Jun 1, 2020

Performance of Contracts in Covid Era – Predicament and Protection!

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One may argue that Pandemic has not affected businesses alike, and there can be reasonable differences between risk exposure of businesses. But, the modern businesses are so closely inter-locked (on backward, forward and all other sides), that risk (or at least its trepidation) has become systemic and structural phenomenon across industry.

With the slowdown of commercial operations of businesses (be it, manufacturing, trading or service), drying resources, in form of capital and/or man-power, all over the Country and looming uncertainty on arrival of normality, a major concern has risen on the performance of contracts entered among the businesses.

It is not merely a shot in the dark, but the ominous pandemic has, in point of fact, made (and haplessly! ‘would make’) many business default (temporarily or even absolutely) in performing contracts. There has already been a marked trend of increase in contractual disputes and it is almost certain that plenty more would arise in the near future.

While the defaults or delays might be ascribed to a broad-set of common problems arising before businesses, on account of Pandemic, but the facts and circumstances would be different case to case and have their own complexities. Amid this time of tumult; along-side the efforts of re-negotiation on contracts and amiable settlement, businesses may also evaluate the following time-honored triad of doctrines for respite —

  1. Doctrine of Essence of Time;
  2. Doctrine of Force Majeure; and
  3. Doctrine of Frustration.

This piece attempts to decrypt (if not explicate) the triad of doctrines and their applicability.

Doctrine of Essence of Time

‘Time is the essence’ is a term in contract law which indicates that the parties to the agreement must perform it by the time to which they have agreed.

Section 55 of the Indian Contract Act (‘ICA’) provides that when a party to a contract promises to do certain acts on a stipulated time but fails to do so, then the contract becomes voidable on the option of the other party, if the intention of the parties was that ‘Time should be of Essence’. The intention can be ascertained from—

  1. express words used in the contract;
  2. nature of the property which forms the subject matter of the contract;
  3. nature of the contract; and
  4. surrounding circumstances.

It is settled law that the fixation of the period within which the contract has to be performed does not per se make the stipulation as to time, the essence of the contract, as held by Supreme Court in case of Govind Prasad Chaturvedi v. Hari Dutt Shastri.1 In fact in certain contracts, for instance, contract relating to sale/purchase of immovable property, the general presumption (and not an absolute proposition) is that time is not of essence.    

In nutshell, whether time is of essence to a contract is a question of fact, and the real test is of ‘Intention of the Parties’. It depends upon facts and circumstances of each case, as has been held in the case of Swarnam Ramchandram v. Aravacode Chakungal Jayapalan.2 The salutary test of intention is one of the time-tested principles in the dominion of law of contracts, and has been followed in M/s Citadel Fine Pharmaceuticals vs M/s Ramaniyam Real Estates3.Citadel’s case ranks amongst cases recognizing exception to the presumption in immovable property contracts.

Having discussed the above-said and before adverting to the next doctrine, it would be of pertinence to deal with following question that might still arise in minds—

  1. What if the time is not made essence of a contract expressly?
  2. The answer to question is two-pronged, —

    1. an express intention to make the time essence of a contract goes long way to establish it. But, the courts have been conscious that the intention of parties to make the time essence of a contract may also be implied from the nature, structure of contract and circumstances surrounding it.
    2. there have been cases where no express stipulation w.r.t essence of time was made at the time of entering into contract, but later on a notice was given by either party to make time of the essence, and in such cases the courts have recognized time being of essence, upon—
      1. examination of the facts & circumstances and real intention behind giving such notice;
      2. examination of readiness and willingness of the notice giving party for completion of contract;
      3. the nature and extent of default made by the other party.
Doctrine of Force Majeure vis-à-vis Doctrine of Frustration

Force Majeure is not defined under ICA yet governed by it. To start with, let’s take the dictionary meaning of ‘Force Majeure’, it means an event or effect that can be neither anticipated nor controlled.

Wherever, a reference is made to the term ‘Force Majeure’, the intention is to save the performing party from the consequences of anything over which he has no control. However, as simple as its exposition, is not its application. Even Courts have remarked that the term has no consistent or definite meaning.

Now coming to how Force Majeure is governed under ICA, note that the event (Force Majeure) if relatable to a clause stipulated expressly or impliedly in the contract, is governed by provisions of Section 32 of ICA, as discussed in Part – A, hereinafter. However, if the event is outside the scope of the contract, it is dealt with under Section 56 of ICA, as discussed in Part -B, later hereinafter.

Irrespective of the governing provision, the applicability of Force Majeure and/or doctrine of frustration would not automatically exterminate the contract for all purposes, it depends on the fact and framework of each case.

Part – A: Force Majeure and Section 32 of ICA

Applicability of Force Majeure under Section 32 of ICA, w.r.t performance of contracts, would depend on contingent nature of contract, either stipulated expressly or impliedly i.e. can be gathered from the intention of contracting parties. As held by Supreme Court in the celebrated decision of Satyabrata Ghose v. Mugneeram Bangur & Co.4 if a contract provides (whether expressly or impliedly) for events or contains covenants, according to which performance would stand discharged under certain circumstances, such discharge would take place under the contract itself.

Simply put, the doctrine of frustration, under Section 32 of ICA, is applied on the ground that the parties themselves agreed to an expressed or implied term which operated to release them from the performance of the contract.

The principles laid down in seminal case of Satyabrata Ghose (Supra) has been recently applied with full force by the Supreme court in the matter of National Agricultural Cooperative Marketing Federation of India Vs. Alimenta S.A. 5

Having discussed about the concept of Force Majeure in context of Section 32 of ICA, it is important to note that, as far as the pandemic is concerned, the provisions of Section 32 of ICA might not come to respite in those cases, where specific Force Majeure scenarios are not envisaged or such clause is designed in a catch-all fashion. Because, Courts as a matter of caution, construe Force Majeure clauses narrowly.

Part – B: Force Majeure and Section 56 of ICA

If the Force Majeure event is not attracted to the facts of a case i.e. if it is not covered by Section 32 (which might very well be the situation in a fairly large number of cases), it is dealt with by a rule of positive law under Section 56 of ICA on the ground of subsequent impossibility.

In simple words, Section 56 comes into play, when the whole purpose or basis of a contract is frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement.

The application of Section 56 of ICA, would not depend on the intention of parties, but rather on a host of grounds which make the performance impossible. The ‘impossibility’, being talked under provision is not only confined to physical impossibilities. Instead, the doctrine of frustration comes into play —

  1. Where the performance is physically cut off or impossible; and
  2. Where the object that parties had has failed.

Keeping the above-said two situations in mind, it would be instructive to take note of a few grounds for application of doctrine of frustration—

  1. Destruction of subject matter – the doctrine of frustration applies with full force where the actual and specific subject matter of the contract has ceased to exist.
  2. For example, In the celebrated case of Taylor Vs. Caldwell6 the defendants had agreed to let the plaintiffs the use of their music hall between certain dates for the purpose of holding a concert there. But before the first day on which a concert was to be given the hall was destroyed by fire without fault of either party.

    It was held that the contract was not absolute as its performance depended upon the continued existence of hall. Because the hall was destroyed without fault of the defendants, the subject matter was destroyed, and parties were not made liable.

    In Indian paradigm also, the judgement in V.L. Narasu Vs. P.S. Iyer7 recognized the ground of destruction of subject matter.

  3. Unusual change of circumstances – A contract will frustrate where circumstances arise which make the performance of the contract impossible in the manner and at the time contemplated. This happens when the change of circumstances has affected the performance of the contract to such an extent as to make it virtually impossible or extremely difficult or hazardous.
  4. In case of Tarapore & Co. Vs Cochin Shipyard Limited8 Supreme Court observed that law has to adapt itself to the economic changes. Whereas marginal price rise may be ignored, but if prices escalate out of all proportion that it can’t be said that parties reasonably expected it or even contemplated it and it makes the performance so crushing to a party as to border virtually on impossibility, the law would have to offer relief to the party in terms of price revision.

    In 2017, in the case of Energy Watchdog v. Central Electricity Regulatory Commission9, the Supreme Court refused to apply the doctrine of frustration on the facts before it, in which unusual change of circumstances was pleaded, by noting that—

    mere incidence of expense or delay or onerousness is not sufficient; and that here has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances”.

    In Energy Watchdog’s case (Supra) the Court emphasized that in situation where unusual change of circumstances is an argument advanced by parties, the test of “radically different” would be important.

  5. Non-occurrence of contemplated event – Even if the performance of a contract remains possible, non-occurrence of an event contemplated by parties, as the reason for the contract, would destroy the value of performance. But for this, it is incumbent, that the happening of contemplated event must be the foundation of contract. In Krell Vs Henry10a contract to hire a room to view a proposed coronation procession was held to have frustrated when the proposed procession was postponed.
  6. Illness or death of a party – A party to contract is excused from performance if it depends upon existence of a person i.e. if a person perishes or becomes too ill. In Robinson v. Davison L.R.11 there was a contract between the Plaintiff and the Defendant’s wife (as the agent of her husband) that she should play the piano at a concert to be given by the Plaintiff on a specified day. On the day in question she was unable to perform through illness. The contract did not contain any term as to what was to be done in case of her being too ill to perform. In an action against the Defendant for breach of contract, it was held that wife’s illness and the consequent incapacity excused her and that the contract was in its nature not absolute but impliedly conditional upon her being well enough to perform.
  7. Government or legislative intervention – A contract will be frustrated if the legislative or governmental intervention has directly uprooted the foundation of the contract or makes its performance illegal.
  8. In Man Singh Vs. Khazan Singh,12 performance under a contract for the sale of trees of a forest was discharged when the State of Rajasthan outlawed the cutting of trees in the area.

    However, note that an intervention of temporary nature which does not displace the fundamental basis of contract will not result into frustration. A good example of this could be found in the formative case of Satyabrata Ghose (Supra), where war condition was known to the parties while entering into the contract such that they were aware of the possible difficulty in the performance of the contract, in such circumstances, it was held by Supreme Court that the orders of the State in requisitioning the land were of temporary nature and did not affect the root of the contract, especially when no stipulation as to time was provided in the agreement such that the work was to be completed within a reasonable time.  The Court observed as follows—

    “A contract is not frustrated merely because the circumstances in which it was made are altered. The Courts have no general power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events.”

    In a nutshell, the effect of an administrative intervention has to be viewed in the light of the terms of the contract and a host of other factors surrounding it. But, where such intervention makes the performance unlawful the courts will have no choice but to put an end to the contract, See Supreme Court’s judgment in Boothalinga Agencies Vs. VTC Poriaswami Nadar.13

    Recapitulating the foregoing, it can be safely said that the ‘impossibility’ of performance has to be severe and permanent. Mere commercial inability would not qualify as legal frustration.

Contractual Disputes in COVID vis-à-vis Doctrine of Frustration and Force Majeure

Now, we shall take look at occurrences of different contractual disputes during the COVID Era vis-a-vis applicability of doctrine of frustration and Force majeure.

  1. Tuition Fees: There exists a contract between a school and parents for consideration of service of education and tuition respectively flowing from both the parties. In the case of Naresh Kumar v Director of Education,14 it was pled by Petitioner to exempt the parents from paying tuition fees citing the economic difficulties arising due to COVID-19 lockdown. The Court however rejected the plea by stating that online education is being provided to the students and the same is being availed by them. Also, the School has to pay salaries to the teachers and staffs who are providing the service. The Court observed thus—
  2. While there can be no cavil, to the proposition that the requirement of payment of school fees would, necessarily, become enforceable only where the fees are payable, i.e., where the parents are physically in a position to pay the school fees, we cannot agree that, during the period of lockdown, or during the period when online education is being provided by the schools, and availed of, by students, tuition fees should be exempted. So long as schools are disseminating education online, they are certainly entitled to charge tuition fees.”

  3. Letters of Credit: In Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp & Ors15., Bombay High Court adjudicated upon a contractual dispute to determine whether the COVID-19 outbreak constitutes a force majeure event. The petitioner requested the court to prevent encashment of letters of credit given to its Korean-based suppliers for non-receipt of goods as a result of the lockdown in India. The Court in the facts before it, held that—
  4. The lockdown declared in the Nation would be for a limited period and the lockdown cannot come to the rescue of the Petitioners so as to relieve them from contractual obligations of making payments.”

  5. Bank Guarantees: In the case of Indrajit Power Pvt. Ltd. v UOI,16 Delhi High Court dismissed the plea of Indrajit Power to refrain Central Govt from invoking bank guarantee. The Court dismissed the petition on the ground that one extension for 12 months had already been granted to the Petitioner and the decision to invoke the bank guarantee was neither illegal nor discriminatory. On April 20, 2020, Delhi High Court in the case of Halliburton Offshore Services Inc. v Vedanta Limited and Anr, 17 granted interim relief to Halliburton Offshore Services Inc., an energy company, restraining Vedanta Ltd. from encashing bank guarantees secured for the performance of a contract to drill petroleum wells. The court held that “the countrywide lockdown, which came into place on 24th March, 2020 was, in my opinion, prima facie in the nature of force majeure”. Since the order was passed at an interim stage without going into merits, the outcome of the dispute may still change.
  6. Factoring facility: While prima facie observing that Factoring Facility offered by banks was at par with loans and advances and would therefore be covered under the ambit of RBI Circulars for benefit of borrowers during COVID-19, the Delhi High Court in the case of Eastman Auto & Power v RBI 18 restrained banks from taking any coercive action against a corporate entity for default in payment for the bank’s Factoring Facility.
  7. Airline Tickets: A three judge bench of the Supreme Court on 27.04.2020 issued a notice to the Ministry of Civil Aviation on a petition by an NGO named Pravasi Legal cell stating that airlines operating both domestic and international flights in India are violating the Ministry order, which requires that they pay the full refund for tickets booked for air travel during the COVID-19 lockdown.
  8. Rent: Recently, Delhi High Court in the case of Ramanand and Ors. V Dr. Girish Soni and Anr. 19 considered provisions of S. 108(B)(e) and S.108 (B)(1) of Transfer of Property Act, 1882 from the point of view of Force Majeure and held that tenants cannot invoke Force Majeure and claim suspension of rent owing to the lockdown, while they are in the occupancy of the rented premises. However, providing some relief to the tenants, the Court observed that some postponement or relaxation in the schedule of payment of rent can be granted owing to the lockdown and on a case to case basis. The Court observed, “The fundamental principle would be that if the contract contains a clause providing for some sort of waiver or suspension of rent, only then the tenant could claim the same. The force majeure clause in the contract could also be a contingency under Section 32 which may allow the tenant to claim that the contract has become void and surrender the premises. However, if the tenant wishes to retain the premises and there is no clause giving any respite to the tenant, the rent or the monthly charges would be payable.”
Conclusion

The COVID-19 pandemic and the consequential steps undertaken by governments worldwide, such as the lockdowns and movement restrictions, have already had a significant economic impact.

In such a scenario, it is expected (reasonably), that parties across the globe would seek to perpetuate i.e. extend, (or) discharge the contractual obligations, they would have otherwise performed, inter-alia, by pleading the doctrine of essence of time; doctrine of frustration; doctrine of Force Majeure. Summing up, it is however, important to note that—

  1. The contract won’t become voidable per se because a time of essence clause is present and performance is delayed. Lockdown is a supervening event, impairing the ordinary functioning of human life and many associated aspects, including trade and commerce. The relief would depend of facts of the case, intention of the contracting parties and the nature of delay and its impact.
  2. Protection under Force Majeure Clause and Doctrine of Frustration would not come to every case as a rule. Note that neither the pandemic situation nor, these doctrines could be said to be a “one size fits all”. It is important to note that the parties won’t be able to shrug away their contractual liability just by pleading the above-mentioned doctrines, courts have tendency to ask parties to honor their contractual commitments, as far as possible, regardless of delay in performance or supervening events. If a party wants a court to interfere, it would have to show in facts and framework of its case that—
    1. There exist such supervening events/circumstances for which Force Majeure remedy is provided for in the contract;
    2. There has been substantial damage to the essence of the contract;
    3. The contract cannot be performed owing to the supervening beyond control events;
    4. Even if it is physically possible to perform the contract after the lockdown, the same would be useless;
    5. The failure of performance of the contract was not because of lack of commercial viability, but rather on account of other factors that followed which actually gave rise to their non-performance despite all attempts to find alternate means of performance.

1 (1977) 2 SCC 539
2 (2004) 8 SCC 689
3 Civil Appeal no. 6437 of 2011 decided on August 08, 2011
4 1954 SCR 310
5 Civil Appeal No.667 OF 2012, decided on April 22, 2020
6 (1863) 3 B&S 826: 122 ER 309
7 ILR 1953 Mad 831
8 (1984) 2 SCC 680
9 2017 (4) SCALE 580
10 (1903) AII ER Rep 20
11 (1871) 6 Exc. 269
12 AIR 1961 Raj 277
13 AIR 1969 SC 110
14 W.P.(C) 2993/2020
15 Commercial Arbitration Petition (L) Nos. 404, 405, 406 of 2020
16 W.P. (C) 2957/2020
17 Supra note 3
18 W.P.(C) 2997/2020
19 RC. REV. 447/2017; Decided on 21st May 2020

AUTHORED BY

Mr. Ankit Singhi

Partner & Head - Company Law Advisory

ACS, LLB

ankit@indiacp.com

+91 11 40622208

Mr. Ravi Prakash

Associate - Corporate Litigation Representations

Advocate, Delhi High Court

ravi@indiacp.com

9818598604

Request a Call
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