This article is written by Deepika Kacholia, a student at Dr Ram Manohar Lohiya National Law University. This is an exhaustive article that aims to explain the ramifications of the COVID-19 induced lockdown on the realization of contracts.

Introduction

The novel coronavirus, the origins of which can be traced back to Wuhan, China, has now proliferated and spread across the globe at an alarming rate. Its outbreak is posing grave challenges to almost all the facets of human life and a lot is at stake. Like various other sectors, the business sector has also been gravely hit. The outbreak of the novel coronavirus has perturbed the markets worldwide, the stock markets have collapsed, supply chains have been thrown into disarray and modes of transportation have been shut down. The performance of contracts, which is a sine qua non of business transactions, has either become out of question or has been delayed, notwithstanding the intention of the parties.

Contract, as defined under section 2(h) is “an agreement enforceable by law” meaning thereby, an agreement that honours each specification postulated in the act and the breach of which can be adjudicated by a court of law upon a civil suit filed by the aggrieved party. Consequent to the COVID-19 induced halt, various provisions have been adduced by corporates and other commercial bodies. The parties to the contract, in order to hold up or evade the performance of a contract or renegotiate the terms of the contract, will vigorously bring up the matter of COVID-19 engendered conditions of halt and standstill. This article is an attempt towards understanding the impact on contracts from legal lenses in the present scenario.

The Doctrine of Force Majeure

In these times, various companies and corporates have affirmed the doctrine of Force Majeure. The precise interpretation of this term is “superior force”, both natural and non-natural. In the Indian jurisdiction, the elemental foundation of this doctrine was laid down by a judgment of the Madras High Court in Edmund Bendit and Anr vs. Edgar Raphael Prudhomme ((1925)48MLJ374), wherein force majeure was elucidated as causes, the genesis of which can neither be obviated nor can somebody be held blameworthy for the same. Furthermore, in the case of Dhanrajamal Gobindram vs. Shamji Kalidas & Co. AIR 1961 SC 1285, the learned judges of the Supreme Court observed that force majeure as a term is not simply the French adaptation of vis major. The sum and substance of this term, in the opinion of the court, is of an extensive nature. The court, in its opinion, awarded what could be the most capacious connotation of the term and stated that where the force majeure clause has been alluded to, the clear resolution of the parties would be to save the bacon of the performing party from repercussions of something which could not have been curbed or the occurrence of which could not have been obviated.

The perceived meaning of the above-mentioned term, in the context of merchandise undertakings, is unforeseeable circumstances that prevent a person or company from fulfilling a contract. Such events include, but are not limited to, the ‘act of God’. This term doesn’t find an outright mention in the Indian Contract Act, 1872 per se, albeit the courts have taken active cognisance of the term and its implications thereof. Also, certain other sections of the act, as mentioned below, assume importance in the present framework.

In the Indian realm, Force Majeure procures subsistence from the contract itself and in the occurrence of a disagreement the scope of a Force Majeure clause will be ascertained by the application of principles of contractual interpretation. The question whether force majeure clauses can be invoked to absolve the parties from their duties under the contract would be answered in the light of facts, events, nature and general terms pertaining to the particular contract. However, the fact that there exists a stipulation under the contract which expressly includes pandemic in the force majeure clause would set off such a clause in the COVID-19 pandemic as well. However, the onus of proving that the specifications of the contract would have been carried out was it not for the COVID-19 pandemic would lie on the party taking its plea (Classic Maritime v. Limburgan Makmur SDN BHD and Another, [2019] EWA Civ. 1102).

The certificates that have been issued by the governmental departments in the past few days can further be of contributory help in order to argue that the execution of stipulations laid down under the contract could not possibly be performed given the occurrence of the pandemic. The China Council for the Promotion of International Trade (CCPIT) has issued force majeure certificates that safeguard companies from damages of legal nature. Similarly, on February 19, 2020, the Ministry of Finance issued an Office Memorandum on ‘Force Majeure Clause’ ordaining that in accordance with the due process provided in the memorandum itself, the pandemic that has grappled the world presently ought to be regarded as a force majeure event, thereby having the effect of invoking force majeure clause as and where thought to be befitting. However, this should not be viewed as conveying that the parties are liberated from the obligations arising out of the contract. This memorandum merely intends to defer the performance for the time being. As long as the termination of the contract does not cause pecuniary reverberations, either party can terminate the contract if its performance has been staved off or made late for a period of ninety-plus days. Nevertheless, such certificates don’t serve as binding documentation.

It was held by the Supreme Court in Energy Watchdog vs. CERC (2017) 14 SCC 80 that the force majeure events that have been left out of the contract deliberately cannot be relied upon at a later stage. It was also held in this case that a force majeure clause will lose its pertinence in as much as there exists an auxiliary route of performance of conditions, as laid down in the contract.

Stipulations Laid Down Under

Section 32 of the Indian Contract Act, 1872

The parties will be discharged from assuming the specifications of the contract if there occurs any circumstance that can perhaps render the performance of such a contract impossible. Such cases attract the provisions of Section 32 of the Indian Contract Act, 1872. This section pertains to contingent contracts. In the case of Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310, that has become a leading light with regards to the ambit of section 56, the court pointed out that the cases where the contract would stand suspended on the “happening of certain circumstances”, expressly or impliedly mentioned in the contract, would be independent of the sweep of section 56 of the act. The court further, in the case of Energy Watchdog vs. CERC (2017) 14 SCC 80 while referring to the foreknown judgment clarified that cases of such nature will be dealt under the arrangements of Section 32.

Section 56 of the Indian Contract Act, 1872

As mentioned above, the prevalent situations either render the performance of contracts impossible or cumbersome. The provisions with respect to the former instance, i.e. where the performance has been rendered impossible is dealt under Section 56 of the Indian Contract Act, 1872. The Act lays down that an agreement made in pursuance of execution of something, which has been rendered impossible post the contract was made, is void. The loss incurred by the promisee, as a result of non-performance will be duly compensated. While section 32 lays down stipulation pertaining to contingency, section 56 deals with the common law principle ‘doctrine of frustration’. The Supreme Court in the case of Industrial Finance Corporation of India vs. Cannanore Spinning & Weaving Mills Ltd. (2002) 5 SCC 54 held:

“It may be noticed that the statute itself has recognized the doctrine of frustration and encompassed within its ambit an exhaustive arena of force majeure under which non-performance stands excused by reason of an impediment beyond its control which could neither be foreseen at the time of entering into the contract nor can the effect of the supervening event be avoided or overcome.”

It was held in Energy Watchdog case that in as much as the occurrence of force majeure comes about outside the scope of the contract, it is dealt with under Section 56 of the Indian Contract Act. It is not mandatory for the performance of the contract to become unfeasible veritably. It will be sufficient to exhibit that such performance has become unrealistic and irrelevant in as much as the very purpose behind the formulation of the said contract cannot be brought to fruition and the intention of the parties cannot be realized. But if other modes of the fulfilment of the performances are within easy reach, though the cost that the parties may incur is more, then this condition would not lead to the contract being frustrated in toto. 

In the judgment delivered in the case of Satyabrata v. Mugneeram, 1954 SCR 310, the court pointed out that the obligations arising out of a contract can be discharged if the very substratum upon which the contract was based and which the parties had in mind has been thrown into disorder with a change in the state of affairs or things. At this juncture, it becomes pertinent to note that a person is not absolved from his duty merely because the performance of the terms has become burdensome and inconvenient as a result of the altered state of affairs. The Supreme Court, in M/S. Alopi Parshad & Sons Ltd. v. Union of India, 1960 (2) SCR 793, while turning down the claim of the party that sought to supply ghee at inflated rates citing a change in circumstances post World War II, observed that the frustration of a contract cannot be pleaded entirely on the premise that the state of affairs stand altered or have become more demanding, and the parties are therefore refrained from getting rid of the bargain that they, on their own accord, made. This way of the looking at things as they stand also finds reverberation in the judgment delivered in the case of Tsakiroglou & Co. Ltd. v Noblee Thorl, GmbH, 1961 (2) All ER 179 wherein it was noted that the fact that alternative route was longer than the original one, doesn’t discharge the party from his obligations arising under the contract.

Conclusion

It can be said that the underpinning of agreements has been disrupted in the times of this pandemic. The answer to the question of discharge of obligations is not an objective one. All the above discussed determining factors and considerations are influenced by the terms stipulated in the contract itself. The state of affairs that can lead to the dissolution of a contract, the preconditions thereof, the dubiety over-application of the doctrine of frustration etc., to a great extent, are swayed by the specifications of the contract.

It is clear that the incorporation of the pandemic in the force majeure clause will provide comprehensibility as to whether or not the COVID-19 pandemic will bring about the efficacy of the force majeure clause as mentioned in the contract. The catch-all wording, which is generally used in the contracts, would also be instrumental in bringing about the intended effects of the force majeure clause if the realistic circumstances have the effect of rendering the realization of the contract impossible. Despite the fact that the contract has been frustrated at the tail length, Section 65 of the Indian Contract Act that stipulates that the party who has received any benefit under the contract which later on was discovered to be void will have to restore such benefit or compensate the other party accordingly, can be invoked. The parties can also seek to renegotiate the terms if the performance of the contract in its original form has become strenuous or if the parties do not wish to terminate the contract.

References

1. The Indian Contract and Specific Relief Acts by Pollock and Mulla.
2. Law of Contract & Specific Relief by Dr Avtar Singh.