IMPACT OF COVID-19 ON COMMERCIAL CONTRACT- FORCE MAJEURE AND DOCTRINE OF FRUSTRATION.
A commercial contract is an agreement during which one or both parties conform to try and do something or to not do something. A contract is usually oral, though written documents are more typical.
Commercial contracts are the lifeblood of business. You sign contracts with employees, landlords, customers and vendors agreeing to buy for, to sell, to provide insurance or to carry out services. Oral contracts are technically legal, but having a written and signed commercial contract is much safer.
Types of Commercial Contracts
The business world runs on contracts. A given contract is additionally a poster agreement between two companies, between a corporation and employees or between a corporation and an independent contractor. Consider some standard commercial-contract examples:
• A supplier agrees to sell you goods or to provide parts
• You conform to supply services to a unique company
• A new hire signs a contract
• An employee signs a non-compete agreement; this will be an example of a contract specifying to not do something — during this case, to not work for the competition
• A confidentiality agreement to not discuss or share certain information
• Leasing or buying land or building space
Following the rapid spread of the novel coronavirus (“COVID-19”) that was first reported in Wuhan, China at the tip of 2019, the planet Health Organization declared COVID-19 to be a virus on March 11, 2020.
In this note, we consider how calamity provisions in commercial contracts and also the related common law doctrine of frustration could even be engaged within the context of the COVID-19 outbreak. because the spread and impacts of the novel Coronavirus (COVID-19) continue, individuals and businesses are finding it increasingly harder to accommodate their contractual obligations. As such, parties are attempting to find ways to either temporarily suspend their performance obligations under contracts or to completely extinguish their contractual agreements. this text will study and contrast two ways of terminating contracts during COVID-19: the doctrine of frustration and unavoidable casualty.
Termination of Contract via Frustration
Frustration of a contract occurs when performance of an obligation under the contact becomes impossible or unlawful after a contract has been executed, and such impossibility is due to an unpreventable event. The results of such may be a void, or frustrated contract. it isn't sufficient that the event makes it more costly, difficult or impracticable to perform the contract – it must be impossible.
The test for frustration was established in Davis Contractors Ltd v Fareham Urban District Council. Here, Lord Radcliffe stated that frustration is satisfied where:
• A frustration event causes the contractual obligation owed by a celebration under the contract to become impossible or radically different from the duty contemplated at the time that the parties entered into the contract;
• The frustration event wasn't caused by either party; and
• The contract doesn't otherwise pander to what is going on to happen on the occurrence of an alleged frustration event (e.g. by force majeure).
Termination of Contract via unavoidable casualty
The term unavoidable casualty is often defined as ‘an event or effect which will be neither anticipated nor controlled’. Some unavoidable casualty events include acts of God, war, terrorism, natural disasters, plagues, epidemics and other events that are beyond the control of parties.
Contracts often contain unavoidable casualty clauses which could have various effects. they'll often provide that an affected party be relieved from having to perform a contractual obligation or within the choice, will have the timeframe for performance extended. unavoidable casualty clauses generally provide that performance be suspended for a short period during the event or is that the event is prolonged then termination could even be available. However, if unavoidable casualty events don't seem to be expressly mentioned in an exceedingly contact, it isn't relevant, and no termination are available on such grounds.
Whether COVID-19 is taken into consideration an unavoidable casualty event, will depend wholly on the definition of unavoidable casualty within the contract. COVID-19 may represent the realm of an “epidemic”, “pandemic”, “act of God”, or “act of government”. Contracts may additionally exclude terminations on such grounds.
Events Capable of Constituting unavoidable casualty
The “test” for unavoidable casualty usually requires the satisfaction of three distinct criteria:
• the event must be beyond the reasonable control of the affected party;
• the affected party’s ability to perform its obligations under the contract must are prevented, impeded or hindered by the event; and
• the affected party must have taken all reasonable steps to hunt to avoid or mitigate the event or its consequences.
What is the difference and therefore the way does each apply to COVID-19?
In short, the difference between the 2 is hat frustration is applicable to all or any or any contracts whereas unavoidable casualty is simply applicable to those that have express unavoidable casualty provisions. Another difference is that depending on the contract; unavoidable casualty may find yourself in either termination or suspension of a contract, whereas frustration usually results in an automatic termination of the contract.
to work out frustration on the grounds of COVID-19 you would like to point out that it's impossible or radically different to perform the contractual obligations due to COVID-19. Doing so will result in a void contract and parties are discharged of their future obligations. to work out unavoidable casualty during COVID-19, there must be an unavoidable casualty Clause within the relevant contract and such clause must include a definition that covers COVID-19. The effect of multinational may find yourself in suspension of performance or termination of the contract. it is important to note that frustration won't usually apply where there’s an unavoidable casualty clause within the relevant contract.
Consequences of act of God Claims.
The consequences for the parties where a sound calamity event has occurred will depend upon the character of the affected party’s obligations under the contract, similarly because the results and remedies expressly contemplated by the act of God provision.
Contractual remedies for calamity typically include an extension of some time to perform those obligations or suspension of contractual performance for the duration of the calamity event. If the calamity event extends over an extended period, some provisions may entitle the parties to terminate the contract.
Section 56 of the Indian contract Act, 1872 provides impossibility of performance after the execution of a contract, could also be invoked if the contract doesn't expressly provide a tragedy clause.
Energy Watchdog v. Central Electricity Regulatory Commission & Ors is one in all the leading Judgments wherein the Apex Court held in terms of Section 56 that:
“What was held was that the word “impossible” has not been employed within the Section within the sense of physical or literal impossibility. The performance of an act won't be literally impossible but it should be impracticable and useless from the aim of view of the thing and purpose of the parties.
If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it should be said that the promisor finds it impossible to try and do the act which he had promised to try and do.
It was further held that where the Court finds that the contract itself either impliedly or expressly contains a term, in line with which performance would stand discharged under certain circumstances, the dissolution of the contract would occur under the terms of the contract itself and such cases would be restricted under Section 32 of the Act. If, however, frustration is to want place de hors the contract, it'll be governed by Section 56.”
The party should be ready to establish that non-performance of the contract i.e. non- payment of contract rentals isn't thanks to loss of business but thanks to the act of God event.
Frustration of contract envisages impossibility of performance leading to avoidance of contract and could be categorized because the discharge of a contract. Therefore, establishing that an unexpected event is impacting the party’s ability to perform its obligation has frustrated the concept of the contract. Proving frustration by the affected party would bring the contract to an end.
Impact of COVID-19 on commercial leases
Seeking to bail out from COVID-19 impact by either reduction of rentals for a limited period of sometime or waiver in charges by the lessees at such instances, the revenue of lesser would be at stake. It had even been difficult to defer the payments on part of the lessees because it'd only build up their liability. There’s no one-size-fits-all solution. The lessee shouldn't die the burden to the lessor alone as they have other financial obligations of paying loan interest, property tax etc.
Few Property Owners, Developers, business occupiers have chosen for its specific partner’s complete waivers until the lockdown. However, this also seems to be a short aid for survival within the short run. During the existence of pandemic, the lessees wouldn't be excused for dues pre or post COVID-19 crisis.
“Under such conflicting circumstances, parties to the contract would be forced into Insolvency Proceedings for defaults in lease rentals but to our rescue, the minister of finance Nirmala Sitharaman on 24th March 2020 in a very handout declared that minimum threshold of default from 1 lakh is raised to 1 Crore for MSMEs with immediate effect.”
While interpreting the disputes which could arise before various courts a holistic approach is additionally adopted so in any case the interest of parties. Even otherwise, it's highly unlikely that Courts might interpret a lease contract incapable of performance leading to termination. Additionally, tenant’s financial strength during the lockdown could also become a side for deciding waiver.
Does COVID-19 trigger act of God Clause?
Every act of God clause should be considered and interpreted separately and in light of the contract as a whole. It should be easier to argue that COVID-19 and its squeal trigger act of God clause if the clause expressly includes a plague or disease as an iterated example of events giving rise to the clause. Within the absence of pandemic or disease being listed as examples, a celebration claiming the advantage of act of God clause would first should demonstrate that COVID-19 may be a circumstance that falls within the language of the provision.
Assuming COVID-19 may be a “force majeure” within the meaning of the provision, the party seeking to rely upon it must then show two things: that COVID-19 has made the performance of their obligations impossible; which the outbreak and its consequences were beyond the reasonable foresight and skill of the parties at the time they entered into the contract. In other words, the party claiming the advantage of the clause must show that they cannot perform their contractual obligations because of unforeseeable, extraordinary circumstance beyond their control. A court typically won't accept that an occurrence may be act of God unless no part of it absolutely was within the control of the party claiming its benefit. In other words, a celebration cannot rely upon its own actions or inaction, which led to a selected consequence, as an occurrence of force majeure; the circumstance must be unforeseeable and completely outside the control of the parties.
It is difficult to assess how a court will tackle these questions particularly because the impact of COVID-19 continues to be unfolding daily. However, given the current state of affairs, it's likely that a court will find that COVID-19 is an unforeseeable event outside the control of either party. Whether COVID-19 makes it impossible for a celebration to fulfil their contractual obligations may be a distinct matter. The obligations cannot simply be harder to fulfil; they need to be impossible. The determination of these questions goes to be both fact and contract-specific.
The treatment of COVID-19 in an exceedingly global context, while not determinative, may provide some insight into whether obligations under a contract became impossible to perform. Global responses to the pandemic could even be particularly relevant for transnational or international agreements. In India, an Office Memorandum from the Ministry of Finance dated February 19, 2020 states that the distribution of the supply chain as results of the COVID-19 outbreak constitutes a cataclysm event. Specifically, the Memorandum clarifies that COVID-19 should be considered “a case of natural calamity”.
The concepts of act of God, frustration, fairness, and mitigation are complex and heavily obsessed with the facts at play. Whether or not a contract contains an act of God clause, it shouldn't create an entitlement to relief under such a clause within this circumstances. this will depend upon how the act of God clause is drafted and so the facts of each case. If there isn't any act of God clause during a contract, or if it doesn't apply within the context of COVID-19, a celebration may, in narrow circumstances, be entitled to relief under the common law concept of frustration.
Parties should also review the entire contract to know their rights, obligations, and remedies. As an example, parties should consider any clauses concerning termination, delay, and so the implications of a default under the contract.
- RIDHI BHATIA
(MANIPAL UNIVERSITY JAIPUR)