Force Majeure under law of contract and Covid-19

Force Majeure during Covid-19 under law of contract.

                                        

 

SARS-19 ( Severe Acute Respiratory Syndrome) is a viral disease named as Novel Coronavirus (Covid-19) by the World Health Organization. Its outbreak was first reported in Wuhan, a city in China in December 2019, then got spread in  every corner of the world but still not sign  of ending deadly viral disease. The world grappled with this disease, many lost  their near and dear ones, many struggle to get cured with help of advance machineries like ventilators, many got drained emotionally, personally and financially. Many struggled to make ends meet. Many got depressed that  led them to commit suicide. All countries were forced to enforce total lockdown as the only option to combat the spread of coronavirus while pharma companies of many countries tried hard to develop vaccines. In the Indian scenario, economic was severely affected. It knocked down the economic growth of both the public and private sectors due to close down of companies or the minimum labour availability. It also rendered agreement in commercial  contract between parties impossible to fulfill due to the enforcement of lockdown. During the period of lockdown, clause of Force Majeure in the contractual agreement came to the rescue of both the parties in the contract.

WHAT IS  FORCE MAJEURE?

            According to Merriam Webster Dictionary Force Majeure is defined as ‘ an event or effect that cannot be reasonably anticipated or controlled. Though, the definition of “force majeure is not provided in the Indian Contract Act, the Supreme Court of India has provided the succinct definition of the term “force Majeure” in the case of Dhanrajamal Gobindram vs Shamji Kalidas and Co. Air 1961 SC 1285. In the case it was held that the expression “force majeure  is not a mere French version of Latin expression ‘ vis major’/Act of God. It has a wider meaning. The wider meaning of Force Majeure was cited  Strikes, breakdown of machinery, which though, normally not included in “vis Major” are included in “force majeure”. Where reference is made to “Force Majeure”, the intention is to save the performing party from the consequences of anything over which he has no control.

            In the case of Mohd. Serajuddin vs. State of Orissa, AIR 1969, the Court gave broader meaning of  Force Majeure as an  act of God, war, insurrection, riot, civil commotion, strike, earthquake, tide, storm, tidal wave, flood, lightning, explosion, fire and any other happening which the lessee would not reasonably control.

Force Majeure is merely a contractual remedy clause, that arises solely on the basis of an express provision included in a contract. It essentially frees both parties from liabilities or obligations when an extraordinary event or circumstances beyond the control of the parties, such as war, strike, riot, epidemic, pandemic or an event described as ‘Act of God’ prevent one or both the parties from fulfilling their obligations. The clause does not essentially put an end to contract, but only suspend the contractual obligations till the duration of unforeseen events. In the court of law, one party can claim remedy of force majeure only on the terms of the contract entered into before occurrence of unforeseen events. The remedy of force majeure depend on the term of the express contract entered into between the parties. So therefore in the commercial contract, the clause of force majeure should be properly drafted with long list of events that shall excuse non-performance of obligations.

DOCTRINE OF FRUSTRATION AND FORCE MAJEURE IN INDIAN LEGAL SYSTEM

            There is no specific meaning of Force Majeure but its reference is provided in Law of Contract and other various relevant Acts of every country, so in India the provision is provided in Sections 32 and  56 of The Indian Contract Act, 1872. To begin with, Section 32 of the Indian Contract Act provides that, contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.

            Section 56 stipulates Doctrine of Frustration. It lays down that an agreement to do an act impossible in itself is void. Second paragraph to the section says that 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.  Section 56 mentions two kinds of impossibility. Firstly, impossibility existing at the time of the making of the contract. Secondly,  a contract which is possible of performance and lawful when made, but the same becomes impossible or unlawful thereafter due to some supervening event. Impossibility here means not only physical impossibility but also legal impossibility.

             The basis of the doctrine of frustration was explained by Justice Mukherjee in the Supreme Court decision in the case of Satyabrata Ghose Vs. Mugneeram AIR 1954 in the following words - " The essential idea upon which the doctrine of frustration is based is that of impossibility of performance of the contract; in fact impossibility and frustration are often used as interchangeable expressions. The changed circumstances make the performance of the contract impossible and the parties are absolved from the further performance of it as they did not promise to perform an impossibility. The doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of section 56 of the Contract Act.

          Sometimes, the fact that the performance of the contract is impossible or unlawful may be within the knowledge of the promisor, but the promisee may not be knowing about the same, then such promisor must compensate for the loss sustained by the promisee because of non-performance of the contract.

            As for the compensation, contract which became frustrated because of major lockdown due to coronavirus, third paragraph of Section 56 does not apply because neither of the parties had the knowledge about the coronavirus, before  contract was made. So, Promisor is not liable to pay compensation to the promisee because of non performance of promise.

            Doctrine of Frustration is a non-contractual term and is applied when the contractual clause of force majeure is absent from the agreement of contract. Application of Doctrine of Frustration may be brought before the legal forum for the purpose of determining the rights of parties in contract thereto.

APPLICABILITY OF FORCE MAJEURE

 The contractual clause of force majeure  is applied in the Real Estate Development project that come under the Real Estate Regulatory Authority, Financial transaction agreement.

Disclaimer:

The Article is written from the various sources for academic and practical purpose.