Effect of COVID-19 on Contract law- The concept of Force Majeure & Frustration of Contract

The author of this blog is Khushi, 2nd-year B.A.LLB,  Student at Ramaiah College of Law, Bengaluru.

COVID-19, a pandemic as declared by the World Health Organization                                                (WHO) is caused by the virus named "Novel Coronavirus". The virus is named coronavirus because of its crown-like outer structure and is claimed to be originated in the city of Wuhan, China with bat and pangolin as potential carriers. The highly contagious pathogen has resulted in the collapse of the world economy due to lockdown. Such a negative impact has affected the domestic and international market supply-chain at its core. The immediate results were disturbance of supply chain, which is 'unforeseen' and expected delay in performance and carrying out the 'contractual' obligations and thus, give rise to the key concepts of contract law that is 'Force Majeure' and 'Frustration of Contract'.

Force Majeure and Frustration of Contract.

Force Majeure
The term "Force Majeure" is a legal maxim, which provides temporary relief to the parties of contract from performing its obligation or liability under a contract due to an extraordinary event i.e. natural disasters, an epidemic, the act of government, etc. Although the term "Force Majeure" is absent from the very fundamental framework of the Indian Contract Act some reference has been made concerning the term in Sec.32 of Indian contract Act,1872[1] which proposes that if a contract contingent on the occurrence of an event, which is impossible to perform becomes void. The term Force Majeure is used to describe a "superior or unforeseen event", the purpose of Force Majeure is to allocate risk and put the parties under the notice of an unforeseen event which can cause a delay in discharge of contractual obligation(the provision can be invoked only if the clause has been mentioned in the contract). Force Majeure provision can generally be found in various contracts i.e. supply of goods, real estate developers, distribution agreements, project finance agreements, etc.

 Frustration of Contract
The doctrine of frustration of contract is explained in Sec.56 of the Indian contract Act,1872[2]. Sec.56 is based on the maxim 'les non cogit ad impossibilla' which means the law will not compel a man to do, what he cannot possibly perform. The basic of the doctrine of frustration was explained by Supreme Court in the case Bangur Satyabrata Ghose v/s Mugneeram Bangur  [3]where Justice Mukherjee held that the basic idea of "frustration of contract" is that if the parties to a contract to perform an 'act' become impossible because of an unforeseen event, which the promisor could not prevent then such a contract itself becomes void or 'frustrated'.

Can a Force Majeure clause be elucidated to cover a “Pandemic”?
Act of God means an extraordinary natural event or circumstance which could not be foreseen or prevented by human intervention such as flood, earthquake, hurricane, landslide, etc. The term 'Act of God' is often seen in force majeure clauses as criteria to invoke the clause.
The term force majeure can be seen in different aspects not merely as that of 'Act of God', force majeure can include incidents such as war, lockdown, an act of government, riots, etc. The pandemic COVID-19 has different aspects attached to it such as lockdown, the disturbance in the supply chain, delivery of only essential goods, etc, for COVID-19 to be invoked as force majeure clause it depends on the language of the clause (some force majeure clause contains terms such as ‘any other happening’) and rule of legal interpretations of the Force Majeure clauses.

Importance of Force Majeure and Frustration of Contract during COVID-19.
In light of the Force Majeure clause, the clause should contain the word that indicates the effect of the event on the performance of the contractual obligation to invoke the clause i.e. prevent, hinder, delay, obstruct. The Supreme Court in the case Energy Watchdog vs Central Electricity Regulatory[4] constructed the general term to guide the nature of the contract and to decide the claim of parties to invoke the clause of force majeure.

Elements of Force Majeure: -
a.       Inform without delay to the other party of the contract about the unforeseen event, stating details of the Force Majeure event.
b.      Inform the other party when the Force Majeure event will end and thereafter resume the contractual obligation immediately or as decided by parties otherwise.
For example- Two companies X&Y signed a contract of delivering non-essential goods (luxury goods such as cars, TVs) and the contract refers to the occurrence of 'Force Majeure' event as a clause. Since in present times due to COVID-19 the government has imposed lockdown in India and has allowed delivery of only essential goods, Company X will be required to issue a notice to Company Y stating the current situation and indicating that such an event is unforeseen and could not be controlled and therefore, the provision of Force Majeure will be applied and the obligation of both the companies will be postponed till the lockdown continues to be in effect.
Concerning the pandemic COVID-19 Ministry of Finance has issued an Official Memorandum on 'Force Majeure Clause' stating that 'coronavirus should be claimed as the case of natural calamity and force majeure clause can be invoked whenever considered appropriate'. It also provided that 'Force Majeure does not exclude a party's non -performance, but only suspend it for the duration of force majeure event. The firm must notify the force majeure event as soon as it occurs and cannot be claimed ex-post facto. ‘If the performance in whole or in part or any obligation under this contract is prevented or delayed by any reason of force majeure for a period exceeding ninty days, either party may at its option terminate the contract without any financial repercussion on either side’. [5]The official memorandum may not serve as a binding document and if a dispute arises with acceptance or rejection shall vest with the discretion of the courts.
Future, in the situation, were the parties to the contract do not have an explicit clause of Force Majeure, the parties can solicit remedy under Sec.56 of Indian Contract Act.1872 and seek frustration of contract. For this purpose, the courts will have to see whether it is impossible to fulfill the contractual obligation and whether the doctrine of frustration can apply to such contracts.
Elements of Frustration of Contract: -
a.       There has to be a valid agreement/contract.
b.      An unforeseen event, which the promiser could not prevent.
c.       The contractual obligation should be impossible to perform.

For example- Company V has entered into a contract with a wedding planner for providing decorations for a wedding. Due to the pandemic COVID-19, the government has imposed lockdown in India. In the present situation, the contract between both the parties will be frustrated as the act is impossible to perform due to lockdown and therefore the contract concerning Sec.56 will become void.

This gives an insight of Application of these key concepts in future contract keeping in mind the unforeseen situation (in the present case it's COVID-19) and if a contract does not include a 'Force Majeure' clause then parties to the contract can invoke Sec.56 of Indian Contract Act,1872 to discharge the parties from their contractual obligation. Application of these provisions by the court will depend on case to case basis considering the current situation of pandemic COVID-19.

[1] Indian Contract Act (1872), Chapter III of Contingent Contract (Section 32), (uputd.gov.in)
[2] Indian Contract Act (1872), Performance of reciprocal promises (Section 56), (uputd.gov.in)
[3] Bangur Satyabrata Ghose v/s Mugneeram Bangur ,1954 AIR 44
[4] Energy Watchdog vs Central Electricity Regulatory,2017(4) SCALE 580
[5] DEPARTMENT OF Expenditure, Force Majeure Clause, (Feb 20th, 2020), (https://doe.gov.in)