WHO declared SARS-CoV-2 (COVID-19) as a pandemic on the 11th March 2020. India reported its first and foremost case on January 30, and in recent weeks, the nation has seen the exponential growth in the number of confirmed cases. This constant increase in the cases leads the ministry of health and family welfare of India to admit that India has entered into the “limited” community transmission phase.[i] Many people blamed the blatant globalisation the element cause of the transmission of this pandemic but the irony is that the business – the main pillar of the globalisation is the worst-hit sector. The shock felt by the international and domestic trade is relentless. The equilibrium of the input-output curve is disturbed as all types of contracts now will be delayed.
This article seeks to examine the fate of the various contracts – Whether the contracts would be delayed, cancelled or repudiated?
FORCE MAJEURE CLAUSE & DOCTRINE OF FRUSTRATION OF CONTRACT
The doctrine of frustration of contract is laid down under Section 56 of the Indian Contracts Act (ICA)[ii]. The section says that if a contract is made, and after the making of such contract its performance becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Frustration of contract denotes that the contract cannot be concluded, due to practical commercial impossibility to conclude it.[iii] Whenever such condition arises which makes the contract substantially impossible, the doctrine of frustration dissolves the contract.
When it comes to the contract between the parties, there are two cases to it firstly, when the force majeure clause is given in the contract itself. In this case, some specific events of force majeure are inserted in a contract and when any of those events occur the contract gets dissolved. There cannot be an implied force majeure events in a contract, thus the clause and the events must be specifically mentioned in the contract. So until and unless there is a specific mention of the pandemic as force majeure in a contract, frustration of contract cannot be claimed in this COVID – 19 situations. Secondly, when there is no mention of force majeure clause, in these cases force majeure can be invoked by the virtue of section 56 as described earlier. The concerned party can claim that the practical commercial impossibility in concluding the contract. In these cases, the happening of some specific event is not the pre-condition but the impact of such an event should be a practical commercial impossibility. COVID 19 till now has led to the lockdown of country, closure of any kind of transport which will eventually lead to a situation where delivery, construction, production, services etcetera will be impossible. Thus, by virtue of Section 56 COVID-19 does become a force majeure event and thus concerned party can claim the relief.
CROSS-BORDER CONTRACTS AND COVID-19
But after dealing with the contracts where the Indian Contract Act 1972 (ICA) governs, we need to look at the cross border cases where ICA is not the sole governing authority. Since COVID-19 is worldwide no flights, shipments and any form of transport are allowed from one country to another, which makes it impossible to complete certain contracts. International Chamber of Commerce (ICC) deals with the cases of cross border contracts. ICC has a separate force majeure clause named “ICC Force Majeure Clause 2003”.[iv] By this clause, ICC provides for four requisites to deal with force majeure cases. Firstly, that there must not be any agreement between the parties on the aspect of force majeure. If there is any agreement between the contracting parties on force majeure then only that clause will govern such cases. So if the contact between parties of two different countries has ‘Force Majeure Clause’ either impliedly or expressly covers the situation of the pandemic, concerned parties can claim relief in the present situation of COVID-19.
Secondly, as per Clause 1(a) of ICC Force Majeure Clause 2003 if a party is at failure because of an impediment beyond its reasonable control. Thirdly, Clause 1(b) provides a reasonable apprehension aspect that whether at the time of entering into a contract it can be predicted or not, which is subjective as it depends on the entering of contract. Lastly, clause 1(c) provides to look at whether the impediment could have been avoided or can overcome the impediment. Which also differs from case to case, but from the above we can conclude that non-application of domestic laws does not render the cross border contracts without remedy. Contracts affected by COVID-19 can claim relief under the ICC Force Majeure Clause 2003.
WARRANTY CONTRACTS: TIME-BASED CONTRACTS
We have to deal with an unimaginable aspect of these Force Majeure situation of COVID-19 i.e. warranty contracts. What makes warranty contracts worthy of separate mention here is the fact that a warranty is a promise by one party to another about the product or service which he claims to be true, and if comes out to be false he is liable to reimburse the loss. But in case of COVID-19 whether a promisor can escape its liability claiming force majeure? This question has to be answered in the cases where the warranty is the warranty of repair, replacements, and servicing of products. Such warranties are time-specific and sometimes the sole reason why a customer buys the product. So dissolving such contracts by the force majeure is not justified to the consumers but at the same time, the imposing liability on the seller will do no justice. Recently, some smartphones companies come to the front and extended the warranty of the product as the movement is completely restricted.[v] This type of assessment of the policies and pro-active steps are the most needed in this time of the crisis where the consumer rights are respected and company’s inability to perform its duty will not result in the failure.
COVID-19 is never seen before pandemic after 100 years. There has been a lot of change for a country like India in terms of 1947 independence and 1991 new economic policies. Not only India whole world have faced rapid changes in terms of globalization. This is a new event for world altogether and the application of old laws will be difficult for dealing with new situations. As firstly, dealing with government contracts in the time where we believe the sovereignty exception, force majeure prevents the sanctity of contract in such cases. Secondly, Section 56 of ICA[vi] provide for the impossibility of performance of contract which leads to frustration but does not provides what events, and will it cover the COVID-19 like events. This is a big question that has been answered and makes the current law suffice to deal with the current situation. COVID-19 is a widespread disease and it is affecting trade all over the world and hence ICC Force Majeure Clause will be sufficed to deal with cross border case. Moreover, warranty contracts are a totally different aspect to touch, where extension of warranty is the only possible way-out to maintain the balances of right.
[i] Sanchita Sharma, Limited community transmission has begun in India: Health ministry document, HindustanTimes, (March 31, 2020), available at https://www.hindustantimes.com/india-news/limited-community-transmission-has-begun-in-india-health-ministry-document/story-apAvK1AdxCQLM1gGp4FLCM.html
[ii] Indian Contract Act, 1872, Sec 56, Act No. 9 of 1872, (India).
[iii] Industrial Finance Corporation of India Ltd. v. The Cannanore Spinning & Weaving Mills Ltd. and Ors., (2002) 5 SCC 54.
[iv] ICC Publishing S.A. , ICC Force Majeure Clause 2003, International Chamber of Commerce (February 2003), available at https://iccwbo.org/content/uploads/sites/3/2017/02/ICC-Force-Majeure-Hardship-Clause.pdf
[v]ETTelecom, COVID-19: Oppo, Realme extend warranty support across devices, accessories, ETtelecom.com, (March 27, 2020. 12:22 PM) available at https://telecom.economictimes.indiatimes.com/news/covid-19-oppo-realme-extend-warranty-support-across-devices-accessories/74842612.
[vi] Supra Note 2.
ABOUT THE AUTHORS
Mridul Nagar is a sixth-semester student at National Law University, Jodhpur pursuing B.A. LLB (Hons.). He has a keen interest in Criminal law and Intellectual Property Rights.
Pradyumna Mishra is a sixth-semester student at National Law University, Jodhpur. The author takes an avid interest in Corporate Law. His interest in Contract Law is the inspiration behind this Article.
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