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Use of Indian Contract Act in Small Businesses during Pandemic

8 min read

By Samanta Rao

Published On: November 1, 2021 at 14:30 IST

Introduction

During the period of lockdown amid the COVID-19 pandemic, citizens faced numerous problems with regard to their personal, professional, financial, and commercial lives. Apart from the impact COVID-19 continues to unleash on countries worldwide and human beings, its outreach has also reached into small business and commerce.

This article focuses on the impact of Covid-19 on the performance of contracts, which are held by Indian law.

In addition, businesses at the international level are affected and the main reason for that is the inability of companies to complete their contracts. As a result, businesses have an impact and therefore the operations are also subject to contracts and obligations under contracts are reviewed to assess these impacts.

The word that has taken on the context of today’s business contract and that is often heard is “force majeure” and how this term will be defined in the agreement after COVID-19.

What is contract under Indian Contract Act,1872

The term Contract is defined under the Section 2(h) of Indian Contract Act,1872- “An agreement enforceable by law is a contract”[i]

Essential elements of contract as follows:

  • There must be parties to the contract.
  • There must be free consent of both the parties.
  • There must be offer and acceptance.
  • Parties must be competent to contract.
  • There must be consideration of an agreement
  • There must be a Lawful object.

What is “force majeure”?

Force majeure is a French term, defined in Black’s Law Dictionary which means “an act of God”, an event in which party cannot be held accountable such as hurricane, armed conflict and tornado.

For example: A business do exist between two party’s ‘X’ and ‘Y’. Where ‘X’ needs to deliver goods to Y AND Y needs to pay some amount to X for the same here because of COVID-19, X and Y shall not be liable if they failed to perform their contractual obligation under the clause of force majeure in contract.

The Enforcement Force Majeure clause protects the party from any financial liability for its failure to fulfil a contractual obligation.

Contractual Force Majeure Clauses under Indian Contract Act, 1872

According to the Indian Contract Act, 1872 deciding which conditions promised a contract would be legally binding. This action is silent with the term “force majeure” but the action allows for an agreement to make the action impossible. Which means that if the contract parties are unable to fulfil the promises due to the action or circumstances that are not possible the contract will be cancelled.

If an event that is alleged to have prevented work under contract, such as an epidemic COVID- 19, is specifically mentioned in the force majeure clause and the event occurs, the parties concerned may be free to operate. it can be argued that an epidemic / pandemic such as Covid-19 falls under the category of “force majeure”.

Is COVID-19 a force majeure event?

The term Force Majeure does not usually cover an epidemic or epidemic, it is used for earthquakes or volcanoes or other forms of natural disasters. The Minister of Finance in February clarified that procurement disruption due to the spread of coronavirus is justified as a major power event and companies may use a force majeure clause.

Statutory provisions under Indian Contract Act and the absence of a Force Majeure clause

The Indian Contract Act of 1872 contains two provisions dealing with Force Majeure and Act of God.

Section 32 of the Indian Contract Act “Enforcement of contracts contingent on an event happening. —Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. —Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened.” If the event becomes impossible, such contracts become void.”[ii] This Sectiondeals with contingent contracts and states, among other things, that if a contract is predicated on the occurrence of a future event that becomes impossible, the contract is null and unenforceable.

Section 56 of the Indian Contract Act- Agreement to do impossible act.This section deals with frustration contract and provides for the contract to be void, inter alia, if possible, as a result of an event that the promoter could not prevent, after the contract has been entered into.[iii]

How small businesses form online contracts?

Coronavirus has most million of businesses to as official implement shelter in place policies to help slow the spread of disease. Some businesses, on the other, have been deemed essential and can continue to operate in order to provide crucial services to their communities. Running a businesses pandemic comes with a host of challenges  especially for the over 30 million small businesses like Most of the people have started small by selling clothes, grocery products, some essential items and many more through Instagram, Facebook, amazon and etc.  

Even with all of the above efforts, reaching new audiences on Instagram can be difficult for small businesses. Small amounts of money spent on advertising can go a long way. You may target a more particular audience with Instagram advertisements, increasing your exposure to people who might be interested in what you have to offer. This results in high conversion rates and is frequently a profitable investment.

By starting online business people created an express contract between them that they will give their money through Paytm and get their product delivered to them by courier on time.

How small businesses are affected by contractual obligations?

During the pandemic people who started small businesses faced to expressed contractual obligations as many customers didn’t get their product on time and seller didn’t get payment on time. The major challenge is that business will have to manage two parallel accounts- Receivables and continually reconcile inventory. For example, retail-clothing boutique whose mobile payment system enabled selling at festivals but does not connect with the main POS. (Point of sale system).

In such a situation if the parties are unable to successfully use the force majeure clause to justify performance during a coronavirus outbreak, or if the contract does not contain a clause of force majeure, and the impossibility or impossibility protection fails, another possible protection for the party that is unable to fulfill its obligations under the contract due to coronavirus is intentional frustration under Section 56 of the Indian Contract Act, 1872.

For this doctrine to work, the frustrated purpose must be so fundamental to the contract that, as both parties understood, without it, transactions would be meaningless. “Put simply, the frustration of intentions arises when change in circumstances makes the performance of one component unprofitable for another, warding its purpose in making an agreement.”

If the contract does not contain a clause of force majeure, and the impossibility or impossibility protection fails, another possible protection for the party that is unable to fulfil its obligations under the contract due to coronavirus is intentional frustration.

Case laws

  • Satyabrata Ghose Vs Mugneeram Bangur & Co.[iv]

Facts of the case

Mungeeram Bangur and Co were the owners of a large estate in Calcutta. They plan to make deals with different buyers for the sale of land. Bejoy Krishan Roy, defendant no. 2 in this case, it was certain consumers who entered into an agreement with the Company. The land was requested by the Government of India for military purposes in 1941.

In 1943 Mugneeram Bangur and the company, the defendant, wrote a letter to Bejoy Krishan Roy informing him that the government would keep the land owned. The company was unable to build the proposed buildings during the war.

Held

The Supreme Court has ruled that when a force majeure occurrence is related to an express or implicit stipulation in a contract, it is controlled by Section 32 of the Act, however when it occurs outside of the contract, it is handled by Section 56 of the Act.

  • Standard Retail Pvt. Ltd Vs Gs Global Corp and Ors.[v]

Facts of the case

In this case, the applicants had a contract with defendant No.1 of South Korea’s head office to supply certain metal products. Referrals were to be made from South Korea to applicants in Mumbai. Applications were lodged under Section 9 of the Arbitration and Conciliation Act, and applicants imported metal from South Korean companies GS Global Corp. and Hyundai Corp. Applicants seek guidance that prevents the responding bank (Wells Fargo Bank) from negotiating or filing debt.

The plaintiffs in these appeals allege that due to the crisis and the closure of COVID-19, contracts with the number being answered have been terminated as they are not enforceable due to frustration, impossibility and impossibility in terms of Section 56 of the Indian Contract Act. in general terms and conditions including compulsory law, which gave defendant N0. 1 the right to terminate a contract or part thereof in the form of written notice in the event of an act of God including epidemics, other natural disasters, war or armed wars etc. at the right time.

Held

The Bombay High Court has held in this case whereupon, while rejecting the order to pray as it was prayed, the Court noted that the force majeure clause was contained in a contract to sell the instrument and not in the books of credit. Although this order is rejected for some reason, it does indicate the difficulties that may arise when a basic contract justifies performance but a separate / separate contract / financial arrangement such as a letter of credit or bank guarantee is unconditional.

Conclusion

While various contractual parties may attempt to rescind their obligations in the wake of the Covid-19 pandemic, relying on the force majeure provision in the applicable contract or Section 56 of the Indian Contract Act to do so is not guaranteed. The burden of proof on the party seeking to have its non-performance excused is on the party attempting to show that Covid-19 genuinely influenced performance of the specific contractual obligations in a particular circumstance.

While determining whether the Covid-19 epidemic is within the scope of the appropriate force majeure clause is a good place to start, other factors such as causality and the duty to mitigate must also be considered in order to assess the respective strengths and weaknesses of such parties’ positions. Relevant letters and correspondence (including force majeure notices) should rigorously detail not only the occurrence of a force majeure event, but also the exact impact of the event on the contractual obligation from which the party seeks to be excused.

ABOUT THE AUTHOR

This article is written by Samanta Rao, a student studying in final year pursuing BBA LLB from Centre for Legal Studies-Gitarattan International Business School, GGSIPU, New Delhi. The author is an ambitious, confident and hard-working law aspirant. She is very passionate about her work and takes initiative to accomplish her goals.  She is highly innovative with a keen interest in writing articles and analysing judgements.

Edited by: Aashima Kakkar, Associate Editor, Law Insider

References

What is Force Majeure?

Force Majeure in the times of Covid-19  

Coronavirus and Force Majeure


[i] The Indian Contract Act,1872, s.2(h)

[ii] The Indian Contract Act,1872, s.32

[iii] The Indian Contract Act,1872, s. 56

[iv] Satyabrata Ghose Vs Mugneeram Bangur & Co, [1954] SCR 310

[v] Standard Retail Pvt. Ltd Vs Gs Global Corp and OrsOrder dated April 8, 2020 passed by the Bombay High Court in Commercial Arbitration Petition (Lodging) No. 404 of 2020.