EVOLUTION OF CONTRACT LAW DURING THE GLOBAL COVID19 PANDEMIC

Updated: Aug 15


Author: Mohini Chaturvedi, Sharda University










EVOLUTION OF CONTRACT LAW DURING THE GLOBAL COVID19 PANDEMIC

The World Health Organization officially recognized and declared the coronavirus outbreak (“COVID-19”) a global pandemic on March 11, 2020. This pandemic has drastically affected human lives as well as commercial activities around the globe. It has shifted the world to work in virtual mode which has impacted the contractual based businesses and other commercial activities to accomplish its activities. The pandemic has led to a humanitarian crisis and economic crisis of an unprecedented level. Several restrictions on movement of persons and goods have raised the unpredictable situations to perform contractual obligations. Uncertainty as to the performance of contracts has led to parties envisaging breaches of contract and its remedies.


PRINCIPLES RELATED TO UNCERTAIN CONTRACTUAL PERFORMANCE-

The general principles involved relating to contractual performance impossibility to execute includes the concept of Force Majeure and Vis Major. ‘Force Majeure’ means an event that cannot be anticipated or controlled and includes both the acts of nature and people respectively. The ‘Vis Major’, a Latin term means ‘Act of God’ which is an unpreventable event caused exclusively by forces of nature.


‘Force Majeure’ concept has a wider scope than ‘Vis Major’ since the former encompasses both natural and artificial unforeseen events whereas the latter focuses only on natural unforeseen events. The Supreme Court in the case of Dhanrajamal Gobindram v. Shamji Kalidas & Co.[1] recognized the distinction between the terms ‘Act of God’ and ‘Force Majeure’. Both the terms are used to benefit the party so as to excuse themselves for the non-performance of the act and prevent a party from being liable for a breach of contract. It also saves the non-performing party from the consequences of situations over which one has no control.

FORCE MAJEURE CLAUSES IN CONTRACTS-

The Force Majeure clause protects a party from any financial obligation or liability for its failure to perform a contractual obligation. For events to constitute force majeure, they must be unforeseeable and unavoidable. The contract which contains a force majeure clause is negotiated between parties and acts as a relief if an unavoidable event happens.


STATUTORY PROVISIONS UNDER INDIAN LAW –

The Indian Contract Act, 1872 which determines the circumstances in which promises in a contract shall be legally binding is silent on the term ‘force Majeure’. Though the Act allows an agreement for performing an ‘impossible act’, the force majeure clause can’t be invoked as it is not expressly provided.


The Indian Contract Act, 1872 contains two provisions that are related to Force Majeure and the Act of God. Section 32 of the Act deals with contingent contracts which states that if a contract is based on the happening of a future event and such event becomes impossible to perform, then the said contract becomes void. Section 56 of the Act states the concept of frustration of a contract and provides that a contract becomes void if it becomes impossible to perform from the promisor’s side by reason of an event that could not be prevented after the contract is made.


Whether an epidemic/ pandemic like Covid-19 is an ‘Act of God’, this question has not been answered directly by Indian Courts. The Courts in the United States of America and the United Kingdom had in various cases observed that the ‘Act of God’ includes a pandemic/ epidemic. In the case of, Lakeman v. Pollard[2], a laborer at a mill left his job early during a cholera epidemic. His major reason for quitting the job was concern about himself for contracting the disease and, therefore, he failed to complete his contract. The mill owners stated that the work contract is breached and compensation is to be given. The Court held that the cholera outbreak was an ‘Act of God’ and it is not a breach of contract by the laborer.


In Satyabrata Ghosh v. Mugneeram Bangur[3]The Supreme Court established the scope of Section 56 of ICA where the term ‘impossibility’ is to be used in a practical sense and not in a literal way. In the case of Energy Watchdog v. CERC[4] The Supreme Court held that force majeure clauses are to be narrowly construed and since there was a specific clause where force majeure in the contract in question was specified, Section 56 of the Contract Act would not have any applicability. In the case of Offshore Services Inc. v Vedanta Limited & Others[5] The Court observed that Covid19 is a force majeure event and has to be interpreted narrowly. The Court findings include that the breach of a contract has to be examined on the facts and circumstances of each case and cannot be justified merely on the invocation of COVID-19 as a Force Majeure event. It is not the duty of the Courts to provide a shelter for justifying non-performance of the act. A ‘real reason’ and a ‘real justification’ must necessarily be present which the Court would consider in order to invoke a Force Majeure clause.


In India, the Finance Ministry in February 2020, clarified that disruption in the supply chain due to the spread of coronavirus qualifies as a force majeure event, and companies and businesses can invoke the force majeure clause. The force majeure event must have a direct impact on the non-performance and the party seeking to rely on the force majeure event is also under a duty to mitigate and/or explore alternate means of performance.


A situation, where contracts have a force majeure clause, exists-

Resolution probability high

For such contracts, where the clause of force majeure is contained, the complex contracts can be resolved easily.

• Time-efficient

But misuse of such clauses can also be there and it is likely that companies may face allegations that it has used the COVID-19 situation to escape out of payment or performance.


CONCLUSION

The current situation has put in a dilemma for every contracting party whether to add a force- majeure clause or not. In this tough time, the parties should act in a rational manner when deciding the terms of a new contract. The contractual terms should be carefully determined and other alternatives must also be designed if an impossible circumstance occurs while performing the contracts.

[1] AIR 1961 SC 1285 [2] 43 Me 463 (1857) [3] AIR 1954 SC 44 [4] (2017) 14 SCC 80 [5] http://www.lawstreetindia.com/analysis/4616/HC-No-force-majeure-succour-for-Halliburton-Cites-pre-COVID-contract-non-performance-vacates-earlier-orderhttps://indiankanoon.org/doc/123403504/https://www.legalserviceindia.com/legal/article-2234-case-analysis-satyabrata-ghose-v-s-mugneeram-bangur.htmlhttps://talwaradvocates.com/covid-19-force-majeure/https://www.casemine.com/judgement/in/58ed051f53bee77d50c41d9f ● https://www.shearman.com/Perspectives/2020/04/Analysis-of-Non-Performance-of-Contractual-Obligations-in-Light-of-the--COVID-19-Pandemic

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