Monday 15 June 2020

THE TWO Fs GOVERNING CONTRACTS IN THE TIME OF COVID-frustration and force majeure By- Eesha Vij

INTRODUCTION
No one ever imagined the present-day world to be a reality one day! All of us might have seen a number of sci-fi movies which revolved around corona like pandemics but who thought that the reel and real-life differences will become so bleak one day that we won’t be able to distinguish. The world today revolves around – sanitizers, social distancing, face masks and lockdown.
Lockdowns have brought about a devastating effect on the national economy as well as the life of every citizen but have you ever thought what impacts do these lockdowns have on the contracts and their performances? In this article, we will discuss the two major principles which govern the contracts during these times of distress- the doctrine of frustration and force majeure. For a better understanding, let us look at a brief timeline of the national lockdown which the country has been under since March’20 after the World Health Organisation (WHO) officially declared coronavirus/covid-19 as a pandemic on March 11, 2020:-

14 March 2020: The Government of India declared COVID-19 as a "notified disaster".
22 March 2020: Nation observed 22-hour voluntary curfew on the appeal of PM.
24 March 2020: The Government of India ordered a nationwide lockdown for the next 21 days.
14 April 2020: Lockdown extended till 3rd of May, with a conditional relaxation after 20th  April for the specific regions where the spread of the virus was under control.
01 May 2020: GOI extends the lockdown further by two weeks until 17 May. 
12 May 2020: PM announces economic relief package with the aim of Self-reliant India.
17 May 2020: The lockdown was further extended till 31 May by the ‘National Disaster Management Authority’.
30 May 2020: The ongoing lockdown further extended till 30 June in containment zones, with services resuming in a phased manner starting from 8 June. It is termed as "Unlock 1".
Now, when we think about the obstruction and hindrance presented in the performance and fulfilment of various commercial contracts due to covid-19, two major legal concepts need to be highlighted, namely- the doctrine of frustration and force majeure. In this part of the article, we will try and understand these concepts and in the later parts, further topics like correlation and their application in the suits filed in courts will be dealt with.

The term ‘force majeure’ has been defined in Black’s Law Dictionary, as ‘an event or effect that can be neither anticipated nor controlled.  It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.’

What if a contract doesn’t include a force majeure clause?
If a contract does not include a force majeure clause, the parties would have to ascertain in light factors such as the nature of the contract, the nature of the event and so forth, as to whether Section 56 of the Contract Act (which deals with agreements between the parties to do an impossible act) and which has been briefly discussed below, can be applied to such contract so as to discharge the parties from their contractual obligations.

The doctrine of frustration comes into action in these two situations- first where the performance is physically cut off, and second where the object has failed. The SC of India has held that the section 56 will apply to both kinds of frustration[1].

For better justification, many explanations have been put forward for the doctrine of frustration as a part of the law of contract. Most well-known theories are- theory of implied term and just and reasonable solution, but these theories are not applicable under Indian laws as the Supreme Court  justice B.K. Mukherjea said in the case of Satyabrata Ghose v Mugneerma Bangur & Co.,[2] “These differences in the way of formulating legal theories really do not concern us so long as we have statutory provision in the Indian Contract Act. In deciding cases in India, the only doctrine we go by is that of supervening impossibility or illegality as laid down in section 56 of the Contract Act, taking the word ‘impossible’ in its practical sense and not literal…”.

There are specific grounds of frustration and some of the well- established grounds are-
·       Destruction of subject matter
·       Change of circumstances
·       non- occurrence of the contemplated event
·       Death or incapacity of a party
·       Government, administrative or legal interference
·       Application to leases

It has to be taken into notice that only a few of these grounds are applicable during the present conditions put forward due to the coronavirus outbreak. One of the grounds being ‘change of circumstances’ gels to the legality of the current subject-“where circumstances arise which make the performance of the contract impossible in the manner and at the time contemplated”[3].

Sometimes the performance of a contract remains entirely possible, but due to the non-occurrence of an event contemplated by both parties as the reason for the contract, the value of performance is destroyed
.
Similarly, a contract will be dissolved when legislative or “administrative intervention has so directly operated upon the fulfilment of the contract for a specific work to transform the contemplated conditions of performance. The effect of an administrative intervention has to be viewed in regard with the terms of the contract, and if the terms show that the parties have undertaken an absolute obligation regardless of administrative changes, they cannot claim to be discharged[4].

Claims under this situation- quantum meritum claims.

A well-known English law doctrine of quantum meritum has been allowed by the courts under this section. The Supreme Court observed in State of Madras v Gannon Dunkerley & Co.[5] that a claim for quantum meritum is a claim for damages for breach of contract. The value of the material used or supplied is a factor which furbished a basis for assessing the amount of compensation.

The Supreme court has passed a few recent judgements concerning this sphere of contracts which shall be taken up and scrutinized in the next part.

REFERENCES

[1] AIR 1945 SC 44
[2] AIR 1954 SC 44
[3] Viscount Maugham in Joseph Constantine Steamship Line Ltd. V Imperial Smelting Corp. Ltd., 1942 AC 154 (HL)
[4] Naihati Jute Mills Ltd. V Khayaliram Jagannath AIR 1968 SC 522: (1968) 1 SCR 821
[5] AIR 1958 SC 560

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