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Can a virus be used as an excuse for the delayed performance of contract?

Author : Shatakshi

INTRODUCTION-

“A party commissioned with the discharge of its obligation, without giving him the charge to perform that would not be different from a servant entrusted with the execution of a service without giving him the control to do so.”

 It would be an understatement to label Novel Corona Virus (COVID-19), as just a virus. As quoted by WHO’s Director General “COVID-19 can be characterized as pandemic and they have never seen before, a pandemic that can be controlled at the same time.” This virus turned the whole world upside down, confined even the mightiest people in their homes and put an end to all day to day activities. Now, as far as the concern goes for contracts, apart from the general requirements to make an agreement a valid contract, it is necessary that a favorable and usual environment should be there to ensure successful completion of contracts.   The outburst of this global pandemic, has generated an unusual environment, and has affected the contractual obligations in some contracts, which has given rise to situations like- non performance of contracts or delayed performance of contracts. Presently, there are various factors responsible for such kind of delays for ex. shortage of raw material, non availability of labour, legislative restrictions, health concerns etc. This article gives an insight about, how COVID-19 is affecting performance of contracts and the scenarios where delayed performance of contracts shall or shall not be excused because of this pandemic and what does the law says about it.

HOW THE VIRUS IS HINDERING THE PERFORMANCE OF CONTRACTS?

COVID-19 has proved itself as a deep state of emergency that has compelled most of the nations to take restrictive and preventive measures such as quarantine and lockdowns. These measures, though serving best for the public health, have adversely affected day to day contracts. Even the parties that are willing to perform their respective obligations are barred from performing it, because of these restrictions. The major disruptions caused by these constraints are precisely defined below:

a.  Scarcity of labour-  The Economic survey of India 2017 estimates the inter state migration of workers around 9 million per year, while Census 2011 estimates the total number of internal migrants in India about 139 million. This data ascertains that migrant workers are used as labour on a huge scale in India. These workers are used in many FMCG companies, manufacturing units and at construction sites. As the Government of India imposed nationwide lockdown on March 24, 2020, the major consequence was the confinement of all persons in their residence including these workers also. This led to disruption in production and manufacturing of goods, and emerged as a reason for non performance or delayed performance of those contracts, which included supply of goods and barred the contracting parties from fulfilling their respective obligations. A similar effect can be seen on construction projects, where shortage of labour led to non completion of construction projects on time.

b. Non availability of raw material- With the increasing outbreak of COVID-19, many regions in country are being so badly affected that it is not possible for those areas to supply raw material to many companies and businesses. This caused many parties to not perform their obligations, because of being reliant on that supply of raw material. The outcome was the delayed performance of such contracts. 

c. Restrictions on transportation– The contracts requiring supply of goods and services from one place to another were delayed because of restrictions imposed by Government on transportation. The inability to transport goods and furnished products impacted a number of contracts all across the country. In some of the cases, somehow the parties have been successful in procuring raw material and limited labour, but the initial phases of lockdown have not been a piece of cake when it comes to transportation facilities.

d. Contracts with other countries- The restrictions due to COVID-19 were not only imposed domestically but also internationally. A vast number of contracts with other countries were barred by these constraints. Apparently, the virus has drastically changed the environment for contracts.

e. Contracts whose essence is destroyed– Apart from the general contracts of supply and construction, some of the contracts have got their main essence destroyed due to the COVID-19 crisis and the restrictions that follow behind. These are the contracts which include such things that have been explicitly forbidden by the legislative orders.

For example- A company had entered into a contract with an event organizer to organize an event for all the employees of the company. However, as per the legislative order imposing lockdown and ensuring strict compliance of the same, any such event has been prohibited until the lockdown ceases to exist. In this scenario, the main essence of the contract is destroyed as the organizing of event has become impossible and neither of the party can fulfill their obligations.

WHEN THE DELAYED PERFORMANCE OF CONTRACT CAN BE EXCUSED –

Contractual provisions in India are governed by Indian Contract Act, 1872 that amends and defines the law relating to contracts. Due to the crisis caused by COVID-19, many contacts are being delayed in terms of their performance. As per the Indian law, not all contacts can be excused because of COVID-19, only the specific ones can. To answer the question, as to what are the circumstances when a contact can be excused, Indian law grants two remedies in such situation.

  • Force Majeure clause
  • Frustration of contact

1. FORCE MAJURE CLAUSE (FMC) – The term seeks its origin from French language, meaning “a superior force”. The very term has been expressly defined in Black’s law Dictionary as- an event or effect that can be neither anticipated nor controlled. A force-majeure can be an act of god (natural calamities) or an act of living (war, riots etc.) the Black’s Law Dictionary also defines a force- majeure clause as “A contractual provision allocating the risk if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled” In general terms, an event can be categorized as a force majeure when it is unforeseeable and unavoidable by the parties and it bars the performance of contractual obligations by parties. The Indian contract Act, 1872 does not anywhere defines a force majeure clause and its implications but the parties may involve this clause in their contract to save themselves from any liability arising out of non performance or delayed performance in case any force majeure event occurs. The implications of this clause can be made clear by the following points.

  • A force majeure clause can not be implied, it must be expressly mentioned in a contract, and then only it can relieve parties from their obligations.
  • A force majeure clause shall be interpreted keeping in view the words contained in a particular contract. For example- if force majeure clause in a contract contains ‘epidemic’ or ‘pandemic’ in itself, COVID-19 may be considered as a force majeure in those contracts. In Energy watchdog v. Central Electricity Regulatory Commission, the SC clearly held that only those events, which are explicitly included in the contract, can serve as an excuse for performance.
  • The provisions of the clause also differentiate the remedy from contract to contract. Some parties may include in their force majeure clause that upon the occurrence of any supervening event they maybe be excused for the delayed performance or they may terminate the contract. The remedy provided to them follows the provisions contained in the said clause.
  • In order to imply force majeure, “the performance of the contract must become impossible or impracticable or useless from the point of view of the object and purpose which the parties had in mind.”
  • The circumstances delaying the performance of the parties must be beyond the control of the parties. There must not be any chance for the parties to mitigate the effect of the event or avoid it.
  • The burden of proof lies upon the party seeking the implication of force majeure clause to establish that the particular event is force majeure, it affects the performance of contract and there is nothing that the party can do to escape such event.

A very important point here to be noted is, that the Govt. of India by its official memorandum dated 19-02-2020 issued by Ministry of Finance has stated- Disruption of the supply chains due to spread of corona virus in China or any other country should be considered as a case of natural calamity and a force majeure clause may be invoked following the due procedure.”

However, there are certain contracts which do not contain the provision of force majeure clause; in such case section 56 of the Indian Contract Act 1872 can be applied, to discharge the parties from their obligations.

2- FRUSTRATION OF CONTRACT- Section 56 of the ICA, 1872 states “An agreement to do an impossible act in itself is void”. The section talks about two folds of impossibility. One being the initial impossibility (where the contract made was impossible from the very beginning) and the other being the subsequent impossibility (when the performance of contract was quite possible at the time of commencement of contract but some event subsequently happened that made the performance impossible). The doctrine of frustration can only be invoked if the event which caused such frustration was not foreseeable by the parties. For ex. A contract with B for the import of goods and the import is thereafter made illegal by govt. order. In this case the performance becomes impossible and contract becomes void.  In general, the doctrine of frustration applies to many circumstances, but when we keep an eye only on the contracts, where the reason of impossibility is COVID-19, the applications of this doctrine comes in play in the following scenarios-

  • Destruction of the subject matter– A contract attracts the doctrine of frustration when the subject matter of that contract (the main essence) has ceased to exist. These are the contracts which have lost their relevance due to corona virus. For example- Mr. X signs a contract with Mr. Z, a banquet hall owner for the arrangement of his wedding. After the announcement of nationwide lockdown, all such events and gatherings were prohibited. In this case the subject matter gets destroyed and the contract becomes void.
  • Administrative or legislative intervention– A contract becomes impossible to perform when a legislative or an administrative order makes its performance impossible. For example- An administrative order turns a banquet hall into a quarantine centre till the further notice. It is done to help the patients suffering from corona virus. Because of the said order, any contract with that banquet hall owner terminates itself.

In such circumstances, the doctrine of frustration renders the contract void, the parties are discharged of their performance and the contract dissolves. This provision serves best in the cases where no help could be taken from force majeure clauses.

WHEN THE DELAYED PERFORMANCE OF CONTRACT CANNOT BE EXCUSED-

We have already discussed the situations, where the delayed performance or non performance of a contract can be excused because of a virus. However there are incidents, where a virus cannot be the excuse for the delayed performance of contracts.

  • When in the contract, it has been explicitly provided, that the contract would continue despite the occurrence of any such event.
  • When there is only difficulty in performance and no actual impossibility, the contract cannot be excused. For example- if the supply of raw material or transportation of goods has not become completely impossible, it has just become difficult or the total cost involved has increased, the parties shall not be excused of their obligations.
  • To invoke FMC clause or to apply doctrine of frustration, the parties have to prove that they took all the reasonable measures that were in their control such as- hiring extra workers, spending extra money etc.

CONCLUSION- There is no doubt in ascertaining that, ‘yes! There may be scenarios when a virus can be used as the excuse for the delayed performance of contract’. The contract which is being delayed due to a particular supervening event should contain a Force majeure Clause, mentioning the said event in its ambit to relieve the parties of their respective obligations until the event ceases to exist. And in case, where no FMC Clause is present in the contract, the parties can frustrate the contract under section 56 of Indian Contract Act, 1872. The words contained in the FMC Clause play a vital role as only they decide what events will be included in the force majeure; hence a contract must be drafted keeping in mind all the possibilities that could arise in the future. However, no such remedy is provided, if the delayed performance is caused by any malfeasance, negligence or commercial difficulty at the part of the parties. To be excused the contract must be explicitly become impossible to perform, mere difficulty serves as no excuse.

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