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Contractual obligations and implications during Coronavirus

total count of victim's to the Corona Virus has totaled to 8800 cases with India having 169 patients being infected with the virus. With Coronavirus succumbing people to social distancing and working from home, the virus has caused tremendous human activity disruption worldwide. Additionally the Corona Virus now being labelled as a pandemic by the World Health Organization (WHO) which is larger than a epidemic in the ratio of its spreading globally has led to multiple businesses and logistic frameworks to collapse. China being largely affected by this virus has caused instability to millions of manufacturing and production businesses.

India has been dependent on China for three major businesses. One of them is the pharmaceutical line. China is the biggest supplier of the basic active pharmaceutical ingredient ( API) for the manufacturing of medicines. China provides India with 70% of its API. The pharmaceutical manufacturing companies have already begun facing the brunt of disruption of supplies from China and exports from India have relatively been cut down indicating an increase in pricing of medicines.

The automobile industry in India is hit because China being our major supplier of automobile parts has shut manufacturing activities and is unable to deliver. Another important and largely affected field is the solar power energy producers. India sources all of its major components for solar power production from China. Solar power plants being quicker to assemble and build are now facing scarcity in supply of basic components and cells.

Demands being higher due to cost reductions has led to power producers to enter into various agreements with contractors which in turn has led to creation of excessive non compliable power purchase agreements ( PPAs) . Shut down of production in China will cause power providers and contractors severe losses and bad credibility. If damages caused due to this shut down cannot be covered, power producers will be left to fend for themselves as the currently known contractual obligations would hold them liable for not obeying by the contract and pay for damages .

In the present scenario , no government has spelled out any compensation for failure to perform contractual obligations or any relief from consequences of breached contractual obligations. But the concept of Force Majeure is applicable in such scenarios.

What is Force Majeure?

Force Majeure is a doctrine contractually agreed upon by all parties to a contract. Conditions which are included within this doctrine along with the reliefs are predefined and recorded as a contractual term. The doctrine of Force Majeure cover unforeseeable circumstances which cause the failure of performing contractual obligations.

This doctrine exempts parties from liability that arises from failing to perform the terms which are contracted, which breach would otherwise cause the defaulting party to be penalized . The conditions to be covered under this doctrine must be unforeseeable and something that is not in the control of any party. Such non performance would then be exempted. It is to be noted that the parties are not completely freed from the performance of the contract.

Only those conditions which are covered under the said doctrine permit the parties to claim an unforeseeable non-performance. Therefore the conditions , events and circumstances covered under this term in a contract are to be carefully drafted and can be exhaustively listed . The conditions in the included list of the said doctrine are usually natural disasters, act of God, fire , adverse weather etc.

This term may also include a list of manmade activities such as war , riots and political upheaval . A list of excluded events or circumstances may also be allowed to be used if those become a consequence of any event of the included list . The contract may also reserve the right to include any other event unless such an event is in the excluded list.

Application of Force Majeure

The said doctrine in the contract cannot be applied without proving it. The burden of proof lies on the non performing party . Such a party has to prove that the event or circumstance was the only reason for the non performance that lead to the failure or delay in performance of the contract.

The non performing party also has to prove that it complied with its duty to mitigate the non performance and its consequences. The duty to mitigate is generally worded and implied when applying under the doctrine of Force Majeure. The non performing party has to prove that they tried to reduce the consequences of the event or circumstances for the performance of the contract. Force Majeure Certifications received from the Government are of aid to the relief seeking party.

Ultimately each contractual term involving the said doctrine is interpreted individually. The language and words used along with their legal and common interpretation would lead to a relief for the party affected. The doctrine of Force Majeure does clash with the doctrine of frustration which is covered under Section 56 of the Indian Contract Act, 1872.

The doctrine of frustration similar to that of force majeure does cover parties for non performance due to uncontrollable circumstances leading to the contract to be terminated and parties being freed from their obligations of further performance of the terms. Doctrine of Force Majeure would be preferably claimed as it is easier to prove along with maintaining longer business relationships with the other party as no termination of contract is required if both parties agree on it.

Currently looking at industrial concerns the Government of India on 19th February , 2020 made the spread of the Coronavirus causing break down supply chain a 'natural calamity' and has allowed parties to seek relief under the doctrine of Force Majeure. Unfortunately no such specific direction has been given in generality for all contracts to include the outbreak of Coronavirus under the doctrine of Force Majeure.

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