Contractual Obligation During COVID-19
The Covid-19 pandemic has not affected the world physically and mentally but also disturbed the commercial contracts. The governments all across the world have put complete lockdown, restricted foreign travel & sealed international border. All these resulted by hitting the economy hard. Companies and also individuals are under enormous financial burden coupled with uncertainty over the performance of their existing commercial contracts. There may be many contracting parties who may unwilling or unable to continue with their obligations or responsibilities.
Plea of Force Majeure & Frustration of contract
In many cases events like epidemic, pandemic, outbreak of diseases, lockdown can be listed as triggering events in the Force Majeure Clause. Therefore, Covid-19 pandemic should be deemed as a Force Majeure event. The term Force Majeure has been defined the Black’s Law Dictionary as “an event or effect that can be neither anticipated nor controlled’. The term includes both acts of nature (e.g. floods and hurricanes) and acts of people (e.g. riots, strikes and wars).”[i] A contractual provision allocating the risk if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled.[ii]
A contract may insert the clause of Force Majeure so that one can absolve oneself from liability at the time he cannot fulfill the terms of the contract or if by attempting to do so will result in loss or damage of goods for reasons beyond its control. Force Majeure aims at exempting a party from contract which has become impossible for performance, due to intervention of a superior force. The concept of Force Majeure has gained significance in the present situation.
Section 32 of the Indian Contract Act, 1872, dealing with contingent contracts. Section 32 of the Indian Contract Act, 1872 reads as follows,
“Enforcement of contracts contingent on an event happening – Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.” [iii]
From contractual perspective, a force majeure clause provides temporary reprieve to a party from performing its obligations under a contract upon occurrence of a force majeure event. The factors on which the outbreak of Covid-19 and the lockdown ordered by the state and the central government can be related to Force Majeure are first, establishing the casual connection between the force majeure event and hindrance to the performance of the contract, secondly, harmonious construction with all the provisions and thirdly, compliance with the condition precedents contained in the force majeure clause.
Section 56 of the Indian Contract Act, 1872 reads as follows,
“Agreement to do impossible act. Contract to do an act afterwards becoming impossible or unlawful — 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. Compensation for loss through non-performance of act known to be impossible or unlawful.—Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.” [iv]
Frustration of a contract is the happening of an act (after the execution of contract) outside the contract and such act makes the performance of contract impossible. Frustration of contract is a statutory remedy. Section 56 of the Indian Contract Act enshrines the doctrine of frustration of contract. The bottom line to it is “impossibility”.
In another leading judgment on Section 56 of the Indian Contract Act, 1872, Energy Watchdog vs. Central Electricity Regulatory Commission and Anr. (2017)[v], the Supreme Court held as follows –
“in so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract. 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 of the parties.”
But mere difficulty in carrying on the contractual obligation is not enough for the frustration of contract or force Majeure unless there is an expressed contractual provision for such situation.
In a recent case with respect to Force Majeure in Bombay High Court ordered in Standard Retail Pvt. Limited & Ors. v. G.S. Global Corp & Ors.[vi], the Respondent performed its part of the contract by dispatching some steel products from South Korea. The Petitioners failed to comply with their part of the contractual obligations and relied upon the Force Majeure clause of their contract for excusing the non-performance thereof. Petitioners contended that the outbreak of COVID-19 global pandemic and the subsequent lockdown and restrictions imposed by the Government, prevented them from performing their contractual obligations. The Bombay High Court refused to give any relief to the Petitioner and inter alia held that since steel was declared as essential service and there were no restriction on its movement and all ports and port related activities including the movement of vehicles and manpower, operations of Container Freight Station and warehouses and offices of Custom Houses Agents were also declared as essential services, the force majeure clause will not come to the rescue of the Petitioner. The aforesaid Order solidifies the point of law that a Force Majeure clause will not help the defaulting party unless it’s impact on performance of contract is established.
In another important judgement pronounced in Delhi High Court in the case of M/s Halliburton Offshore Services INC vs Vedanta Limited & Anr[vii] The Petitioner in this case argued that owing to a complete lockdown, on industrial activities as well as on movement of persons in the country, including, specifically, the state of Rajasthan, consequent to the COVID-19 pandemic, the petitioner was unavoidably handicapped in performing the contract. The Delhi High Court accepted the plea of the Petitioner and held that the countrywide lockdown was prima facie in the nature of force majeure. Further, with respect to the assertion that Petitioner was engaged in the business of Petroleum which is a declared essential service, the Delhi High Court observed that “petitioner is not engaged, stricto sensu, in the production of petroleum, but is, rather, engaged in drilling of the wells, which activity is substantially, if not entirely, impeded as the result of the imposition of the lockdown.”
Analysis of Government Notifications
A notification issued by the Deputy Secretary of Government of India; Ministry of Finance noted that Government of India vide its Memo No. F. 18/4/2020 PPD dated 19-02-2020[viii], “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 force majeure clause. In this regard it is clarified that it should be considered as a case of natural calamity and force majeure clause may be invoked whenever considered appropriate, following due procedure.”
Analyzing this memo shows that it has included in itself a very limited purview. This memo does provide a cover protection to all the commercial contracts. If there lies a question of Force Majeure clause in the contract the contract may be invoked and if the pandemic has affected the fundamental basis of the contract, then it will amount to frustration of contract under Section 56 of the Indian Contract Act, 1872.
The Ministry of New & Renewable Energy vide Office Memorandum bearing no. 283/18/2020-GRID SOLAR dated March 20, 2020[ix] has again termed the occurrence of Covid-19 as a Force Majeure Event. Vide the said notification, the Ministry of New & Renewable Energy has decided to grant time extension in Scheduled Commissioning Date of RE Projects considering disruption of the supply chains due to spread of coronavirus in China or any other country as a Force Majeure event.
The Ministry of New & Renewable Energy vide Office Memorandum bearing no. F. No. 283/18/2020-GRID SOLAR dated April 17, 2020[x] has reiterated the occurrence of Covid-19 as a Force Majeure Event. It is pertinent to note that it has been provided to treat the delay on account of disruption of the supply chains due to spread of corona virus in China or in any other country, as Force Majeure and has directed for the grant of suitable extension of time for RE projects on account of coronavirus. However, such extension shall be based on the evidence produced by the developers in support of their respective claims of such disruption of the supply chains due to spread of corona virus in China or in any other country. It has further been provided that all the Renewable Energy implementing agencies of the Ministry of New and Renewable Energy (MNRE) will treat lockdown due to Covid-19 as Force Majeure. It has been directed that all the Renewable Energy implementing agencies may grant extension of time for the aforesaid projects on account of lock down due to Covid-19, equivalent to the period of lock down and additional 30 days for normalization after end of such lock down. But all these government notifications are restrictive in nature. The fact whether the party can have the benefit of Force Majeure or not will entirely depend on the contractual provisions. The need of the hour is that we have to have a systematized law which absolves an influenced party from playing out its commitments under the agreement during the time of such lockdowns and such lockdowns must be considered as Force Majeure. The opportunity has arrived that we ought to have law identified with Force Majeure as rather than just drawing light from Section 32 of the Indian Contract Act or the contractual obligation.
[i] Black’s Law Dictionary Eighth Edition, First South Asian Edition 2015
[ii] Black’s Law Dictionary Eighth Edition, First South Asian Edition 2015
[iii] Section 32, Indian Contract Act, 1782
[iv] Section 56, Indian Contract Act, 1782
[v] 14 SCC 80
[vi] Commercial Arbitration Petition (L) No. 404 of 2020 decided on April 8, 2020
[vii] O.M.P. (I) (COMM) & IA 3697/2020, decided on 20.04.2020
National University of Study and Research in Law, Ranchi