This article is written by Rajat Chawda from the Institute of Law, Nirma University, Ahmedabad. This article explains the legal consequences which will arise due to the coronavirus outbreak. 

Introduction

Coronavirus has adversely affected the global economy. The pandemic has caused almost every country to go into lockdowns to save its citizens from the virus. The lockdown has caused people to remain closed in their house, crumble the economies, halting down businesses that are incurring losses.

Amidst such lockdowns, there are many agreements and promises, which were to be fulfilled but because of the current situation, the same has not been possible. This article explains the legal position of such agreements and explains whether a virus outbreak can constitute an Act of God or not.

Legal Consequences

Breach and Non-performance of Contracts

A breach of contract occurs when either of the parties to a contract refuses or fails to comply with conditions accepted in the agreement.  

Section 37 of the Indian Contract Act, 1872 makes it mandatory on part of the parties to obey the terms of the agreement. 

When a legally binding contract is breached by either of the parties, a ‘right to sue’ vests with the other party to claim damages or compensations from the party at fault. 

These rights have been defined in Chapter VI of ICA, titled ‘Of the consequence of the breach of contract’.

This section also provides for two exceptions:

1. When the contract has been already performed,
2. When the person is excused under the law (defences).

Defences for Breach of Contract

Defence against a suit for breach of contract discharges the party in fault from any sort of liability. Broadly, there are three defences for the breach of contract:

1. Force Majeure

Any Act of God or unforeseen circumstances that prevent either of the parties to perform and honour obligations of the contract is a defence to breach or non-performance.

Illustration: ‘A’ comes into a contract with ‘B’ to build a house at a specified location but because of a landslide in that area, it is now impossible to build the house. Here, ‘B’ cannot claim damages or compensation from’ because of the defence of the ‘Act of God’.

2. The Frustration of Contract

A contract, whereby subsequent of its formation, the performance becomes impossible or unlawful due to other circumstances unforeseeable by both of the parties. 

Illustration: ‘A’ comes into a contract with ‘B’ to paint the house of ‘B’. Before he could render his services, the municipal board demolished his house. The contract is said to become frustrated.

3. Justification

When a party at fault can justify the reasons for the breach or non-performance of the contract.

Illustration: ‘A’ comes into a contract with ‘B’ to provide a thousand quintal of wheat but before the performance, the grains became bad for consumption.  Here, ‘A’ justified his non-performance by stating that the grains agreed to be delivered were not fit for the performance and therefore such non-performance occurred.

Force majeure

The Principle in the UK

Since England is a common law country, the parties are at flexibility to choose which acts and circumstances will be considered as an act of force majeure. The principle also includes under it acts of human intervention apart from the act of God. Under this scenario, the burden of proof lies on the party claiming the defence of force majeure. The party has to prove that the occurrence of an unforeseen event lies under the doctrine of force majeure. 

Three tests for Force Majeure:

1. Externality

If it was not in the hand of the parties to control such an event.

Example: Landslides, Floods cannot be controlled by humans. 

2. Unpredictability

There was little anticipation for the happening of such an event and there is an element of shock and surprise that it occurred.

Example: Weather changes cannot be predicted, War with a nation cannot be predicted, Emergency cannot be predicted.

3. Irresistibility

The parties cannot, at any cost avoid such circumstances.

Example: If due to war, the government has imposed a curfew, all the parties cannot avoid it but to follow the orders.

Force Majeure under ICA

Under ICA, the term ‘Force Majeure’ is not expressly and properly defined but its essence can be inferred from Sec 32 and Sec 56 of the Act. 

Section 32 defines ‘contingent contracts’, in which enforceability of a contract depends on happening or not happening of an event. If in the future, the happening of an event becomes ‘impossible’, the contract is said to be ‘void’.

Section 56, defines the principle of the frustration of contract under which subsequent impossibility of happening of an event exempts a person from his contractual obligations.

In India, since the force majeure is not expressly defined anywhere, the defence can only be taken, when parties have incorporated this clause in their agreement. Since the legislation expressly defines the frustration of contract under Sec 56 of ICA, the principle of force majeure is loosely recognized in India per se.

Does a Virus Outbreak constitute an ‘Act of God’?

A party claiming the defence of force majeure is not available, defence of frustration of contract can be claimed. The words which are used in defining every clause of the ‘Act of God’ like ‘unusual’, ‘unforeseeable’, ‘grave and sudden’, ‘extraordinary’, etc try to describe the general requirements which a circumstance or phenomenon has to fulfil to qualify as an act of God. It must be unusual or extraordinary that it is very hard to foresee such a turn of events.

It cannot be conclusively stated whether COVID-19 will be considered as an ‘Act of God’ by the court. It shall be determined by the court in the near future, whether this virus qualifies as an Act of God fulfilling the appropriate requirements to be considered as one or not. 

What adds gravity to its discourse is that the WHO’s Directed General declared it as pandemic and stated in his speech that, “We are in uncharted territory. We have never before seen a respiratory pathogen that is capable of community transmission, but which can also be contained with the right measure.”

This statement will somewhat add gravity to consider this virus as an Act of God.

Frustration of contracts

The frustration of the contract defined under Section 56 of ICA is a minor version of force majeure. If the principle of force majeure is not available, the defence can be claimed under the principle of the frustration of the contract. This principle is based on the Latin maxim, ‘les non cogit ad impossibilia’ meaning, a man cannot be compelled by law to do what he cannot possibly perform.

There are three necessary conditions to claim this defence:

1. A contract must be existing between two parties which is valid and enforceable.
2. The contract must be executed partially, meaning there is some part of the contract which is yet to be performed.
3. The contract becomes impossible to perform after it is entered into.

While dealing with the present scenario of COVID-19, this principle cannot be considered as a good defence as firstly, this defence is claimed under the circumstance where the subject matter of the contract is dissolved because of the subsequent impossibility. Secondly, the defence is only available when partially, the contract has been executed.

Therefore, between the defence of Force Majeure and Frustration of Contract, Force majeure is comparatively a better defence because of its wider application and interpretation. 

Justification

Justification is a recognized defence under tort law but is not directly recognized under the law of contracts. Since the Law of Contracts has evolved from case to case basis under the common law jurisprudence, therefore, justification can also be considered as a good defence under contract law. 

‘Justification’ of any act or omission is to provide reasons for performance or non-performance. If the reasons are justifiable the person justifying his actions is exempted from any sort of liability. This defence is always available on the grounds of justice, equity, and good conscience.

In the present scenario of coronavirus, the non-performance or breach of contract can be justified on the grounds of 

(1) The government declaring lockdown, which expressly prohibited the functioning of every kind of business because of health safety, except the businesses dealing with essential commodities. 

(2) When the entire country is under lockdown, it is impossible to perform the terms of a contract efficiently and effectively. Therefore, on this ground defence for non-performance can be claimed. 

It is on the court to analyze and adjudge the justification provided, circumstances present, and the gravity of the matter from case to case basis.

Categories or sectors that are affected

A report of the UN Conference on Trade and Development stated that the outbreak of the corona pandemic might cost the global economy $1-2 trillion in 2020. An article stated that along with the other countries, India is also entering into a recession. The lockdowns have adversely affected the global supply chain. The 21-day lockdown of India will too have an adverse impact on the Indian economy as the major business sectors will soon reflect in their perspective reports.

The major industries and businesses to be impacted include the travel industry, the hotel industry, manufacturing sectors, small skill sector, consumer & durable market, poultry & seafood markets. 

Amongst these sectors, the hardest category to be impacted by this pandemic is the group consisting of daily wage earners and unskilled labour. Because the earnings of these people depend on the daily work they do, the lockdown has resulted in continuous unemployment, with little or no money in hand. If these groups are not looked after, they will die of hunger before corona catches them.

Current Legal Status of the Contracts

If one analyzes the situation and the statutes carefully, he would understand that the contracts have not become impossible or unlawful to perform. The word ‘unlawful’ means something which lacks the sanctioning of the State & ‘impossible’ means not able to be done, to occur or exist. But prior to this pandemic almost all of the contracts had the legal backing and were possible to be executed. 

They have become impossible to execute because of the ongoing lockdowns and unlawful because repercussions will be there if one does not obey the State’s decision of lockdown. Therefore, the contents or deed of the contact has not become impossible or unlawful per se but the present scenario has made them seem like this.

In light of the above paragraph, these contracts should be considered as ‘difficult’ to perform, not ‘impossible’ or ‘unlawful’ to perform. Under the current circumstance when in a state almost every other activity is halted and it is difficult to trade even essential commodities, these contracts should be considered as lapsed for a subsequent duration of time, until the conditions become normal again and the businesses resume their function. 

Conclusion

People enter into contracts daily either directly or indirectly. For every work, an individual performs there is an incentive attached either for himself or for others. In this circumstance of a pandemic where there is a global lockdown seen for the first time in human history, the global economy is falling into recession, businesses are going down and there is also a scarcity of essentials in the market. It should be rationally understood that in a situation like this, it is difficult for a person to honour and perform his part of the obligations of the contract. In such a situation, we all should stay together as someone rightly said, ‘We should hang together in a desperate situation, otherwise we will all hang separately’.

References

https://blog.ipleaders.in/enforceability-force-majeure-clause-india-uk/

https://www.livelaw.in/know-the-law/force-majeure-act-of-god-doctrine-of-frustration-under-india

https://www.nortonrosefulbright.com/en/knowledge/publications/844d7cf4/contract-performance-

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