How will the courts respond to an anticipated deluge of disputes relating to frustration of contracts in a post-COVID-19 world? Ritin Rai provides an analysis

The law of frustration has developed by reconciling two competing contract law principles. Sanctity of contract, the principle that requires a party to comply with its contractual obligations, is one that underpins all contract law. The principle, though, is not absolute, and is to be reconciled with a competing principle that certain unforeseen events may occur during the performance of a contract that discharge a party from the performance of its contractual obligations.

The exercise of reconciling these two competing principles will be tested as courts are called upon to deal with the inevitable flood of cases where a party to a contract will assert the COVID-19 pandemic as an unforeseen event that has frustrated the contract and rendered performance impossible.

Reliance on force majeure clause

The relatively simpler cases will be ones where the contract in question contains a force majeure clause and provides for the consequence upon the occurrence of that force majeure event. Force majeure clauses typically contain inclusive (and not exhaustive) definitions of what constitutes a force majeure event, and courts also interpret such clauses liberally. Force majeure clauses typically contemplate the suspension of parties’ obligations during the occurrence of the event, and may even contemplate a right to terminate a contract if the event continues for a specified duration of time.

If the parties have agreed – expressly or impliedly – that a contract is to be performed (or not performed) upon the occurrence (or non-occurrence) of an event, sections 32 and 33 of the Indian Contract Act give effect to that agreement. These provisions provide that obligations that are contingent on the occurrence (or non-occurrence) of a contingent event cannot be enforced until that event has (or has not) occurred.

An office memorandum issued on 19 February 2020 by the Ministry of Finance is instructive as to how the government understands COVID-19 as a force majeure event. The office memorandum reads:

“A force majeure means extraordinary events or circumstance beyond human control … An FM clause in the contract frees both parties from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract …

A doubt has arisen if the disruption of the supply chains due to spread of coronavirus in China or any other country will be covered in the force majeure clause (FMC). In this regard, it is clarified that it should be considered as a case of natural calamity and an FMC may be invoked, wherever considered appropriate, following the due procedure as above.”

It bears repetition that these force majeure clauses are events within the contemplation of the parties at the time of contract formation, and principally suspend performance of the contract. When a party relies on such a clause, the courts undertake an exercise of contractual interpretation in determining whether the force majeure (or contingent) event has occurred, and then apply the contractual provisions to determine the consequence of the occurrence on the performance of obligations by the parties to the contract. Given the sheer scale and reach of this pandemic (and also that it has been recognized as such by the government), it is difficult to imagine cases where a party’s performance of its contractual obligations will not be suspended for the duration that the pandemic affects such performance.

disputes

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Ritin Rai is a senior advocate designated by the Supreme Court, and is based in New Delhi. His practice spans appearances in a wide range of commercial and regulatory disputes in the courts and tribunals situated in Delhi, and before arbitral tribunals in India and abroad. He is also a door tenant at 7 King’s Bench Walk, London.