COVID-19 has posed a threat to human life across the globe so much so that it has now been termed a ‘pandemic’ by the World Health Organization (WHO). Apart from the rising deaths, stock markets across the globe have plummeted with Sensex crashing over 3,000 points in a span of two hours. The concern is not only limited to stocks and reduced production across the globe causing massive losses to the world GDP but also toward the performance of commercial contracts.
COVID-19's impact on the execution of contracts, and how to mitigate it
A contract is an enforceable agreement. This term ‘enforceable’ simply means a contract having the force of law (ie, it fulfils all other criteria essentials for it to be deemed a contract) must be performed by all the parties to it, and in event of failure to do so the party aggrieved may bring a civil suit in a court of law or refer it for adjudication or arbitration as the case may be. But with the recent development of such a disease, which is forcing individuals to remain in a designated place for the time being or even bringing cities to standstill, what will be the legal status of contract to be executed by that person or in that area?
In the event of impossibility of a contract we may immediately refer to Section 56 of Indian Contract Act, 1852, which says that any act that was to be performed after the contract is made becomes unlawful or impossible to perform, and which the promisor could not prevent, then such an act which becomes impossible or unlawful will become void.
Section 56 is based on a common law principle known as ‘Doctrine of Frustration’ propounded by English judges through a series of case. As per this Doctrine there can be two grounds upon which even a legal contract can be termed ‘frustrated’ or, in other words, absolving all the parties from the liability of performance on account of certain intervening factors: (1) performance of contract is physically impossible, and (2) the object of contract has failed.
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