[Guest Post] COVID-19 Impact on Contracts: Force Majure v Doctrine of Frustration by Prince Pawaiya and Prerna Arora

Amidst the Pandemic ‘COVID -19’ outbreak, Indian, much less global economy is on a standstill. The question of performance / fulfilment of obligations of underlying terms of a contract is leaving a lot of companies high and dry. Is the pandemic COVID -19 outbreak a force majeure event? The very silent yet pivotal clause of a contract is now ace and is deciding the fate of contracts between parties. We have tried to explain circumstantially, the impact of this outbreak on contractual obligations of parties to a contract.

COVID – 19 - A Force-Majeure Event
As per World Health Organization (‘WHO’), ‘A disease outbreak is the occurrence of disease cases in excess of normal expectancy. The number of cases varies according to the disease-causing agent, and the size and type of previous and existing exposure to the agent. Disease outbreaks are usually caused by an infection, transmitted through person-to-person contact, animal-to-person contact, or from the environment or other media.”

On March 11, 2020, the novel coronavirus; COVID -19 was termed as a pandemic outbreak by the WHO. The WHO had declared the outbreak of the COVID-19 as a global emergency leading all the contractual parties to encounter a force majeure event or apply the doctrine of frustration of contract to safeguard their interest.

Force Majeure: Meaning
A French expression, Force Majeure, refers to a superior or irresistible force, which is better known in India as an Act of God but this has not been defined under the Indian Laws. The phrase, however, has a more extensive meaning than ‘Act of God’ or ‘Vis Major’. The Hon'ble Supreme Court of India in Dhanaramji Gobindram v. Shamji Kalidas & Co had explained the concept of Force Majeure as 

...the expression ‘Force Majeure’ is not a mere French version of the Latin expression ‘Vis major’. It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in ‘Force Majeure’. Judges have agreed that strikes, break- down of machinery, which, though normally not included in ‘Vis Major’ are included in ‘Force Majeure’.
In other words, a Force Majeure refers to occurrence of an event, which is outside reasonable control of a party and which prevents that party from performing its obligations under a contract. For an event to be a Force Majeure, shall fulfil the below-mentioned conditions:
  • the event must be beyond the reasonable control of the affected party;
  • the affected party’s ability to perform its obligations under the contract must have been prevented, impeded or hindered by the event; and
  • the affected party must have taken all reasonable steps to seek to avoid or mitigate the event or its consequences;
Given the outbreak of the COVID-19, there are three probable situations in a contract with respect to the Force Majeure clause:
  1. Where Force Majeure clause is stipulated in a contract, which explicitly talks about epidemic/ pandemic or outbreak of disease;
  2. Where Force Majeure clause, though stipulated, does not explicitly deal with a pandemic, epidemic situation, etc.;
  3. Where a contract is silent or does not include a Force Majeure clause.
Contracts wherein, Force Majeure clause stipulates pandemic, epidemic etc. gives a perfect opportunity to a party to avoid or delay performance of onerous obligations, including payment and delivery commitments. The outbreak of COVID-19 is beyond the control of defaulting party is very evident from the ongoing situation. The onus is on a defaulting party to prove that it is not able to perform its contractual obligation(s) because of the COVID-19 outbreak despite taking all necessary measures to mitigate the event.

In Gujarat Urja Vikas Nigam Ltd. Vs. Tarini Infrastructure Ltd. & Ors. the Hon’ble Supreme Court of India has held that an uncontrollable event would qualify as a Force Majeure event. In Energy Watchdog Vs. CERC the Hon’ble Apex Court has held that the contract wherein Force Majeure clause is explicitly mentioned are out of the purview of Section 56 of the Indian Contract Act, 1872. The fate of the contract after the invocation of Force Majeure clause will depend on the parties and terms and condition of the contract.

In a situation, where a contract provides for a Force Majeure event but does not explicitly capture the current situation, parties to a contract shall opt a liberal interpretation of the phrases used to portray the incapability of the defaulting party to fulfil his contractual obligations as the circumstances are ‘outside the reasonable control of the party affected’. It is amply clear that a pandemic such as COVID-19 would qualify as Force Majeure under such a provision.

More often than not, clauses such as Force Majeure do not form part of a contract. Does it mean that a company or a person can be forced to perform obligations under the contract such as in a lock-in period? Given the present scenario, the affected party can resort to the Doctrine of Frustration of Contract enshrined under Section 56 of the Indian Contract Act, 1872. As discussed earlier, Force Majeure is not defined under Indian laws and terms of any contract is governed as per provisions of the Indian Contract Act, 1872. Therefore, a mere absence of a specific stipulation in a contract cannot override the basic principles enshrined under Section 56.

The doctrine of Frustration of Contract:
Section 56 of the Indian Contract Act talks about two situations:

Initial Impossibility - An agreement to do an impossible act, is void. In other words, the Agreements that are void ab initio.

Subsequent Impossibility – purpose of a contract to become impossible and not difficult – ‘A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful’. It is pertinent to note that the purposes of a contract should have become impossible and not difficult. The Doctrine of Frustration is usually invoked under subsequent impossibility scenarios. Given the present circumstances, contracts wherein the payments are due, do not become impossible to act upon amidst the outbreak, they only become difficult. The party asserting the Doctrine of Frustration during the outbreak of COVID -19 to safeguard itself should make it crystal clear that the object of the contract is impossible to perform and not onerous. However, in such a situation, lessee’s/licensee’s/tenant can always approach the landlords and request for suspension of rentals/license fees/compensation during the subsistence of Force-Majeure.

In M/s Alopi Parshad & Sons Ltd. v. Union of India it was held that ‘a contract is not frustrated merely because the circumstances in which it was made are altered. The courts have no general power to absolve a party from the performance of his part of the contract merely because its performance has become onerous on account of unforeseen turn of events.’ However, wherever the parties have entered in to a contract wherein time is the essence, then, the defaulting party may resort to Doctrine of Frustration, as it is not merely a matter of impossibility, but a matter of impracticality, as it frustrates the very purpose for which the parties have entered into a contract.

The Hon’ble Supreme Court in Satyabrata Ghose vs Mugneeram Bangur & Co., And Another has held that 
“The second paragraph enunciates the law relating to the discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. The wording of this paragraph is quite general, and though the illustrations attached to it are not at all happy, they cannot derogate from the general words used in the enactment. This much is clear that the word ‘impossible’ has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view and if an untoward event or change of circumstances totally upset the very foundation upon which the parties rested their bargain, it can very well be said that the promisor L/B(D)2SCI-6(a) found it impossible to do the act which he promised to do.”.
In Naihati Jute Mills Ltd. Vs. Hyaliram Jagannath, held that “to hold a contract as frustrated, the change in events or circumstances must be so fundamental as to be regarded by law as striking at the root of the contract”.

In Sushila Devi vs. Hari Singh, the Court held that “the impossibility contemplated by Section 56 of the Contract Act is not confined to something which is not humanly possible. If the performance, of a contract, becomes impracticable or useless having regard to the object and purpose the parties had in view then it must be held that performance of the contract has become, impossible.”

The parties to a contract may use Doctrine of Frustration of Contract or invoke Force Majeure clause to negate breach of the contract and safeguard their interest, but eventually, everything will be determined by the terms and conditions of the contract. The courts will deep-dive into the terms of a contract to ascertain whether the situation at hand can be excused basis what is mentioned in the contract.

We strongly recommend a thorough analysis of the contractual terms, and where required, notify the opposite party by way of a letter/notice apprising it of a possible derailment, suspension, termination or frustration as the case may be in light of the pandemic COVID-19 outbreak/ Force Majeure event.

  Prince Pawaiya is the Founder and Managing Partner of GNP Legal, a full service law firm in   Mumbai and Delhi. Co-author, Prerna Arora is an Associate in GNP Legal, Delhi. Author can be   reached at : [email protected]

Disclaimer- This article is not meant to be legal advice and shall the reader have specific question in relation to an agreement, the reader is encouraged to reach out to an Advocate.

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