Getting out a of contractual liability due to Covid-19

This article appeared on 21 March 2020

After the confirmation of the first Covid-19 case in the country, the government had to take numerous steps to prevent further spread of the virus. As a result, the entire tourism sector came to a standstill, entry of labourers from India is stopped, entertainment centres closed, and the transportation sector faces restrictions. The government also informed that, should the situation worsen, some districts or the entire country may get locked down.
In such a case, many will lose their job, default loans, rents or fail to perform their contractual obligation.  The government is planning to roll out an economic stimulus plan and coming up with numerous fiscal and financial policies to cope up with the situation. 

In such a situation, are there any legal protections for those who may not be able to pay their loans, employers from paying their employees or tenants who may be unable to pay their rents or other contractual liability in Bhutan?

Yes, there is a possibility under the doctrine of force majeure (French word  “cas fortuit” meaning “superior or irresistible force) ” where an event or effect that cannot be reasonably anticipated or controlled”.

It is often compared with the Act of God and includes natural disasters, diseases, strikes, lockouts, accidents, wars, terrorism, which are beyond the control of parties in the contract. Under this doctrine, the law “relieves the parties from performing their contractual obligations” and does not have to pay penalties for non-performance under such circumstances and Bhutan is no exception.

Generally, the clause of force majeure is also known as a hardship clause is incorporated within the respective contractual documents. Covid-19, a global pandemic is one such event that will qualify under the force majeure clause.

In-light of this, the performance of contractual obligations such as loans, house rents or other contractual liabilities may become impossible. 

In Bhutan, incorporation of force majeure clause within the contract documents is not common. However, Section 87 of the Contract Act of Bhutan, 2013 provides this clause in all contracts automatically. It states “If after a contract is entered into, the performance of a promise made under the contract becomes unlawful or impossible by reason of some event which is not within the control of the promisor, the contract shall become void when such performance becomes unlawful or impossible, and such a contract need not be performed”.

This section makes it clear that banks, house owners or government agencies, private entities, employees and other promisee can’t impose penalties nor performance of contractual obligations in such situations. This is because, due to Covid-19, repayment of loans, salary or house rent or other contractual obligations is “rendered impossible or impracticable” which was not known when the parties entered into contracts nor “had reason to know”.

Considering force majeure as extremely exceptional cases, courts are often required to interpret  “a force majeure clause in light of its purpose to limit damages where the reasonable expectation of the parties and the performance of the contract have been frustrated by circumstances beyond the control of the parties.

This means it is not automatic that parties can invoke Section 87 of Contract of Bhutan merely because the Covid-19 case existed in Bhutan but must prove that, the non-performance of the contractual obligation is a result of this disease and performance became impossible and impracticable.