Understanding the enforcement of contractual rights in India

Bizar Male

INTRODUCTION

Contracts play an intrinsic role in our daily lives, especially those who are involved in business sector. The basic intend to enter into a formal, legal contract with another party is to bind them legally and obligate them to perform the work which was agreed upon. This performance of contract gives rise to a contractual liability which is imposed upon the party which defaults in performance of such contract. To address this issue, the Law of Contract, or to be precise, the Indian Contract Act, 1872 lays down the fundamental essence of a contract and also clarifies the rights and liabilities which bind a party once they enter into a contract between themselves.

If a contract has developed between two parties, the performance of such contract, the completion of the work or the object for which the contract has been entered into, has to be fulfilled. In case of non-performance of the contract on behalf of the performing party, there would be a breach of such contract, and in such a scenario, the defaulting party has to pay certain amount of compensation to make good the loss suffered due to the breach of such contract. Indian Contract Act, 1872 talks about non-performance of contract in two of its sections, namely, Section 56 (Impossibility to perform the contract after its execution) and Section 32 (Contingent contract).

In this context, there has been a concept of force majeure which is prevalent during times when a contract cannot be performed due to certain unprecedented situations.  To discuss about force majeure a bit, there is no statutory law dealing with force majeure in India, unlike other neighbouring countries like China and France. Article 7.1.7 under the UNIDROIT Principles of International Commercial Contracts defines Force Majeure as “party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences“. It is basically a civil law and in contract, it is a bilateral understanding between the parties and the force majeure clause entered into a contract.  If there is a force majeure clause in a contract, in order to invoke the clause, the provisions of frustration of contract clause is applied. This force majeure clause is basically applied in the event of war, disaster, epidemic, calamity and usually in all force majeure clause, there is a suspension of contract, during the force majeure situation. One of the main issues which might arise during force majeure is with regard to the payment for the contract. To clarify that, although performance of a contract suspends during force majeure but the payment due for the contract would not be frustrated.

COVID 19 AND ENFORCEMENT OF CONTRACTUAL OBLIGATION

During the pandemic, every sector of the economy has faced a huge setback with regard to obligations, on its completion and performance, arising out of contract, due to the ongoing pandemic. For the purpose of performance of a contract, there are usually two parties involved; one who receives the money on successful completion of the work assigned and the other who pay the money on due performance. Sec. 56 of the Indian Contract Act, 1872, lays down, “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.” Thus, the main base of this section rests upon the term ‘impossibility’ and, on a plain reading of the section, it can well be concluded that the present pandemic situation can well be related to this section and it can as well be invoked on our contractual obligations. However, force majeure clauses in a contract does not excuse the non-performance of parties in its entirety but only suspends it for a duration of force majeure. So, that itself implies that there could not be a complete termination of force majeure clause, that may be the agreement gets terminated on account of an force majeure clause being there or there could be a temporary suspension. In a recent case Standard Retail vs. G.S. Global Corp., steel was being imported in the country and it was claimed that steel, being an essential commodity, has to be excluded from the purview of the applicability of force majeure clause. The single-bench of the Bombay High Court has very clearly stated that force majeure will not be considered in that specific instance since it is a private contract. It is to be mentioned at this backdrop that on February 2020 the Government of India declared the outbreak of Covid-19 pandemic to qualify as a force majeure with respect to the performance of contract but it has not included private commercial contracts within its purview but has clarified that it may have an assuasive value, by providing that, “coronavirus should be considered as a case of natural calamity and force majeure may be invoked, wherever considered appropriate, following the due procedure (in the Office Memorandum)”.3 It provides that “a force majeure clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the force majeure. The firm has to give notice of force majeure as soon as it occurs and it cannot be claimed ex-post facto…If the performance in whole or in part or any obligation under the contract is prevented or delayed by any reason of force majeure for a period exceeding ninety days, either party may at its option terminate the contract without any financial repercussion on either side”.

Nevertheless, in cases where the performance of the contract cannot be excused by bringing it under the purview of force majeure, it can still be absolved under Section 56 of the Indian Contract Act, 1872, which talks about doctrine of frustration. However, there is a subtle difference between doctrine of frustration and force majeure. On of them being, doctrine of frustration is applicable in cases where the contract was silent of any such unlikely event whereas a force majeure clause in a contract enlists all such events, the occurrence of which will excuse the performance of the contract for the time being.

Coming to the impact of Covid-19 pandemic on enforcement of contractual obligations, it can well be said that it is, by now, not unknown to us that how the nationwide lockdown has disrupted business of every sector and the quarterly GDP report was an ardent reflector of that, it will not be a surprise if there is a spike in number of cases relating to enforcement of contractual rights in a desperate move to dissolve the enforcement of force majeure clause. In absence of a force majeure clause, the parties may seek for enforcement of doctrine of frustration under Section 56 of the Act, and it could be a challenge before the court and the tribunal to decide whether this situation qualifies for temporary suspension of performance of contract by invoking the force majeure clause or rendering the whole contract as void by enforcement of Section 56.

RELIANCE-FUTURE DEAL

Last month, Future group decided to sell its retail, wholesale, logistics, warehousing, assets to Reliance Retail for around 27 Cr. All the key group companies of Future Group were supposed to be merged into Future Enterprises and the latter, by way of a slump sale will transfer the retail and wholesale business to Reliance Retail and Fashion Lifestyle.

It is imperative to mention here, that in 2019, Amazon.com NV Investment Holdings acquired 49% stake in Future Coupons- a promoter group entity of Future Retail. Amazon was also granted a call option allowing it to all or part of promoters’ shareholding in Future Retail. Future Coupons and Future Retail also entered into a shareholders’ agreement. This shareholders’ agreement quoted that prior approval of Future Coupons is required on certain matters such as “transfer or license of all or substantially all of the assets of Future Retail, or material assets, transfer of assets above a certain threshold to a related party, amendment of articles of association in conflict with the terms of SHA or any issuance of the share capital in contravention of the SHA.”

Now, it is this shareholders’ agreement mentioned above, that amazon is accusing Future Group in violation of the contractual obligations, since, according to Amazon retail, the contract specifically contained the clause which mentioned that Future Group could not sell any asset within 10 years of the deal, and even if they wish so, the e-commerce will have the first right over it. The retail giant has also claimed that in the shareholders’ agreement, they have specifically mentioned about certain companies and also provided the list of those companies, with which the Future Group cannot enter into a deal, but that clause has also been ignored by Kishore Biyani led retail company. But the Future Group has claimed that although they approached the e-commerce, they vehemently denied the proposal and thereafter they signed the deal with Mukesh Ambani led Reliance Industries Limited. Most recently, on 07th October, 2020, Amazon, besides sending a legal notice has also initiated an arbitral proceeding before the Singapore International Arbitration Centre (SIAC), having its seat of arbitration in Singapore.

It has been reported that Future Group intends to settle the matter amicably either through mediation or arbitration. This proposed deal has raised speculation among other market players and traders that if the deal succeeds between Future Group and Reliance Industries Limited, it may lead to a monopoly power at the hands of the Reliance Industries which would ultimately, lead to an anti-competitive environment in the country. however, the deal is at a very nascent stage to analyse since, apart from the arbitration proceeding initiated by Amazon, it is still the permission of Securities and Exchange Board of India (SEBI), Competition Commission of India (CCI), National Company Law Tribunal (NCLT) and also of the creditors and minority shareholders.

Reference:

  1. http://www.legalserviceindia.com/article/l289-Doctrine-of-Frustration-&-Force-MajeureClause.html#:~:text=Doctrine%20of%20Frustration%20is%20defined,afterwards%20becoming%20impossible%20or%20unlawful.
  2. https://futureretail.in/pdf/FRL_Board_Meeting_Outcome_12.08.2019.pdf
  3. https://www.livemint.com/news/india/amazon-approaches-singapore-arbitration-centre-over-future-reliance-deal-11602155326101.html
  4. https://www.mondaq.com/india/litigation-contracts-and-force-majeure/932798/performance-of-contractual-obligations-during-the-covid-19-pandemic
  5. https://www.mondaq.com/india/litigation-contracts-and-force-majeure/963934/contracts-and-force-majeure-during-a-pandemic-a-view-from-india?type=mondaqai&score=78
  6. https://www.mondaq.com/india/litigation-contracts-and-force-majeure/934764/force-majeure-frustration-of-contract-in-light-of-covid-19?type=mondaqai&score=81
  7. https://economictimes.indiatimes.com/industry/services/retail/why-is-amazon-against-the-future-reliance-deal/what-is-the-ril-future-deal/slideshow/78615515.cms
  8. https://www.business-standard.com/article/companies/future-group-to-go-for-mediation-over-amazon-s-legal-notice-on-ril-deal-120100800752_1.html
  9. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/amazon-issues-legal-notice-to-india-s-future-group-over-reliance-deal-60650198

 

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