Effect of Covid 19 on Contracts

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“Consensus ad idem” this is a very popular and well known maxim being used in law, it means meeting of minds of the parties for the same thing in the same sense. This is one of the most important maxims one should be keeping in mind. This maxim is in a way a gist of what a contract is.

Contract can be said to be an agreement between two or more parties for the performance or non performance of a particular act for a valid consideration. Now from this many new questions are raised as to what is a valid consideration, when a contract can be said to finalized, when it can be said that there is a breach of contract and what are the remedies in case of a breach of a contract.

The consideration should be something that not only the parties regard but also the law can regard as having some value. It must be real and not illusory, whether adequate or not, Chidambara v. P.S.Renga [1]. And for a contract to be valid and executable it should have a valid consideration and when all the terms and conditions are finalized. A contract can be either oral or written but a written contract has more evidentiary value.

Today the world is in the middle of a pandemic. But once this gets over it is going to be a bloodbath as many or I would say most of the contractual obligations which were supposed to be fulfilled during this period are not met with. So all these contracts will now become breached and heavy penalties are being levied upon parties for breach of contracts. Many businesses will be destroyed due to breach of such contracts. Two concepts of the contractual law came to the rescue of many parties – frustration of contract and force majeure clause.

Frustration of contract

When an act or doing being a part of the obligation of either of the parties to the contract becomes impossible or illegal to be performed due to the factors unknown or unforeseeable to the parties then such contract is said to be frustrated. It is being provided in the Section 56 of the Indian Contract Act, 1872; it says that a contract becomes void, when it is impossible to be performed by the promisor. And furthermore when a contract becomes frustrated or void then comes into the picture Section 65 of the Indian Contract Act, 1872; it talks about the restoration of any profit or advantage being received by any of the parties to the contract before such frustration of contract. In simple language this section wants to put both the parties in the exact situation where they would have been if no such contract was ever executed in the first place i.e. restitution to the original position.

Force majeure clause

A contract is full of clauses and the parties are free to put anything they wish to be done or to be avoided as a clause till the time it is not prohibited by any prevailing law. A force majeure clause is basically a waiver of obligation on the happening of an event which is out of the hands of the parties and makes the contract impossible to be properly or completely executed. This clause usually includes all the conditions that will be considered to be a force majeure like act of god, new govt. policies or any other clause which they deem to be fit. It even talks about the consequences of a force majeure being coming into force. But a notice is to be provided to the other party for the discharge of obligation from them. If a party fails to give the notice which is compulsory by the contract then the force majeure cannot be invoked; Madura coats v. ARKAY energy Ltd. [2]

But this clause might not permanently waive off the obligation but merely provide for a small window for such majeure to be over and after that the obligation is to be fulfilled.

“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.” The tenants request for suspension of rent was also rejected but was allowed to be postponed owing to the lockdown. This was held by the Delhi High Court in Ramanand v. Dr Girish Soni [3].

In case if a contract does not provide for a force majeure clause then the parties may refer to Section 32 of the Indian Contract Act, 1872; that says that if a contract is contingent on the happening of an event which event becomes impossible, then the contract becomes void.

The main difference between these two is that frustration of a contract happens due an act which was not foreseeable by the parties and the force majeure clause relieves a party from the contractual obligations by the prefixed circumstances that were fixed by the parties themselves.

Conclusion

In the lieu of this lockdown we can expect a lot of firms and MNC to seek the measure of frustration of contract or force majeure. The appellate court should suo moto give some advisory as to how this situation has to be tackled otherwise a large number of cases would be seen in the court increasing the burden of the courts and then the court will have to try each and every case on an individual basis. The concepts may be of help to those who have are willing to perform their part of the obligation but are genuinely incapable of doing so and will be misused by those who were already looking for a way to defraud the other party and get out of their part of the obligation.

Bibliography

[1] AIR 1956 SC 193: (1966) 1 SCR 168
[2] Madras HC 2009
[3] RC.REV 447/2017

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