Lawwatch

Legal remedies available to those who fail to perform any contract due to Covid Lockdown

Covid : an unforeseen pandemic

The emergence of Covid-19 as a pandemic around the world in an unprecedented manner as nobody could foresee has brought in many unforeseen restrictions in movement, stoppage of production, scarcity of raw materials, shortage of labour and disruption in supply chain. Such restrictions have put timely performance of contractual obligations by many in disarray or made timely performance of many contracts delayed or impossible.

Such failures in performance by the contracting parties under a valid contract are protected by law under Section 32 and 56 of the Indian contract Act, 1872, if such failures occurred due to reason beyond the control of the parties. The Section 32 of the contract act invokes the concept of force majeure and the Section 56 of the contract act invokes the concept of frustrated contracts.

In order to get protection under the Section 32 of the contract act a clause technically called ‘Force Majeure’ clause should be specifically provided in the contract.

What is Force Majeure clause?

Force majeure clause is a clause in a contract. It refers to an event such as spread of the pandemic Covid that can neither be anticipated at the time of making the contract nor controlled by the parties and makes the performance of the contractual obligations impossible. Such a clause must be an express one and cannot be an implied one.

The principle of force majeure states that if a party is unable to perform its contractual obligations due to any eventualities listed in the clause of the contract, the parties are not liable to perform its obligations so long as the event exists as such.

In fact the concept of force majeure has not been explicitly dealt with in the Indian statues or contract law, except Section 32 of the Indian contract act. The Section 32 stipulates that if a contract is contingent on the happening of an event that becomes impossible then the contract becomes void. For a force majeure clause to become applicable the occurrence of the event must be beyond the control of the parties. The parties must demonstrate that they have made sincere efforts to mitigate the impact of such an event and it was impossible for them to overcome it.

Force majeure event relieves the parties

In the light of a force majeure event the parties would be relieved from performing their respective obligations under the contract during the period. If the force majeure event continues for a prolonged time the parties may terminate the contract.

Force majeure clause must include the possible events such as war, earthquake, epidemics or such other events that occur beyond the manageability of the contracting parties. The use of the term such other makes the list of events more an exhaustive one by adding conditions that would apply to such an event. Force majeure clause has great importance in contracts as it relieves the parties from performing contracts in an impossible environment and paying any liabilities thereto.

Doctrine of frustration of contract

If a contract does not include a force majeure clause then the parties to the contract can invoke Section 56 of the contract act so as to discharge the respective party from his obligations.

The Section 56 of the contract act, which impregnates with the doctrine of frustration of contract, states that if something that could not be foreseen at the time of entering to the contract happens later, the contract will become void. It is not the absolute impossibility that is envisaged under the Section 56 but a fundamental change in the contractual environment and performance.

Section 65 protects from undue advantage

The Section 65 of the contract act is of help in mitigating loss when the contract become impossible or void. The Section 65 says that if any party gets any advantage out of the frustration of a contract, the party who receives the undue advantage is bound to restore it or compensate the party from whom it is received. This provision puts both the parties in the same footing.

Differences: force majeure & frustration of contract

The force majeure clause foresees an unexpected event and which it occurs the parties can defer performance so long as the event continues whereas in frustration of contract it is not foreseen.

The frustration of a contract is invoked and applies when the entire subject matter and rationale for the performance of the contract is destroyed. Under doctrine of frustration no event is foreseen.

Both cannot be claimed

When a force majeure event is not specifically provided for under a contract, then relief under frustration of contract may be claimed by the affected party. But if force majeure event is covered under a contract the party cannot claim frustration of such contract.

In order to invoke force majeure the party should demonstrate that the event was beyond the control of the party despite taking reasonable steps and there were no alternate means to perform the contract. Force majeure is not to be used to excuse negligence or other malfeasance of a party who fails to perform. It cannot also be used when the contract has become financially or commercially more difficult to perform.

If there is no express force majeure clause and in case it is impossible to perform the contract even after deferment, the parties will have to take shelter under frustrated contracts. To claim relief he must establish the performance of the contract was impossible and every endeavour has been taken by him. Force majeure clause is usually included in commercial contracts.

The burden of proof on force majeure is on the party seeking relief in the court under the clause.

Case laws for additional reading

  1. Satyabrata Ghose v Mugneeram Bangur & Co., delivered on 16th November, 1953 (citations: 1954 AIR 44), available at https://indiankanoon.org/doc/1214064/

  2. The Naihati Jute Mills Ltd v Hyaliram Jagannath, delivered on 19th October, 1967 (citation: 1968 AIR 522), available at https://indiankanoon.org/doc/1144263/

  3. Energy Watchdog v Central Electricity Regulatory Commission and Ors. etc delivered on 11th April, 2017, available at https://indiankanoon.org/doc/29719380/