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COVID-19 and Contractual Disputes in India: A Law and Economics Perspective

The COVID-19 pandemic has unleashed a catena of contractual disputes. Several companies and firms have cited COVID-19 as force majeure to suspend the promised supply of goods or services, triggering legal claims of compensation from the counterparties. Employers have refused the promised employment, borrowers have expressed their inability to service debts, and insurance companies have denied compensation for business losses. Even the Centre is wavering in honoring terms of the ‘social contract’ for sharing GST revenue with the States.In this article, we synthesise the Indian Contract Act and relevant case laws to present a legal position on force majeure, frustration of contract and contractual gaps. Using the economic analysis of law, we examine contractual disputes from various sectors, including power, construction and real-estate, rental, event management and hospitality, among others. We analyse these disputes from legal and economic-efficiency points of view. We delineate disputes where the use of force majeure or frustration of contract is justified. We use economic analysis to draw the attention of courts and policymakers towards the economic implication of their decisions. Our analysis suggest that at times the courts under-appreciate the long-term economic consequences of their rulings. Finally, we argue that contracts are not a good instrument for achieving equitable distribution of economic gains and losses. We discuss how public policy is better suited to address equity the other related issues arising from long-term contracts such as debt, employment and insurance contracts.