COVID-19: Force Majeure and Its Impact on Performance of Contract

We are all aware of the ongoing Pandemic (COVID-19), which has adversely affected human lives across the globe. To prevent its further spread, many countries, including India, have taken various precautionary measures. One such measure is ‘Lockdown’ wherein all economic and business activities are kept on hold for a temporary period. However, it may continue for infinitely. Though this precautionary measure does help in preventing further spread of the virus and saving lives, at the same time, it is also harming a nation’s economy. Since all commercial activities except for essentials are suspended, the economy of the entire country is at stake. In this article, we will be discussing COVID-19 and its impacts on the performance of contracts. It would be relevant to see whether these Acts and contracts entered by the parties between themselves provide for any provision of ‘force majeure’ or ‘Act of God’.

COVID-19

On January 30, 2020, the World Health Organization (WHO) Director-general called an emergency meeting, regarding the outbreak of novel coronavirus 2019 in the People’s Republic of China. They had identified a pandemic outbreak of this virus as a “public health emergency of international concern” advising governments across the globe to take precautionary measures to prevent its further spread[1]. WHO on February 11, 2020, announced in a media briefing, the official name for the disease that is causing the 2019 novel coronavirus outbreak. The official name given to this contagious disease was coronavirus 2019. COVID-19 is spelt as C-O-V-I-D hyphen nineteen[2].

Force Majeure

The concept of force majeure finds its origin in French civil law and find its root in the Napoleonic Code. Force majeure is a French term which means “a great fore”—the force of the act of God. Section 56 of the Indian Contract Act, 1872, defines the force majeure clause as those events or circumstances which are beyond the control of the parties, for which parties to the contract cannot be held accountable, for example, natural disasters or the outbreak of hostilities. A force majeure clause generally excuses one or both parties from the performance of the contract in some way following the occurrence of such events. Its fundamental principle states, if a specific event occurs which is beyond the party’s control, then that party is excused from performance of the contract, or to all or part of its obligations. That party would not be liable for its failure to perform the duties, under the clause. 

Furthermore, an act of God can be any event which is a natural calamity without any human intervention and which could not have been prevented even after taking reasonable measures or with one’s knowledge. Hence, it may be considered that the spread of Coronavirus falls within the definition of ‘Act of God’ or in other words, the Pandemic can be labelled as a force majeure event. Force majeure was examined in a broader sense in the case of Dhanrajmal Gobindram v Shamji Kalidas[3] The Hon’ble Supreme Court held that the term force majeure is of broader importance. About force majeure, the intention is to save the parties from repercussions that are beyond their control. Further, in the case of Energy Watchdog v Central Electricity Regulatory Commission[4], The Supreme Court faced an issue of whether an increase in coal prices (because of some changes in Indonesian laws) could be considered as a force majeure event by individual power-generating companies that were sourcing coal from Indonesia. The Supreme Court held that a mere rise in coal prices does not constitute a force majeure event.

In countries such as the United States and the United Kingdom, force majeure clauses are acceptable, but they must be more precise about the events that would trigger the clause. In the case of Taylor v. Caldwell, held that when an unforeseen event occurs during the performance of a contract and makes it unfeasible to execute the contract or changes the very purpose of the contract and thus, must not be pursued because it would be unreasonable to insist upon such performance[5].

Doctrine of Frustration

The doctrine of frustration as propounded by English law is distinct from the legislative rule under Indian law to supervise failure. This doctrine is concerned with, when the contract becomes impossible to perform by the parties of the contract, due to a natural calamity or uncontrolled event. In Common law, the doctrine of frustration is concerned with the change of circumstances that it nullifies the very purpose of the contract as a whole. However, under Indian Law, the doctrine of frustration is defined under Section 52 of the Indian Contract Act, 1872 where after agreeing if the contract becomes impossible to perform due to some event or circumstance which cannot be prevented and frustrates the fundamental purpose of the contract or makes it strenuous to perform or makes it illegal, to be accomplished.

In the case of Krell v Henry[6] the plaintiff and the defendant entered into a contract for leasing Plaintiffs apartment to the defendant to watch the coronation of the king. It got cancelled subsequently, the result being; the defendant refused to make payment. The plaintiff sued the defendant for the remaining amount due under the contract. The court held that the agreement between plaintiff and defendant was frustrated as cancellation of the procession deprived it of its commercial purpose. Therefore, the claimant’s action for breach of contract was a failure.

Furthermore, In the case of Satyabrata Ghose v Mugneeram Bangur, the Defendant’s company started a project for the development of an area into a housing colony. The plaintiff was provided with a plot on payment of earnest money. The company undertook the charge to build roads and drains necessary for making the area suitable for residential purposes. As soon as the work got completed, the purchaser was called upon to pay the due purchase money. But, before anything could happen, a portion of the property was taken over by State during the Second World War for military purposes. The company attempted to revoke the contract on the ground of supervening impossibility.

As in the present case, the parties to the agreement were well aware of war before entering into a contract. Therefore, the court held that property requirements did not affect the basis of the contract. To determine whether the agreement between the parties is frustrated, it is not mandatory that the performance of it becomes impossible, mere impracticability of performance, from the perspective of the parties and the object of the contract is also covered. Secondly, no stipulation of time was disclosed in the contract such that the work should be finished within a reasonable period. Therefore, according to Section 56 of the Indian Contract Act, the contract is not frustrated or become impossible to perform.[7]

The fundamental difference between the force majeure and the doctrine of frustration is as follows:

  1. Under force majeure, parties to the contract put a list of exhaustive events that might affect the performance of the contract in future whereas, under the frustration of contract, the parties to the contract have not contemplated any event or circumstance which would lead to the impossibility of the contract in future.
  2. Under force majeure, the performance of the contract gets suspended until the time the act or event remains in continuance, and parties have to perform their obligations once it gets over. In contrast, under the frustration of contract, the performance of the contract gets ceased, and parties get free from their obligation.

Implications of Force Majeure by Government of India

These two concepts become more crucial in the current time because of the ongoing Pandemic due to which the entire country is under a situation of lockdown and all activities whether it is economic or business in the country are at hold. On February 19, 2020, the Department of Expenditure, Procurement Policy Division and Ministry of Finance issued an Office Memorandum to the ‘Manual for Procurement of Goods, 2017’, which serves as the injunction for procurement by the Government of India. This memorandum, briefly states that the novel Coronavirus could adequately be covered under force majeure clause because it is a ‘natural calamity’ which is beyond human controland all the departments who should invoke it by the ‘due process’. 

A force majeure provision appeases one or both the parties to the contract if performance is hindered by an event that is beyond the control of parties, from the duty to fulfil the contractual obligations. Typical force majeure incidents may include burning, flooding, or terrorist attacks etc. Force Majeure is a word for portraying an event of “superior force.” The force majeure clause originates from the contract, while the doctrine of frustration is a universal law principle.

Insurance contracts

Insurance contracts are essential indemnity contracts where the insurance company reimburse the insured on happening of a certain event. Insurance contracts shall be concluded with a mitigated risk of force majeure events taking place and affecting business. When entering into such a contract, reasonable care should be taken to make sure that the language of the insurance policy does not provide the insurer with fine print exclusions from paying compensation.

Alternative to Force Majeure

In the absence of a force majeure clause, parties under the contract could be liberated from the performance of the contract by claiming the frustration and impracticability of the contract. To ensure the performance to be truly impossible to achieve, the event must be unforeseeable. The doctrine of frustration based on the coronavirus pandemic will depend upon the facts and circumstances of the contractual relationship. A group seeking to rely on the reasonable defence of impossibility, in contrast, to force majeure clauses, must manifest its reasonable effort to resolve the barriers to performance of the contract. Likewise, if a group does not use all reasonable or appropriate means to overcome the alternatives to government actions, a regulation may not prevent performance.

Conclusion

The ongoing Pandemic has affected economic activities throughout the world so severely that even the world’s most robust economy has also collapsed. The precautionary step by the government of India is no doubt a brilliant step to prevent its further spread. Still, at the same time, it has also caused several problems to various commercial units, making their contractual obligations impossible to execute for a temporary period. The total shutdown has severely affected the economy and has caused massive loss to every sector of the economy. But the non-performance of the contractual obligations does not lead to legal proceedings against the parties because according to Section 4 of the Epidemic Disease Act, 1897 states that, “no suit or legal proceeding can be made against any person for anything done by them under the Epidemic Disease Act” and according to the Section 73 of the Disaster Management Act, 2005 it provides that, no proceedings can be initiated against any person, acting in good faith in pursuance of regulation framed under it.

Furthermore, under Section 56 of Indian Contract Act, 1872 to invoke the doctrine of frustration, parties to the contract must show that the performance of the contract has become impossible, the conditions have become primarily different from those mentioned in the contract. To invoke on such grounds, it would depend on the wording of the Contracts, and how the courts would interpret these clauses. It must be proofed to manifest that there were no alternate methods in the performance of the contract. Moreover, parties should take on other acts to maintain liquidity after the lockdown period.


[1] Statement on the second meeting of the International Health Regulations (2005) Emergency Committee regarding the outbreak of novel coronavirus (2019-nCoV), (May. 19, 2020, 11:26 AM), https://www.who.int/news-room/detail/30-01-2020-statement-on-the-second-meeting-of-the-international-health-regulations-(2005)-emergency-committee-regarding-the-outbreak-of-novel-coronavirus-(2019-nCoV).

[2] WHO Director-General’s remarks at the media briefing on 2019-nCoV on 11 February 2020, (May 19, 2020, 11:38 AM), https://www.who.int/dg/speeches/detail/who-director-general-s-remarks-at-the-media-briefing-on-2019-ncov-on-11-february-2020.

[3] DhanrajmalGobindram v Shamji Kalidas, (1961) 3 S.C.R. 1020.

[4] Energy Watchdog v Central Electricity Regulatory Commission, (2017) 14 S.C.C. 80.

[5] Taylor v Caldwell, (1861-73) All ER Rep 24.

[6] Krell v Henry, (1903) 2 K.B. 740.

[7] Satyabrata Ghose v Mugneeram Bangur, A.I.R. 1954 S.C. 44.

Mohit Nautiyal from Law College Dehradun


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