Pandemics And Lockdowns — Effects On Indian Contracts

Executive Summary

Do force majeure events, like the current lockdown and Covid-19 pandemic, legally excuse performance of contractual obligations in India? Based on past decisions of the Indian Supreme Court, the law in India can be summarised as follows.

• Under the Indian Contract Act, 1872 if a contract expressly or impliedly contains a force majeure clause that applies to the facts of the case at hand, the contract is regarded as a contingent contract (i.e., one that is triggered when an anticipated contingent event occurs).1

• Therefore, if the contract has an express or implied force majeure clause, and the force majeure event occurs (i.e., the anticipated contingent event occurs), the provisions of the force majeure clause must be applied to determine the effect of the force majeure event on contract performance.

• On the other hand, if the contract does not contain such a force majeure clause applicable to the facts of the case, one must apply a different set of provisions in the Contract Act, i.e., those dealing with impossibility of performance and frustration of contracts due to extraneous, uncontrollable events. 2 Under these provisions, performance will only be excused if the force majeure event has rendered performance either literally impossible, or impracticable and useless,from the point of view of the object and purpose of the contract—i.e., the event should dislodge the fundamental basis of the contract (not just make performance more onerous).

Background

We are now in the midst of what economists are calling the “Great Lockdown.” The Covid-19 pandemic has led many countries to close virtually all businesses and establishments (other than those providing essential goods or services), or to impose stringent restrictions on travel, commerce and business. In India too, a comprehensive, 21-day lockdown was announced with effect from March 25, 2020, and recent news reports suggest the lockdown may be extended for longer periods in parts of the country.

The lockdown and pandemic are affecting almost every business. Contracts are becoming harder to perform; in some cases they have become impossible to perform, or entirely impracticable. Do such events then legally excuse the performance of contractual obligations? This note reviews Indian law on how events like the lockdown and pandemic might affect the performance of contractual obligations.

What Legal Principles Apply

Events like a lockdown are brought about by a ‘change in law’, and pandemics, like plagues and other epidemics, are often referred to as an ‘act of God’. Such events, which arise after a contract has been entered into, which affect the performance of contractual obligations, and over which the contracting parties have no reasonable control are described as ‘force majeure’ events. (They are often, though not always, dealt with under a ‘force majeure’ clause in commercial contracts).

Under Indian law, “Force majeure is governed by the Indian Contract Act, 1872.”3

(As India is a common law country, there is also often a tendency to also look at English judgments dealing with force majeure events. Such an exercise is of limited value. The Supreme Court of India has held that “to the extent the Indian Contract Act, deals with a particular subject, it is exhaustive upon the same, and it is not permissible to import the principles of English law de hors [i.e., outside the scope of] these statutory provisions.”4 English law judgments on the subject are of limited persuasive value for courts in India.)

Therefore, in order to identify the legal principles applicable to the effect of force majeure events on contracts in India, one must primarily focus on the provisions of the Contract Act.

In this regard, the Supreme Court of India has held that if the force majeure event, “is relatable to an express or implied clause in a contract,” it is governed by provisions dealing with contingent contracts (set out in section 32 of the Contract Act). However, insofar as a force majeure event occurs outside the scope of the contract, “it is dealt with by a rule of positive law under section 56 of the Contract Act,” which concerns the treatment of agreements to do impossible acts. 5

In other words, the general principles applicable under Indian law may be summarised as follows.

If the contract expressly or impliedly has a force majeure clause applicable to the case at hand, then that clause must be applied to determine the effect of the force majeure event on performance of the contract. In fact, as the Indian Supreme Court has noted “when a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, section 56 can have no application.”6 On the other hand, if the force majeure event is outside the scope of the contract then courts in India will determine whether the contract is affected by the law set out in section 56 of the Contract Act. The following paragraphs discuss the application of these general principles in practice.

Applying the Legal Principles

Force Majeure Event Covered by Contract

As mentioned above, if the contract expressly or impliedly contains a force majeure clause that applies, then the provisions of the contract will determine the effect of the force majeure event. Where such a clause is contained in the contract, Indian law takes the view that the parties have previously anticipated the possibility of extraneous intervening events occurring that could affect performance, and have agreed on the effect of such events on performance. The law will then give effect to this intention expressed by the parties in the contract, as per its terms. Therefore, in such instances, there is no general rule or principle of law that excuses performance. (Nor would the views of one of the parties to a contract, regarding the nature of the event, determine the effect of the event—even if that contracting party were the Government of India.7)

Rather,the terms of the contract determine the effect of the event. Since different contracts have different types of force majeure clauses, the effect of a force majeure event would vary across these different contracts. For example, it is possible that the terms of a contract allow performance to be suspended or waived if a force majeure event occurs; or the contract might require a party to take certain specific actions if such an event were to occur; or the contract may require the parties to initially continue as before when such event occurs, but then allow either party to terminate the contract if the event continues unabated beyond a specified period of time. These are just examples of various outcomes possible. In each case, it would be the specifics of the underlying contract that would determine the effect of the force majeure event. 8

Force Majeure Event Not Covered by Contract Provisions

On the other hand, in instances where the contract does not expressly or impliedly contain a force majeure clause that applies to the facts of the case, then the force majeure event will be regarded as being outside the scope of the contract and outside the contemplation of the parties.

In such instances, a different set of provisions, contained in section 56 of the Contract Act, must be applied to determine whether the contract is affected as a result of the force majeure event.

Section 56 of the Contract Act identifies (in relevant part) specific situations where a contract becomes void even after it has been entered into by the parties. If a contract becomes void under section 56, performance of the contract would be excused once it is void. But in order for the contract to become void under section 56, the following conditions (which are set out in the statutory provision) would need to be met: the performance of the contract must become “impossible” or become “unlawful” by reason of an event that the person obliged to perform the contract could not prevent.

In this context, the Indian Supreme Court has held that the impossibility referred to in section 56 is not limited to literal or physical impossibility. Under section 56, the “performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do.”9 In other words, section 56 doesn’t just cover literal impossibility but also practical impossibility that upsets the very foundation of the agreement between the parties.

It should be emphasised that section 56 does not affect a contract where the performance of obligations, as a result of the force majeure event, has become more onerous than was previously anticipated by the parties. “There is no general liberty reserved to the courts to absolve a party from liability to perform his part of the contract, merely because on account of an uncontemplated turn of events, the performance of the contract may become more onerous.”10 Rather, for the contract to become void under section 56, the force majeure event must totally upset the very foundation upon which the parties rested their bargain.

Therefore, in cases where no force majeure clause is applicable to the facts, performance may be excused as a result of a force majeure event, if such event has rendered performance either literally impossible, or impracticable and useless from the point of view of the object and purpose which the parties had in view, and the event has also dislodged the fundamental basis of the contract (not just made performance more onerous).

1 Contingent contracts are dealt with in Part III of the Contract Act, and in section 32 in particular.

2 Impossibility of performance and frustration of contracts is dealt with in section 56 of the Contract Act.

3 Energy Watchdog & Ors v. Central Electricity Regulatory Commission & Ors, (2017) 14 SCC 80, at para 34.

4 Satyabrata Ghose v. Mugneeram Bangur and Company & Ors, AIR 1954 SC 44, at para 10.

5 Energy Watchdog (supra note 3, at para 34). See also Satyabrata Ghose (supra note 4, reiterating this position and holding, at para 10, that “impossibility and frustration are often used as interchangeable expressions”).

6 See Energy Watchdog (supra note 3, at para 48, following Satyabrata Ghose, supra note 4).

7 In the case of the pandemic, different ministries of the Government of India have taken contrary views. Earlier this year, the Procurement Policy Division in the Ministry of Finance issued an office memorandum (No F.18/4/2020-PPD, dated February 19, 2020) to ministries and departments stating that the disruption of supply chains due to the pandemic should be considered a natural calamity that would allow force majeure clauses to be invoked. A month later, the Ministry of Labour and Employment, issued an advisory (DO No. M11011/08/2020-Media, dated March 20, 2020) advising employers of public and private establishments not to terminate their employees or reduce wages as a result of the pandemic. The Labour Ministry’s advisory also required that if workers take leave they should be deemed to be on duty without consequential deduction in wages, and that if a place of employment is made non-operational due to Covid-19, the employees would be deemed to be on duty.

8 Promises under Indian law may be express or implied, and force majeure clauses are typically drafted in a manner that allows events not expressly called out as force majeure events to also be included within the scope of the force majeure clause. This said, the general approach is that force majeure clauses “are to be narrowly construed.” Energy Watchdog (supra note 3, at para 45).

9 Satyabrata Ghose, supra note 4, at para 9.

10 Alopi Parshad and Sons Ltd v. Union of India, AIR 1960 SC 588, at para 22. See also Naihati Jute Mills Ltd v. Khyaliram Jagannath, AIR 1968 SC 522, at para 10 (reiterating that the courts “have no general power to absolve a party from the performance of his part of the contract merely because its performance has become onerous on account of an unforeseen turn of events), and Energy Watchdog, supra note 3, at para 40 (holding that “a more onerous method of performance by itself would not amount to a frustrating event”).

Contributing Advisors