This special report will be reviewing the legal implications of the COVID-19 pandemic on businesses, especially with regard to the performance and frustration of contracts as well as employers' obligations.
The Coronavirus disease 2019 ("COVID-19") is a respiratory illness that can spread from person to person. The virus that causes COVID-19 is a novel coronavirus that was first identified during an investigation into an outbreak in Wuhan, China1. On 11 March 2020, the World Health Organization ("WHO") made the assessment that COVID-19 can be characterized as a pandemic2.
According to the United Nations Conference on Trade and Development ("UNCTAD"), the United Nations' trade and development agency, the slowdown in the global economy caused by the COVID-19 outbreak is likely to cost at least $1 trillion3. According to UNCTAD projections, the COVID-19 epidemic could bring global foreign direct investment flows to their lowest levels since the 2008-2009 financial crisis4. According to estimates, the slowdown of manufacturing in China due to the COVID-19 outbreak is disrupting world trade and could result in a $ US 50 billion decrease in exports across global value chains5. In India, the Prime Minister has announced the creation of 'COVID-19 Economic Response Task Force' ("Task Force") under the Union Finance Minister, to deal with the economic challenges caused by the pandemic.
The Task Force will consult stakeholders and take feedback. On the basis of such feedback, decisions will be taken to meet the challenges. The Task Force will also ensure implementation of the decisions taken to meet these challenges6.
The Effect of a global pandemic on contracts
The COVID-19 outbreak has impacted the ability of businesses around the globe to fulfil existing contractual obligations. With national and local governments imposing unprecedented travel, movement, and large-gathering restrictions and other social distancing measures, and concerns of contagion, companies from various sectors are experiencing severe business interruptions.
'Force Majeure' clause
- Many commercial contracts contain 'force majeure' clauses that provide for discharging a contracting party when a supervening event, beyond the control of either party, makes performance impossible. This clause can be invoked only when a contract provides for it, and how it applies to each contractual relationship has to be analysed on a case-to-case basis.
- Paragraph 9.7.7 of the Manual for Procurement of Goods, 2017 ("Manual") issued by the Ministry of Finance, Government of India defines 'force majeure' as extraordinary events or circumstance beyond human control such as an event described as an act of God (like a natural calamity) or events such as a war, strike, riots, crimes (but not including negligence or wrong-doing, predictable/seasonal rain and any other events specifically excluded therein). On 19 February 2020, an office memorandum was issued by the Ministry of Finance, referencing the abovementioned paragraph 9.7.7 of the Manual, clarifying that disruption of supply chain due to the outbreak of coronavirus should be considered as a case of natural calamity, and the force majeure clause may be invoked wherever appropriate, following the due procedure as provided in the Manual7. Generally, companies that are party to central government contracts for procuring goods may invoke force majeure, thereby exempting these contracts from performance conditions in the interim.
- In Energy Watchdog and Others v. Central Electricity Regulatory Commission and Others8, the Hon'ble Supreme Court held that "force majeure is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied clause in a contract, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the contract."
Impossibility of performance
- Section 56 of the Indian Contract Act, 1872 ("Contract Act") reads as follows:
- Agreement to do impossible act—An agreement to do an act impossible in itself is void. Contract to do an act afterwards becoming impossible or unlawful—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
- Compensation for loss through non-performance of act known to be impossible or unlawful—Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.
- The Hon'ble Supreme Court in Energy Watchdog and Others v. Central Electricity Regulatory Commission and Others9 further stated that "the law in India has been laid down in the seminal decision of Satyabrata Ghose v. Mugneeram Bangur & Co10. The second paragraph of Section 56 has been adverted to, and it was stated that this is exhaustive of the law as it stands in India. What was held was that the word "impossible" has not been used in the Section in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties.
Frustration of contracts
- If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do. Where the court finds that the contract itself either impliedly or expressly contains a term, according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Contract Act11. If, however, frustration is to take place de hors the contract, it will be governed by Section 56 of the Contract Act.12
- The courts have no general power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events,13 and application of the doctrine of frustration must always be within narrow limits.14 Therefore, the legal position in India is that a more onerous method of performance by itself would not amount to a frustrating event.
- The Supreme Court, for its part, has with the objective of reducing physical filings in courts and tribunals across the country during the COVID-19 pandemic passed a general order on 23 March 202015 extending the limitation prescribed under the general law or special laws – whether condonable or not, with effect from 15 March 2020 until further orders. The Hon'ble Supreme Court has passed the order under Article 142 read with Article 141 of the Constitution of India, making it binding on all courts and tribunals.
- The Karnataka High Court vide an order dated 30 March 2020 acknowledged the directions issued to the state governments through an order passed by the Ministry of Home Affairs, Government of India dated 29 March 2020 ("MHA Order"). The High Court clarified that the directions contained in the MHA Order would have to be implemented in letter and spirit. The MHA Order clearly stipulates that all employers, be it in the industry or in the shops and commercial establishments, should make payment of wages of their workers at their work places, on the due date without any deduction, for the period their establishments are under closure during the lockdown.
Employers' obligations during the pandemic
- In order to prevent the situation from deteriorating, the Central and State Governments and Regulatory Authorities have required businesses and employers to put in isolation, quarantine and social distancing policies. Disruption in the supply chain coupled with labour shortages is a major challenge to businesses, with the potential to cause major revenue losses. A vital question in front of employers is regarding their obligations towards employees who are unable to work due to either sickness or governmental regulations.
- The Ministry of Health and Family Welfare has issued an 'Advisory on Social Distancing Measure in view of spread of COVID-19 disease'16 on 16 March 2020, encouraging private sector organizations/employers to allow employees to work from home wherever feasible. On 19 March 2020, the Ministry of Corporate Affairs ("MCA") issued an advisory to all companies and limited liability partnerships ("LLPs"), on preventive measures to contain the spread of COVID-19. It was stated in this advisory that to meet this urgent health exigency, all companies and LLPs are expected and strongly advised to put in place an immediate plan to implement the 'work from home' policy as a temporary measure till 31 March 2020, after which the position will be reviewed by the appropriate authorities as per the evolving situation; all companies and LLPs are advised to implement the work from home policy in their headquarters and field offices to the maximum extent possible, including by conducting of meetings through video conference or other electronic/telephonic / computerized means. Further, companies and LLPs are required to confirm their readiness to deal with the COVID-19 threat through a web form named CAR (Company Affirmation of Readiness towards COVID-19) on 23 March 202017. Prohibitory orders requiring the closure of commercial and private establishments are also being passed by police departments of various states.18
- The Ministry of Labour and Employment, Government of India, in a letter to the All India Organization of Employers dated 20 March 2020 (D. O. No. M–11011/08/2020-Media) advised all employers of public/private establishments to not terminate their employees, particularly casual or contractual workers from job or reduce their wages. If any worker takes leave, he should be deemed to be on duty without any consequential deductions in wages for this period. Further, if the place of employment is to be made non-operational due to COVID-19, the employees of such unit shall be deemed to be on duty. The Maharashtra Commissioner of Labour, vide a letter dated 20 March 2020, reiterated the advisory given by the Central Ministry of Labour and Employment, and advised employers of public and private establishment to not terminate or reduce the wages of their employees, particularly casual or contractual workers. Similarly, the Karnataka Department of Labour vide a circular dated 24 March 2020 advised employers of all establishments not to terminate the employees or reduce their wages. Further, the Karnataka Department of Labour has issued a circular dated 5 March 2020, providing that employees who have contracted COVID-19 are to be granted 28 days' leave with wages.
- The Employees' State Insurance ("ESI") Corporation has extended the time period for filing and payment of ESI contribution: the ESI contribution for the months of February 2020 and March 2020 can be filed and paid upto 15 April 2020 and 15 May 2020, instead of 15 March 2020 and 15 April 2020, respectively19.
In conclusion, businesses are required to pay salaries and wages to their employees, even if the employees are absent or the place of employment is shut down, on account of the COVID-19 outbreak, based on the central and state government advisories.
In so far as subsisting contracts are concerned, businesses should attempt to understand the aspects which will be affected, and determine whether renegotiation of terms can be done to account for the changed circumstances. Force majeure and performance related clauses may have to be particularly re-examined.
8. (2017) 14 SCC 80
10. 1954 SCR 310
11. Section 32 - 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.
If the event becomes impossible, such contracts become void.
12. Energy Watchdog and Others v. Central Electricity Regulatory Commission and Others, (2017) 14 SCC 80
13. Naihati Jute Mills Ltd. v. Hyaliram Jagannath, 1968 (1) SCR 821
14. Energy Watchdog and Others v. Central Electricity Regulatory Commission and Others, (2017) 14 SCC 80
15. In re : Cognizance for extension of Limitation [Suo Motu Writ Petition (Civil) No(s).3/2020]
18. For example, see 'Proceedings of Commissioner of Police and Additional District Magistrate, Bengaluru city' dated 31 March 2020 whereby prohibitory orders were passed by the Police Department, Government of Karnataka
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.