CONTRACTS – SAVIOUR FROM UNFORESEEN LIABILITIES
In lights of COVID-19 being declared as a pandemic by World Health Organization, The Ministry of Health and Family Welfare has issued several guidelines to prevent the spread of the disease. Social distancing with reference to mass gathering, implementation of travel restrictions are some of the measures that are effectively enforced. The outbreak has been declared as an epidemic and the provisions of Epidemic Diseases Act 1897 have been invoked wherein shutdown of educational institutions and many commercial establishments has been declared. Due to arrears of accounts, pile-up of inventories, breakage of production cycle, discharge of workers, etc. almost all industries are experiencing depletion at an alarming rate.
For parties that have entered into agreements for purchase, sale, leasing, licensing, renting, servicing, etc., the uncertainty caused by the spread of Corona virus has raised crucial concerns in regards to implementation of such agreements. The pertinent question that arises in this situation is “How to justify the rights and obligations of the parties in the agreement amidst the outbreak?”, “What shall be the scope of contractual relation between parties to an agreement in lights of the current pandemic?” The Government of India has clarified that disruption of supply chains due to spread of Corona virus should be considered as a case of natural calamity and “force majeure” clause may be invoked wherever considered necessary, vide an office memorandum O.M. No. 18/4/2020-PPD3.
Interpreting the above O.M., it can be safely concluded that the rights, obligations and contractual relations amongst parties to an agreement in the Corona virus pandemic depend upon the presence of “Force Majeure” Clause in the commercial contract.
WHAT IS FORCE MAJEURE?
“Force majeure” is a French phase and is used to describe a “Superior force” event. The law relating to Force Majeure is embodied under Sections 32 and 36 of the Indian Contract Act, 1872. The term has been defined in Merriam Webster Dictionary as “superior or irresistible force” and “an event or effect that cannot be reasonably anticipated or controlled”
In Cambridge Dictionary it is defined as “an unexpected event such as a war, crime, or an earthquake which prevents someone from doing something that is written in a legal document. “
As per Indian Contract Act, 1872 and various applicable rules, regulations and advisory notifications, it can be said that Force Majeure clause in a contract frees the parties in the contract from performing and exercising the rights and obligations as incorporated the in the contract on happening of events that are beyond the control of the parties. The common law incorporates Force Majeure as Doctrine of frustration which As per Section 56 of the Indian Contract Act reads “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. It can be inferred that both Force Majeure and Doctrine of Frustration operates at the instance of a supervening impossibility which is unforeseen and is not attributable to either parties in the commercial contract. In a plethora of judgments and landmark cases, the courts have defined ‘Force Majeure” as an event that neither be controlled nor can be anticipated. It includes an Act of God or natural disasters, war or war-like situations, labor strikes, epidemics, pandemics, etc.
IMPORTANCE OF CONTRACTS IN A PANDEMIC:
Due to the outbursts and subsequent governmental advisory, many suppliers will not be able to perform their contractual obligations, of the very least, the performance will be delayed. Under such scenarios, the force majeure clause would be a determining factor to understand the implications of these events. A contract defines the rights and obligation of the parties. It also covers within its ambits clauses like “force majeure” to bring remedy in situations that are beyond the control of parties. In the case of Syed Khused Ali vs. State of Orissa and Anr. (AIR 2007 Ori 56) the facts laid that there was no Force Majeure clause in the agreement between the parties. The performance of the contract at the later stage became impossible and unlawful as it depended on the issuance of certificate by the government and the act was declared unlawful. It was held that Section 56 of The Indian Contract Act, 1872 would apply to the case and the petitioner would not be liable for payment of damages. Entering into contractual relations prevents business and enterprises from hefty liabilities which may arise due to non performance of a contract even when the non performance is attributed to a supervening impossibility.
INTERPLAY OF FORCE MAJEURE AND COVID-19
As mentioned earlier in the article, Force Majeure operates not at the instance of the parties but on the happening of a supervening event which frustrates the performance of the Contractual obligations. The ambit of Force Majeure is wider than Act of God and includes pandemics. On declaration of Covid-19 outbreak as a pandemic by World Health Organization and subsequent steps taken by Government of India, to control the outburst, the contractual obligations and relations between parties and affected. The facts and the specific terms of the contract will define whether the parties in the contract can be freed from performing the contractual obligations. In situations like these and especially concerning around “force majeure” courts have laid focus on the language of the specific clause in the agreement to provide protection to the parties.
PROCEDURAL REQUIREMENTS TO INVOKE THE CLAUSE
The parties shall invoke the Force Majeure clause after satisfying the procedural requirements as mentioned in the clause. For instance the clause may provide that the party suffering from the Force Majeure event shall inform about the same to the other party giving all necessary details without any delay. The clause can also provide for a specific “x” day notice period from one party to another.
CONCLUSION: DETERMINATION OF COVID-19 AS FORCE MAJEURE EVENT
As per the latest reports published by the World Health Organization on 13th May 2020, the Corona Virus outbreak has led to 287399 deaths globally. More than 4170424 positive cases have been registered. It has spread to more than 112 countries and territories around the world. The WHO defines a pandemic as “worldwide spread of a new disease”. The declaration to the effect as to whether the spread of Covid-19 would be include as an impossibility in terms of performance of contractual obligations in necessary. Following factors shall have to be kept in mind to render the outburst of Covid-19 as impossibility in performance of a contract:
- Nature of contract
- Means and time available with parties to discharge their contractual obligations
- Flexibility in interpretation of contractual relations between parties
- Ambiguity in contracts
- Scope of Force Majeure clause in the contract
- Inclusion of “pandemic” in the Force Majeure
At this point in pandemic, it is important to realize the importance of contractual relations between the parties vis-à-vis the inclusion of Force Majeure clause in the same.