even in this difficult times. What can also be done is that certain adjustment regarding price or amount of goods, etc can opt to deal with the issue harmoniously because only cooperation can save humanity from the current crisis.


[1] Cercind.gov.in. 2020. [online] Available at: <http://www.cercind.gov.in/2018/orders/95-MP-2017.pdf> [Accessed 21 April 2020]. [2] ((2017) 14 SCC 80). [3] [1920] 2 KB 714. [4] No. F18/4/2020-PPD, Ministry of Finance. [5] Lockdown Prima Facie In Nature Of Force Majeure': Delhi HC Stays Bank Guarantees' Invocation [Read Order]. Livelaw.in. Available at: <https://www.livelaw.in/news-updates/lockdown-prima-facie-in-nature-of-force-majeure-delhi-hc-bank-guarantee-155525> [Accessed 22 April 2020]. [6] (1863) 3 B & S 826. [7] AIR 1954 SC 44. [8] AIR 1968 SC 522. [9] Commercial Arbitration Petition (L) NO. 404 OF 2020.


Author Details:

Riddhi Daga and Akansha Uboveja are students at Hidayatullah National Law University.


The views of the author are personal only. (if any)




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