About the Article
We are all aware of Covid-19 outbreak and how it is affecting human lives around the world. In such situations during the lockdown, many activities are suspended temporarily such as business activities, stock market, economic activities etc. It does help in the spread of the virus but this has somehow been negatively affected the economic situations in the country. Contract.
Complexity in business operations has increased significantly. Hence this has frightened customers and they are seeking legal advice to avoid any risks. Same conditions are also seen in business contracts. This article will help to provide information about Force Majeure clause, Global Scenario and Doctrine of Frustration.
WHAT IS FORCE MAJEURE OR ACT OF GOD?
It is a French term which means ‘a superior force. It is beyond one’s control. It includes the Act of God, war, earthquakes, cyclones, floods, fires, storms and other such things that might affect the contract. ‘Covid-19’ thus falls in the definition of ‘Act of God’ or ‘Force Majeure’ event as it is tagged as a pandemic in nature.
In the case of Energy watchdog and Ors. v. Central regulatory electricity commission and Ors. : The Supreme Court of India had realized that in the Indian contract Act, 1872 the word ‘impossible’ was not used under section 56. It was necessary to mention that performance of the contract was not possible which leads to disturbance of the main basic aspect of the contract. (1).
The essentials of section 56 and section 32 are discussed in the Indian contract Act, 1872 but the application of section 56 will depend entirely on a case by case basis to the contracts signed during the lockdown period.
STATUTORY PROVISION OF SECTION 56
Section 56. Agreement to do impossible act: An agreement to do an act impossible in itself is void.
Contract to do the act afterwards becomes impossible or unlawful.—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”
According to this section, where a contract becomes impossible to imply or becomes void or unlawful to perform then it is called the ‘Doctrine of the frustration of contract’.
Eg: A and B sign a contract to marry each other. A becomes unsound before the marriage. The contract becomes void.It is an uncertain future event that occurred but cannot be enforced by law until and unless that event takes place (2).
In the case of Satyabrata Ghosh v. Mugneeram Bangur and Co.: The war condition caused difficulty in the performance of the contract. There was no time period mentioned. Hence it would not preview under Section 56 of the Indian contract Act, 1872 as it was not absolutely impossible by the fact that the time was not mentioned. Hence such events are expressed or implied under Section 32 of the Indian contract Act, 1872 that is Frustration of contract (3).
WHICH PARTY HAS DUTY TO MITIGATE?
The party which claims Force Majeure is mostly under the duty has taken all the endeavour to make sure that the event does not mitigate and try to avoid its effect.
Also, the Force Majeure should have such circumstances of the contractual breach and the party is unable to fulfil its contractual obligation.
Tamplin Steamship Co. LTD v Anglo-Mexican petroleum products Co. LTD
It was held that parties will be excused only if the performance of contract seems impossible but by some cause or by some reasons, none of the parties was held responsible. Parties would need legal rights and legal remedies and make a holistic assessment of risk that has occurred in the contract. It is very necessary to determine the recourse of the party and its impact on the clauses elaborated in the contract (4).
DOES THE FORCE MAJEURE EVENT HAVE TO BE UNFORESEEABLE?
For an event to qualify as Force Majeure, most of the contracts provide that it must be unforeseeable or not reasonably foreseeable at the time of execution of the contract.
- CONTINUITY IN BUSINESS CLAUSES AND DISASTER MANAGEMENT PLANS :
Business continuity became difficult during Covid-19 period due to social distancing. Adjusting payments, data transfers and other such things can be done to avoid a breach of contracts.
A practical plan can be incorporated such as –
- Clear provisions regarding what exactly is the procedure for declaration of disaster.
- What lies under critical functioning and what measures can be taken.
- CHANGE IN SERVICE CAUSE:
It can help in the modification of service cause. But if the party makes an unauthorised change then the contract will be considered as unauthorised and lead to liability of costs.
- REPLACEMENT OF CLAUSE:
If it seems that the party is unable to perform under some obligation agreed upon by some part of the contract then it is important to note that such alternative services are mentioned in the contract by which the party seeks some alternative remedy.
- WHAT INCLUDES FORMAL REQUIREMENTS?
If the party proposes itself for non-performance of contract some formal requirements are needed to be fulfilled. At times a party is also required to show proofs or events dealing with the force majeure.
- TERMINATION OR RENEGOTIATION?
The effect of force majeure or Act of God may lead to termination or renegotiation of contract. The termination would be analysed on what grounds the contract is being suspended. Also, parties can consider whether to suspend a contract or renegotiate it by considering it as a new opportunity instead of bad bargaining.
- WHAT IF NO FORCE MAJEURE INCLUDED IN THE CONTRACT
The affected party may claim relief under the Doctrine of Frustration under Section 56 of the Indian contract Act,1872. But to prove that the contract is frustrated, it is necessary to prove that the contract is frustrated and there is some contractual obligation in performing the contract.
- OTHER POSSIBLE WAYS OR CONSEQUENCES OF CONTRACTS
Counter- parties may attempt to invoke other contractual clauses like price adjustment clauses, material adverse change (MAC) clauses, limitation or exclusion clauses, to limit or exclude liability for non-performance. The ability to invoke such other grounds will depend on the wording of the relevant clause, and how the clause is construed by courts or tribunals.
INDIAN POSITION WITH RESPECT TO FORCE MAJEURE
Section32: Enforcement of contracts contingent on an event happening. “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.
According to the provision of the Indian contract Act,1872 in Section 32 it is necessary to observe whether the conditions are same or not and whether they are unconditional and irrevocable. Due to specific connotation in Force Majeure, courts have time to interpret or express contractual provisions in order to make the contract effective.
An interesting development with respect to cases of force majeure claims is the Bombay High Court order in Standard Retail Pvt. Ltd. and Ors v .G.S. Global Corp. and Ors the Respondent performed its part of the contract by dispatching some steel products from South Korea. The Petitioners failed to comply with their part of the contractual obligations and relied upon the Force Majeure clause of their contract for excusing the non-performance thereof. Petitioners contended that the outbreak of COVID-19 global pandemic and the subsequent lockdown and restrictions imposed by the Government prevented them from performing their contractual obligations. The Bombay High Court refused to give any relief to the Petitioner and inter alia held that since steel was declared as essential service and there was no restriction on its movement and all ports and port-related activities including the movement of vehicles and manpower, operations of Container Freight Station and warehouses and offices of Custom Houses Agents were also declared as an essential service, the force majeure clause will not come to the rescue of the Petitioner. The aforesaid Order solidifies the point of law that a Force Majeure clause will not help the defaulting party unless it impacts on the performance of contract established (5).
Another significant judicial pronouncement in this respect is Delhi High Court’s order in M/S Halliburton Offshore Services v Vedanta Limited & Anr. The Petitioner, in this case, argued that owing to a complete lockdown, on industrial activities as well as on movement of persons in the country, including, specifically, the state of Rajasthan, consequent to the COVID-19 pandemic, the petitioner was unavoidably handicapped in performing the contract. The Delhi High Court accepted the plea of the Petitioner and held that the countrywide lockdown was prima facie in the nature of force majeure. Further, with respect to the assertion that Petitioner was engaged in the business of Petroleum which is a declared essential service, the Delhi High Court observed that “Petitioner is not engaged, stricto sensu, in the production of petroleum, but is, rather, engaged in the drilling of the wells, which activity is substantial, if not entirely, impeded as the result of the imposition of the lockdown.”(6).
Covid-19 has set some patterns to the term ‘Force Majeure’. This has thrown a light on legal concepts of section 56 and section 32 of the Indian contract Act, 1872. It will also change the way the IT sector operates. Considering the social distancing all agreements will be mostly seen in electronic records henceforth.
- [(2017) 14 SCC 80.
- (2) Section-56 Indian contract Act 1872
- 1954 AIR 44, 1954 SCR 310.
-  2 AC 397.
- Commercial Arbitration Petition (L) Nos. 404, 406, 405 of 2020, Commercial Arbitration Petition Nos. 408 and 407 of 2020 | 08-04-2020
- [O.M.P. (I) (COMM) & IA 3697/2020, decided on 20.04.2020]
BY- Sulakshana Pawar | Pune University