“COVID -19: Impact on Commercial Contracts”

The author of this blog is Mr. Ayush Kumar Jain, 4th Year BBA-LLB student at University: Presidency University, Bengaluru.


1. Introduction
Novel Coronavirus has been reported throughout the world including India. World Health Organisation has declared public health emergency and most of the powerful countries like USA failed to spread this covid-19. By looking that India has imposed lockdown all over the country so that it can be stop from spreading this novel coronavirus. Due to outbreak of Covid-19, business and industries have distracted and also have a impact on market as well as those persons who earns money on daily wages. There has been adverse impact on the commercial markets as well as world’s economy. Commercial contracts plays an essential role in world’s economy and non- performance of commercial contracts affect not only world economy but business also badly.

Ascribable to Covid 19 pandemic, parties are unable to fulfill their performance towards their contracts. Moreover, the parties unable to perform their contractual obligation because it’s created disruptions in domestic markets. There were many times a situation arises where a contract obligation cannot be fulfill due to unforeseen event for example natural disaster etc. Sometimes, a contract obligation cannot be fullfiled by such acts due to which a question arises that who will be responsible for non-performance of their liability?

Now, this article is discussing about liability for non-performance and how Force Majeure clause does plays an important role in the contract. This article also helps to find out that Covid 19 pandemic will be consider as Force Majeure or not?

2. Force Majeure and Pandemic:
Force Majeure means superior force and the term has not defined in the Indian Contract Act, 1872 but by glance reading of Section 32[1] and 56[2] of the Indian Contract Act, 1872, can be understand that the concept of Force Majeure has embodied in the above said Sections. A Force Majeure means extraordinary events or circumstances beyond human control such as an event includes an act of God or natural disasters, a war, strikes, riots, crimes etc. It protects a parties from the non-performing of contractual obligation when a force majeure clause expressly mentioned in the contract. Commercial contracts often includes force majeure clause and safeguard the parties who unable to perform their contractual obligation. This clause gives right to another party to refuse if it is impossible to do or unable to perform the contract from their part of obligation.

Basically, Pandemic will be considered as an unforeseen event and the event capable of constituting force majeure required to consider these conditions i.e. the unforeseen event must be on the far side of the reasonable control of the affected party; the affected party’s ability to perform its contractual obligations must have been prevented, hamper or hindered by the unforeseen event; and the affected party must have taken all reasonable steps to seek to steer clear of or mitigate the event or its consequences and there are no other means for performing under the contract.

It is an unforeseeable Circumstance that prevent a parties from fulfilling a contract. The event occurred is an unforeseen or unexpected event. Secondly, due to such event, a parties unable to fulfill the contractual obligation or makes impossible to perform the contract. A parties have taken all the measure for fulfilling the obligations. In the light of the above mentioned points, Covid 19 pandemic is an unforeseen event and Force majeure clause will protects the parties for non-performing the contractual events. It will depends on the nature of transaction and accordingly, it will lead to frustration of the contract.

In the absence of an express force majeure clause, parties rely upon the doctrine of frustration. The doctrine of frustration will apply if the event is not the fault of any party to the contract; the unforeseen event or circumstance occurs after the formation of the contract and it becomes impossible to fulfil the contract.

Doctrine of Frustration and Force Majeure are the most important elements which plays an essential role in the contract and it protects those parties who has not fault in their part and because of that, they unable to fulfill the contractual obligation. If the contract does not include a force majeure clause, the affected party could claim relief under the doctrine of frustration under Section 56 of the Indian Contract Act, 1872.

In the English law where force majeure clause is a part of contract and created by the parties, not general in common law. In such situation, it will depend on the wording of the contract that it will cover such activities or not. It is for the parties to rely upon that clause for non-performance of the contractual obligation and satisfy a Court.

3. Impact on commercial contracts:
It is badly affecting not only Indian Markets but all over the world and because of that it will effect on countries economy. In the light of Covid 19, many people are not able to supply goods and services due to which a parties not able to fulfill their contracts. To mitigate this problem, the Force Majeure clause will help in and protect the parties from non- performing the contracts. It will only protects when this clause has drafted in the contract. In the other hand, it will lead to frustration of contracts and that will also not good for the markets. It is completely depends on the transaction of the contract and some contracts can be fulfill later such as hiring a car for some purpose etc.

The Government of India is also helping to safeguard the interest of parties in commercial contracts and in the event of any disruption in the supply chains due to spread of corona virus will be covered in the Force majeure Clause. Moreover, it not only affecting the commercial contracts but every kind of business activity such as Real estate sector, share markets etc.It is not right to say that it has only effected but there are many safeguards available in commercial contracts i.e. review the contract in which the force majeure clause exists and analyze the relevant factors & try to do modification if it is possible to make the parties for performing the contract.

Employers and employees both are mostly affected by the covid-19 and there is a situation arises that employer is liable to pay wages to their employees. Employers are not bound to pay until the work done by employees and the contractual obligation must be fulfil but if the situation arises that the employees unable to perform their obligation, would the Force Majeure clause will rescue to the party who has no fault. For answering these question, it depends on the situation.

4. Conclusion:
The Author in this article by observing every minor points come to conclusion that if the parties not perform the contractual obligation and it is protected by force majeure clause and then it will lead to frustration of contract. It will affect the interest of the parties who makes the contract and another person does not perform and protected by Force Majeure clause. In other side, if all contracts lead to frustration, then to have a bad impact on the world’s economy. Covid-19 Pandemic will be consider unforeseen event and Force Majeure clause will covered this pandemic. It is right to say that health pandemic become economic pandemic.

[1] Enforcement of contracts contingent on an event happening.

[2] Agreement to do an impossible act