Commercial Agreements & Contracts In IndiaForce Majeure & Contractual Obligations during Covid- 19

INTRODUCTION 

The COVID-19 pandemic has shaken the workforce, business operations and lives to the core in an unprecedented manner, which will be remembered as a catastrophic moment causing adverse effects not only to human lives but also the business, commerce and the economies at the global level.

With the unexpected and sudden change in working patterns and the logjam in the economy because of lockdown and restricted movement in the country, it is imperative that many contractual obligations have become impossible to perform.

Section 37 of the Indian Contract Act, 1872 renders a joint obligation on the contracting parties to either perform or offer to perform their respective promises, except if the obligation to perform has been relieved by law.

Section 37 of the Indian Contract Act, 1872 stipulates as under:

“37. Obligation of parties to contract —The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law.”

Thereby, pursuant to the outbreak of the pandemic, circumstances had arisen where parties to the commercial contracts were not able to perform their promises under the contract, regardless of the fact that they were not at fault.

Several queries have been raised time and again regarding the liabilities that can arise to a party as a result of such non-performance due to an unforeseen lockdown. However, with the outbreak of the virus being declared as a “Force Majeure Event” by the Ministry of Finance on 19.02.2020, some queries were settled through interpretation of the force majeure clause. On the other hand, the remaining felt the need to relook and revise their existing agreements in order to protect themselves from similar circumstances in the future.

FORCE MAJEURE – MEANING 

The literal meaning of the term “force majeure” is derived from French words for superior or greater force, and commonly used to denote situations that are “beyond the control and without the fault or negligence“ of the party. Such situations and circumstances obstruct the continuation or lawful existence of a contract amidst the parties.

The objective of incorporating a force majeure clause in commercial contracts is to aid the contracting parties to identify risk and thus, circumvent frivolous litigations because of delay or non-performance caused due to circumstances not under the control of the parties. In other words, force majeure is usually invoked in order to escape a party from performing the obligation, either permanently or temporarily, under the contract.

Force majeure in practice encompasses three essential categories of events –

1. Act of God;
2. Human events; and
3. Performance failures.

Identifying the category of force majeure event helps us to place a novel event and its implications in the clause of the contract constituting force majeure. The pandemic, for instance is an act of god. The ambit of a force majeure clause can be extended to incorporate specifically exclude more than one force majeure events.

Further, the invocation, applicability and outcome of the force majeure clause will depend on three key factors –

1. Intricacy with which the force majeure clause is drafted. The language of such clause can differ significantly and as a corollary effect, the force majeure clause will have different scopes.
2. Governing law of the Contract that controls the interpretation of the agreement.
3. The event itself.

Parties to the contract mutually decide the list of events to be categorized under this clause which includes acts of war, riots, fire, flood, hurricane, earthquake, explosion, strikes, lockouts, slowdowns, prolonged shortage of supplies, governmental action prohibiting or impeding any party from performing its respective obligations under the contract causing its frustration.

It is pertinent to note that a force majeure clause does not excuse a party’s performance entirely, but only suspends it for the duration of the force majeure however, the consequences of the invocation of the clause depends primarily on the agreement between the parties.

For example, if the force majeure clause provides that where force majeure continues for more than a stipulated period then either party may at its own option terminate the contract without any financial obligations or repercussions on either side.

On the contrary, it can be inferred from several precedents that the concept is being misused to liberate parties from obligations that they are not willing to perform anymore. The parties have tried to mould the situation by taking recourse of the doctrine of frustration and force majeure as a shield to escape duties and obligations under the agreed contract. It is severally used as a defence against the plea of breach of contract.

Here we aim to put into place our interpretations keeping in mind the judicial trends, interplay between force majeure and doctrine of frustration.

DOCTRINE OF FRUSTRATION vis-à-vis LEGAL PROVISIONS OF CONTRACT ACT

It is observed that in various instances, force majeure and frustration are used interchangeably. However, a Doctrine of Frustration is invoked when an event occurs subsequent to formation of the contract and without the fault of the contracting parties, such that the contract becomes impossible to perform in the manner intended by the contracting parties. In such situation, the parties can take recourse under Section 56 of the Indian Contract Act, 1872.

On the other hand, Force majeure is when the contract inclusively covers the list of events considered to declare the performance of contract impractical or impossible which will also lead to relieve the parties from their obligations.

Usually, when a force majeure event is not expressly included under the contract, the aggrieved party can resort to frustration of contract and make its claims. However, if on the contrary, the event is incorporated as a force majeure event under the contract then frustration of contract cannot be resorted to.

Section 32 of the Indian Contract Act, 1872 mentions the contingent contracts which contains a clause recognizing the events on occurrence of which the performance shall be discharged i.e. the contract cannot be enforced until the uncertain future event happens. However, the contract will be become void if such uncertain future event becomes impossible.

The provision is premised on impossibility of contingency – a future uncertain event that parties were aware of at the time of entering the contract and chose to make their contract contingent upon happening of that future uncertain event. Thereby, if a contract incorporates a force majeure clause, Section 32 of the Indian Contract Act, 1872 will be applicable, meaning the parties had contemplated that these events are likely to occur and thus stipulated these events as a trigger point or contingent event to absolve them from their obligation.

Section 56 of the Indian Contract, 1872 enshrines the doctrine of frustration and impossibility to govern the force majeure event when such event is not a part of the contract or mentioned in the contract. It renders an agreement to do an act impossible in itself to be void. Further, if the act contracted for becomes impossible to perform after the contract was made, then the contract becomes void on occurrence of such event.

The sine qua non for invocation of Section 56 is as below:

1. an existence of a valid contract between the parties;
2. the contract is yet to be performed; and
3. the contract after it is entered into becomes impossible to perform due to fact or law.

It is imperative to note that force majeure is present in common law as the doctrine of contract. In other words, Doctrine of Frustration is an inbuilt factor in Section 56 of the Indian Contract Act, 1872. However, it can neither be invoked in case of commercial hardship nor can be used as a device to avoid a bad bargain.

JUDICIAL TREND

The common law principle of doctrine of frustration stems from the case of Taylor v. Caldwell (1861-73) All ER Rep 24, wherein the Court held that:

“…if some unforeseen event occurs during the performance of a contract which makes it impossible of performance, in the sense that the fundamental basis of the contract goes, it need not be further performed, as insisting upon such performance would be unjust.”

The case of Ganga Saran v. Firm Ram Charan, AIR 1952 SC 9 enumerates on the above and held that Section 32 of the Indian Contract Act, 1872 comes into play when the contract is dissolved by its own force whereas Section 56 of the Indian Contract Act, 1872 will occupy its field when the contract dissolves due to an impact of a violent external force.

This decision has been further affirmed in the case of Satyabrata Ghose v. Mugneeram Bangur & Co., AIR 1954 SC 144 wherein the Supreme Court laid down the following principles relating to frustration:

1. Doctrine of frustration under Section 56 involves the discharge of the contract by reason of supervening impossibility or illegality which was beyond contemplation of the parties at the time when they entered into the contract.
2. The word “impossible” under Section 56 does not mean physical or literal impossibility, but practical impossibility from the point of view of the object and purpose which the parties had in view, such as the change in circumstances totally upsets the foundation of the contract.
3. Section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties.
4. Where the contract itself contains a term, either express or implied, according to which performance would be discharged, the dissolution of the contract would take place under the terms of the contract itself and would be governed by Section 32 of the Contract Act would be completely outside the purview of Section 56 of the Contract Act. In such a case, the impossibility should have been anticipated by the parties during signing of the agreement.
5. If the parties contemplated the possibility of an intervening event that might affect the performance of the contract but also expressly stipulate that the contract will remain in force despite the event then doctrine of frustration cannot be applied and performance of the contract can be demanded despite the occurrence of the event.
6. Whenever the frustration happens, the dissolution of contract is automatic and it does not depend on the ground of breach or repudiation of either parties.

In Alopi Prashad and Sons Ltd. v. Union of India, AIR 1960 SC 588, the Supreme Court applied Section 56 of the Indian Contract Act, 1872 and held that the Courts cannot absolve a party from its liability to perform its part of the contract only because certain uncontemplated event has resulted in making the performance of the contract commercially onerous. The Supreme Court held that:

“…it is only when a consideration of the terms of the contract, in light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged” that the contract ceases to bind the parties, because upon its true construction the contract does not apply in that situation.”

The Supreme Court in the Energy Watchdog v. Central Electricity Regulatory, (2017) 14 SCC 80, refrained from applying Section 56 of the Indian Contract Act, 1872 because the contract had a force majeure clause and an express exclusion clause with respect to certain force majeure events. The Court enumerated to hold that when a contract provides the consequences of certain force majeure events but specifically excludes certain other force majeure events, then the force majeure events that were consciously excluded by the parties cannot be relied upon for the purposes of claiming the benefit of such consequences.

The Supreme Court further held that the excluded force majeure event was obviously within the contemplation of the parties and was consciously excluded at the time of entering into the contract. As a result, the Supreme Court held that the case was covered under Section 32 and Section 56 of the Indian Contract Act, 1872 will have no application to those facts for the purpose of claiming frustration. The Court while rendering the decision relied on the principle of Satyabrata Ghosh that since the contract had specific exclusion through the force majeure clause, Section 56 will have no application.

Recently, the Supreme Court in South East Asia Marine Engineering and Constructions Ltd. (SEAMEC Ltd.) v. Oil India Limited, Civil Appeal No. 673 and 900 of 2012, decided on 11^th May, 2020, propounded on utility and implications of a force majeure clause. The corollaries of a force majeure clause in rendered under Section 56 of the Indian Contract Act, 1872 that provides that happening of an uncertain event such that performance becomes impossible, then the contract will become void.

“When the parties have not provided for what would take place when an event which renders the performance of the contract impossible, then Section 56 of the Contract Act applies. When the act contracted for becomes impossible, then under Section 56, the parties are exempted from further performance and the contract becomes void. However, there is no doubt that the parties may instead choose the consequences that would flow on the happening of an uncertain future event, under Section 32 of the Contract Act.”

Conclusively, it can be inferred that Indian Courts have interpreted and applied the force majeure clause in strict sense.

INVOCATION OF DOCTRINE OF FRUSTRATION DURING COVID – 19 AS A FORCE MAJEURE EVENT

One impediment in invocation of the force majeure clause can arise in order to establish its applicability unless the event is expressly mentioned under the contract.

Express inclusion of force majeure event in a contract might be pertaining to any other event than the pandemic like novel coronavirus. It is extremely unlikely that the contracts entered until 2020 would have contemplated to incorporate the occurrence of the pandemic COVID – 19. Nonetheless, the inclusion of dissolution of the contract due to epidemic, pandemic or other such events that are external forces, beyond the control of the contracting parties can form the basis to invoke the doctrine of force majeure. Further, the actual inability to perform the obligations is due to lockdown enforced by the government, therefore the force majeure clause can be invoked if the term “lockdown” in included therein.

For contracts not explicating the occurrence of a force majeure can take the recourse of Section 56 of the Contract Act to implore frustration of contract pursuant to the lockdown condition. The provision permits termination of the contract if due to unforeseen event, the obligations cannot be performed. The party invoking frustration of contract will have to establish that the change in circumstances have defeated the basic foundation of the contract, thus making it impossible to perform.

In other words, whether the pandemic and the lockdown situation will be governed by Section 32 or Section 56 of the Indian Contract Act, 1872 is subject to whether the contract incorporates a force majeure clause. Alternatively, in light of bonafide intent, parties can absolve themselves from the contract through mutual consent.

Even in absence of an explicit clause, the party relying on uncertain event as an excuse to non-performance need to adequately establish that it had taken all plausible measures to mitigate the effect of external force but still will not be able to perform the contractual obligation.

Further, the impact of the pandemic is a temporary event until it stands cured, therefore, the impossibility of the performance is also temporary. Thus, a contract will be dissolved or frustrated under Section 32 or 56 of the Indian Contract Act, 1872 if the time is the essence of the contract. Otherwise, the force majeure clause will only postpose the contractual obligations and not set-free the parties from their contractual obligations.

CONCLUSION 

The implementation of the directions through notifications including lockdown measures under the Epidemic Disease Act, 1897 and the Disaster Management Act, 2005 have to be adhered to in the strictest sense otherwise the violators would be penalized under the Indian Penal Code. Thus, inability to fulfil the obligations under the contract entered into between the parties cannot invoke legal proceeding if the non-performance was due to lockdown imposed by the Government, subject to the condition that the parties are able to prove the nexus between the circumstances and the contractual obligations.

Nonetheless, mere inconvenience, difficulty, pause or delay in performance of obligations under a contract pursuant to the pandemic and its consequential restrictions will not be allowed to escape its contractual obligations under the realm of force majeure clause.

Henceforth, it will be insightful to observe an interesting development in the realm of contract law where the judiciary interprets the implication of Covid -19 in light of the force majeure clauses of the contracts as the effect of the pandemic descends. The bottom-line would be to consider the events covered under the force majeure clause to determine whether the contract will be suspended or frustrated.

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