This article is written by Pavni Tuli, a student at USLLS, GGS IP University, New Delhi and Ritika Bharti, a student at Christ University, Bangalore. The article discusses the provisions of enforcing Force Majeure amidst COVID-19.

Introduction 

The ubiquity of Coronavirus (COVID-19) has brought forth several legal dilemmas. The World Health Organization (WHO) declared COVID-19 as a pandemic and governments across the world have enforced national lockdowns and curfews which restrict the movement, travel from one place to another and mass gatherings of people.

With its very onset, COVID-19 has tremendously impacted the global economy along with the contractual obligations of parties in commercial contracts. One such predicament involves the contractual obligations that have come to a halt due to impossibility or delay in performance.

Meaning of Force Majeure

Force majeure is a French term that literally means “Superior force.” A force majeure event refers to the occurrence of an event which is outside the reasonable control of a party and which prevents such party from performing its obligations under a contract. It is related to the occurrence of an event for which no party can be held accountable provided the event is unforeseeable, external to the parties of the contract, and unavoidable. The Supreme Court of India in Energy Watchdog v. Central Electricity Regulatory Commission [1], lucidly stated that “insofar as a force majeure event occurs that dehors the contract, it is dealt with by the rule of positive law under the Section 56 of Indian Contract Act. The performance of an act may not be literally impossible, but it may be impracticable and useless from the point of view of the object and purpose of the parties”.

Force Majeure Provision

Based on the terms of the contract, by and large, a party can claim relief for a force majeure event. Similarly, as with all issues subordinate to the particulars of a contract, each force majeure arrangement should essentially be considered on its exact terms and in its particular setting. Determination of force majeure event not only depends upon the contractual interpretation of the clause but also on how the force majeure event is defined in the contract, for instance, specific relief from COVID-19 may be sought under the force majeure clauses that include terms such as epidemics, pandemics, diseases, action by government, nation/statewide lockdown, etc., which ultimately hinders the fulfilment of contractual obligations of the parties. However, the force majeure event need not necessarily be COVID-19 itself but the effect it has on the frustration of contractual commitments of the parties. 

The force majeure provision may be invoked if the following criteria are fulfilled:

• The impediment is beyond the reasonable control of the affected party;
• The impediment could not have been foreseen by the affected party while concluding the contract;
• The event hinders the affected party’s ability to perform the contractual obligations; and
• The affected party has taken all reasonable steps to avoid or mitigate the event or its foreseen consequences.

It should be kept in mind that the party seeking to rely on the force majeure clause has to send a due intimation to the other party for seeking relief under the force majeure provision. A delay in sending the notice may render the utility of the force majeure clause futile.

The Manual for Procurement of Goods 2017 

“A Force Majeure (FM) means extraordinary events or circumstance beyond human control such as an event described as an act of God (as a natural calamity) or events such as a war, strike, riots, crimes (but not including negligence or wrong-doing, predictable/seasonal rain and any other events specifically excluded in the clause). An FM clause in the contract frees both parties from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract. An FM clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the FM. The firm has to give notice of FM as soon as it occurs and it cannot be claimed ex-post facto. There may be an FM situation affecting the purchase organisation only. In such a situation, the purchase organisation is to communicate with the supplier along similar lines as above for further necessary action. If the performance in whole or in part or any obligation under this contract is prevented or delayed by any reason of FM for a period exceeding 90 (Ninety) days, either party may at its option terminate the contract without any financial repercussion on either side.”

Notice Requirements

Unlike a one-off episode such as a catastrophic event, which is generally restricted in time and bound to a specific geographical region, the COVID-19 flare-up has been dynamic and has portrayed its capacity to multiply quickly and unexpectedly across different nations and geological locales. On February 17, 2020, the China Council for the Promotion of International Trade revealed that it had already issued over 1,600 ‘Force Majeure certificates’ to firms in 30 sectors, covering contracts worth over $15 billion.

In India, the Office Memorandum issued by the Ministry of Finance, Department of Expenditure effectively states that the COVID-19 outbreak could be covered by a force majeure clause on the basis that it is a ‘natural calamity’, caveating that ‘due procedure’ should be followed by any Government department seeking to invoke it. Furthermore, the Ministry of Finance has also declared that solar project developers can invoke force majeure if they fail to meet their contractual obligation due to any impediment caused by COVID-19.

Consequences of Force Majeure Claims

The ramifications for the parties where a legitimate force majeure event has happened will rely upon the nature of affected party’s commitments under the contract, along with the consequences and remedies explicitly contemplated by the force majeure arrangement in the contract.

Contractual remedies for force majeure typically include:

• an extension of time to perform those obligations; or
• suspension of contractual performance for the duration of the force majeure event; or
• termination of the contractual performance if the force majeure event extends over a longer period.

Practical Suggestions for parties invoking Force Majeure provision

Parties should be vigilant regarding their obligations as the situation continues to unfold, and should take into consideration the following steps:

• They should rigorously review their contract in order to determine whether the contract provides for a force majeure clause or not. And if it does, interpret the force majeure provision to ensure if an event such as COVID-19 or nation/statewide lockdown will fall within its purview. The legal principle of ejusdem generis, as well as harmonious construction, will come handy. If in doubt, it may be helpful to seek legal advice early on in the process.
• Carefully discern that the inability to perform the obligations under the contract is due to the consequences (direct or indirect) of COVID-19 and not other considerations thereto.
• Be vigilant in taking steps to avoid or mitigate the possible effects of COVID-19 upon your business, workforce and your ability to continue to perform contractual obligations. It will be of utmost legal importance to show that you have taken all reasonable measures to fulfil your obligation and that it was, in fact, beyond your reasonable control.
• Carefully consider whether there are any time-bound notice requirements and take timely action in intimating the other party/parties.
• Carefully go through the insurance policy’s terms and conditions to determine whether insurances may cover any of the expected losses.
• The existence of a force majeure clause may give the parties the leeway to renegotiate their obligations under the contract. It is however imperative that the renegotiations are made keeping in mind any future obstruction that COVID-19 may cause. This is in line with the fact that for contracts that have been entered into during the continuance of the COVID-19 crisis, it will be difficult to invoke force majeure as the parties will be expected to be aware of the ongoing situation and its foreseeable consequences.

Denial of Force Majeure protection by Bombay High Court

The Bombay High Court on 8th April 2020, refused ‘Force Majeure’ exemption to steel importers noting that steel has been declared as an ‘essential service’ during the lockdown. The petitions were filed under Section 9 of the Arbitration and Conciliation Act wherein the petitioners sought directions restraining the Respondents (Korea-based exporters) from encashing the Letters of Credit by invoking the force majeure clause in their contract. The petitioners relied upon Section 56 of Indian Contract Act, 1972 as well as Supreme Court’s judgment in Energy Watchdog v. CERC (2017) and Satyabrata Ghose v. Mugneeram Bangure and Co. (1954) to contend that the contracts with Hyundai Corp and GS Global stood terminated as unenforceable due to “frustration, impossibility and impracticability.” Refusing the ad-interim reliefs sought by the Petitioners, the Court stated that:

The Letters of Credit relates to an independent transaction with Bank Wells Fargo and therefore, does not relate to the present dispute between the Petitioners and the Respondents.

The contract in question was on Cost and Freight basis. Basing upon this, the Court noted that since the Respondents had complied with their obligations and performed their part in the contract by shipping goods from South Korea, the inability of the Petitioners to perform their obligations towards purchasers and the contention that they would subsequently suffer damages could not be considered as a valid ground to invoke Force Majeure. Therefore, in cases like this, it is pertinent to note that the mere possibility of hardship, damage or any financial liability would not be sufficient to invoke Force Majeure.

The Court also relied upon the fact that the distribution of steel was declared as an ‘essential service’ and that there was no restriction on its movement. In light of this, the Force Majeure clause could not come to the aid of the Petitioners.

Furthermore, the Court stated that the lockdown would be for a limited period and that the lockdown should not be used as an excuse to resile from the contractual obligations.

Doctrine of Frustration

However, for contracts that have not incorporated a force majeure clause, the alternative lies under Section 56 of the Indian Contract Act, 1872, which deals with the Doctrine of Frustration. Simply put, the Doctrine of Frustration encompasses acts that have become impossible or illegal to perform. However, this is a limited defence to non-performance. The Supreme Court in the landmark case of Satyabrata v. Mugeeram [2] explicitly stated that relief under Section 56 can be availed only in cases where the contractual obligation has become impossible owing to a change in circumstance that has totally shaken the very foundation upon which the parties had entered into an agreement. To claim relief under this section, the parties must prove the absolute impossibility of contractual performance due to the Force Majeure Event, and not merely any loss, hardship or financial difficulty in its execution. Swaying away from the general understanding of ‘impossibility’, the Supreme Court in Energy Watchdog v. Central Electricity Regulatory Commission [3] noted that “the word “impossible” has not been used in the Section in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties”.

Conclusion

The nationwide economic slowdown and an overall slump in various other sectors due to the outbreak of COVID-19 may not be construed as a valid reason for the frustration of each and every contract. The avoidance or delay in performance of certain obligations of a contract due to the force majeure clause differs from one contract to another depending upon the facts and circumstances of a particular case. The onus will be on the parties to highlight the particular quandary caused by the outbreak of COVID-19 that prevented them to fulfil their duties and obligations under the contract. Therefore, the burden of proof claiming that the occurrence of the pandemic is the sole reason behind non-performance rests upon the party seeking to claim benefits under such a clause. Moreover, the party will be required to prove that there were no alternative means by which the contractual obligation could have been fulfilled and that all reasonable measures had been taken to mitigate the consequences of such a circumstance.

Lastly, it is also pertinent to note that unlike Force Majeure clauses where the parties can delay the performance (contractual remedy) based on their circumstances, no such relief can be availed under Section 56 of Indian Contract Act.

References

[1] 2017 Latest Case Law 307 SC.

[2] 1954 A.I.R. 44.

[3] 2017 Latest Case Law 307 SC.

[5] Union of India v Pearl Hosiery Mills, AIR 1961 Punj 281