Impact of COVID-19 on Contracts

The unanticipated coronavirus epidemic has disrupted our personal, professional, financial, and commercial life to the point that best performance is unattainable at all levels. This article focuses on the influence of Covid-19 on contract performance under Indian law. We examine whether impossibility of performance under Indian law is entirely an issue of contract drafting, and if so, can businesses salvage their responsibilities and save their contracts using the lines given above from an English judgment.

We believe that by publishing this article, businesses will be able to take a closer look at their contracts and determine whether or not their performance can be excused without liability or compelled by law. We also shed light on the difficulty of performance in contracts regulated by the commonly adopted English law, and what elements English courts or tribunals might examine in instances like these.

Covid-2019 has either made it difficult or impossible to accomplish. It has made it difficult for some parties to fulfil their contractual responsibilities, while rendering others utterly incapable of doing so.

Section 56 of the Indian Contract Act, 1872, provides for the impossibility of performing a contract after it has been executed (ICA). Section 56 is found in Chapter IV of the ICA, which deals with contract performance and purports to address one type of circumstances in which contract performance is excused or dispensed with. It contains the following features:

Section 56 states that an agreement to do an impossible act is itself void.

A contract to do an act which turns out to be impossible after it has been made, by reason of some event which the promisor could not prevent, thus the contract becomes void.

Although, if the promisor makes a promise to the promisee that an impossible act is possible while knowing that the act will not be fulfilled, such promisor must make compensation to the promisee for the same promise.

The majority of contracts specifically state that the contract will be stopped or terminated if certain events occur. In such instances, the contract would be terminated according to the terms of the agreement. Although in English law these cases are treated as cases of frustration as detailed in Part B below, in India they would be dealt with under section 32 of the Indian Contract Act which deals with contingent contracts or similar other provisions contained in the Act. The following is Section 32 of the Indian Contract Act:

Contingent contracts to do or not to do anything if an uncertain future event happens, it cannot be enforced until the future event has happened, if the said future event becomes impossible, such a contract is termed as void.

There may be instances where an unforeseen incident renders performance impossible just for the duration of the event, allowing a window for resuming normal contractual responsibilities once the event has ended. In such cases, the concept of force majeure comes into play.

Force majeure arises from the contract in Indian law, as it does in English law. The purpose of this clause is to protect the performing party from the repercussions of a breach caused by an unforeseen incident. As a result, it is an exception for contract violation. The type and general terms of the contract, the circumstances that precede or follow it, and the facts of the case will all determine whether force majeure can be used to dismiss obligation for non-performance. In the event of force majeure, the party must choose whether or not to utilise the contract’s force majeure clause to relieve itself from contract performance.

The terms “impossibility” and “frustration” are frequently interchanged. It’s crucial to note, however, that the English common law notion of frustration differs from the statutory provision of supervening impossibility and illegality under Indian law. This has an impact on how contracts are read differently under English and Indian law. The party must prove frustration of contract in order to be excused from inability of performance under an English law regulated contract due to Covid-2019. Whether or not a contract allows for the use of the frustration doctrine is determined by legal theories developed by English courts. These include (a) insinuating terms into the contract; (b) empowering courts to assess what is just and reasonable in certain situations; and (c) engaging in contract construction based on the parties’ intentions.

The legislative provision under Section 56 of Indian law, on the other hand, establishes a positive rule of law on supervening inability or illegality that renders execution difficult in the practical, rather than literal sense. 6 When a court finds that the entire purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances that is so fundamental that it is regarded by law as striking at the heart of the contract as a whole, relief is granted on the basis of subsequent impossibility. The contract would then come to an end on its own.

As can be seen, the preceding considerations are highly fact- and contract-specific. Lord Denning J. noted in the first paragraph of this article that parties cannot be expected to have the โ€˜foresight of a Prophet, or his lawyer with the draughtsmanship of a Chalmer.’ In an appeal, however, Justice Viscount dismissed the role of courts in suggesting terms and what is just and reasonable into contracts, emphasising that the parties’ fate is entirely dependent on the contract’s design. Parties may not be justified in using drastic measures in times of crisis, such as the Covid-19 outbreak. As things stand, parties will have to examine their contracts very carefully.

In addition to contractual wording, understanding the company’s commercial operations and transactions in the relevant industry and sector, as well as the scope of contractual clauses dealing with impossibility of performance, will be crucial. The Material Adverse Change clause, for example, is a clause akin to force majeure that protects parties from unforeseen adverse changes in circumstances in mergers and acquisitions. When determining whether the Material Adverse Change clause can be used in a specific situation, such as the Covid-19, the aforementioned practical considerations in the context of mergers and acquisitions must be considered, such as the impact of Covid-19 on the transaction, the language of the Material Adverse Change clause and whether it provides a suitable remedy, and formal requirements.

Furthermore, court contract interpretation in unforeseen occurrence conflicts is rife with varied and complex methods, all of which are highly reliant on the nature of the contract and the wording of the provisions. To protect themselves on both sides of performance, allocate risk appropriately, establish a strategy for renegotiation if necessary, and preserve the integrity of contract, parties should seek legal assistance and conduct a complete legal examination of their contracts.

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