COVID-19: AN ACT OF GOD AND IMPACT ON COMMERCIAL CONTRACTS BY APARNA MUKHERJEE

 

COVID-19 or the Coronavirus disease was first detected in [1]Wuhan, China in the early January of 2020 and since has been spreading globally giving rise to the what came to be known as the ongoing Coronavirus Pandemic. This catastrophic disaster has caused the death of millions of people, many to be hospitalized and also many to lose jobs; along with leaving a countable number of migrant workers trapped in their work places, unsafe and far away from their home towns while some took shelter on the streets and footpaths, a few fortunate ones found refuge in nearby shelter homes.

Social distancing and self-isolation became the norm as Covid-19 encompassed all walks of life. Educational Institutions were shut down, examinations postponed and offices resorted to work from home. Amidst this chaos, many businesses were also affected in a grave manner. This led to financial slowdown as well as businesses not being able to fulfil their contractual commitments. In the after effect of this lockdown, to say the least many manufacturers and suppliers will not be able to deliver or perform their part of the contract or may delay as the situation permits. Naturally they would not want to be held liable for [2]non-performance of contract under section 39 of the Indian Contract Act. Similarly, the companies might not be able to perform their customer agreements. The promisee or the promiser may fail to execute the consideration pertaining to the terms of the said contract. Considering all the factors, the force majeure clause would be an essential part of the inference derived from the implication of these events.

The ‘Act of God’ or the force majeure clause is not present in any statute. The Indian Contract Act,1872 doesn’t explicitly define the same. However, it is often finds place in contracts as well as in court proceedings from time to time. Force Majeure or in other words an act of god is an event which cannot be reasonably anticipated or controlled by a prudent man. For example, if its windy and the clouds have gathered an ordinary, prudent man would come to the conclusion that it is likely to rain. [3]Some examples of the same can be floods, hurricanes, earthquakes, war, terrorism, acts of the government, explosions, plagues etc. These clauses generally contain the occurrences of events or fulfillment of conditions that will set this cause into motion. The consequences would generally discharge the parties of their contractual duties.

[4]For contracts not having the force majeure clause, it is likely that if such events take the parties place would adhere to section 56 of the Indian Contract Act. Section 56 elaborates on the [5]doctrine of frustration, after the contract has been signed or decided upon between two parties and incidents which could not be predicted or controlled beforehand occur thereby, frustrating the contract, rendering it impossible, or even illegal; in these cases the parties are absolved of their obligations and the contract becomes void. An example could be cited by referring to a case law [6]Taylor vs Caldwell,1863, an opera house for rented for hosting concerts but it burnt and was destroyed, which frustrated the very purpose of the contract leaving it unattainable. Frustration brings the contract to an end at the start of an uncontrollable event which is different from breach of a contract where the party suffering can decide if they would continue the contract or not.

The three most important guidelines laid down by courts to see if an event qualifies as an ‘act of God’ or not. These three guidelines being [7] was the event brought about by natural causes and without human intervention; was it impossible for an ordinary man to reasonably envision the occurrence of such an event and its consequences; if such an event could have been predicted was it impossible to prevent it by taking precaution and care? Adhering to the guidelines given by the courts, it can be safely said that the outbreak of COVID-19 itself falls within the ambit of an act of God. The speed with which the deadly overtook the world, caused people to retire from their normal everyday lives and take shelter in their respective homes suggests that it was an unforeseeable event caused by unpreventable natural causes. However, the delay caused by many suppliers, delay in honoring the customer agreements by many companies and non-performance of the contractual terms by businesses most likely has been brought about by the restrictions imposed upon everyone by the Government to curb the spread of COVID-19. It can therefore be inferred that any human intervention to prevent the spread of this deadly virus will not constitute ‘an act of God’. This will result in breaking the chain of events between the original act i.e. the outbreak and spread of the pandemic and not being able to fulfil the contractual duties.

So if a party is seeking to depend on ‘act of God’ as a defence for the inability to execute the contract they must reason that their failure to carry out the contractual responsibilities arose as a result of the pandemic itself and not cause by the Government intervention. For example, the board of directors of an educational institution can state that they postponed or canceled their classes to protect their students and staff on account of coronavirus before the Government even imposed the lockdown. So if the parents would question the authorities on their inability to conduct classes and exams the latter could retaliate by taking the defence of ‘act of God’ as they had suspended all classes before the lockdown.

Whether ‘act of God’ can be resorted to as a defence on a certain extent, also depends on the nature of the contract. The said parties would have to prove that they are unable to discharge their part of the contract, further in order to perform the contractual commitments they may have to go beyond the guidelines prescribed by the Government which in turn would be unlawful. Along with this the parties also need to show that they have taken all necessary steps to mitigate the consequences arising from the event. The parties should keep in mind that faint excuses like[8] increased economic cost or difficulty in carrying out the terms would be weak grounds to invoke ‘act of God’ as the defence argument. This would further go on to prove that there must be some alternative method to fulfil the contract which is neither impossible nor unlawful.

However, keeping in mind, extraordinary nature of the COVID-19 pandemic, the Courts may make an exception, be more generous in their interpretation of the force majeure clause regarding parties with genuine difficulties in performing the contract. [9]Pertaining to this, an ad-interim order was granted by the Bombay High Court on 30th March 2020 in the case of Rural Fair price Wholesale Limited and Anr vs IDBI Trusteeship Services Limited and Ors. During the hearing the Court Granted an ad-interim order on the grounds of the unpredictable Covid-19. IDBI Trusteeship wanted to sell of its pledged shares as the prices in the market were substantially falling. The said contract did not have a force majeure clause, nevertheless, the High Court passed an ad-interim relief leaning on Covid-19 as an excuse. However, this was different when compared to resorting to ‘act of God’ and it is difficult to ascertain where the courts will choose to follow the technical approach or pass judgement based on the equity and effects of the present situation.

Taking into consideration, the spread and consequences of the Novel Coronavirus, the parties if unable to carry out their contractual promises in case of such an event as stated above, they can perform their remedies keeping in mind that it is impossible to satisfactorily complete the contract or can choose to frustrate the contract on the grounds of the indefinite continuation of the pandemic. Interpretations made by the Courts regarding such unforeseen events are many and each having a different approach, it is also very much dependant on the language of the contract terms. It will therefore be in the best interest of the parties to seek proper legal advice, legally analyse their respective contracts, prepare their arguments to protect themselves on either side, to preserve the sanctity of the contract.

FOOTNOTES

[1] ‘Timeline Of The 2019–20 Coronavirus Pandemic In January 2020’ (En.wikipedia.org, 2020) <https://en.wikipedia.org/wiki/Timeline_of_the_2019%E2%80%9320_coronavirus_pandemic_in_January_2020> accessed 3 May 2020.

[2] ‘How To Deal With A Breach Of Contract In India; And Why Legal Remedies Are Easier Said Than Done’ (cnbctv18.com, 2020) <https://www.cnbctv18.com/legal/how-to-deal-with-a-breach-of-contract-in-india-and-why-legal-remedies-are-easier-said-than-done-4562501.htm> accessed 4 May 2020.

[3] ‘What Is Force Majeure? The Legal Term Everyone Should Know During Covid-19 Crisis’ (The Economic Times, 2020) <https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis/articleshow/75152196.cms?from=mdr> accessed 4 May 2020.

[4] ‘Covid – 19 Impact Of Force Majeure In Indian Commercial Contracts – Coronavirus (COVID-19) – India’ (Mondaq.com, 2020) <https://www.mondaq.com/india/litigation-contracts-and-force-majeure/926160/covid-19-impact-of-force-majeure-in-indian-commercial-contracts> accessed 4 May 2020.

[5] Editorial board of professional book publishers, The Indian Contract Act 1872 – Bare Act -Professional (The professional’s 2018)

[6] ‘Doctrine Of Frustration – Corporate/Commercial Law – India’ (Mondaq.com, 2020) <https://www.mondaq.com/india/contracts-and-commercial-law/407868/doctrine-of-frustration> accessed 4 May 2020.

[7] ‘COVID-19: An ‘Act Of God’? | Lexology’ (Lexology.com, 2020) <https://www.lexology.com/library/detail.aspx?g=ae286f43-1755-41dd-928b-1a234737564c> accessed 5 May 2020.

[8] ‘Covid-19: A Force Majeure Event? – Coronavirus (COVID-19) – India’ (Mondaq.com, 2020) <https://www.mondaq.com/india/litigation-contracts-and-force-majeure/922894/covid-19-a-force-majeure-event> accessed 5 May 2020.

[9] Japnam Bindra, ‘SC Sticks To HC Order Restraining IDBI Trusteeship From Selling Shares Of Future’ (Livemint, 2020) <https://www.livemint.com/companies/news/sc-refuses-to-interfere-with-bombay-hc-order-restraining-idbi-trusteeship-from-selling-shares-of-future-group-11587137642895.html> accessed 7 May 2020.

DISCLAIMER: The views and opinions expressed are that of the authors and do not necessarily reflect that of Katcheri.in.

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