Has Covid-19 made it impossible to perform your contract?
The Indian Contract Act, provides for circumstances where the contractual parties are no longer able to perform their contractual obligations, or, when a party is prevented from or is unable to perform its part of the obligations due to events beyond their control.
Events such as the recent crisis of coronavirus pandemic are generally covered under a force majeure clause absolving a non-performing party from incurring any liability. In case such a clause does not feature in the contract, parties will have to rely on Doctrine of frustration of contract.
When does a contract become frustrated?
Parties to a contract are free to agree on their own rights and obligations and as a general rule, a party that breaches a contract, on its own volition, is liable to compensate the non-breaching party. However, problems occur when external occurrences or events render the contract unlawful or impossible to perform.
When a major unforeseen event beyond the control of a party prevents it from discharging its contractual obligations, the contract is said to have been frustrated. What is required for the contract to become frustrated is impossibility or impracticability to perform. Courts have held that difficulties in performing the contract or failure of third parties from performing their obligations does not render the contract frustrated.
In general, if the event makes it impossible or impracticable for a party to perform its contractual obligations, this is likely to frustrate the contract. The difficulty to perform must be a physical difficulty such as change in law, death/incapacity or any such subsequent change in circumstances that has rendered the contract impossible to perform.
Frustration should not be self-induced and should arise without blame or fault on either side. Doctrine of Frustration of contract cannot be invoked, however, if a party, on its own, decides to refrain from performing the contractual obligations, or, if the party is negligent, or, if the party that invokes frustration had anticipated the occurrence of the event.
What happens if a contract becomes frustrated?
When a contract is frustrated, it is essentially cancelled and neither party needs to do anything more for the other. Parties are excused from performing any further obligations under the contract. There is no need to pay any sums set out in the contract and any payments have already been made but not used, a refund or partial refund may be obtainable.
How is frustration different from force majeure?
Force majeure can only be invoked if a force majeure clause is included in your contract. Doctrine of frustration can be invoked, by claiming that the contract has been frustrated and has become impossible to perform, even if there is no force majeure clause in your contract.
Since Section 56 of the Indian Contract Act does not define specific triggering events, there is more scope to argue that a certain event has frustrated the contract, than could be argued pursuant to a conservatively drafted force majeure clause.
Know more about contract frustration. Contact Legawise for any further information.