Breach And Non-performance Of Contracts

A breach of contract occurs when either of the parties to a contract refuses or fails to comply with conditions accepted in the agreement.

Section 37 of the Indian Contract Act, 1872 makes it mandatory on part of the parties to obey the terms of the agreement.When a legally binding contract is breached by either of the parties, a ‘right to sue’ vests with the other party to claim damages or compensations from the party at fault.

This section also provides for two exceptions:

1.When the contract has been already performed,

2.When the person is excused under the law (defences).

Defences For Breach Of Contract

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1. Force Majeure

Any Act of God or unforeseen circumstances that prevent either of the parties to perform and honour obligations of the contract is a defence to breach or non-performance.

Illustration: ‘A’ comes into a contract with ‘B’ to build a house at a specified location but because of a landslide in that area, it is now impossible to build the house. Here, ‘B’ cannot claim damages or compensation from’ because of the defence of the ‘Act of God’.

2. The Frustration Of Contract

A contract, whereby subsequent of its formation, the performance becomes impossible or unlawful due to other circumstances unforeseeable by both of the parties.

Illustration: ‘A’ comes into a contract with ‘B’ to paint the house of ‘B’. Before he could render his services, the municipal board demolished his house. The contract is said to become frustrated.

3. Justification

When a party at fault can justify the reasons for the breach or non-performance of the contract.

Illustration: ‘A’ comes into a contract with ‘B’ to provide a thousand quintal of wheat but before the performance, the grains became bad for consumption. Here, ‘A’ justified his non-performance by stating that the grains agreed to be delivered were not fit for the performance and therefore such non-performance occurred.

Three tests for Force Majeure

1. Externality

If it was not in the hand of the parties to control such an event.

Example: Landslides, Floods cannot be controlled by humans.

2. Unpredictability

There was little anticipation for the happening of such an event and there is an element of shock and surprise that it occurred.

Example: Weather changes cannot be predicted, War with a nation cannot be predicted, Emergency cannot be predicted.

3. Irresistibility

The parties cannot, at any cost avoid such circumstances.

Example: If due to war, the government has imposed a curfew, all the parties cannot avoid it but to follow the orders.

Impact Of Force Majeure Clauses

1. Most of the commercial contracts usually incorporate a force majeure clause. A force majeure clause must be expressed. It prevents the parties from the risk of breaching the contract when an unforeseeable event occurs.

2. An express provision that identifies pandemics, epidemics or outbreaks as force majeure events shall help the parties to trigger the force majeure clause more efficiently.

3. However, most contracts include Act of God. The impact of coronavirus can be construed in both ways; the virus by itself as a natural phenomenon and measures such as social isolation, curfew and quarantine as government actions.

BURDEN OF PROOF

The party claiming under a force majeure clause should bear the burden to prove that his performance of the contract is absolutely hindered due to the coronavirus. The party should show that he doesn’t have any alternate means to fulfil his obligation. A mere increase in costs for meeting the contractual obligation may not help a party to activate the force majeure provisions laid down in the agreement.

PROCEDURE TO INVOKE FMC

1. The relying party should make a notice to the other party before invoking the force majeure provisions.

2. All the necessary information regarding the force majeure claim including potential consequences and the time by which the force majeure event is expected to conclude should be conveyed. Such communications should be properly documented.

3. The other party should make sure that all the notice requirements are met. The party may also check if the relying party has any potential alternative means to tackle the unforeseeable circumstances created by the virus.

4. A contract may have conditions by which a prolonged continuation of a force majeure event confers a party the right to terminate the agreement with a written notice to the other party. Some contracts may also provide for holding the obligations until the end of the force majeure event.

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This Office Memorandum applies to government procurements. It states that the parties invoking the force majeure clause is not free from the performance of the contract.

Rather the performance of the contract is suspended for the force Majeure period. The party relying on the clause should serve a notice to the other party and cannot make any claim ex- post-facto.

The memorandum also states that if the performance of the contract is delayed for a term exceeding 90 days, either party can terminate the agreement by written notice, without any financial impact on either party to the contract.

However, this may not be applicable to various private contracts.

Force Majeure Under ICA & Contracts With No FMC

Under ICA, the term ‘Force Majeure’ is not expressly and properly defined but its essence can be inferred from Sec 32 and Sec 56 of the Act.

Section 32 defines ‘contingent contracts’, in which enforceability of a contract depends on happening or not happening of an event. If in the future, the happening of an event becomes ‘impossible’, the contract is said to be ‘void’.

Section 56, defines the principle of the frustration of contract under which subsequent impossibility of happening of an event exempts a person from his contractual obligations.

In India, since the force majeure is not expressly defined anywhere, the defence can only be taken, when parties have incorporated this clause in their agreement. Since the legislation expressly defines the frustration of contract under Sec 56 of ICA, the principle of force majeure is loosely recognized in India perse.

Sec – 56 says that:-

1.An agreement to an act impossible in itself is void.

2.A Contract to do an act which, after the contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when act becomes impossible or unlawful.

Illustration: A contracts to take in cargo for B at a foreign port. A’s Government afterwards declare war against country in which the port is situated. The contract becomes void when war is declared.

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The frustration of the contract defined under Section 56 of ICA is a minor version of force majeure. If the principle of force majeure is not available, the defence can be claimed under the principle of the frustration of the contract. This principle is based on the Latin maxim, ‘les non cogitadimpossibilia’ meaning, a man cannot be compelled by law to do what he cannot possibly perform.

There are three necessary conditions to claim this defence:

1. A contract must be existing between two parties which is valid and enforceable.

2. The contract must be executed partially, meaning there is some part of the contract which is yet to be performed.

3. The contract becomes impossible to perform after it is enteredinto.

While dealing with the present scenario of COVID-19, this principle cannot be considered as a good defence as firstly, this defence is claimed under the circumstance where the subject matter of the contract is dissolved because of the subsequent impossibility. Secondly, the defence is only available when partially, the contract has been executed.

Therefore, between the defence of Force Majeure and Frustration of Contract, Force majeure is comparatively a better defence because of its wider application and interpretation.

Justification

Justification is a recognized defence under tort law but is not directly recognized under the law of contracts.

Since the Law of Contracts has evolved from case to case basis under the common law jurisprudence, therefore, justification can also be considered as a good defence under contract law.

‘Justification’ of any act or omission is to provide reasons for performance or non-performance. This defence is always available on the grounds of justice, equity, and good conscience.

In the present scenario of coronavirus, the non-performance or breach of contract can be justified on the grounds of

(1) The government declaring lockdown, which expressly prohibited the functioning of every kind of business because of health safety, except the businesses dealing with essential commodities.

(2) When the entire country is under lockdown, it is impossible to perform the terms of a contract efficiently and effectively. Therefore, on this ground defence for non-performance can be claimed.

It is on the court to analyze and adjudge the justification provided, circumstances present, and the gravity of the matter from case to case basis.

Does A COVID-19 Outbreak Constitute An ‘Act of God’ ?

The words which are used in defining every clause of the ‘Act of God’ like ‘unusual’, ‘unforeseeable’, ‘grave and sudden’, ‘extraordinary’, etc try to describe the general requirements which a circumstance or phenomenon has to fulfill to qualify as an act of God. It must be unusual or extraordinary that it is very hard to foresee such a turn of events.

It shall be determined by the court in the near future, whether this virus qualifies as an Act of God fulfilling the appropriate requirements to be considered as one or not.

What adds gravity to its discourse is that the WHO’s Directed General declared it as pandemic and stated in his speech that, “We are in uncharted territory. We have never before seen arespiratory pathogen that is capable of community transmission, but which can also be contained with the right measure.”

This statement will somewhat add gravity to consider this virus as an Act of God.

Current Legal Status Of The Contracts

1. The contracts have not become impossible or unlawful to perform. The word ‘unlawful’ means something which lacks the sanctioning of the State & ‘impossible’ means not able to be done, to occur or exist.

2. They have become impossible to execute because of the on going lockdowns and unlawful because repercussions will be there if one does not obey the State’s decision of lockdown.

3. In light of the above paragraph, these contracts should be considered as ‘difficult’ to perform, not ‘impossible’ or ‘unlawful’ to perform. Under the current circumstance when in a state almost every other activity is halted and it is difficult to trade even essential commodities, these contracts should be considered as lapsed for a subsequent duration of time, until the conditions become normal again and the businesses resume their function.

E-contracts

1. Adoption of techniques such as work from home and video conferencing can lead to a surge in e-contracts.As per section 10A of the Information Technology Act, 2000, e-contracts are valid and enforceable. They can be entered into through communication mediums like email, fax or other internet mediums.

2. Electronic documents are also admissible as evidence before the courts as per section 65A of the Indian Evidence Act.

3. Given the present world scenario, travel restrictions are imposed in various parts of the world. Parties to a contract can rely on e-contracts for making urgent contractual arrangements. Electronic signatures should be reliable and the parties should prove that the parties agree to be legally bound by the contract.

4. However e-contracts do not apply to negotiable instruments, wills, trust deeds, power of attorneys and contract of sale of immovable property.

The use of e-contracts can be a big boon in the present plot of lockdowns, curfews and other travel restrictions.

Global lockdown seen for the first time in human history, the global economy is falling into recession, businesses are going down and there is also a scarcity of essentials in the market.

It should be rationally understood that in a situation like this, it is difficult for a person to honour and perform his part of the obligations of the contract.

In such a situation, we all should stay together as someone rightly said, ‘We should hang together in a desperate situation, otherwise we will all hang separately’.

IMPACT OF COVID-19 & LOCKDOWN ON LESSOR/LESSEE RELATIONSHIPS

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Several commercial establishments which are leased out to retail stores, restaurants, corporate offices etc. Now given the situation where the businesses are closed down pursuant to the order of the government, it needs to be examined whether the lessees are under a legal obligation to pay the lease rent for the period of lock down or not.

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This Article Is Contributed By: Keshav Dwivedi

Organised By: Vaibhav Srivastava, Harsh Vardhan Singh & Team

Event: Legal Webinar

Organization : Table To Screen

Impact Of COVID-19 Pandemic On Civil Contractual Relations Legal Aspects