This article is written by Shivangi Kumari and Vaishnavi Roy.
Table of Contents
Abstract
COVID-19, its outbreak has led to the coronavirus being widely reported across the world and its consequences still continue. Different countries have imposed travel bans, lockdowns and restrictions on gathering. The World Trade Organization has considered the outbreak as a pandemic. It has led to an adverse effect on the domestic market and its network of the supply chain. The virus already has led the legal industry in many problems. Recently, even the Supreme Court of India had utilized its plenary powers under Article 142 of the Constitution to extend the ‘limitation period’ in all cases mentioned under the Limitation Act, 1963.
There has been adverse impact on the world economy as well. Such a negative impact has affected the domestic market chain at its core due to the complete social distancing and other preventive measures. The immediate results were supply-chain disruptions, ‘unintentional’ and delay in performance and carrying out of the contractual tasks. From construction contracts to manufacturing and supply agreements, the variety of contracts which are likely to be affected by the spread of COVID-19 is undoubtedly humongous. Counterparties, including suppliers and professional service lenders (e.g. Independent Consultants & Accountants) may seek to avoid immediate performance, by citing delay or non-performance borne out of an unexpected event. This prevents the efficient working of businesses and has impacted existing operations and contracts. On the issue of contracts, this outbreak has brought many new aspects to the fore, one of which includes the Force Majeure clause that impacts formal contracts. Given the disruption of supply chains caused by the COVID-19 pandemic, many contracts will be delayed, interrupted, or even cancelled. So will the contractors be sued for the breach of contract? Does the pandemic come under the exception of the breach of contract?
Introduction
The invoking of contractual Force Majeure clauses in response to contractual performance difficulties arising from effects of coronavirus disease (COVID-19) is happening increasingly. Because there is no doctrine of Force Majeure in English law, the focus needs to be on specific wording of the clause.
An Act of God can mean many things to many people. Is the coronavirus (COVID-19) Pandemic an “act of god”? It may sound like a philosophical or theological question-but it’s likely to be a legal one because the occurrence of an act of god potentially extinguishes liability for a party in breach of a contract.
What is an Act of God?
An Act of God is defined as the directly, suddenly, insanely violent, naturally, and irresistible act of nature, one which could not by any amount of care would have been foreseen or if it has been foreseen, could not be avoided by any amount of care by any individual. An ‘act of god’ is mainly considered in context of:
(1) The exemption of ‘act of god’ given to the common carriers;
(2) Act of god as a defence to claim of negligence, rather in context of an Force Majeure clause. The meaning of ‘act of god’ is defined as follows. It must be:
- Be exclusively the consequences of natural causes;
- Be of an extraordinary in nature; and
- Such that it would not be anticipated or provided against by the party seeking to rely on it.
Exclusively of natural causes
Illness, especially the one that’s spread from person to person, involves the agency of humans. It might be argued that COVID -19 does not fit into this conception of a happening, as the causative element isn’t a virus but the acts of governments. There are the samples of english courts finding that an illness is often an ‘act of god’.
In Boast v Firth (1868)[1], permanent illness was recognized as an ‘act of God’ within the context of a private contract. during this case, the judge highlighted that only illnesses that aren’t the fault of the person in question are often considered an ‘act of God’:
“Not every illness, though it’s permanent, are often said to be the act of God. It’s going to have arisen from the wilful carelessness or imprudence or misconduct of the apprentice: then it might be no excuse”.
In Hall v Wright [1859][2], it had been also recognised that an illness might be an ‘act of God’. The judge during this case, in considering the hypothetical scenario of a contract for an author to write down a book or a painter to color an image within an inexpensive time, determined that:
“if the author became insane or the painter paralytic, then incapable of performing the contract by the act of God, he wouldn’t be liable personally in damages.”
In Ryan v Youngs [1938][3], a person who was employed by the defendant to drive a lorry, died whilst driving the lorry which ran on and injured the plaintiff. The judge ruled that:
“This case is what has often been mentioned as an act of God. An apparently healthy, apparently competent man, responsible for a competent machine, is suddenly struck down, which may be a matter which nobody can reasonably anticipate.”
Of such an unprecedented nature
In addition to being a natural cause, an ‘act of god’ must be extraordinary or overwhelming.
Case Laws
In Nugget v Smith,[4] the court had compared the difference between wind which enables a ship to navigate the ocean and therefore the rainfall which causes a river to burst its banks. Both are natural events but latter is that the more violent and thus an ‘act of god’.
Nicholas v Marsland: The defendant was the owner if a series of artificial ornamental lakes, which has existed for an excellent not years & had never previous to 18th June, 1872 caused any damage. Thereon day, after a most unusual fall of rain, the lakes overflowed, the dams at their end gave away & water out of the lakes over excited the country bridges lower downstream. The court held that there was no liability.
Therefore it’s likely that COVID-19 would satisfy this limb of definition because it represents an “unprecedented” pandemic.
Cannot be anticipated of provided against
Lastly so as to constitute an ‘act of god’ the act must also not be ready to be ‘prevented by any amount of foresight and pains and care reasonably to be expected’ by the party counting on it.
Case Laws
Commissioner of Railways v Stewart: The several plaintiffs sued western Australian commissioner of railways for damages in negligence after damage was caused to their properties. The plaintiffs argued that the culverts beneath the railway embankment were insufficient to affect a rainfall which had occurred and water broke the embankment and caused damage to the properties. The court found that downpour wasn’t magnitude or intensity that it might be classified as act of god.
Pandemic & Act of God
The global impact of the outbreak has caused an alarming case of utmost disruptions of economic activities and day-to-day business transactions. There has been a consequential lockdown and suspension orders by various governments vide specific ordinances and general government orders. Therefore, it’s completely fair to state that the results of the pandemic have the effect of a rigid interruption.
In the present scenario arising thanks to the COVID -19 pandemic, the govt of India has also taken steps to safeguard the interest of parties in commercial contracts. The Ministry of Finance, Government of India vide an office memorandum recently clarified with reference to ‘Manual for Procurement of products, 2017, and declared that within the event of any disruption within the supply chains thanks to spread of coronavirus in China or the other country, such situation are going to be covered within the act of God Clause (FMC) within the contract. It’s further clarified that such a situation should be considered as a natural calamity and act of God clause could also be invoked, wherever considered appropriate, following the due procedure. The said Manual is issued by the Ministry of Finance for various Ministries/Departments which are delegated powers to form their own arrangements for procurement of products under the Delegation of monetary Power Rules, which need to be exercised in conformity with the ‘Procurement Guidelines’.
Similar initiative was taken by the Ministry of latest & Renewable Energy with reference to ‘solar project developers’. The Ministry vide an Office memorandum, recently declared that whoever misses contractual obligation deadlines on account of COVID -19, can invoke the act of God clauses to avoid any financial penalties. There must be ample proof to point out that there have been no alternative means or method for performing the party’s obligations under the contract.
Can human negligence instigate the act of God?
People believe that God is their superior which if they were to wish for him, he will free them from everything, but there’s no superior. You yourself are your superior. We are liable for our own mistakes. We are somewhere responsible for every disaster in some way. This statement creates more difficulties to know whether the Covid 19 pandemic is the explanation for humans and therefore the government negligence or is like other present disasters which humans don’t have any control of. Diseases like Covid 19 are spread easily but to certain extent it can often effectively be controlled. Moreover it needs the govt to return out with more safety measures and for the people to be more careful and preventive.
A disease outbreak and/or pandemic and a government’s response to those sorts of outbreaks are often an act of God event, typically defined as:
An unforeseeable event or circumstance; and beyond the control of and without the fault or negligence of the non-performing party. Acts of God include wars, riots, hurricanes, floods, epidemics, and natural disasters. A serious, widespread pandemic can qualify as an act of God sufficient to invoke act of God protection, but in some states, the definition within the clause must be more expansive. A party seeking to invoke act of God protection should carefully examine the contract.
Conclusion
It has also known that the parties has reduced the power to satisfy their contractual performances thanks to restriction in movement, stoppage of production, increase in costs thanks to scarcity of raw materials components, labour shortages, shortage of funds, disruption within the supply chains. With widespread disruption in business, manufacturing and transport, of coronavirus it are often assured that India can see a flood of ‘force majeure’ invocations.
Of course, in such events, the courts and arbitrators will need to evaluate and choose each dispute on individual merits, which might support the terms of the contract, the intent of the parties, steps taken to mitigate.
References
[1] Nugget vs smith[1876] CPD 423
[2] Isabella hall v george wright (1859)120E.R. 695
[3] Ryan vs Youngs[1938] 1 All E.R.522
[4] Nugget v smith [1876]1 C.P.D. 423
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