Author - Santosh Salora pursuing L.L.B. from Campus Law Centre, Faculty of Law, University of Delhi.
The global spread of pandemic called COVID 19 has a bad repercussion on every sector. It had not only affected the India’s economy but has effect on other countries’ economies also. The COVID 19 and lockdown announced all over the world had a huge impact on the contractual obligations.The contract law is based on the principle of “pacta sunt servanda” which means that an agreement should be kept. But sometimes exceptional circumstances occur which are beyond their control due to which parties are unable to complete their obligations. As there is Latin maxim which clearly defines such situation, “les non cogit ad impossibilia” which means a man cannot be compelled by law what s/he cannot possibly perform. Law should not compel them to perform the contract obligations instead provide them remedy in such a difficult situation. If the parties are unable to perform their contractual duties, they will not be liable for that if they took a valid defense of force majeure or doctrine of frustration and burden of proof lies on their shoulders only.
What is force majeure?
In the simplest way, force majeure is an occurrence of any unforeseeable event which cannot be assumed or controlled by the parties and which prevent the parties to perform their contractual obligations. The essential ingredients of force majeure are:
· An unexpected/unforeseen event.
· Performance of contract becomes either impossible or unachievable.
· Parties try either to perform the obligations or to mitigate the damages.
While agreeing for the terms and conditions of the contract, parties agree with the force majeure clause in order to get relief under this clause whenever any unexpected event happens which is beyond the control of parties and whichprevents the parties from the performance of contractual obligations. Force majeure is considered as an exception to the breach of contract.Force majeure includes events like act of god, flood, war, sudden natural calamity, war, terrorist attack etc. Our Indian Contract Act, 1872 does not define the term force majeure in express way but if there is an express clause in the contract which stipulates force majeure events that will be governed by the Chapter III (Contingent Contracts) of the Act. More particularly, force majeure doctrine can be seen in the Section 32 of the Chapter III of the act which deals with the enforcement of contingent contracts meaning thereby contract in which a term or provision will be enforceable only after happening of an uncertain future event and if the event becomes impossible the contract will become void under the act.
What is Doctrine of Frustration?
If there is an absence of any force majeure clause under the contract then it becomes a question of fact for the court to decide whether to discharge the contractual obligations under the principle of frustration of contract and to provide the relief and performance on the basis of the nature of contract. According to the doctrine of frustration when an unexpected event happen which is beyond the control of the parties due to which the performance of contractual obligations becomes impossible and contract becomes void as the act become impossible. Under this doctrine, relief is granted only when the act becomes impossible. This doctrine is covered under the Section 56 of the Chapter IV (Performance of Contracts) of the act. The landmark case of Satyabrata Ghosh v. Mugnareem Bangur and Co. and anothers 1954 AIR 44 held that impossibility does not mean a literal interpretation but it implies two elements:
· Occurrence of unexpected event or changes of circumstance has destroyed the subject matter or basis of contract.
· The object or the purpose of the contract has frustrated and cannot be achieved further.
The court while granting the remedy has to examine the contract and the circumstances under which the contract was made. The only evidence on which the court has to decide whether the changed circumstances and unexpected event has destroyed the basis and the object of the contract are the belief, knowledge and the intention of the parties. The purpose and the subject matter of contract is always a question of fact which needs to be decided by the court on the basis of available evidences.
Impossibility or Hardship
There is a clear difference between impossibility and mere hardship as stated by the Bombay High Court in the case of Standard Retail Pvt. Ltd. v. M/s G S Global Corp. and others (Commercial Arbitration petition no. 404 of 2020)that mere hardship to the parties under the performance of contract are not covered under the definition of impossibility. Further, it was also held that lockdown is temporary in nature and is for a limited period of time, so the doctrine of frustration cannot be invoked and force majeure clause did not apply to the importers, thus the court did not provide any relief under the force majeure clause to the plaintiff.Impossibility destroys the object and the purpose of contract but mere hardship does not destroy the purpose and the object but creates difficulty in the performance of the obligations where the purpose and object of the contract still can be achieved. Mere economic loss is not impossibility similarly a contract cannot be frustrated because of alteration in the circumstances. In the case of Halliburton Offshore Inc. v. Vedanta Ltd. and Anothers, Delhi High Court granted interim injunction to the plaintiff after giving due consideration and liberal view to the force majeure clause and further held that COVID 19 pandemic and lockdown were prima facie force majeure events, which are considered as beyond the control of parties of the contract. In the case of Rural Fair priceWholesale Ltd. and Anothers v. IBDI Trusteeship Services Ltd. and others, Bombay high court granted interim relief to the plaintiff by recognizing the market situation due to the COVID 19 and lockdown announced. Whether the force majeure will apply or not will depend upon the force majeure clause under the contract and how the court interprets that clause in order to give the remedies to the parties involved. In case of absence of force majeure clause there is common law remedy of doctrine of frustration and court’s decision to apply it or not is a question of fact.
Conclusion and Suggestions
COVID 19 is declared as an act of god by WHO and parties in any contract can take this defence to protect themselves from legal consequences of breach of contract. On the date of 19th February 2020, the Department of Expenditure, Procurement Policy Division, Ministry of Finance issues an Office Memorandum and this memorandum states that COVID 19 will be covered under the defence of force majeure because it is considered as a natural calamity. But this cannot be applied to every contract and the force majeure clause needs to be interpreted according to the facts and circumstances of the contract. The COVID 19 can be brought under the ambit of ‘Act of God’ which is considered as most generic clause of the force majeure clause. It is best for the parties to draft the force majeure clause in such a way so that it could cover situations like government imposing lockdowns, epidemics and pandemicsapart from the events like act of god, natural calamity. Several proactive steps has been taken by the government of China and Russia like issue of force majeure certificate and in India COVID 19 pandemic has been covered under the ambit of ‘natural calamity’ in the government contracts. Such measures should be applied in the commercial contracts and it would be an interesting development in the field of contract law in India. Our courts are giving varied interpretation of clauses, terms, and parameters regarding the performance of contract and government are also issuing notifications and directives regarding this. Mere hardship and impossibility clause stands a real test today. It would be interesting to see how the court entertains cases involving such a double edged sword where determining actual facts and situations become all the more difficult. In view of this pandemic, the law relating to force majeure will probably go through a massive development.