FRUSTRATION OF CONTRACTS AND APPLICABILITY OF FORCE MAJEURE AMIDST COVID-19

Source : National Law Review

This article is written by Anusha Mohapatra, a third-year student of Symbiosis Law School, Hyderabad.

Overview

Events such as wars, terrorism, earthquakes and hurricanes, acts of the government, plagues, epidemics, or pandemics similar to the one we’re facing today fall under the ambit of Force Majeure. These events tend to be construed as an excuse for non-performance of a contract.

Thus, the clause tends to protect whosoever invokes the same, from liability or any delay caused in enforcement. These could also involve, apart from epidemics and pandemics, government actions such as quarantine or a shortage of labor or materials etc.

Indian Context

Force Majeure is governed under S.56 of the Indian Contract Act 1872. It excludes one or both parties from liability to perform such contractual obligations when they remain prevented from being performed due to any situational or environmental factors, thus being beyond the parties’ control. This provision is also called agreement to do an impossible act.

Other existing provisions regarding the Doctrine of Frustration as per Section 56 of the Indian Contract Act, 1872, revolve around the issue of impossibility of performance of contract. Both the provisions impossibility and frustration are often used interchangeably for the fact that as circumstances make it impossible to execute or perform a contract, this lack of performance exempts individuals from liability due to the contract in itself becoming void in nature.

Another connected concept is Section 32 of the Indian Contract Act, 1872 dealing with enforcement of contracts contingent on the occurrence of an event. These forms of contracts are formed to be enforced by law only when there is an occurrence of another event and it cannot be enforced without the occurrence of the said event.

Apart from these provisions, another doctrine that exists is the doctrine of Part Performance or Past Performance. This doctrine addresses the performance obligations on parties and seeks to discharge their liability based on how their past performance towards enforcing contracts has been. Thus, this is a fact-finding exercise, to ascertain if such force majeure event or past nonperformance has caused a breach.

COVID -19 and its effect on enforceability of contracts

The Covid-19 pandemic has truly rendered a real impossibility to act for everyone in some way or the other. The Nationwide Lockdown declared on 24th March 2020 led to suspension of economic activity which led to the start of a series of instances wherein the clause was invoked by both courts and parties affected. Inspite of this, there is no universal applicability of this clause as such.

The Bombay HC. recently in Standard Retail Pvt Ltd vs GS Global Corp, the first matter for invocation of the force majeure clause vis a vis the pandemic wherein the petitioners alleged that their contracts with the Respondent no 1 would be terminated as they had become impossible to enforce due to the frustration aspect. It was held that the petitions could not be accepted, since the petitioners were not entitled to any ad-interim relief since they had by themselves encountered an inability to perform their obligations involving their purchasers, and thus cannot forego their contractual obligations regarding making payments to Respondent No. 1.

Interpretation and Scope

Whether an event may be called a force majeure one or not, and what are the kinds of events included under the same can only be determined based on the court’s interpretation of the law, and the scope of events included under the large ambit of force majeure. In the current setup, two form of events have seemingly occurred. First, the pandemic in itself. Second, an Act of Government, wherein the government bodies in our country-imposed travel restrictions, quarantines, trade embargoes, closed up all buildings and borders. Yet what is crucial to be examined is whether these are exhaustive in nature or not. Thus, the courts and tribunals must be satisfied, to rid such parties of their contractual liabilities.

In certain circumstances, provisions specify the need for invoking force majeure once a causal relation between the event occurring and the excuse so made leads to an impossibility or delay in performance.

In another case, M/S Hariburton offshore services Inc v. Vedanta Ltd and Anr, a detailed examination was conducted so as to determine whether non-performance or breach of contract has to be examined based on the facts and circumstances of the case. For instance, just ascertaining whether the deadlines before the outbreak were fulfilled or not, and whether there a continuing breach so caused or if the invoker was performing in a steadfast manner, all are considered. Thus, the allocation of risk between parties and what circumstance governed the contract and its enforceability are important to be determined. In the end, the courts and tribunals must be satisfied.

Force majeure is triggered by the affected party, to mitigate events that have so transpired, whether it is a layover, moving personnel or assets and thus involves talking to the other party for an alternate arrangement. A general objective test is one such suggestive test to establish whether the event truly could not have been avoided. Apart from the same, certain exemptions to the clause include either an obligation to pay money elsewhere, economic hardships, reduction in demand or just shortages in labor.

Remedies

To deduce the amount or the kind of remedies so required, parties must prove that the exigency was beyond the parties’ reasonable control, and that there existed a genuine difficulty in performance of the contract. Thus, what is to be established is not just the fact that it was truly outside the parties’ control to perform their contractual liabilities, but the circumstances were such that could not be mitigated and the non-performance was not under control of the invoker.

The virus has had a profound impact on various entities, ranging from supply chains to commercial contracts. To ascertain to what extent can such rights, obligations and liabilities be exempted, and the Force Majeure clause invoked during Epidemics, Pandemics such as SARS and Ebola in the past and Covid-19 in present times, there are a handful of consequences so arising; excusing the aggrieved party from performance in whole or in part, excusing such a party for any delay in performance, entitling them to suspend the claim or ask for an extension so as to perform the contract with an extended amount of time, or just giving the party a right to terminate the contract.

Conclusion

Thus, in circumstances wherein Force Majeure is triggered, remedies such as an excuse for non-performance, no liability for such lack of performance, a suspension or termination right are all viable remedies. For accommodating the possibility of prolonged force majeure periods, and to tackle such circumstances, having state laws in place or drafting the contract in a way so as to take in account such unprecedented events is the first step in that direction. Another viable option is to amend such an agreement, if not generate an alternate one.