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.
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.
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