The effects of the COVID-19 has led to difficulty in performance of contracts. Some parties are unable to perform on their contractual obligations while rendering others completely incapable of performance. This difficulty brings to light the clause of ‘Force Majeure’which means ‘superior force’ in French language. This provision exempts a party from performing their contractual obligations which have become impossible or impracticable due to an event or effect which the parties could not have foreseen or had a control over. It is usually inserted for unforeseeable incidents such as natural calamities, war, sudden change of government policies etc.
However, if the contracts do not have a ‘force majeure’clause, the Indian Contract Act, 1872[1]helps in this scenario with two sections. In its Section 32 containing ‘Contingent contracts’, it states that the performance of the contractual obligations is contingent on the happening or non-happening of an event. The contract becomes void if the event in question becomes ‘impossible’ in nature. While, Section 56 deals with performance of contracts and purports to deal with one category of circumstances under which performance of a contract is excused or dispensed with. The two parts of this section can be elucidated as:
A. Doctrine of Initial Impossibility– The section lays down that an agreement to do an impossible act is in itself void.
B. Doctrine of Subsequent Impossibility– Secondly, it refers to a situation when the performance of a contract is possible at the time it is entered into by the parties, however, the happening of a subsequent event renders its performance impossible or unlawful.
Judicial Pronouncements
The Supreme Court over the years has been reluctant in holding that a contract has been frustrated. However, the Court has not wholly ignored the proposition that a contract could be frustrated in unforeseeable circumstances and has held the same in various pronouncements.
These have been noted below:
I. Contracts not frustrated
Delay does not mean “impossible”
The earliest and the most relevant case on frustration of contract is that of Satyabrata Ghose v. Mugneeram Bangur & Co.[2]– This case involved a sale of plot between the plaintiff and defendant after which the second world war broke out and plots were compulsorily acquired by the military for the purpose. The claim was that the contract stands frustrated due to the acquisition by the military, however, the Court held that the performance of the contract has not necessarily become “impossible” or “impracticable”, it has simply been delayed. Since there was absence of any definite time period decided earlier, the agreement was not time bound and could be performed after the war as well. Hence, the contract cannot be said to have been frustrated.
Further, the Court in this case also laid down that if the contract in question has an express or implied ‘force majeure’clause then it shall be assessed on the said clause and not on the basis of Section 56 of the Indian Contract Act.
Difficult does not mean “impossible”
In M/s Alopi Parshad & Sons Ltd. v. Union of India[3], the case involved supply of ghee to army personnel during second world war. The parties claimed higher rates due to the outbreak of the war and the contractor claimed that it was entitled to amounts over and above the rates as revised in the agreement in 1942. However, the court held that the agreement was revised 3 years after the hostilities had commenced so mere change in circumstanceswill not lead to frustration of contract.
Price rise does not make it “impossible”.
In the landmark and recent judgement of Energy Watchdog v. CERC[4], it has been repeatedly pointed out that the doctrine of frustration must always be within narrow limits. It was held in context that except for a rise in price of coal, there was no event which could lead to frustration of contract. Since alternative modes were available, although at a higher price, it would not lead to a contract being wholly frustrated.
II. Frustrated Contracts
Impossible Supervening Circumstances
In the case of Sushila Devi & Ors. v. Hari Singh and Ors.[5], the question herein was of an “agreement to lease” and not “lease” itself (earlier held in Raja Dhruv Dev Chand v. Harmohinder Singh & Anr[6]that leases cannot be said to be frustrated). The contract between the parties laid down that the lease deed should be registered within 15 days from the date of the acceptance of the tender. However, the said lease deed was neither contemplated nor registered. Thus, there existed only an agreement to lease and not the lease itself and this would fall under the scope of section 56 of the ICA. The Court said that to invoke section 56, the supervening events should take away the basis of the contract and it should be of such a character that it strikes at the root of the contract. The supervening event here was to go to Pakistan physically which was impossible. Further, the terms of the agreement between the parties relating to taking possession of the properties also became impossible of performance.[7]Hence, the contract had become impossible of performance.
It is pertinent to mention in this case that there was recovery of rent paid as prescribed under section 65 of the Indian Contract Act which says that when an agreement is discovered to be void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.
Subject Matter ceased to exist
In VL Narasu v. PSV Iyer[8], the wall of a cinema hall collapsed due to heavy rains and killed three persons subsequently and hence the license of the hall was cancelled. The contract to exhibit a film became impossible to execute as the license was cancelled and the building was under reconstruction until chief engineer would be satisfied. Thus, by the time the reconstruction would be complete, the film would have lost its appeal and hence it was held that the contract was impossible to perform due to destruction of the subject matter itself.
The case laws exhibited above illustrate that the court has in fact very narrowly and strictly limited the scope of section 56 so that the same is not used as a shield in order to get out of an unwanted contract or prevent oneself from performance. The two cases above where the Court has in fact granted the contract to be void due to frustration has been held in an extreme situation wherein one was absolutely physically impossible to execute and the other simply ceased to exist with no fault of their own. Thus, the pattern is to going by the literal words of the section and not stretching the scope as the same is rarely disputed.
COVID-19 and the Uncertainty
The outbreak of the novel coronavirus declared as a pandemic by the World Health Organisation (WHO) has led to a huge turmoil in every business and industry throughout the world as it now poses uncertainty of the future.
The Indian government has been at the forefront in tackling the effects of the virus as well as ensuring that there are safeguards for different industries to survive these uncertain times. In light of this, a noteworthy initiative has been taken which is that ‘force majeure’event in its notifications as reproduced below.
The Ministry of Finance of India has an office memorandum vide F.18/4/2020-PPD[9]as below:
"2. A doubt has arisen if the disruption of the supply chains due to spread of corona virus in China or any other country will be covered in the Force Majeure Clause(FMC). In this regard it is clarified that it should be considered as a case of natural calamity and FMC may be invoked, wherever considered appropriate, following the due procedure as above."
Further gaining strength from the Memorandum, the Ministry of New & Renewable Energy issued an Office Memorandum dated March 20, 2020 which directs all Renewable Energy implementing agencies of the Ministry of New & Renewable Energy(MNRE) to treat delay on account of disruption of the supply chains due to spread of COVID-19 in China or any other country, as Force Majeureevent.
How can a Force Majeure Clause in the Contract be invoked
Not all contracts can claim the defence of ‘force majeure’in light of COVID-19. There are two possible instances wherein it can be suggested that the pandemic is covered:
Firstly, if the contractual definition of a force majeureevent expressly includes a ‘pandemic’. If yes, then the same will provide clarity whether the same can be invoked or not.
Secondly, if the clause covers extraordinary events or circumstances beyond the reasonable control of the parties. This general definition can help invoke the clause by claiming that the pandemic is beyond reasonable control of the affected party.
However, the same is dependent on fact-specific situations and a straight-jacketed formula cannot be prescribed for the same. In case it has been invoked, the burden of proof lies on the party asserting the ‘force majeure’defence to demonstrate the existence of it in the form of the event being unforeseeable and the impossibility of the person to be able to execute the contract.
Remedies
Remedies available to the parties depends on the clause set out by them itself. Some of them may provide for immediate termination of the contract upon the happening of the unforeseeable event; others may provide for limitations in time after which either party may terminate the agreement with written notice to the other or they may require the contract to remain in effect until the said event is resolved.
Effects on different types of Contracts
1. Employment:
Frustration of an employment contract can be said to have occurred when an unexpected event prevents one or both parties from meeting basic requirements of such a contract. The parties are then relieved from any obligation to provide notice or compensation for the end of employment. However, this is rare and difficult to prove.
Such a case was brought before the Indian judiciary in 1959 in State of Rajasthan v. Madanswarup and Anr[13]. In this case, two employees had been hired by the State of Bikaner as Government Advocate and Assistant Government Advocate for five years and they had continued to serve till February 11, 1950 when there services were terminated. According to their contracts, these were bound to be renewed for another term. However, the State urged that any contracts made by the former State of Bikaner (which ceased to exist due to reorganisation post-independence) were not binding upon the successor State of Rajasthan by any covenant. Further, the High Court of Bikaner of the former State of Bikaner had been abolished by law and even the temporary Bench of the Rajasthan High Court which had been set up had come to an end. Thus, the performance of the contracts of the parties had become impossible by the ‘doctrine of frustration’ and consequently, the plaintiffs cannot successfully found any action for damages or compensation on that account.
In this case, the contract was said to have been frustrated as the one of the parties had ceased to exist. The analogy drawn from this is that even in the present situation, if the COVID-19 forces shut down, the contracts entered into by them can be claimed to have been frustrated and impossible to perform. However, it will depend upon the factual matrix of the case. In another announcement, the government has specifically advised to not terminate contracts of labourers who even though are in essential services, but have gone home to be with their family.
2. Commercial contracts:
In 2017, a matter was brought before the Central Electricity Regulatory Commission (CERC) wherein the ‘demonetization’ move by the government was claimed to be a ‘force majeure’event, however it was struck down citing that in the facts of the case, additional time was also given for the party to finish the work and hence the defence of ‘force majeure’cannot be sought.
Hence, contracts are continuously being reviewed and assessing their contractual provisions for seeking suitable rights and obligations. And on the potential routes for discharging the commercial arrangement or contract, particularly in light of ‘force majeure’.
3. Contracts of Sale:
As seen earlier in the case of Satyabrata Ghose v. Mugneeram Bangur and the Suez Canal case, in both these cases, the contract was not frustrated and an alternate route/means to perform the contract was ordered. Hence, it can be said that in contracts of sale, if it becomes absolutely impossible to perform the sale only then can the contract be frustrated and other conditions like delay or change in circumstances will not have a strong legal effect. In the COVID-19 related cases, the same reasoning will be followed.
4. Infrastructure and Manufacturing:
For both these sectors, the Indian government has already issued memorandums (as reproduced above under ‘COVID-19 and the Uncertainty) stating that COVID-19 falls under the ambit of ‘force majeure’and this move should help tide over losses faced in these sectors at least.
However, in each case it will have to be proved that the circumstances around performance have been fundamentally impacted, and a mere change in circumstances or rise in price will be as effective an argument.
Conclusion
Even though new steps are being taken by different departments of the government each day to control the heavy economic impact of the COVID-19 outbreak and the subsequent lockdown, once things return to normal, the government may have to implement measures to improve the economic condition, such as aggressive enforcement by tax authorities, contractual rights may get affected in unforeseeable ways involving government intervention and similar measures in order to get the country back on track and given the vigilance that has been displayed by the government so far, the bouncing back could also be smoother than expected.
[1]Access the Act here. [2]1954 SCR 310. [3]1960 2 SCR 793. [4]2017 14 SCC 80. [5]Civil Appeal no. 1225 of 1966. [6]1968 AIR 1024. [7]Smt Sushila Devi and Another v. Hari Singh and Others, Civil Appeal No. 1225 of 1966. [8]AIR 1953 Mad 300. [9]Access OM here. [10][1863] EWHC QB J1. [11][1961] 2 WLR 633. [12]706 F.2d 444. [13]AIR 1960 Raj 138.
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