Authors - Rashi Suri (Partner), Kavya Nargund (Intern)
The unforeseen Covid-19 pandemic has severely impacted contractual performance across the globe and also it has interrupted our personal, professional, financial and commercial lives, to an extent of preventing best performance at all levels; even rendering performance impossible. The unprecedented nature of the pandemic has thrusted the general public into a state of distress, not only for their health and safety but it has undermined the ability of individuals and businesses to fulfill their contractual obligations. It would be unfair to hold them strictly liable for their failure to do so.
Singapore recently has passed COVID-19 (Temporary Measures) Act, 2020 in order to curtail liability and reduce the number of matters that land up in a dispute due to COVID-19. The Act was an unprecedented step and aims to provide temporary and targeted protection for businesses and individuals who are unable to fulfil certain contractual obligations because of COVID-19.
This article focusses on the key benefits of the law passed by Singapore for granting temporary relief to parties whose contractual obligations are affected by COVID-19. The later part of the article will analyze the approach that can be adopted by the Indian courts in granting interim reliefs to the affected parties which otherwise would lead to lengthy litigation or possible insolvency proceedings. Further, the article will aim to understand that what India can learn and adopt from the Singapore model.
On April 7, 2020 Singapore passed the COVID-19 (Temporary Measures) Act, 20201 (hereinafter referred to as “the Act”) to provide temporary relief to parties who are unable to perform their contractual obligations due to the COVID-19 pandemic (COVID-19), amongst other measures.
The Act aims to cover contracts entered into or renewed before March 25, 2020 and obligations that are/were to be performed on or after 1 February 2020. Amongst others, the following (termed as Scheduled Contracts in the Act) are covered by the Act:
The scheduled contracts also cover in its ambit the contracts to which the government is a party.
The Act will prohibit a contracting party from taking the following legal actions against a non-performing party:
Along with that, the Act in its different parts deals with temporary relief for financially distressed individuals, firms and other businesses by bringing in for modifications to several other legislations in Singapore such as the Bankruptcy Act, Insolvency Restructuring and Dissolution Act, Companies Act, Limited Liability Partnerships Act, Business Trusts Act, saving and transitional provisions. It also provides for temporary measures for conduct of meetings, court proceedings and Syariah court proceedings, remission of property tax and lastly control orders to prevent spread of COVID-193.
The Act provides for temporary relief to parties who are unable to perform their contractual obligations due to the COVID-19 pandemic related events the temporary relief shall apply for six (6) months but may be extended or shortened by the Minster for Law.
The outbreak of COVID-19 has brought most economies to an unprecedented grinding halt. The commercial ramifications thereof have made it necessary for everyone to take a closer look at the concept of force majeure. In India, the statutory provisions which come closest to understanding the principles of force majeure are Sections 32 and 56 of the Indian Contract Act, 18724.
Section 32 pertains to contingent contracts and would govern the field with respect to express force majeure clauses in contracts. Section 56 provides the principles behind the concept of force majeure in the form of the doctrine of frustration of contract. It could potentially be pleaded by a non-performing party in the absence of a force majeure clause in the contract.
A party to a contract which contains a force majeure clause would be expected to prove5:
If the contract does not include a force majeure clause, the affected party could claim relief under the doctrine of frustration under Section 56 of the Indian Contract Act, 1872. However, in order to claim that the contract is frustrated, it must be established that the performance of the contractual obligations has become impossible by reason of some event which the claiming party could not prevent and that the impossibility is not self-induced by the claiming party or due to his negligence. Ultimately leading to termination of contract.
COVID-19 has had impact on various contracts relating to commercial undertakings (e.g. construction projects), commercial and industrial tenancies and individual consumer transactions (e.g. bookings for events). Individuals or companies who are unable to meet their obligations may have to pay damages or forfeit deposits6. But, most of the clients or parties to a contract does not want their contract to be terminated by frustration instead suspension of their rights for time being and then once the situation gets to normalcy the obligations under the contract are to be performed. Here, in this regard Singapore legislation has bought that change. It provides temporary and targeted protection for businesses and individuals who are unable to fulfil certain contractual obligations because of COVID-19. It will, in that way, seek to provide temporary cash-flow relief for these businesses and individuals, who may otherwise have to pay damages or risk having their deposits or assets forfeited.
COVID-19 has been declared as a pandemic by the World Health Organization. Pursuant to that, the Government, through one of its initial notifications, dated 19 February 20207, recognized disruption of supply chains due to COVID-19, and problems in performance of contractual obligations. It has provided relief by specifying that COVID-19 will be considered a natural calamity and force majeure clause may be invoked, following due procedure. Additionally, Government has notified several protective measures, through different ministries and departments.
The Ministry of New & Renewable Energy (MNRE)8, which has directed all its renewable energy implementing agencies to treat delay on account of disruption of supply chains as force majeure.
The Ministry of Shipping has informed major ports that the COVID-19 pandemic ‘can be’ considered as a natural calamity that would entitle invocation of ‘force majeure’ provisions in for contractual obligations (order no. PD-13/33/2020-PPP/e-339106 dated 20 March 2020 and letter dated 24 March 2020).
On March 29, the Ministry of Home Affairs had issued an order under the Disaster Management Act stating that landlords must not demand rent from students, workers and migrant labourers for a month. The landlords who force labourers and students to vacate their premises will face strict action.
The interim relief measures provided by government through various notification apply to contracts where one party is a government body. The Ministry of Finance, released a circular dated February 19, clarifying that disruption of supply chains due to spread of COVID-19 shall be construed as a force majeure event and it includes only those contracts in relation to procurement of goods as per the Manual for Procurement of Goods, 2017. In such contracts, like contracts with agencies of MNRE, the mandate is from the Government to the government bodies and it is expected that there will be compliance.
However, it is very problematic if the authority to decide who is entitled to be given the benefit of ‘extension of time’ or ‘force majeure’ to these bodies, to check whether the party is ‘actually affected’ by COVID-19 related event. It amounts to violation of principles of natural justice if it does not benefit the counterparty. The Singapore law achieves this objective by way of a law and by having a system of independent assessors who will examine cases of dispute9.
For instance, the counter party wants an urgent interim relief such as no coercive action of invoking performance guarantee for delay. This is very much prior to the authority based on evidence adduced by affected party is “fully satisfied” that such party was “actually affected” due to these disruptions. Meaning that the affected party will have to go to court to seek an injunctive relief against invocation by counter party. It will have to convince the court that its performance is really and materially impacted by COVID-19. The court will be called upon to examine whether this is a defense available to an allegation of breach and adjudicate this issue.
At this stage India can look at the Singapore model10.
The Singapore law stipulates that the affected party must serve a notice for relief on the counterparty. After serving the notice for relief, the counterparty is prohibited from taking any action against the affected party. If the counterparty disputes the application of the law to the affected party’s contract, an assessor will determine if the inability to perform contractual obligations was due to COVID-19 related events. An assessor is appointed by the Minister for Law, who will decide if the nonperformance was caused by a COVID-19 event and can grant the requisite reliefs. Parties are to represent themselves before the assessor (no lawyer representation). There is no appeal from the assessor’s determination.
However, once the affected party serves the notice seeking relief on the counterparty, affected party can avail all the interim reliefs until either such notice is withdrawn or an assessor determines that the relief under the law is not attracted.
Which otherwise would require the affected party who is unable to perform contractual obligation due to this unforeseen Covid-19 wants interim relief, he has to approach the court and then called upon to examine and establish whether the inability to perform constitutes a breach or whether COVID-19 is a defense to the inability to perform. This is a lengthy and tedious process which would take long time litigation and its time consuming.
After carefully analyzing the Singapore law, one can notice that the burden of proof shifts from affected party to counter party. Once the affected party serves notice for relief and if counterparty wants to dispute that the nonperformance of affected party is not impacted by Covid-19 pandemic then he has to prove that. Until then no coercive step can be taken against affected party and gets all the temporary reliefs applicable to its contract. Singapore has placed assessors to do this exercise.
In India, it is urge to the government to take quick resolution which can be in the way of passing an order or direction by various ministries for time being to meet an urgent necessity i.e. to temporarily suspend the contractual obligations of the parties not only those contracts where government is one of the party to the contract but all other contracts including commercial contracts between individuals, businesses and companies who are unable to perform their obligations and impacted by Covid-19 related events, due to this unprecedented and unforeseen hit of Covid-19 pandemic there is huge impact on the businesses, trade contractors and various sectors which have been badly affected and these contribute majorly to the growth of our economy.
1- Ministry of Law, Singapore, ‘Temporary Relief for Inability to Perform Contractual Obligations due to Coronavirus Disease 2019 (COVID-19) Situation’ at https://www.mlaw.gov.sg/news/press-releases/temporary-relief-for-inability-to-perform-contractual-obligations-due-to-coronavirus-disease-2019-covid-19-situation, last visited on May 3, 2020, at 01:11 pm.
3- Singapore, COVID-19 (Temporary Measures) Act, 2020.
4- Indian Contract act, 1872 sec 36 and 56.
5- The Viewpoint: Force Majeure in times of a pandemic, Available at https://www.barandbench.com/view-point/the-viewpoint-force-majeure-in-times-of-a-pandemic last visited May 14,2020 at 8:30 pm.
6- Supra note 1
7- Office Memorandum No.F. 18/4/2020-PPD titled ‘Force Majeure Clause’, issued by Department of Expenditure, Procurement Policy Division, Ministry of Finance.
8- Office Memorandum No. 283/18/2020-GRID SOLAR, issued by Ministry of New & Renewable Energy (MNRE) grid Solar Power Division dated 20.03.2020.
9- Available at https://www.barandbench.com/view-point/the-viewpoint-force-majeure-in-times-of-a-pandemic last visited on May 14, 2020 at 8:30 pm.
10- Available at https://www.mlaw.gov.sg/news/press-releases/2020-04-20-covid-19-temporary-measures-act-provisions-relating-to-temporary-reliefs-to-commence-on-20-april-2020 Last visited on May 13, 2020 at 9:30 pm.