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Covid-19 Impact on Contractual Obligations


Authored by Pratha Kotecha


Keywords : Covid-19, Contractual Obligations. Force Majeure, Indian Contract Act, 1872.


Abstract

The emergence of novel coronavirus disease has resulted in a wide-lockdown across the countries and affected many industries. Hence the concept of Force Majeure has become one of the critical points of discussion, considering that this provision allows a contractual party to hinder from fulfilling its obligations. The article focuses on two such concepts- Force Majeure and the Doctrine of Frustration.


Introduction

The outbreak of Covid-19 has put the government of various countries under pressure to keep its economy afloat. It has conjointly resulted in lockdown in several countries and as such contractual performance continues to pose difficulties for parties, as major manufacturing companies and factories around the world closed down due to the spread of the virus, and fulfilling contractual obligations in such crises is no longer commercially viable to economic actors.


The essence of this article is to address and provide legal answers to some of the legal issues arising from the contractual difficulties set to be encountered by parties to the transactions as a result of the outbreak of the Covid-19 pandemic.


Contractual Obligations

According to Black’s Law dictionary, Contractual Obligations is the one that arises from a contract or agreement.[1] It is those duties that both employers and employees are legally responsible for in a contract agreement. The exact impact of the Covid-19 pandemic on liabilities of the parties under commercial contracts is still not clear.


Given the extremely diverse nature of resources and services needed to perform contractual obligations, there's a danger that several contracting parties may be unwilling or unable to continue with their obligations. As various contracts expressly include material adverse change clauses, parties will have to analyze whether the present scenario is covered by these contractual provisions and how its effect will be. They will also need to give a thought on the allocation of liability and expenses in relation to the non-performance or threatened non-performance. All this has resulted in corporate and individuals reviewing their contracts to invoke force majeure for suspending the obligations in the contracts.


Force Majeure

The term Force Majeure originated from the French language and finds its roots in ‘Code Napoleon’. It is not explicitly conceptualized under the English common law, rather Force Majeure was viewed as an interloper, imported into the common law through its appearance in clauses in the contracts of commercial parties. A Force Majeure clause in the common law tradition is not a universally applicable concept as in the civil law tradition but is a purely contractual right and is therefore different from other legal systems, such as China and France, where Force Majeure is a codified legal concept and the Courts have the power to declare events like Covid-19 pandemic, as a Force Majeure event.


Over the years and in the usage of the same in the contractual sphere, Force Majeure has been defined as ‘an irresistible force or compulsion such as will excuse a party from performing their part of the contract’. For its claim to hold, the establishment of the fact that the event goes to the root of the contractual obligation and the damage or failure would not have occurred unless for the Force Majeure event, must be proved.


The Indian Contract Act, 1872, nowhere expressly refers to the term 'Force Majeure'. However, for agreements that contain an explicit or implied force majeure covenant, the same may be covered by Section 32 thereof which refers to 'contingent contract' (such contracts where performance is dependent upon the happening or non-happening of an event). In light of the above-mentioned provision of law, for every contract, it is required to be found from the terms mentioned as to whether the same is a contingent, conditional, unconditional, or irrevocable contract.


The Hon’ble Supreme Court of India in the case of Dhanrajmal Gobindram vs. Shamji Kalidas[2] has held that the term force majeure is of wider import. Judges in the past have agreed that where the reference is made to force majeure, the intention is to save the performing party from the consequences from anything over which he has no control.

A Force Majeure event is dependent upon the provisions of the contract. In many cases events such as an epidemic, lockdown, outbreak of disease or pandemic, may be listed as triggering events in the Force Majeure clause. If such a view is taken, the Covid-19 pandemic shall likely be deemed to be a Force Majeure event.


On the other hand, where no relevant event is specifically mentioned, the intention of parties will be considered. Some clauses do not have the same wording and are limited to a few events only, which involves considering whether the list of events included was intended to be exhaustive or non-exhaustive, in which case invoking the clause would not do much good unless both the parties to the contract mutually decide to suspend the operation of the contract for a specific period.


In the past, many similar events such as SARS and Ebola have occurred, but the law about pandemic and Force Majeure is still not settled. There is hardly any case law that may be considered even indicative or purposive for the same. However, in a few cases, Executive Orders to stop production, supply or manufacturing have been deemed to be Force Majeure events. Similarly, travel restrictions, lockdowns, suspension of free movement, can be argued for claiming Force Majeure.


Doctrine of Frustration

This is a common law doctrine used to set aside contracts where an unforeseen event either renders contractual obligations impossible or radically changes the party’s principal purpose for entering into a contract. Frustration basically means that the contract has drawn to a close and parties are not liable to perform their contractual obligations anymore. The threshold for frustration is kept very high and parties must show that the very purpose of the contract has been so affected, that it has become incapable of being performed.


The origin of the Doctrine of Frustration has been from Roman laws. It was part of the Roman contract law which extinguished obligations of innocent parties where the thing is destroyed without the debtor's act or default, and the contract purpose has "ceased to be attainable".

The doctrine of frustration has been embodied in the Indian Contract Act, 1872 by way of Section 56 which states – A contract to do an act which, after the contract is made, becomes impossible or become unlawful because of some event which the promisor could not prevent, becomes void when the act becomes impossible or unlawful.


However, the statutory provision under Section 56 also sets out a positive rule of law on supervening impossibility or illegality that renders performance impossible in its practical, and not literal sense.[3] The court grants relief on the ground of subsequent impossibility when it observes that the whole purpose or basis of a contract was frustrated by the disruption of or occurrence of an unexpected event or change of circumstances which is so essential as to be regarded by law as striking at the root of the contract as a whole. The contract as a result then automatically comes to an end.


Conclusion

Any party to a contract can either invoke the Force Majeure clause or the Doctrine of Frustration, however, in situations where the same cannot be done and an obligation is mandatory to be fulfilled, the same can be with the mutual consent of parties be suspended. In case of non-fulfillment of such obligations, as mentioned in the contracts, the same can’t lead to legal proceedings if it were affected by the lockdown imposed by the government or owing to any hindrances caused due to Covid-19 in performance of obligations arising out of a contract by either party, as long as it is sufficiently established that the situation that had arisen was of such nature that it was impossible for the party seeking exemption from performance, to perform its part of the contract.


Further, judicial interpretation of contracts in disputes involving unforeseen events is writ large with diverse and nuanced approaches, highly dependent on the nature of the contract and the language of the terms. It is therefore prudent for parties to seek legal advice and conduct a thorough legal analysis of their contracts to protect themselves on either side of performance, and to allocate risk properly, prepare a strategy for renegotiation if required, and save the sanctity of contract.


References

· Black’s Law Dictionary (4th Ed. Rev. 1971) http://heimatundrecht.de/sites/default/files/dokumente/Black%27sLaw4th.pdf


· Abhishek Arya and Arvind Thapliyal (June 29, 2015) India: Doctrine of Frustration https://www.mondaq.com/india/contracts-and-commercial-law/407868/doctrine-of-frustration#:~:text=The%20doctrine%20of%20frustration%20is,or%20unlawful%20will%20become%20void.

· Nishith Desai Associates (March 2020) Impact of Covid-19 on contracts, Indian Law Essentials.http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Impact_of_Covid-2019_on_Contracts.pdf


· Cyril Amarchand Mangaldas (March 23, 2020, 6:26 pm) Coronavirus, Force Majeure And Impact On Commercial Contracts https://www.bloombergquint.com/coronavirus-

outbreak/covid-19-coronavirus-force-majeure-and-impact-on-commercial-contracts

· Rajat Prakash (April 7, 2020) Covid-19: Analysis Of Contractual Obligations And Force Majeure https://www.indialegallive.com/special-story/covid-19-analysis-contractual-obligations-force-majeure/


· Edun Oluwatimilehin (May 2020) COVID-19: Possible Effect On Contractual Performance Under Commercial Transactions.

https://www.researchgate.net/publication/341623445_COVID-19_POSSIBLE_EFFECT_ON_CONTRACTUAL_PERFORMANCE_UNDER_COMMERCIAL_TRANSACTIONS


· Yugvendra Pawar Jha, Kunal Verma, Waheb Hussaini (May 12, 2020) Performance Of Contractual Obligations During The COVID-19 Pandemic https://www.mondaq.com/india/litigation-contracts-and-force-majeure/932798/performance-of-contractual-obligations-during-the-covid-19-pandemic


Foot notes: [1] Contractual Obligation Definition, Black’s Law Dictionary (4th Ed. Rev. 1971) [2] (1961) 3 SCR 1020 [3] Satyabrata Ghose vs. Mugneeram Bangur and Others, AIR 1954 SC 44, paragraph 17.

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