Breach of Contract during Lockdown

454 votes

The onset of the Covid-19 pandemic in India has proven not only to be a humanitarian crisis, but also an economic crisis of an unprecedented scale. Specifically, restrictions on movement of persons and goods, save for those involved in essential services, have raised serious doubts on the ability of parties to perform their obligations under contracts when these are not ordinarily classified as ‘essential services’. Uncertainty as to the performance of contracts has led to parties envisaging breaches of contract and assessing their rights and remedies in relation to the same.
 

Force majeure & Doctrine of Frustration

A party should check whether there is a force majeure clause and, if there is one, the precise wording.  The purpose of such clauses is to protect an innocent party, such that on the occurrence of an event beyond their control which is the sole cause preventing performance of their contractual obligations, it may be excused from performance, without being liable to the other party.

Whether such a clause will be effective in the current circumstances will depend on the exact wording of the force majeure clause, and whether it makes express reference to say pandemics, outbreaks of notifiable diseases or government actions as being events which the contract recognises as being ones which excuse performance of obligations.  If the clause permits the contract to be terminated on the occurrence of the specified event (as opposed to performance just being suspended), then the innocent party may be entitled to terminate the contract without incurring liability to the counterparty.

In the absence of an express force majeure clause, in rare circumstances the doctrine of frustration may apply.  This will only be the case where the performance of the contract has become physically or commercially impossible as a result of an event beyond the control of the parties, or where the contract has been rendered radically different to that envisaged by the parties at the time they entered into the contract.  If the contract has been frustrated, then it is automatically terminated.
 

Contractual breach provisions

If force majeure and frustration do not apply, then the failure of performance should be assessed against any express contractual breach provisions.  Many contracts will include clauses entitling one or both parties to terminate the contract in certain circumstances.  Such clauses may give a right to terminate for “material”, “substantial” or, more rarely, “any” breach of contract.  If the contract does not define what constitutes a relevant breach, it may only be possible to assess whether the particular breach would trigger a right to terminate by looking at previous decisions made by the courts.

As well as giving a right to terminate in the case of particular breaches, the contract may also require the party in breach to be given a period of time to remedy their breach.  If there are any ‘remedy’ or ‘cure’ clauses, they will typically require the party not in breach to serve written notice identifying the breach and requiring the party in breach to remedy the position within a specified period.  If the breach is not remedied within that period, then the innocent party may be entitled to serve a further notice terminating the contract.

Where there are ‘remedy’ or ‘cure’ clauses, they should be complied with strictly, notwithstanding the current circumstances, otherwise an innocent party may find themselves in repudiatory breach of contract.
 

How can a lawyer help?

Looking at the complexity of the issue, it is highly impossible for a layman to understand the technicalities involved in the issue. Interpretation of terms of a contract in accordance with the law is in itself a very technical task and beyond the scope of expertise of a layman. This is why it is imperative in times like these to have a corporate lawyer by your side who can help you understand the technicalities involved and can formulate the right strategies to ensure a desired result in a contract-related litigation.

LawRato LawRato

549 votes

There are several safeguards available to a party in such a case if the cause is genuine, ranging from force majeure to mitigation of damage causes etc.
I will have to know further details in order to advise you better

Advocate Ankit Sharma LawRato

636 votes

The lockdown imposed by the government is not in your hands and thus construed to be an act of god. It's a force majeure and thus parties are not bound to fulfill the obligations and can invoke that clause

Advocate Anubhav Kathuria LawRato