Posted by : Sajith Sreedharan on April 8th, 2020 in Strategic Advise And Management Support
Outbreak of unforeseen and or reasonably anticipated Pandemic swept industries both manufacturing and services alike, affecting the performance of contracts of former heavily than the later. Pandemic is characterized as time dependent but geographically independent, however due to prevalence, the time dependent resulted to be longer than anticipated. With developing and developed nations declaring lockdown and emergency, non-performance of contracts due to impossibility gains significant importance. Notwithstanding many Nations declared pandemic as “Force Majeure”, it is reasonably foreseen that dispute between parties and litigation shall linearly increase. Therefore in the present economic / human crisis, we analyze, the significance and impacts on commercial contract.
Commercial Contracts reiterate that impossibility of performance of the contract works by a contractor will not, in general, relive him from liability in damages for breach of performance, save and except under exemptions. If, however the impossibility to perform his contract arises from a cause that neither party could have reasonably contemplated when the contract was made, and the terms of the contract made no provision for unforeseen circumstances, he will not be bound. The law in such cases will hold that where the performance proves to be impossible, it is an implied term of the contract that it must be commercially impossible, as when materials and labor are unobtainable or the Government have by regulation / circular / order prevented the work being done. However, mere unforeseen surge of market prices is no ground for non-performance, but should this rise be on an extravagant scale, the cost will dissolve the contract with all its terms.
Impossibility is a result that the performance of the specified work in the manner contemplated by the contract becomes impossible to proceed with work or further. Save and except under allowable exceptions by law, if contractor does not complete completion of any or all of the works as per the milestone prior arising of impossibility, the contractor shall not be excused from the consequences of not fulfilling his contract, including but not limited to the liability to pay damages. Certainly, if the contractor does in direct terms enter into a contract to perform an impossibility, subject to penalty, he will not be excused because it is an impossibility. It is pertinent to mention that this liability to pay damages for non-performance of an impossibility only attaches where the contract is absolute and unrestricted by any condition expressed or implied.
In the state of uncertainty many contracts shall be affected by performance or further performance wholly or in part. This may be under the general rules that may result of express executive orders issued under the powers of emergency legislation or due to outbreak of disease. In principle the question, if the same whether the new state of things is such as the parties provided for or contemplated and whether further performance, so far as the prohibition is not total, or when removed, would really be performance of the same contract.
The essential ideas on which the doctrine of frustration is based is that of impossibility of performance of the contract, in fact impossibility and frustration are often used as interchangeable. The changed circumstances makes the performance of the contract impossible and the parties are absolved from the further performance of it as they didn’t promise to perform impossibility. The doctrine of frustration is really an aspect or part of the law of discharge of contract by reasons of supervening impossibility to act as agreed to the done. Frustration is the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law as striking at the root of the agreement and is entirely beyond what was contemplated by the parties when they entered into the agreement. If the event which could not be foreseen by the parties supervenes, frustration would apply. The doctrine of frustration is embodied under section 56 of Contracts Act. The essential idea upon which the doctrine of frustration is based is that of impossibility of performance of the contract. The changed circumstances make the performance of the contract impossible and the parties are absolved from the performance of the same shall as if they didn’t promise to perform an impossibility.
Impossibility can also stem out of “Act of God” is that it must be such a direct, violent, sudden and irresistible act of nature, or sudden outbreak of epidemic or pandemic, a would not by any amount of ability have been foreseen, or if foreseen could not by any amount of human care and skill have been resisted. The test seems to be whether the event which caused impossibility was or might have been anticipated and guarded against.
In all circumstances, the concept of impossibility is the key factor to determine, force majeure, frustration of contract, act of god, uncertainty of performance and non- performance. By invoking above mentioned terminology will not result in suspension and or reap the benefits of employer’s risk clause. It is pertinent that parties should prove beyond any reasonable iota of doubt “impossibility” to proceed with works or further works was affected. In the event of impossibility, parties should follow their respective notification / determination clauses of contract. Notification and determination of impossibility is not an automatic mechanism to undo the faults of the parties prior to impossibility.
There is no thumb rule or straight jacket formula commonly applicable to all contracts, therefore exercise caution to understand your specific contact for your specific project to determine impossibility to proceed with works due to outbreak of pandemic.
Prof. Dr. George Yesu Vedha Victor,
International Arbitrator & Emergency Arbitrator