Force Majeure and Contractual Obligations during Covid-19

INTRODUCTION

Owing to the unprecedented impact of the coronavirus and its devastating impact on human beings, it has also taken a toll on business and commerce. The parties to the contracts are facing the impossibility of fulfilling their contractual obligations, or they do not wish to honour the commitment due to the disruptions caused by the economic hardships, which are making the contracts commercially unviable.

This article primarily focuses on the legal aspect of ‘force majeure’, which the contracting parties can invoke to dissolve a contract or absolve themselves from any liability towards the other party.

FORCE MAJEURE AS A LEGAL CONCEPT

The term ‘force majeure’ simply means “greater force.” According to Black’s Law Dictionary, it is defined as an “event or effect that can be neither anticipated nor controlled.[1]  While the types of events that constitute a force majeure event depends on the specific language of the contract, it basically excuses the contractual obligations of the parties when there is a failure of performance of the contract due to some extraordinary and unavoidable circumstances beyond their control, like acts of god, act of foreign enemies, acts of threats or terrorism, natural calamities, wars, hostilities, fires or other disasters.

Although force majeure has not been specifically dealt in Indian Statutes, some reference can be found in Section 32 of the Contract Act[2], which states that if a contract is contingent on the happening of an event and the happening of which becomes impossible, the contract becomes void.

A force majeure clause from a contractual perspective provides temporary relief to a party under a contract from executing its obligations upon the emergence of a force majeure event.

ESSENTIALS OF INVOKING A FORCE MAJEURE CLAUSE

  • The event must be unforeseen-

The event must be unanticipated and uncontrolled. It should be unpredictable by common due diligence. A prior warning for an expected event shall not trigger the force majeure clause.

  • The event should render the performance of the contract impossible-

The very object or purpose of the contract must be disturbed and rendered impossible to perform due to the event to initiate the force majeure clause.

  • Inevitable event-

The event must be unavoidable and beyond the control of parties under the contract. Economic difficulties i.e., rise in expenditure and fewer profits alone would not lead to the force majeure clause to be initiated.

  • The parties must not cause the event-

The event must be entirely beyond the control of parties under the contract. If an event does not stop the parties from performing the contract, then the parties cannot claim the force majeure clause.

  • Condition precedent-

Many force majeure clauses clearly state that the party seeking non-performance of the contract must inform the other party before invoking the force majeure clause. Such conditions are required to be followed for invocation of the force majeure clause.

  • Duty to mitigate losses-

A party under a contract relying on the force majeure clause will take all necessary steps to mitigate the losses caused due to its non-performance.

IS COVID-19 A FORCE MAJEURE EVENT?

In February 2020, the Government of India released an Office Memorandum regarding the disturbance of supply chains by virtue of Covid-19 and whether such a particularly exceptional event will be protected by force majeure clauses or not. The Government’s Memorandum was constructive in clarifying that the COVID-19 pandemic should be considered as an instance of ‘natural calamity’ and that force majeure clauses can be invoked wherever considered acceptable.

WHAT HAPPENS IF A CONTRACT DOES NOT CONTAIN A FORCE MAJEURE CLAUSE?

In the absence of a force majeure clause in a contract, the other possible defence for a party under a contract failing to fulfil its obligations due to an unusual event is “Doctrine of Frustration.”

Section 56 of the Contract Act [3] deals with the frustration of contract which lays down the simple principle that ‘an agreement to do an act impossible in itself is void’.  When the performance of a contract is possible or lawful when it is made, but due to a subsequent event, its performance is rendered impossible or unlawful, then such contract becomes void or it can be said that the contract becomes ‘frustrated.’

The word ‘impossible’ used under Section 56 of the Contract Act has not been used in the sense of literal or physical impossibility. It must be interpreted in a practical form. The performance of a contract may not be literally impossible, but it may be useless and impracticable from the point of view of the purpose and object which the parties had in view. This principle has been upheld in Satyabrata Ghose v Mugneeram Bangur & Co [4].

Section 65 of the Contract Act [5] talks about the concept of restitution. When a contract is discovered to be frustrated, any person who has received any advantage under such contract is bound to restore it or make compensation for it, to the person from whom he received it. Thus, one of the outcomes of restitution in frustration of contract is to put the parties in the same position they were, if the contract had never been executed.

COMMERCIAL HARDSHIP

Commercial hardship is a situation when the contract becomes onerous to perform.  It may make the performance of the contract expensive and unprofitable, but it is not a sufficient ground to claim frustration of contract. Thus, doctrine of frustration is not applied to a situation to alter or excuse performance, where performance of a contract is only rendered more difficult or costly but is practically uncut. This principle was upheld in Sachindra Nath v Gopal Chandra[6], in which the court held that change of circumstances merely resulting in lesser profits than expected is insufficient to claim frustration of contract.

DIFFERENCE BETWEEN FORCE MAJEURE AND FRUSTRATION OF CONTRACT

Under frustration of contract, the impossibility of a party to perform its obligations is connected to the happening of an event after the execution of the contract which was not contemplated at the time of execution of contract whereas, in the case of force majeure, parties to a contract, before the execution of contract identify an exhaustive list of events which would attract the applicability of the force majeure. 

CONCLUSION

The coronavirus is having a significant and detrimental impact on businesses and their ability to perform their contracts. However, whether a person claiming non-performance of contract can invoke a force majeure clause demands an intensive inquiry and must be assessed on a case-by-case basis. To determine the probability of success, the contractual parties must look in the specific language of the contract.


[1] Force Majeure, Black’s Law Dictionary (11th ed. 2019).

[2] Section 32 of The Indian Contract Act, 1872.

[3] Section 56 of The Indian Contract Act, 1872.

[4] Satyabrata Ghose v Mugneeram Bangur & Co, AIR 1954 SC 44.

[5] Section 65 of The Indian Contract Act, 1872.

[6] Sachindra Nath v Gopal Chandra, AIR 1949 Cal 240.


Author: Radhika Jhanwar from U.P.E.S., Dehradun.


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