Around the world, as events have been canceled, restaurants and businesses shuttered. The outbreak of COVID-19 is no new news. It’s existing in the world economy from the past six months or even more, but India strictly observed the precautionary steps by implementing lockdown since March 2020. COVID-19 has not only affected the economy but its later effects include the “Impossibility of Performance of Contract.” Lockdown leads to a temporary shutdown of business intra-state, interstate, and foreign trade as well. Now when we say that there is a temporary closure, the question arises how will the post lockdown contracts be executed or performed? Who will be held liable for damages if any so arises? How will this economy cope up with and after such pandemic? There have been certain judgments and laws which have been referred for the clarification on the same.
Section 56 of the Indian Contract Act 1872 states “A contract to do an act which, after the contract is made, becomes impossible, or, because of some event which the promisor could not prevent, unlawful becomes void when the act becomes impossible or unlawful.” But is this impossibility or difficulty in performance because of pandemic justified? How will the risk be allotted in such situations?
Introduction
Here the concept of Contingent contract, Force Majeure, and Doctrine of Frustration arises. Contingent Contract is defined under Section 32 of the Indian Contract Act of 1872 which states, “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.”The current situation was a much-unexpected situation that arose. But can the outbreak of viruses be termed as Act of God? Generally, force majeure events include an Act of God or natural disasters, war or war-like situations, labor unrest or strikes, epidemics, pandemics, etc. According to Black’s Law Dictionary [1] the term ‘force majeure’ means an event or effect that can be neither anticipated nor controlled, that is such an event is beyond the control and will of human beings. In legal parlance, Force majeure is a civil law and not a statutory law that is under its performance of an event for some time can be an excuse but payment and force vision is no excuse. Moreover, two fundamental principles viz. Pacta Sunt Servanda deals with the purpose as well as terms and obligations of the contract and other principles Rebus Sic Stantibus which deals with discharge of such obligations under certain circumstances when both the parties form a contract must be considered as well.
Covid 19 And Force Majeure
In the current situation Force Majeure is read with the Epidemic Disease Act 1897 and Disaster Management Act 2005 which states that the impossibility of the performance of a contract must be justified and it must be ensured that the effect of such non-performance is temporary or non-temporary. Only after this can, one is excused for non-performance. Similar was held in Tsakiroglou & Co. Ltd. v. Noble Thorl GmbH [2] wherein it was held that if an alternative is available for the performance of a contract; such a contract cannot be held as frustrated.
The Concept of Force Majeure became popular after the 9/11 terror attack as it was only after this incident, various contract makers started inserting such a clause in the contracts. So does a contract provide you with any remedies? The answer to this question depends on the contract itself. If the contract includes the clause of Force Majeure, The company cannot be penalized for non-performance or incomplete performance as Force Majeure includes the word “epidemics” i.e. a widespread occurrence of such a serious disease in a community at a particular time. Moreover, if the contract does not include such a clause, it would be sheltered by Section 56 of ICA, 1872. The remedy need not be a “Yes” OR “No” situation, which is a remedy, can be in any form. It can be Novation, Price Adjustments, Material adverse change clause, and change in limitation period clause, limiting the liabilities, and so on. The remedy best suitable in this situation would be when both the parties to contract re-negotiation amongst them as it is a “give some, take some situation.” The obligation to pay here arises is assumed to be adhoc interims and judgments.
A recent case came up in front of the Delhi High Court [3] decided via Video Recording which stated that the lessee cannot refuse to pay rental obligations because of pandemics or lockdowns due to coronavirus outbreak and cannot rely on Section 108(e) of Transfers of Property Act, 1882. Section 108(e) of the Act states that if due to any unforeseen event the property so gets destroyed partially or wholly results in tenancy rights for lessee as the property is now not fit for the purpose for which it was let. This provision cannot be utilized as it talks about the destruction of the property whereas in the current pandemic situation the lessee cannot pay rent mainly due to no source of income. The payment obligations would wholly rely on the lease agreement if otherwise negotiated or mutually consented on different terms.
Another case of Indirajth Power Private Limited v. UOI & Orson 28 April 2020 dealt by Delhi High Court passed the order that every act of non-performance is not wholly based on the pandemic situation. Here petitioner was to be declared NPA for which he sought redressal from the court. The court observed that despite twelve months extension period petitioner was unable to fulfil his contractual obligations and thus stated that pandemic is no excuse for any kind of non-performance and cannot always take undue advantage of such a situation.
Further, Governmental Departments have issued Force Majeure Certificates issued by the Department of Expenditure, Procurement Policy Division, Ministry of Finance issued an Office Memorandum on Feb. 19, 2020, about the Government’s ‘Manual for Procurement of Goods, 2017’ which serves as a guideline stating that the COVID-19 outbreak could be covered by the “natural calamity clause” provided that due procedure is followed while seeking a remedy.
Another important question that arises is how do we safeguard commercial contracts? There can be various measures that can be taken such as re-assessing, reviewing, and adding the force majeure clause which states the “rules to excuse” as who knows next time it may be a volcanic eruption on a large scale. It must also state the remedies and liabilities for both parties by a mutual consensus, detailed review of supply chains should be conducted to understand the geographic scope of operations, dependencies and business risks, and legal rights. Moreover, if the contract has to be made in the recent future may specifically include COVID-19 and must state clauses covering issues like economic hardships, rate of unprofitability, etc.
The Concept of Supply Chain Management also comes into the picture as it states that, for any contract both the parties must show that reasonable steps were taken to protect the contract from the breach. That is just because your contract includes Force Majeure clause does not mean one must not take reasonable steps for such performance. Moreover, in such a pandemic situation defence of increased cost must not be the sole reason for non-performance. It is thus suggested that guidelines under the Disaster Management Act must be referred and both parties may negotiate on the terms of the contract to ensure that such trivial matters are not taken to court and are resolved speedily.
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The need of the hour is to analyze deeper. This pandemic situation is no time for people to be corrupt; the pandemic is no cloak providing shelter to all the wrong acts or omissions. An economic burden has been created worldwide by small tenants or big multinational corporations, the government is coming up with various methods to ensure justice be it virtual courts or notifications.
At last, this lockdown was never permanent. The economy faced its lows but as the lockdown has been lifting the fear is reducing, the current circumstances are mitigating and invocation of law is being taken care of. The solution to this problem cannot be purely legal, the element of jurisprudence would play a vital part in helping the parties to contract and the Courts will take a liberal view and jurisprudence for fairness and equity amongst all because imposing burden would be no solution. Courts can opt for fact-based decisions as the facts of each case show the actual reason for nonperformance and relief can be given accordingly. Further, the reason for on performance would be neither attributable nor foreseeable by the parties to contract and is justified by the parties in courts.
Endnotes
[1] Blacks Law Dictionary (11th Edition, 2019).
[2] [1961] 2 All ER 179. (Cited in Energy Watchdog (supra)), see also the decision of Coastal Andhra Power Limited v. Andhra Pradesh Central Power Distribution Company Limited. FAO (OS) No. 272 of 2012.
[3] Ramanand & Ors. V Dr. Girish Soni & Anr. Vide Rc. Rev. 447/2017.
Khushboo Garg | University Institute of Law, Regional Centre, Ludhiana