The World Health Organization on March 11, 2020, announced Covid-19 (coronavirus) as a pandemic. This pandemic has resulted to be harsh on businesses and economies globally. For businesses to run smoothly and successfully, the bottom line is that of entering into a contract. The Indian Contract Act 1872 defines the term contract under section 2(h) as an agreement enforceable by law.
Section 37 of the ICA 1872, puts forth the Obligation of parties to contracts according to which the parties to a contract must either perform, or offer to perform, their respective promises unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. Due to the current pandemic, it is become difficult to enforce and fulfill these obligations which lead to enforcement of the Force Majeure Clause or the Doctrine of Frustration.
WHAT IS FORCE MAJEURE?
Force majeure is defined in the Black’s Law Dictionary as ‘an event or effect that can be neither anticipated nor controlled’. The term includes both acts of nature (e.g. floods and hurricanes) and acts of people (e.g. riots, strikes, and wars).
Black’s Law Dictionary defines a force-majeure clause as ‘A contractual provision allocating the risk if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled.’ force majeure clause protects a party from liability in a situation where the terms of the contract cannot be fulfilled due to a superior force (unforeseen situation).
FORCE MAJEURE CLAUSE IN INDIA
Although the Indian Contract Act 1872, does not give a clear definition as to what is a Force Majeure Clause it has been slightly dealt under Section 32 and 56 of the ICA 1872. Section 32 deals with, the Enforcement of contracts contingent on an event happening. 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 reads as an Agreement to do impossible acts. An agreement to do an act impossible in itself is void. Contract to do an act afterward becoming impossible or unlawful. A contract to do an act which, after the contract is made, becomes impossible, or, because of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Compensation for loss through non-performance of an act known to be impossible or
unlawful.— Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the nonperformance of the promise.
The disbanding of a contract when already specified in the terms of the contract according to the Indian law happens only under section 32 and not that of section 56. However, under English law, it is considered under frustration.
DIFFERENCE BETWEEN FORCE MAJEURE AND DOCTRINE OF FRUSTRATION
A force majeure comes into force due to either an act of God, war, etc. these conditions are pre-mentioned in the contract by the parties involved. However for a force majeure clause to be enforceable it has to fulfill all the conditions mentioned in the contract beforehand. The doctrine of frustration is the frustration of a contract if a situation/circumstance occurs after the execution of the contract. The situation when ‘impossible’ in nature leads to frustration of the contract. This is dealt with under Section 56 of the Indian Contract Act 1872. The situation of COVID-19 under section 32 and 56 of the Indian contract Act 1872 depends upon whether the contract contains a force majeure clause or not.
APPLICABILITY OF FORCE MAJEURE DURING COVID 19 IN INDIA
The Department of Expenditure Procurement Policy Division under the Ministry of Finance announced on 19th February 2020 the invocation of the Force Majeure Clause. The invocation of this force majeure clause can be done only if it was mentioned in the contract and that the essential basis of the contract has been affected. However, if no such clause is mentioned in the contract then frustration shall take place under section 56 of the Indian Contract Act 1872.
If a contract before coming into existence includes a force majeure clause then the parties to the contract upon unforeseen circumstances are relieved from performing their duties and from the liability of breach of contract under Section 32 of the Indian Contract Act 1872.
However, if a contract does not include a force majeure clause then the parties to the contract can be relieved under Section 56 of the Indian Contract Act 1872 by the doctrine of frustration. On the situation of the outbreak of COVID-19 which was not a situation foreseen by anyone the force majeure clause or frustration can be invoked and the parties can be dismissed from being liable for damages.