Act of god and Contractual obligation: COVID angle

Reading time: 8-10 minutes.

In an agreement, when two parties gather together to perform certain duties for each other; the agreement becomes a binding contract. The contract gives rise to certain legal responsibilities which the parties need to fulfil, such responsibilities of the parties is a contractual obligation on their part.

When one party fails to perform his part of the contract, the contract is breached. Damages are awarded to the non-breaching party in such a case to make the suffering party stand in the same position as he would have been if the contract was performed. Under each contract, parties exchange goods, services etc. Such conduct of the parties is governed by the terms of the contract and defines how the contractual obligations are to be carried out by the parties.

  • Examples of Contractual Obligation-

Contractual obligations vary from contract to contract. In the case of non-performance, it ordinarily is a breach and allows damages to the other party. Some of the basic contractual obligations are-

Quality of goods- If the parties have agreed upon a certain quality of the good or service, then the party must grant the same quality product. In case, the party supplies a lower quality product rather than the one receiving party consented to; the contractual obligation is not fulfilled and the contract is breached.

Payment- Supply of goods and services by one party creates an obligation for the other party to pay for them. If the receiving party denies payment or is unable to pay due to some reason it results in a breach.

Delivery- The seller of the goods and services is supposed to deliver the products. There might be certain terms specifying the method, date of delivery; all such terms are to be complied with to avoid a breach.

The parties can specify and agree to their individual needs in terms of the contract. They also need to follow some general rules and principles. The parties have the power to decide among themselves what will happen in case of a breach, amount of damages etc.

  • Remedies for Breach of Contractual Obligation-

When duties are not performed in a contract, it results in a breach. Some remedies are allowed to the suffering party in such cases. The general remedies are-

  • Sue for specific performance- The aggrieved party can ask the party to perform the contract after it has been breached if they want to avoid going to court or for any other reason.
  • Sue for Damages- The non-breaching party can go to the court and sue the other party for damages. The damages are awarded to get the party back into his original position before the breach. There are no punitive measures. The damages are awarded in proportion to the loss suffered by the party.
  • Request release from the contract- If a party has been deceived to enter into the contract, the court may allow the party to not perform the contract.
  • Unjust Enrichment- In case the court feels that one party has unjustly benefited from the conduct of another party, it may allow recovering the expenses.

Can Contractual Obligation be transferred to the third party?

Contract delegation is possible. In some cases, when the party transfers the performance to some third party, it is termed as contract delegation. But if the task is of such nature where special skills are required, it cannot be delegated. E.g. If A has agreed to make a portfolio of X and X agreed to pay Rs.20,000 then A cannot delegate the work to someone else as it requires specific skills for which X is paying the money.

What is act of god?

‘Vis major’ a maxim meaning act of god. An act of God is a natural calamity like an earthquake, tsunami, heavy rain etc. over which there is no human control. In certain cases, it can be predicted with the help of science and technology but cannot be avoided. It is an exception to contractual liability under contracts or Insurance laws. In America, tort law may also get affected by acts of God.

In the law of contract, Act of God may imply impracticability or impossibility; where it is no more possible for the parties to fulfil the duty or the performance would require a long time, un-reasonable expenses etc, i.e. The goods to be transferred are no longer in existence. In such cases, the parties are discharged from the contract. Section 32 and 56 of the Indian Contract Act,1872 deals with such cases in India.

Under Insurance law, most cases are protected but the policies are drawn in such a way that they do not cover acts of God. Events like earthquakes, hurricane etc are such incidents where companies deny payment.

In Nichols vs. Marshland, A heavy rainfall occurred such as never witnessed in human history and made the water flow out of artificial lakes at the defendant’s place, ruining four bridges of the Plaintiff. The court held that the heavy rainfall was an act of god and the defendant cannot be held liable.

Examples- a.) Contract law- A agreed to sell his house to B for Rs. 1 lakh, an earthquake occurred and the house was destroyed before it could be transferred. The agreement is impossible to perform and the parties are discharged from the contract.

b.) Insurance law- If a house is set on fire and gets destroyed, it is not an act of god it could have been prevented by someone’s handling or poor construction. A fire caused by lightning strikes or flames taken over by air is considered an act of god.

c.) Tort Law- If an accident is caused due to an earthquake which is an act of god, the driver may escape liability.

Act of god with respect to contractual obligation

‘Force majeure’ is the maxim which covers the act of god. It refers to all the unforeseen acts which are not under the control of human power. Earthquakes, hurricanes, volcanos are covered under force majeure. It also includes acts caused by human acts like strikes, wars etc. When two parties explicitly mention in the contract what will constitute an act of god for the contract, then the parties can escape the obligation arising out of the agreement. Thus, the act of god acts as an exception to liability when the contract is breached by either party due to impossibility arising out of such an event.

To take the excuse of force majeure, the party must show a relation between the event and the inability to perform the duty. It depends upon the contract, whether the party is completely freed from performing the duty or a delay is allowed. Laws on the act of god concerning contractual obligation differ from country to country.

Is COVID-19 act of god in legal terms?

The term act of God is not defined under any statute but appears within Contracts. An act of God may bring up a situation where it is practically impossible for the parties to perform the contract, in such situations they are allowed to escape liability. The pandemic, Covid-19 has got people to think if it is an act of god?

To answer this question, it is essential to know what constitutes an act of God. Three important points need to be taken into consideration-

a.) If the act is a natural calamity or if there is human intervention. If in case humans are involved, it cannot be called natural.

 b.) If the act was unforeseen.

c.) If it could have been foreseen, was it impossible to stop the happening of such an event?

While applying all these aspects to a contract, it is necessary to see if the delay or impossibility is due to act of God or some other reason.

Under the Indian contract Act,1872; section 32 and 56 deals with such instances. Section 32 of the act deals with contingent contracts (based on the happening of a future event) if such a future event becomes impossible then the contract is rendered void. While section 56 relates to the frustration of a contract, it lays down that a contract becomes void if it becomes impossible to perform, because of such an event which was not under the control of parties.

COVID-19 can be called an act of god in legal terms, as it satisfies the necessities of being an act of god. It was neither expected nor prevented. It is no justice to make any party liable when the situation is not under the control of either party. The pandemic has frustrated many contracts due to reason of impossibility arising out of the restrictions put up by the government to protect the spread. When it is a defence for liability in some cases, it cannot be used as an umbrella for all of them. Those, who are covered must prove to the court that the contract is frustrated.

India’s finance ministry has declared COVID-19 an act of god, parties can take it as a defence in case of breach of contract, but not in all the cases. The situation of lockdown has emerged as a result of the pandemic; some might argue that the breach is due to the human act of lockdown, but the knock-on effect cannot be denied.

Critical analysis

The coronavirus pandemic has hit the entire world and given a pause to all the economic and day-to-day activities, while the businesses are at pause; contractual obligations remain un-attended resulting in the breach of contracts. While the act of god acts as an exception to contractual liability, not all events are covered under it. In legal terms, COVID-19 is an act of God, but at the same time human act of lockdown is affecting the contract, which looks like a paradox but the nexus between them cannot be completely severed. The parties while approaching the court must be clear as to the reason for the breach.  i.e. whether the contract was breached due to lockdown or some other factors.

India and several other countries consider lockdown as an act of god. But how far would this apply to the contracts depends upon the nature of the contracts. i.e. If it is impossible to perform the duties or some delay is there. Various courts across the world deal with this exception in different ways, what might happen in one case may not happen in another. Due to non-compliance with the contract terms, the parties will take recourse to this exception to avoid the liability. Force majeure clause agreed by the parties under the contract will play an important role in such agreements. In other cases, where such a clause is absent the relevant laws in the country will apply, like in India section 56 of the Indian contract Act,1872 deals with the frustration of contracts in such cases, likewise, country laws would affect the contracts taking this exception.

Conclusion

COVID-19 is an act of god in legal terms and many countries across the world have acknowledged it. As far as a breach of contracts is concerned, the human act of lockdown has resulted in non-fulfilment of duties. While the act of god acts as an exception to contractual liability, parties across the world would need to prove breach due to coronavirus to avoid liability. The mention of force majeure clause in the contract is a good starting point, the effect of the pandemic on the direct obligation of parties will have to be proven by the party alleging breach due to act of God.

Author: Vaishali Jeswani from Hidayatullah National Law University, Raipur.

Editor: Harinie.S from Symbiosis Law School Hyderabad.

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