May 11, 2020

The Covid-19 outbreak hasn’t only wreaked havoc on people’s health, but has also muffled businesses and negatively impacted the economy. In India, as much as around the world, the protracting days of lockdown are bringing about major revenue losses and severe disruptions for the economy.

While businesses across sectors are mired from carrying out their performance obligations, companies are trying to find answers to the critical aspects associated with the inability to meet the obligations of a legally commercial contract in the current scenario. Questions on lease agreements and rental renegotiation being on top of the chart.

One way to protect a business against the obligations of a commercial contract is to invoke the Force Majeure clause in the contract.

Force Majeure is a French word meaning ‘Superior Force’. It absolves parties from the obligations of a contract in wake of a natural calamity or disaster, war, civil strike, etc. The intention of a Force Majeure clause is to protect a party from being punished for something that was not under their control.

Under the Indian Law, Force Majeure isn’t an implied concept. It is applicable only in contracts that expressly mention about it. If a contract does not have a Force Majeure clause, it won’t be applicable in that contract. Hence, it’s important to analyse the contract at the outset and see whether it has a Force Majeure clause.

In case of the presence of a Force Majeure clause, one needs to analyse whether the Covid-19 situation can be covered under the Force Majeure definition in the contract.

Some contracts use generic language to define a Force Majeure clause, stating to release a party from the obligations under a situation that is outside the party’s control. Under the given definition, Covid-19 is likely to stand as a reason or situation that is beyond the party’s control. Factors like supply chain disruption, labour shortage, etc. owing to the lockdown may be considered as something outside the party’s control and qualify as Force Majeure.

In some contracts, the Force Majeure events are specifically mentioned, in which case, it may not be possible to incorporate Covid-19 in the Force Majeure definition. Scan the contract and confirm whether it mentions natural disaster, epidemic, or pandemic as Force Majeure events. While WHO has declared Covid-19 as a pandemic, Ministry of Home Affairs has notified it to be a disaster under the Disaster Management Act, 2005 and Ministry of Finance has issued Office Memorandum stating Covid-19 to be a natural calamity.

However, there’s every possibility that a commercial contract may not include a Force Majeure clause. In that case, one has to find remedy in the Indian Contract Act, 1872 and interpret whether the current scenario qualifies under the ingredients provided therein.

Section 32 and Section 56 of the Indian Contract Act, 1872 talks about various scenarios when a contract is void or the performance of the contract is waived off or discharged.

Section 56 of the Act lays down the Doctrine of Frustration, which states that in case of a change in situation after entering the contract that makes it impossible for the party to perform the obligations under the contract, the contract becomes void or frustrated. However, the application of the Doctrine of Frustration in a given situation would vary case to case. Mere incidences of delay, expense, or onerousness aren’t sufficient for a party to claim protection under this provision. The party must prove that the performance of obligations became completely impossible because of the changed situation.

Supreme Court’s decision in 1954 on the Satyabrata Ghose v. Mugneeram Bangur & Co. case is an apt illustration on the Doctrine of Frustration. A builder had started a township and invited offers from the buyers. One of the buyers executed the builder-buyer agreement. Subsequently, because of some government acquisition, a large portion of the land for township was acquired and the builder was unable to complete the township as committed in the contract. The Court held that it was impossible to fulfill the commitment made at the time of entering the contract however since the time is not of essence, it would not be considered as a frustrated contract.

Applying the same principle, if it’s shown that the performance under the contract was possible even during the Covid-19 crisis, it will not be possible to take recourse to the Doctrine of Frustration. The defaulting party may be held liable for breach of contract, notwithstanding that the lockdown is going on or that there are severe financial consequences or losses borne by the party.

In any case, it’s important to send a notice to the other party at the earliest, communicating in clear writing about how performing the obligation has become impossible because of the current situation, requesting them to discharge the obligations or grant time extension to a period after the lockdown or mutually decide to terminate the contract. In case a contract provides for liquidated damage, send a notice to the party immediately so that the defaulting party may have a bona fide stand for duly informing them on time and that the latter was restricted due to the situation which had made the contract infructuous.

By: Rohit Jain 

About the Author

Rohit Jain is a Senior Associate at Singhania & Partners LLP, New Delhi