COVID-19: IMPACT ON COMMERCIAL CONTRACTS
Hrithik Yadav B.A. LL.B. (Hons.) Hidayatullah National Law University
Novel Coronavirus Disease or COVID-19 (CO- Corona VI- Virus D- Disease) was declared a Public Health Emergency of International Concern on January 30, 2020 and subsequently as a pandemic all over the world on March 11, 2020 by the World Health Organization (WHO). The declaration effected the financial and corporate business transactions all over the world. Many countries have imposed several restrictions, primarily travel and social distancing for protecting their citizens from the virus. The virus has claimed lives of lakhs of people all over the world and thousands of people have been tested positive for coronavirus in India. The major impact has been to human health, but it has also effected the commercial transactions and business deal all over the world which has brought to light various contractual disputes due to the non-fulfillment of the contracts. This has led to the question that what will happen to all the unfulfilled contractual obligations where neither party is liable for the non-fulfillment. Thus, this article will be aimed to emphasis on the legal perspective behind this face of COVID-19.
The Ministry of Home Affairs with the Annexure dated 24.03.2020 order no. 40.-3/2020-D imposed lockdown all over the country resulting closure of all shops, malls, office spaces, business industries, factories, education institutes etc. and citizens were asked to stay and work from home, because the virus spreads with touch and water droplets sneezed out while coughing and sneezing. People are allowed to go outside their home only to get the basic amenities and in some places it is being delivered at the doorstep. Thus the government played its role in preventing the human health, but the commercial business has been severely hampered by this step as contracts which demanded physical performance of the contract seemed to be impossible now. Commercial contracts in India are meant to be agreements between two corporate or business entities, binding each other for the performance of obligations laid down within the agreement itself.
‘Time’ is considered as the essence of every contract and this lockdown has hampered this very essence as parties won‟t be able to complete their obligation on time and will result in breach of contract. Thus the pandemic brought in light the forgotten clauses of the 148 years old Indian Contract Act, 1872, which are the Force Majeure and the Frustration of Contract clause of the Indian Contract Act, 1872 under section 32 and 56 respectively though not specifically.
COVID-19 and FORCE MAJEURE
The term „force majeure‟ is derived from French language which is defined as superior power, circumstances beyond one‟s control, inevitable (Taxmann‟s Law Dictionary, D.P. Mittal, Taxmann‟s Publications (p) Limited). It is an unexpected event such as a war, crime, or an earthquake which prevents someone from doing something that is written in a legal agreement (Cambridge Dictionary).
It appeared in common law world during the 1900s and was borrowed from the Napoleonic Code (Lebeaupin v Crispin [1920] 2KB 714). The first case to be decided in India was the case of Edmund Bendit And Anr. vs Edgar Raphael Prudhomme before the hon‟ble Madras high court. The term has a very wide implication especially in the context of Contracts. It carries with itself an intention that the parties to the contract will be saved from the performance of the contract for some unforeseen circumstances on which neither party has control. Another similar term used for force majure is „vis major‟ (Vis major means „act of god‟) which is majorly used in common wealth countries. Both point to the same thing i.e. some unpredictable events that lead to un-fulfilled contractual obligations.
The force majeure clause may vary at different time and circumstances as it can be specific in certain cases, as such a list of events which could lead to the invocation of the clause, or it can be general, indicating some events outside the control of the parties to the contract. The pretext in which the term is used will decide the scope the provision as held in the English case of Lebeaupin v. Crispin (1920 2 KB 714 it was held that „A force majeure clause should be construed in each case with a close attention to the word which precede or follow it, and with a due regard to the nature and general terms of the contract. The effect of the clause may vary with each instrument.‟). It results in various outcomes, to be noted some like excluding the parties from performing the contractual obligations, negotiations on the price of the goods due to change in the demand and supply of the goods or on any other key provision of the contract, or even terminate the contract. However, for invoking the force majeure clause it is necessary to confirm that the events resulting in impossibility of the contract are not self-induced, onerous or resulted due to negligent act of the parties (M/s Alopi Parshad & Sons Ltd. v. Union of India, 1960 (2) SCR 793 it was held that „A contract is not frustrated merely because the circumstances in which it was made are altered. The courts have no general power to absolve a party from the performance of his part of the contract merely because its performance has become onerous on account of an unforeseen turn of events‟). It has also been held in the English case of Sea Angels (2013) where the learned judge opined that “Since the subject matter of the doctrine of frustration is contract, and contracts are about the allocation of risk, and since the allocation and assumption of risk isn‟t simply a matter of express or implied provision but can also depend upon less easily defined matters like “the contemplation of the parties”, the application of the doctrine can often be a difficult one. In such circumstances, the test of “radically different” is important: it tells us that the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness isn‟t sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.”
While going towards Indian cases we have a plenty of them where the hon‟ble courts of India have ruled on the scope and applicability of the provision. In the case of Energy Watchdog v. CERC ((2017) 14 SCC 80), the Supreme Court stated that “Force majeure‟ is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied clause in a contract, such as the PPAs before us, it is governed by Chapter III dealing with the contingent contracts, and more specifically, Section 32 thereof. In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract…When a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 cannot have any application.”
Lex non cogit ad impossibilia often used as Impotentia excusat legem, is a latin maxim meaning that „the law does not compel to do what is impossible‟. Force Majeure stands on this maxim as it comes into effect whenever there is impossibility in performance of the contract. Force majeure brings forth the interpretation of this maxim and the parties to the contract are excluded from performance, as they are not bound by the law to perform what has become impossible.
Generally contracts carry with themselves a provision for Force Majeure as there is always a possibility of happening of such events, but if there is no such provision then the courts should apply alternative contractual provisions and decide on the basis of facts and circumstances. The force majeure clause cannot be considered as a blanket remedy for the non-performance of the contracts as the parties need to show that even after taking all the possible steps for fulfilling the obligation they were stopped by a superior force and the act became impossible and that there is a direct relation between the non-performance and superior act.
DOCTRINE OF FRUSTRATION and COVID-19
Section 56: Agreement to do impossible act- An agreement to do an act impossible in itself is void.
Frustration of contract signifies a set of circumstances or events that has happened after the formation of the contract and due to their happening without any fault of either of the parties the performance of the contract becomes impossible, bringing the contract to an end. There may be some cases where one may find that act does not fall under the force majeure clause, and then the party can hold doctrine of frustration as a probable cause for breach or non-performance of the contract. Like in the present case of Coronavirus if the parties to contract are not able to repudiate the contract under sec 32 then they can rest on sec 56, but it need to be proven that the very fundamental foundation of the contract has been destroyed making the performance of the contract impossible.
It has been a theory that force majeure clause should be given a narrow interpretation or meaning, and the Supreme Court in the case of Energy Watchdog v. CERA (Supra note 6) following the Satyabrata Case judgment, gave a narrow meaning to the clause that “When a contract is having a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 cannot have any application.” But there is an issue regarding this view point as the court took it in the sense that when there is a clause of force majeure in the contract, then irrespective of whether the party gets relief from the damages caused due to unwanted happening, the frustration clause will not be applicable in the case. But this does not fit in accord as it will be unsatisfactory on part of justice to not allow the party to contract to invoke the impossibility clause which can be useful in getting relief. The courts should read the judgment given in Satyabrata Ghose‟s case as signifying that when a force majeure clause is there in a contract then the frustration clause has no application in interpretation or constructing the force majeure clause, but the frustration clause (sec 56) should remain as an alternative remedy.
The context and scope of doctrine of frustration has been illustrated in many cases in India. The Supreme Court in the case of Satyabrata Ghose v. Mugneeram Bangur & Co (1954 SCR 310) gave historical ruling on the scope of Sec 56 of the Indian Contract Act, i.e. “the word "impossible" has not been mentioned in the section to mean physical or literal impossibility. The performance of an act may not be physically impossible but it can be impracticable and un-meaningful from the viewpoint of the object and purpose of the parties has in their mind. If an untoward event or change of circumstance totally fringes the very fundamental basis upon which the parties entered the agreement, it can be said that the promisor finds it impossible to do the act which has been promised by him.”
Further in the case of Sushila Devi v. Hari Singh (1971 AIR 1756), it was held that “The impossibility contemplated by Section 56 of the Contract Act is not confined to something which is not humanly possible, If the performance, of a contract becomes impracticable or meaningless having regard to the object and purpose the parties had in mind then it must be held that the performance of the contract has become, impossible”
Thus from all the above cases it can be gathered that the provision of force majeure and frustration of contract can be brought into light not only when the subject matter of the contract gets destroyed, but also when the object in the mind of the parties becomes impossible to achieve. But the provision cannot be invoked merely because the contract becoming onerous as held in the case of The Naihati Jute Mills Ltd vs Hyaliram Jagannath (1968 AIR 522) that “A contract is not frustrated merely because the circumstances in which it was made are altered. The Courts do not have any general power to absolve a party from the performance of its part of the contract merely because the performance has become onerous on account of an unforeseen turn of events.”
Whether COVID 19 can be used to invoke the force majeure and frustration of contract provision of the Contract Act?
Does COVID 19 classify as a disaster or supervening act.
The WHO on March 11, 2020 declared the COVID-19 as a pandemic and many countries took preventive measures for the same. Government of India in response to the declaration, issued an order under Section 6 (2) (i) (Section 6 of the Disaster Management Act, 2005 reads as follows: 6. Powers and functions of National Authority.—(1) Subject to the provisions of this Act, the National Authority shall have the responsibility for laying down the policies, plans and guidelines for disaster management for ensuring timely and effective response to disaster. (2) Without prejudice to generality of the provisions contained in sub-section (1), the National Authority may — (a) lay down policies on disaster management; (b) approve the National Plan; (c) approve plans prepared by the Ministries or Departments of the Government of India in accordance with the National Plan; (d) lay down guidelines to be followed by the State Authorities in drawing up the State Plan; (e) lay down guidelines to be followed by the different Ministries or Departments of the Government of India for the purpose of integrating the measures for prevention of disaster or the mitigation of its effects in their development plans and projects; (f) coordinate the enforcement and implementation of the policy and plan for disaster management; (g) recommend provision of funds for the purpose of mitigation; (h) provide such support to other countries affected by major disasters as may be determined by the Central Government; (i) take such other measures for the prevention of disaster, or the mitigation, or preparedness and capacity building for dealing with the threatening disaster situation or disaster as it may consider necessary; (j) lay down broad policies and guidelines for the functioning of the National Institute of Disaster Management. (3) The Chairperson of the National Authority shall, in the case of emergency, have power to exercise all or any of the powers of the National Authority but exercise of such powers shall be subject to ex post facto ratification by the National Authority.) and guidelines under Section 10 (2) (i) of the Disaster Management Act, 2005, dated March 24, 2020 stating that “all commercial establishments and offices are to remain closed and social distancing to be maintained for preventing the spread of COVID-19 for a period of 21 (twenty-one) days commencing from March 25, 2020.” The order also imposed restriction on the movement of the people and if anybody is found violating the instructions he or she will be liable for criminal prosecution under Sections 51-60 of the Disaster Management Act r/w Section 188 of the Indian Penal Code, with both fine and imprisonment of up to two (2) years. (Guideline 17 of the Guidelines issued by National Disaster Management Authority dated March 24, 2020).
Section 2 (d) (Disaster Management Act, 2005 Section 2(d)) of the Act defines the term „disaster‟ as “a catastrophe, mishap, calamity or grave occurrence in any area, arising from natural or manmade causes, or by accident or negligence which results in substantial loss of life or human suffering or damage to, and destruction of, property, or damage to, or degradation of, environment, and is of such a nature or magnitude as to be beyond the coping capacity of the community of the affected area.” Thus whether an act or event classifies as disaster got to be proven on the basis of the above given criteria. The present situation of the Coronavirus makes it eligible to be classified as a „Disaster‟ under sec 2(d) of the Disaster Management Act after the government invoked the act to handle this situation. Further, Section 6 of the Disaster Management Act authorizes the National Disaster Management Authority to take preventive measures for the prevention and mitigation of disaster, or building capacity to deal with the threatening situation or disaster as may consider necessary.
Thus, it is clear that the Government of India has recognized COVID-19 as a „disaster‟ (Section 2(d), Disaster Management Act, 2005) under the DM Act and is of such a potential nature to be beyond the predictability control and of individuals and the community.
Also The Ministry of Finance via office memorandum dated 19.02.2020 stated that if there is a supply chains disruption due to spreading of coronavirus in China or any other country will be covered within the Force Majeure Clause. The order also clarified that such a situation should be considered as a natural calamity and Force Majeure clause can be invoked whenever considered appropriate, following the due procedure as above. (No. F18/4/2020-PPD, Ministry of Finance, Government of India). And the Ministry of New & Renewable Energy in regards to 'solar project developers' vide an Office memorandum dated 20.03.2020 has stated that if parties fail to meet contractual obligations due to COVID'19 they can invoke the Force Majeure Clauses. (No. 283/18/2020-GRID SOLAR, Ministry of New & Renewable Energy (MNRE), Government of India). But before we can conclude this article it is pertinent to mention the interpretation of contract agreement as it plays a vital role in the determining the invocation of the provision of force majeure and frustration of contract. This has also been highlighted in the case of Union of India v. M/s. D.N. Revri & Co. and Ors ((1961) 3 SCR 1020) where it was held that “It must be remembered that a contract is a commercial document between the parties and it must be interpreted in such a manner so to give efficacy to the contract instead of invalidating it. It would not be right while interpreting a contract, entered into between two lay parties, to use strict rules of construction which are ordinarily applicable to a conveyance and other formal documents. The meaning of such a contract must be gathered by adopting a commonsense approach and it must not be allowed to be thwarted by a narrow, pedantic and legalistic interpretation.” Further in the case of Nabha Power Ltd. (Npl) vs Punjab State Power Corporation, (Civil Appeal No.179 of 2017) it was held that “a contract should be read and construed as it reads, as per its express terms.”
The courts have from time to time adopted express and implied methods of interpretation and it has been their opinion that the interpretation should be done to bring out the proper meaning of the terms of the contract so as to facilitate the business deal smoothly. Further in the case of Mumbai Metropolitan Region v. Unity Infraproject Ltd. (2008 (5) BomCR 196), it was held that “A business like interpretation of contractual terms and conditions should be used in construing contracts made by persons of business to facilitate business dealings. The Court must ensure that interpretation of law in contractual cases should not be served from the object and intention which the parties seek to sub-serve…” Thus, it is essential that proper construction should be given to the terms of the contract. Each term should be given literal, plan and grammatical meaning, so that the intent of the parties can be gathered and thus helpful in determining the invocation of the impossibility clause.
Finally, it comes to the main argument that whether COVID-19 invokes force majeure and I think it is clear from the entire above context that COVID-19 can be considered as to constitute a disaster or supervening act for which the provision can be invoked to satisfy the non-performance of the contract and to save parties from liability of non-performance. For instance, the hon‟ble Delhi High court in the recent case of Halliburton Offshore Services v. Vedanta Ltd. (2020 SCC OnLine Del 542) held that this period of lockdown due to COVID-19 is situation for invoking force majeure clause and the Vedanta Ltd was restrained from invoking bank guarantee because the performance became impossible as it involved overseas transportation.
But it will be invoked only for those contracts which had time as their essence and the contract will stand frustrated and for the other cases the provision will only postponed the performance as the pandemic is not permanent and thus the impossibility is also not permanent.
Conclusion
This pandemic has been spreading worldwide causing lot of miseries and thus making us realize that we should be much more careful towards the nature and protect its prestige. As a general perspective the force majeure clause cannot be invoked as a matter of right as it will always depend upon the circumstances prevailing during that time. Various industrial sectors have faced unforeseen problems and circumstances which were not in their control and thus it is an impossibility due to which the parties are not able to fulfill the contractual obligation and invoke force majeure, but the parties must abide by the terms of the contract and requirement of the provision of force majeure. COVID-19 constitutes as a temporary impossibility and thus time as an essence of contract will play a very crucial role in determining the invocation of impossibility clause. The parties to the contract should take into consideration the situation of each other and try to mitigate the matter of non-performance and further the courts will apply the law of impossibility as it stands and adjudge the cases according to their terms and condition of the agreement.