IMPOSSIBILITY OF PERFORMANCE OF CONTRACTS IN LIGHT OF THE COVID-19 PANDEMIC: FORCE MAJEURE CLAUSES

ABSTRACT

The entire world is entangled in the COVID-19 pandemic, which along with bringing a loss to public life and health, has also created turmoil in almost every other aspect of life. With the lockdown imposed almost everywhere around the world, the global economy is currently at its hardest time and the businesses are facing huge financial losses. Until today, there has been no defined enclosure of a pandemic into the Force Majeure Clauses. One of the major questions that need redressal is whether the parties are still liable to perform their parts of the contract or will the contract will be frustrated due to the pandemic rendering the performance of the contracts impossible. Will the pandemic be regarded as a ‘Force Majeure’ or ‘Vis Major’ and excuse the parties for non-performance of the contract? Under which Act and Section will the ‘Force Majeure’ or ‘Vis Major’ come into play and decide on the liabilities of the parties? 

Keywords- Force Majeure, Vis Major, COVID-19, Section 56, Section 32

FORCE MAJEURE

Force Majeure means, “an event or effect that can be neither anticipated nor controlled, is unexpected and which prevents someone from doing or completing something that he or she had agreed or officially planned to do Force Majeure is usually mistaken to have the same meaning as ‘Vis Major’. Even though the literal meaning of both the terms is the same, Force Majeure has a wider implication than Vis Major in the legal language. Vis Major is a Latin term which means the occurrence of a superior force that is caused by ‘an act of god’ and is beyond human control. Force Majeure on the other hand goes one step further and also includes any event that may be caused due to any human agency, directly or indirectly, which is beyond human control. Hence, Vis Major forms one sub-part of ‘Force Majeure, as laid down in Dhanrajamal Gobindram v. Shamji Kalidas & Co.

Force Majeure Clauses are provided in contracts wherein a list of pre-decided ‘force majeure’ events and the course of action on the happening of either of these events is laid down. The course of action can be varied depending from clause to clause and contract to contract. It may absolve the party from any liability due to non-performance or delay the performance of the contract by a specified time, depending on what has been decided under the contract.  

What happens in case of an absence of a Force Majeure Clause in the Contract?

A lot of concern has come up with regard to the absence of the Force Majeure Clause (hereinafter ‘FMC’) in the contracts. The Indian Contract Act, 1872 (hereinafter ‘the Act’) has an inbuilt provision in the form of Section 56 regarding the impossibility of performance of the contracts that comes to our rescue in the absence of an FMC. Also called the Doctrine of Frustration, this section says that if the performance of the contract becomes impossible due to the occurrence of an unforeseen event, the contract is rendered void. 

In cases where a contract is dependent on the happening of a particular event, Section 32 of the Act comes to our rescue. It states that if the event contingent to the existence of the contract does not take place, the performance of the contract becomes impossible and the parties are hence, discharged. This contingency can be express or implied. In other words, in a situation where the occurrence of a force majeure event happens to be within the scope of a clause in a contract, it comes under Section 32 of the Act, whereas in a situation where the occurrence of a force majeure event happens to be outside the scope of a clause in a contract, it comes under Section 56 of the Act.

In the presence of an FMC in the contract which covers the event that has occurred, the applicability of Section 56 or 32 is eliminated. However, the presence of an FMC does not guarantee that all unforeseen events have been taken care of in the contract. In other words, there exists a possibility that the FMC is incomplete or does not take into account some of the unforeseen events or circumstances. When such an event that is not covered under the FMC occurs and interferes with the obligations of the parties, Section 56 and 32 can be applied so as to save the parties from the contract. 

Which events qualify for a performance to be considered impossible and the contract to be frustrated? 

Theory of ‘Radical Change’

Another factor that aids in determining whether the parties can be discharged due to impossibility of performance is the ‘construction theory’, commonly known as the theory of ‘radical change’. This theory, as laid down in Davis Contractors Ltd v. Fareham Urban District Council, means that the interfering event must have a radical change in the obligation to be performed, and if performed, it would turn out to be something radically different from what was contracted. There has to necessarily be a significant change in what was initially undertaken to be performed and the actual performance in the changed circumstances. Hence, it is the ‘degree of change’ of the obligation that is to be determined in accordance with the facts of the case and the contractual agreement that was entered into. 

Entering into a contractual obligation comes along with the assumption and allocation of risk. In other words, all contractual arrangements involve an element of risk, especially in cases of business or trade agreements. The onus is upon the courts to determine as to how much of this risk and changed circumstance was contemplated by the parties or could be said to be easily contemplated by a reasonable person. The liability of the parties naturally reduces if the event could not be contemplated as opposed to a situation in which it could be contemplated. 

Alternate Mode of Performance or Hindrance of Performance

A physical or literal impossibility does not qualify as ‘impossibility’ under the doctrine of frustration. Simply an unanticipated event, e.g. the rise in prices or the blockage of a particular route for the delivery of materials, does not render the contract as impossible. Such situations definitely end up making the contract more burdensome and relatively difficult to execute in terms of time and money, but not impossible per se. If there exists an alternate mode of performance, irrespective of the fact that it is a matter of higher costs or time, the parties will be required to perform their respective parts of the contract and will not be discharged from their obligations. A mere difficulty in performance or commercial unprofitability does not discharge the parties from their obligations. There have to be more serious grounds of ‘impossibility’ for the ‘doctrine of frustration’ to be applicable. The grounds on which impossibility of performance is claimed must end up making the contract substantially different from what was undertaken initially at the time of materialisation of the contract.

DOES COVID-19 QUALIFY UNDER THE FORCE MAJEURE CLAUSES OR UNDER THE ‘ACT OF GOD’?

In situations where an epidemic/pandemic has been expressly covered under the FMC and the negative effect on the performance of the parties has taken place due to a direct causal relation between COVID-19 and the non-performance by the parties, it is crystal clear that the parties can be exempted from the liabilities in accordance with the terms of the contract.  It is however, pertinent to note that most of the contracts would not include an FMC, and for the few that may, an express inclusion of an epidemic/pandemic under the clause would be absent. While on one hand the courts in the United Kingdom and United States of America have expressly held that an ‘Act of God’ includes an epidemic/pandemic, the Indian Courts have still not reached to a strong standstill on the situation. However, if an FMC covers ‘Act of God’ under its ambit, it can be contended that the COVID-19 pandemic comes under its scope. Reliance can be placed on various precedents like The Divisional Controller, KSRTC v. Mahadava Shetty which stated that the defence of ‘Act of God’ does not qualify as an exemption from liability if there was a reasonable possibility of contemplating in advance the happening of such an event. In Sri Ananda Chandra Behera v. Chairman, Orissa State Electricity Board, it was explained that in a case where a natural calamity occurs, the end effect may usually be the result of the act of god and human intervention coupled together. However, in order for a valid defence to exist, it is necessary that only the effect that resulted out of direct intervention of the act of god is looked at, rather than the effect that resulted out of any human intervention, even if the intervention resulted due to the act of god.  

The mere inclusion of the COVID-19 pandemic as an FMC does not imply per se that the parties would be discharged from their contractual liabilities. In a recent case of Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp & Ors, it was held that there has to be a direct causal relation between COVID-19 and the inability of parties to perform the contract. For instance, most of the people are unable to work due to the government imposed lockdown and not directly because of the virus, which happens to have an indirect causal relation between the contract and the pandemic. The burden to prove whether such an indirect cause lies within the scope of the FMC lies heavily on the parties and on the language of the FMC. Adding on to this, in such situations where the FMC covers lockdown-like governmental policies and the interference in the non-performance is due to the lockdown, the parties can be discharged from the liabilities as per the terms of the contract. 

While on one hand it is quite obvious that any discharge in liabilities of the parties will happen in accordance with the contract, be it a temporary suspension or a permanent one. In cases where the FMC is silent as to the period of suspension, an FMC will not result in the permanent dissolution of the contract; rather it will merely temporarily suspend performance by the parties until the normalisation of the situation (as per Para 9.7.7 of Manual for Procurement of Goods, 2017). 

CONCLUSION

Without the provision of an express Force Majeure Clause dealing with the COVID-19 pandemic situation that directly interferes with the non-performance of the parties, it will definitely be burdensome and difficult for the parties to take reliance either on the FMC or Sections 32 or 56 of the Act. Issues such as the theory of ‘radical change’, ‘alternate mode of performance’ or ‘hindrance of performance’ will create barriers for the parties in their fight towards exemption from liability for non-performance. Another major barrier that would arise would be to prove that the non-performance was due to the direct interference of the pandemic COVID-19 and not due to any governmental or human intervention. 

The reliance and narrow interpretation of the contract entered into and the provisions of the Indian Contract Act can help in rescuing the parties from their obligations. Even though there is no direct inclusion of the COVID-19 pandemic under an ‘act of god’, the parties can certainly rely on precedents or any relevant notifications by the government to prove that the coronavirus/COVID-19 is an ‘act of god’.  In other words, the onus is completely on the parties as to how to prove the interpretation of the contract, relate the facts of their case with the COVID-19 pandemic and seek suspension from performance. 

Author: Mishika Bedi from SLS, Pune

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