This article is written by Abhijit Mittal & Nandini Aishwarya.
Table of Contents
Introduction
The Novel Coronavirus (COVID-19) epidemic broke out in the city of Wuhan in the People’s Republic of China in December, 2019. Since then, the COVID-19 outbreak across continents has not only inflicted large scale loss of lives but also has brought businesses to a grinding halt on account of the world-wide state-mandated lockdowns which is perceived to cause economies to take a huge blow. Such is the catastrophe, that on March 11, 2020 the World Health Organisation declared the outbreak as a ‘Pandemic’[i].
India has also been under the captivity of the lockdown, causing severe hardships to businesses, taking several contracts under its jolt. As parties gasp to keep their operations up and running, the current situation has created a scenario wherein parties are struggling to perform their contractual obligations. Since unprecedented times call for unprecedented measures, parties bound by contractual obligations are hopeful that the clause of Force Majeure will come to their rescue in order to prevent any possible liability towards the breach of their respective contracts because of this pandemic. It has also brought into play the issue of whether COVID-19 can be interpreted as a force majeure event, impacting the performance of contracts. Thus, before falling back on invocation of Force Majeure clause to bring relief in the times of COVID-19, it is imperative to analyse the laws applicable to Force Majeure in India and judicial approach towards the applicability and invocation of the said clause in a contract.
What is Force Majeure?
Black’s Law Dictionary defines Force Majeure as ‘superior or irresistible force’[ii]. Force Majeure is a French term that finds its genesis from the Latin term ‘Vis Major’, which means an irresistible natural occurrence that causes loss/harm and could not have been avoided by humans even after exercising utmost skill, diligence and prudence.
On a plain understanding of both these terms, it is clear that Vis Major is a narrower term comprising only acts of God such as floods, earthquakes and other natural calamities etc. On the other hand, Force Majeure can cover all the events; be it acts of God, epidemics or manmade situations inter alia war, breakdown of machineries, change of government policies, etc. Since the term Force Majeure gives an expansive coverage to the parties, most of the contracts incorporate the clause of Force Majeure to provide safeguards against liability towards the breach of their respective contracts, when certain eventualities are beyond the control of either of the parties.
Force Majeure Clause in a Contract
It is common that the parties entering into an agreement are cautious of protecting their rights and liabilities. One major step in protecting the same is to have a well-drafted Force Majeure clause in the contract, which would determine the extent of such clause depending upon the factors it covers within its ambit. For instance, if the Force Majeure clause in a contract covers epidemic or pandemic, non-performance of contractual obligation in the present situation may not invite any liability. However, in the event, if the Force Majeure clause does not cover a pandemic like situation, introduction of COVID-19 into the contract may be considered as an unforeseen event, which is similar to the other triggers found in the Force Majeure clause. However, in such cases the party invoking the said clause will have to prove that the non-performance of the obligations is beyond the control of such party.
Statutory Provisions on Force Majeure
What happens when the contract does not have any Force Majeure clause? It is interesting to note that although the Indian Contract Act, 1872 (‘Act’) does not provide for any definition of the term Force Majeure, the law pertaining to the same is enshrined under Section 32 and Section 56 of the Act. Section 32 of the Act deals with contracts dependent upon contingent acts, meaning thereby that, in the event the contingent act becomes impossible to comply with, then such a contract would become void. Whereas, Section 56 of the Act deals with a situation where the performance of the contract has become impossible due to happening of any event beyond the control of the parties.
The moot question which has emerged in recent times is, whether the Indian Courts will consider COVID-19 to be the ground of frustration of Contracts under Section 56 of the Act? To have a better understanding on this issue, it is apposite to analyse the approach taken by the Indian Judiciary while dealing with the invocation of Force Majeure clauses vis-à-vis Section 32 and 56 of the Act.
Indian Judiciary on Force Majeure
Indian Courts on several occasions have dealt with the interpretation of Section 32 and 56 of the Act as well as Force Majeure clauses in a contract. In one such landmark judgment in the case of Satyabrata Ghose vs. Mugneeram Bangur & Co.[iii], the Hon’ble Supreme Court while taking a narrower approach has held that doctrine of frustration under Section 56 of the Act will not be applicable merely on impossibility to perform the obligations under the contract. However, the said frustration can only be attracted where such impossibility is beyond the control of the party and has destroyed the very foundation of the contract making it impracticable to perform.
The Hon’ble Supreme Court also dealt with the doctrine of frustration and Force Majeure events in the case of Energy Watchdog vs. CERC[iv], and reiterated that Section 56 or the Force Majeure clause should always be construed narrowly. The Apex Court further held that Force Majeure clause cannot be invoked where there exists alternate mode of performing the contractual obligations as there is a difference between impossibility of performance and commercial difficulty.
Recently, in the case of National Agricultural Cooperative Marketing Federation of India vs. Alimenta S.A.[v], the Hon’ble Supreme Court extensively discussed the scope of Section 32 and 56 of the Act. In the said case, the governing agreement had an express clause contemplating that if there is any prohibition of the export by the Government, the unfulfilled part of the contract shall be cancelled. The Court held that since there was an express contingency provided under the agreement, the contract became void under Section 32 of the Act and not under Section 56 of the Act. The Court also relied on the principles laid down in Satyabrata Ghose (supra.) and held that if the contract whether impliedly or expressly contained a stipulation, according to which it would stand discharged, the said dissolution would be under Section 32 of the Act.
Thus, it can be inferred from the above-mentioned decisions that the Hon’ble Supreme Court of India has always taken a narrower approach while dealing with the invocation of Force Majeure clauses in a contract or Section 56 of the Act. It will, therefore, be interesting to note how the judiciary will interpret the current COVID-19 situation, wherein the parties are unable to meet the contractual obligations because of the cascading effects of the global lockdown.
Has the Government taken any step so far?
Owing to the plummeting condition of businesses, the economy has suffered a deep contraction. In order to tide over the current situation, the Department of Expenditure (Procurement Policy Division) of the Ministry of Finance issued an Office Memorandum dated 19 February 2020 in relation to the ‘Manual for procurement of goods[vi]. As per the said Office Memorandum, the COVID-19 outbreak could be covered under a Force Majeure clause, since it is a natural calamity. Similarly, the Ministry of New & Renewable Energy has issued an Office Memorandum dated 20 March 2020 directing all the Renewable Energy implementing agencies to treat disruption in the supply chain due to COVID-19 as a Force Majeure event[vii]. It is imperative to point out that the aforementioned Office Memorandums are restricted only to certain contracts and are not universally applicable. However, the parties who are unable to meet their contractual obligations may rely on these office memorandums for persuasive value, which showcase the intention of the Government to declare COVID-19 a Force Majeure event.
Invocation of Bank Guarantees amid COVID-19
Recently, amid the current lockdown, the High Court of Bombay refused to grant the exemption of Force Majeure to steel importers. In the order dated 07 April 2020 passed in Standard Retail Pvt. Ltd. vs. M/s. G.S. Global Corp & Ors.[viii], the High Court of Bombay while rejecting the plea of the steel importers invoking the Force Majeure clause to restrain the Respondent therein from encashing the letter of credit held inter alia that since the current lockdown is only for a limited period, the Petitioners cannot absolve themselves from making the payment to the Respondent. One more aspect on which the plea of the Petitioner was rejected is that the Force Majeure Clause in the contract was worded in such a way as to only exempt the Respondent from any possible breach and not the Petitioner. Therefore, it is imperative that the drafting of an agreement especially the Force Majeure clause in the current situation should be in such a way that it should come to the aid and rescue of both the parties and not just one.
The High Court of Delhi however, has taken a more liberal approach while granting injunction against invocation of bank guarantees amidst the COVID-19 and lockdown period. The same can be seen from the order dated 17 April 2020 passed in Ashwani Mehra vs. Indian Oil Corporation Limited & Ors.[ix], wherein a stay was sought on invocation of Bank Guarantees by the Respondent. Since the National Company Law Tribunal is not functioning to its maximum extent, the Resolution Professional of the Petitioner moved the High Court of Delhi. The High Court of Delhi without going into the merits of the case granted stay against the Indian Oil Corporation Limited from invoking the bank guarantee till one week of lifting of the lockdown.
Subsequently in its Order dated 20.04.2020 passed in the case of M/s. Halliburton Offshore Services Inc. vs. Vedanta Limited & Anr.[x] The High Court of Delhi observed that the current lockdown is prima facie in the nature of Force Majeure and neither the Petitioner nor the Respondent could have predicted the same. The Court even after acknowledging the fact that the Petitioner delayed in complying with its contractual obligations, went ahead and granted interim stay on the invocation and encashment of Bank Guarantees on the ground of sudden imposition of lockdown due to outbreak of COVID-19.
High Court of Delhi’s Order: A Ray of Hope?
The observations made by the High Court of Delhi is an interesting take on the prevailing situation. This has undoubtedly come as a relief to many who are finding it difficult to meet the contractual obligations due to the outbreak of this Pandemic. Even though, the Order dated 20 April 2020 does not specifically answer the question as to whether COVID-19 will be considered as a Force Majeure event, since the matter was only at an initial stage and the observations are only prima-facie in nature, however, it somewhat instils confidence and provides an insight into the approach that the judiciary may adopt going forward.
In a nutshell, invocation of a Force Majeure clause is dependent on a case to case basis and may vary on how the contracts are actually worded. Given the stringent and narrow interpretation the Indian Judiciary has taken vis-a-vis the Force Majeure clause, it will be interesting to see how courts will tackle thousands and millions of contracts that may possibly get affected by the current lockdown amidst the outbreak of COVID-19.
References
[i] World Health Organisation, Media Briefing on COVID-19 dated March 11, 2020,
https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-media-briefing-on-covid-19—11-march-2020.
[ii] Black’s Law Dictionary 774(Rev. 4th ed. 1968),
http://heimatundrecht.de/sites/default/files/dokumente/Black%27sLaw4th.pdf.
[iii] Satyabrata Ghose vs. Mugneeram Bangur & Co., AIR 1954 SC 44.
[iv] Energy Watchdog vs. CERC, (2017) 14 SCC 80.
[v] National Agricultural Cooperative Marketing Federation of India vs. Alimenta S.A., Civil Appeal No. 667 of 2012, Judgment dated April 22, 2020,
https://main.sci.gov.in/supremecourt/2010/37543/37543_2010_31_1503_21810_Judgement_22-Apr-2020.pdf.
[vi] OFFICE MEMORANDUM issued by GOVERNMENT OF INDIA, MINISTRY OF FINANCE dated February 19, 2020,
https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf.
[vii] OFFICE MEMORANDUM issued by GOVERNMENT OF INDIA, MINISTRY OF NEW & RENEWABLE ENERGY (MNRE) dated March 03, 2020,
https://mnre.gov.in/img/documents/uploads/file_f-1584701308078.pdf.
[viii] Standard Retail Pvt. Ltd. vs. M/s. G.S. Global Corp & Ors., Commercial Arbitration Petition (L) No. 404 of 2020, Order dated April 07, 2020.
[ix] Ashwani Mehra vs. Indian Oil Corporation Limited & Ors., W.P. (C) 2971 of 2020, Order dated April 17, 2020.
[x] M/s. Halliburton Offshore Services Inc. vs. Vedanta Limited & Anr., O.M.P. (I) (COMM) 88/2020 & I.A. 3697/2020, Order dated April 20, 2020.
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