On March 11, 2020, the World Health Organization categorized the outbreak of the novel coronavirus (“COVID-19”) a ‘pandemic’. Whilst the world has witnessed the Governments of the several countries, including Indian Government, taking some of the strictest measures to contain the spread of COVID-19, the businesses around the globe took a considerable hit. On account of the containment measures and restrictive quarantines and measures employed by the Government of India, the businesses across the country were adversely impacted and, hence, have been compelled to revisit their contractual obligations in view of their viability and inability to fulfil their contractual obligations.
Given the uncertain environment on account of reasons pertaining to the outbreak of COVID-19, it becomes essential to consider whether a party can suspend or be excused from performance of the obligations under the contract. In this respect, generally, the contracts contain a ‘force majeure clause’ which may allow the parties affected by a force majeure situation to suspend or be excused from the performance of the contractual obligations, extend the term of the performance of the contractual obligations and terminate the contract on account of subsistence of such force majeure event. Therefore, it is pertinent to analyse whether the COVID-19 can be considered to be a force majeure event or not and whether mere occurrence of a force majeure event will automatically allow a party to suspend the contractual obligations or be excused from performing of the contractual obligations irrespective of the fact if such party is impacted or affected by such force majeure event or not.
A ‘force majeure event’ typically refers to such circumstance or event whose occurrence is beyond the control of the contracting parties and which renders performance of the contractual obligations by the parties impossible. Generally, such force majeure events are defined in the contracts as occurrence of events such as draught, fire and explosion, chemical or radioactive contamination, epidemic, earthquake, volcanic eruption, landslide, flood, cyclone, adverse weather conditions which are in excess of statistical measures for the last 100 years etc. However, in some contracts, a force majeure event may be given a limited scope such as change in law or policy or physical damage to party’s property etc.
Therefore, whether an event is classified as a force majeure event will depend upon the agreed terms of the particular contract. However, taking into consideration the fact that COVID-19 is declared as a pandemic and in light of a recent office memorandum dated February 19, 2020 issued by the Government of India in relation to ‘Manual for Procurement of Goods, 2017’ which clarifies that the COVID-19 may be considered as a ‘natural calamity’ and force majeure clauses may accordingly be invoked, it can be construed that COVID-19 is a force majeure event.
The laws pertaining to force majeure event in India are governed under the provisions of the Indian Contract Act, 1872 (“Contract Act”). However, there is no express provision for ‘force majeure’ under the Contract Act and the law in respect of the force majeure event is covered under the gamut of Section 56 of the Contract Act which enshrines the doctrine of frustration and provides that an agreement to do an act, which is impossible or which becomes impossible by reason of some event and which a promisor party could not prevent, becomes unlawful and unenforceable in the eyes of law. If a contract becomes unenforceable in the eyes of law, it means that under such a contract a party cannot be made liable for non-performance of its contractual obligations. Pursuant to Section 56 of the Contract Act, a party can be excused from performing its contractual obligations on account of frustration of contract. One of the ground of frustration of contract is supervening impossibility which also includes events such as ‘act of god’ and ‘force majeure event’ (like COVID-19). Therefore, even if, there is no provision relating to force majeure event under a contract between the parties, the party affected by occurrence of COVID-19 can still rely upon and claim suspension of contractual obligations or be excused from performance of contractual obligations in view of Section 56 of the Contract Act.
In view of the same, given that COVID-19 can be construed as a force majeure event, it is important to analyse whether mere occurrence of a COVID-19 will automatically allow a party to suspend the contractual obligations or be excused from performing of the contractual obligations irrespective of the fact if such party is impacted or affected by such force majeure event or not. In this regard, the occurrence of COVID-19 may entitle a party from non-performance of its contractual obligations and invoke the force majeure clause, however, such party must demonstrate that (i) communication, in form of a written notice, is made to the counter party regarding invocation of the force majeure clause and suspension of the contractual obligations; (ii) adherence to the specific procedure, if agreed and laid down in the contract, in case of occurrence of force majeure event; and (iii) the occurrence of the force majeure event has significantly affected the party’s ability to perform the contractual obligations or rendered it impossible for the party to perform the contractual obligations under the contract.
In view of the aforesaid, the mere occurrence of the COVID-19 will not permit or allow the party to suspend or be excused from contractual obligations automatically until such party is able to demonstrate that the non-performance was directly attributable to occurrence of such force majeure event. For instance, in a lease agreement where a party cannot access the premises because of the restrictions imposed by the Government on account of COVID-19, the party can invoke force majeure and claim that it will not be liable to pay rent during existence of such force majeure event. For this purpose, reliance can be placed on judicial pronouncements on this subject which states that in case, if some unforeseen event occurs during the performance of a contract which makes the contract impossible of performance, in the sense that the fundamental basis of the contract goes, then such contract does not need to be further performed because insisting upon performance of contractual obligation in such cases will be unjust.
Therefore, if occurrence of any specific event (i) could not have been unforeseen, anticipated or controlled; and (ii) alters the fundamental basis of contractual arrangement to the extent that it renders the performance of the contract impossible, then such contract does not need to be performed by virtue of Section 56 of the Contract Act. However, if performance of such contractual terms are possible in an alternative manner, then it may weaken the defaulting party’s ground to invoke the frustration of contract under Section 56 of the Contract Act.
In light of the discussion, COVID-19 can be construed as a force majeure event either under the express terms of the contract or by virtue of Section 56 of the Contract Act, if not covered under the express terms of the Contract, claiming frustration of contract. However, it must be clearly noted, the party claiming exemption from performance must be rendered absolutely incapable of performance of contractual obligations because of occurrence of COVID-19. Further, mere economic duress or financial instability cannot be a ground for claiming frustration unless it is demonstrated that the force majeure event renders a party impossible to perform its obligations.