PANDEMIC CLAUSES IN COMMERCIAL CONTRACTS: INDIA PERSPECTIVE


Introduction
The coronavirus, which has become a global pandemic, has cost us thousands of lives until now and lakhs of people continue to suffer from the deadly virus. The virus has continued to horrify people and has impelled the countries all around the world to resort to unprecedented quarantine measures. With almost half of the globe facing a lockdown, economies fearing the threat of recession, loss to industries, unemployment, livelihood, the stock market crash in a blow the entire human cycle has come to a standstill. This situation of hustle and panic with the public health crisis has caused uncertainty to businesses, with the industrial units and warehouses having been closed until further orders. This essentially means that the businesses face the apprehension of fulfilling their obligations under the myriads of commercial contracts that they have ventured into.  
The question that now arises is: Can the business units choose not to honor the contract and evade performance? What are the grounds? What are the provisions and procedures to resort to non-performance? Is there any recourse that the other party has against the non-performing party? What are the consequences? 
The paper seeks to analyze the framework, which is available under the Indian legal regime for dealing with pandemic like that of COVID-19.

Legal Analysis
1. Doctrine of Frustration
A contract is an agreement enforceable by law. This simply means that once you enter into a contractual obligation non-fulfillment of the same can have legal consequences. However, there can be exceptions to the performance of those legal obligations. For this purpose, it is pertinent to refer to Section 56 of the Indian Contracts Act, 1872. [1] Section 56 talks about the “doctrine of frustration”. The word frustration literally means anything, which is exhausted or defeated. In terms of contracts, it means that a contract has become incapable of being performed because of some reasons. Generally at the time of entering into the contract both the parties have the intention to fulfill their respective obligation under the contract. However, there might be certain instances where the performance of the contract becomes impossible due to certain unforeseeable circumstances. This situation is covered by section 56 of the Indian Contracts Act, 1872.
Section 56 of the ICA, 1872 provides that an agreement to do an impossible act is void. It is based on the maxim “les non cogit as impossibilia” which means that law will not compel a man to do what he cannot possibly perform. [2] This doctrine was first recognized in the decision Taylor v. Caldwell [3] wherein the Queen’s bench held that “circumstances beyond the control or fault of two contracting parties excused performance under their contract”. The Hon’ble Supreme Court adopted this doctrine in the celebrated case of Satyabrata Ghose v. Mugneeram [4] wherein the Hon’ble court held that “The courts have no general power to absolve a party from the performance of its contract merely because its performance has become onerous on account of an  unforeseen turn of events.” [5]
The doctrine applies only in two circumstances:
  • Where the performance of the contract is physically impossible. For e.g.: when due to the strike of transport workers the grains could not reach the buyer on time.
  • If the object of the contract has become impossible. For eg:  when due to fire in the warehouse, the products were burnt and therefore the seller could not perform his part of the contract.

In the recent case of Energy Watchdog v. Central Electricity Regulatory Commission [6], the Supreme Court noted that under the doctrine of frustration even though the performance of the contract is not impossible but if the parties are able to prove that “the performance of the contract will be impracticable and useless from the view of the original intention and object of the parties to the contract” [7] then in such cases the parties may be exempted from fulfilling the terms of the contract.
The present case falls in the first category since the performance of the contract has become impossible. The performance of the contract is fundamentally tainted due to the lockdown of all the industrial units, people are advised to quarantine themselves and stay away from crowded places and any form of gathering. This has caused the cities and towns to come to a standstill. Moreover, the migrant workers who had come from villages are forced to return to their native places due to monetary crises, lack of food and shelter. 
All these problems clubbed together to make it certain that Mr. X will not be able to fulfill his obligation under the contract. However, there does exist some good news for Mr. X since he can take recourse of Section 56 of ICA. The condition of COVID-19 will be covered by section 56 because the present circumstances have given rise to this impossibility of performance and therefore he will be exempted from any kind of liability due to non-performance of the contract. 

2. Principle of Restitution
This is pertinent to note at this juncture that while the doctrine of frustration can be relied on by the non-performing party, the relief that is available to the other party is provided under Section 65 of the Indian Contracts Act. Section 65 talks about the doctrine of restitution. The doctrine provides that in case a party is unable to perform its obligations under a contract and subsequently the contract becomes void the non-contracting party is obliged to return any benefit/advantage obtained under the contract. In addition, the circumstance that has arisen must have a fundamental impact on the performance of the contract; any circumstantial change will not enable a party to rely on the doctrine. [8]
The principle of restitution was elaborated by the courts in the case of Fibrosa Spolka v. Fairbairn. [9] The facts of the case were such that the respondent company had contracted with a polish company to manufacture certain machinery and transport it to Gdynia. The respondents in lieu of the contract made a part payment. Before the contract could be performed, Gdynia was occupied by armed forces from Germany due to which the performance of the contract became impossible. The respondents requested for return of money, which was upheld by the court. The upshot is that by virtue of Section 65 a party, which has made any payment for the performance of the contract, has a right to restitution in case of non-performance of it.
The doctrine of restitution does not apply in cases when the agreement/contract is void ab initio. [10] It will only apply when an agreement was valid from the very beginning but became void subsequently on happening of some uncertain future event. This doctrine further led to the practice of incorporating the force majeure clause into the contracts.

3.Force Majeure clause
To refrain from any such uncalled for liability under the doctrine of restitution the parties can agree to something that is called Force majeure clause. Force Majeure is a French term, which means superior force. [11] It is a clause agreed upon by the parties at the time of entering into the contract that in case any exigency as specified in the contract occurs then how the other party has to execute the contract. This will prevent the contract from getting frustrated and protect the non-performing party from bearing the burden of restituting the aggrieved party. Such clauses are tailor-made and can vary subject to the agreement between the parties contracting. Some examples of force majeure events can be natural calamities such as epidemics, unprecedented monsoon, lightning or any other event as mutually agreed. 
The object of this clause is only to determine the course of action that a party is to take in case a situation enumerated occurs and what the rights and obligations of the parties would. In the absence of the clause, the party cannot invoke it and it can rely upon the doctrine of frustration provided under section 56 of ICA, 1872. A force majeure clause has to be specifically mentioned in a contract and it cannot be implied from the terms of the contract. [12] In case of any ambiguity in the clause, the court may apply general principles of interpretation. 
The main purpose of invoking a force majeure clause is to delay the performance of the contract until the exigency lasts. In the absence of the force majeure clause, the part can claim frustration of contract, which will render the contract void. In the present set of facts since Mr. X did not include a force majeure clause, he can only claim the frustration of the contract.

Conclusion
In the light of the global pandemic that the world is facing, myriads of companies which have become un-operational will no longer be able to honor their contractual obligation. In order to decide the future course of action, it is pertinent for them to look into the terms of the contracts to determine whether the contracts have the force majeure clause. However, before invoking the clause the companies must assess whether the circumstances are such that they would intervene in the performance of the contract. In case the force majeure clause does not exist, the party can rely on the doctrine of frustration thereby rendering the contract void. The other party, which is impacted due to non-performance, can rely on Section 65 to claim restitution for any undue advantage that must have been gained by the non-performing party.

References
[1] Herein referred to as ICA, 1872.
[2] iPleaders, available here
[3] [1863]EWHC QB J1
[4] AIR1954SC44
[5] Ibid.
[6] 2017 SCC Online SC 378
[7] Ibid.
[8] M/s Alopi Parshad & sons v. Union of India 1960(2)SCR793
[9] [1942]UKHL 4
[10] Rajasthan Ltd v. Sh Pala Ram Gupta
[11] Collins Dictionary, available here
[12] Bloomberg Quint, available here 

No comments:

Post a comment

Pages