COVID-19 | ENFORCEABILITY OF CONTRACTS IN INDIA | FORCE MAJEURE
Corona Virus Disease (Covid-19) which originated in Wuhan, China in December 2019, has now plagued the entire globe. It has virtually brought the world to a standstill in the last 2 weeks. As per the Indian Ministry of Health and Family Welfare, there have been 606 reported cases of the Corona Virus in India and 10 deaths have been reported so far due to the disease (as on 26 March 2020). The situation has resulted, in the Indian Government imposing a complete lockdown in India for a period of 21 days with effect from 25 March 2020.
The World Health Organization has declared Covid-19 as a pandemic. The spread of Covid-19 in the country has led to the Indian Government invoking powers under The Disaster Management Act, 2005, which has given the Ministry of Health wide powers to contain the spread of the virus. Most state governments have also classified Covid-19 as an `epidemic disease` and hence have invoked the Epidemic Diseases Act, 1897, which gives local authorities, like municipal corporations the power to quarantine people and take other steps towards the containment of epidemics, such as restricting gatherings of people and imposing restrictions on inter and intra- city travel.
IMPLICATION OF LOCKDOWN
The lockdown would essentially result in a standstill for many businesses, using the work from home option if available or temporarily stopping work. This initiative by the Government puts into question, how contracts would be treated due to the stoppage of work. The questions which would arise are:
- Would all contracts entered into for performance at this time be repudiated or frustrated?
- Can such contracts be terminated citing force majeure.
The Government at this point, has not come up with a specific notification classifying Covid-19 as force majeure for all commercial contracts. Despite previous cases of epidemics in the country, there is no case law on the operation of force majeure clauses in the context of an epidemic. Though, the Ministry of Finance, Department of Expenditure, Procurement Policy Division and the Ministry of New & Renewable Energy have through Office Memorandums dated 19 February 2020 and 20 March 2020 respectively (Office Memorandums) clarified that any disruption in supply chains due to Covid-19 should be considered as a natural calamity and the force majeure clause may be invoked, however, the same cannot be treated as applicable to all sectors.
REVIEW OF CONTRACTS
Force Majeure Clause: Since there is no government notification on the same, the clauses in each individual contract would need to be reviewed minutely. For example, if a force majeure clause specifically lists out `epidemic` or `pandemic`, then Covid-19 would fall within the scope of such a clause, and either party may cite force majeure to terminate such a contract. In other cases, if for example, the language of the force majeure clause in a contract is: `any cause beyond the control of the both the parties`, then Covid- 19 may come within the ambit of force majeure, subject to the interpretation of the courts at the time of a dispute. Basically a party must firstly, prove that the force majeure event was not within its reasonable control, such that it could not have been avoided and secondly, it is not related to the neglect or misconduct of the affected party. A link between the two conditions must also be established. It is important to note that the party unable to perform the contract needs to timely invoke the clause by giving a notice citing the force majeure.
It is still uncertain how courts would deal with issues arising due to Covid- 19, as the disaster is still unfolding. It can be opined that the courts should treat Covid-19 as a natural calamity as seen by the Office Memorandums.
Frustration of Contract: The affected parties, in contracts which do not have a force majeure clause, can also argue that the circumstances persisting have made the obligations under the contract impossible to be performed, as provided under Section 56 of the Indian Contract Act, 1872 (Contract Act). Frustration would occur in a situation where the obligations under a contract become impossible to perform, as the purpose of the contract has been frustrated or the purpose has become unattainable. In such a situation, as per Section 56 of the Contract Act, it would be unjust to bind the affected party to its obligations under the contract.
Covid- 19 presents atypical challenges and it has already disrupted businesses, due to stoppage of travel, lockdowns and government directives to cease operations. As a result of it the performance of many contracts would be delayed or even cancelled.
REVIEW OF CONTRACTS
Force Majeure Clause: Since there is no government notification on the same, the clauses in each individual contract would need to be reviewed minutely. For example, if a force majeure clause specifically lists out `epidemic` or `pandemic`, then Covid-19 would fall within the scope of such a clause, and either party may cite force majeure to terminate such a contract. In other cases, if for example, the language of the force majeure clause in a contract is: `any cause beyond the control of the both the parties`, then Covid- 19 may come within the ambit of force majeure, subject to the interpretation of the courts at the time of a dispute. Basically a party must firstly, prove that the force majeure event was not within its reasonable control, such that it could not have been avoided and secondly, it is not related to the neglect or misconduct of the affected party. A link between the two conditions must also be established. It is important to note that the party unable to perform the contract needs to timely invoke the clause by giving a notice citing the force majeure.
It is still uncertain how courts would deal with issues arising due to Covid- 19, as the disaster is still unfolding. It can be opined that the courts should treat Covid-19 as a natural calamity as seen by the Office Memorandums.
Frustration of Contract: The affected parties, in contracts which do not have a force majeure clause, can also argue that the circumstances persisting have made the obligations under the contract impossible to be performed, as provided under Section 56 of the Indian Contract Act, 1872 (Contract Act). Frustration would occur in a situation where the obligations under a contract become impossible to perform, as the purpose of the contract has been frustrated or the purpose has become unattainable. In such a situation, as per Section 56 of the Contract Act, it would be unjust to bind the affected party to its obligations under the contract.
Covid- 19 presents atypical challenges and it has already disrupted businesses, due to stoppage of travel, lockdowns and government directives to cease operations. As a result of it the performance of many contracts would be delayed or even cancelled.
MHCO Comment: The Chinese government has started issuing force majeure certificates to companies, which are incapable of fulfilling their contractual obligations. This effort is to try and protect them from breach of contract claims. The Indian government has till date not issued such certificates. Therefore parties must be ready to invoke and defend force majeure clauses, which might excuse performance of contractual obligations.
The views expressed in this update are personal
and should not be construed as any legal advice. Please contact us directly on
+91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.
No comments:
Post a Comment