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This article is written by Poonam Shekhawat, pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.com.

Introduction

The Indian government on 23rd March 2020 announced a nationwide lockdown for the purpose of containing COVID-19 after the World Health Organisation declared the COVID-19 as a pandemic. The lockdown created circumstances that made it either difficult or impossible for certain contractual parties to perform their obligations under the contracts, and they invoked the “force majeure” clauses in their contracts to protect themselves against liabilities for non-performance of the obligations. Thus, the courts and tribunals were presented with various questions relating to the implications of the force majeure clauses in the wake of the pandemic. In this article, the author has critically analysed five landmark judgments awarded by the courts pertaining to force majeure, assessing the implications of these judgments on the account of the pandemic. 

Force majeure under the Indian Contract Act, 1872

In India, the force majeure events in contracts are governed by two provisions of the Indian Contract Act, 1872, (ICA) i.e., Section 32 and Section 56. Section 32 of the Act applies where the contract between the parties contains a force majeure clause and has also defined the events which will be considered as force majeure events. In such contracts, the determination as to whether or not an event is a force majeure event will be restricted to the contractual terms. On the other hand, Section 56 applies where the contract does not define a force majeure event, and the doctrine of frustration is used to determine whether or not the contract stands frustrated. The contract is said to have been frustrated if an unforeseen event that has not been induced by either of the parties renders the performance of the contract “impossible.” 

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Landmark decisions

The following five are the landmark decisions that have an implication on the force majeure clauses and the pandemic: 

Satyabrata Ghose vs. Mugneeram Bangur & Co., 1954 SCR 310

In this case, the Supreme Court determined the meaning of the word “impossible” stating that for performance to be impossible, it is not necessary that the performance should be literally or physically impossible. Even if the occurrence of the event disturbs the very foundation of the contract rendering the object or the purpose of the contract useless, the performance will be deemed to have become impossible. This decision laid down the standard of “impossibility” of the performance, and the implications of the decision will be that even if the circumstances created by the pandemic are such that the performance of the contract is possible somehow but it ceases the parties’ ability to achieve the object of the contract, then also it will amount to a force majeure event. For instance, in a door-to-door sales service contract with a salesman during lockdown with limited restrictions on movement, the performance is not impossible because the salesmen can go door-to-door. However, people are very unlikely to entertain the salesman to avoid contracting COVID-19 considering he is a door-to-door salesman. In such contracts, the court will consider the contract to have been frustrated. 

Naihati Jute Mills Ltd. vs. Hyaliram Jagannath, 1968 (1) SCR 821

In this case, the Supreme Court laid down that a contract will not be said to have been frustrated merely on the grounds that the circumstances that existed while the contract was formed are now altered, i.e., there has been a turn of events. In this case, the jute supplier had an obligation to supply jute but could not perform it as the grant of his import license was rejected. This decision determines that mere turn of events will not amount to a force majeure event. The likely implication of this case on account of the pandemic is that even if the turn of events has been due to a force majeure event, then also the contract will be said to have been frustrated. For instance, where the importer fails to get his license due to the restrictions imposed by the government in lieu of the pandemic, the court will render it as an alteration in the position due to turn of events, rather than considering the contract as frustrated. 

Sri Ananda Chandra Behera vs. Chairman, Orissa State Electricity Board 1998 85 CLT 79

In this case, the Orissa High Court laid down that the contract stands frustrated only when there has been a causal relationship between the force majeure event and the resulting circumstances. The court said that for determining whether the act is that of a god or a man, the immediate and direct cause of the resulting situation shall be assessed. The court used the instance that when a ship is being cast away in the storm, this was done by the owner but the storm was the act of god, and the loss was caused by the storm, and not the owner.  If this principle is to be applied to the COVID-19 situation, the outbreak of the coronavirus has also been because of the man and the resulting losses has been due to the nationwide restrictions in India which have also been determined by the authorities so this would mean that the direct cause of the resulting circumstances is the act of a man. So, the implication of this decision in the present circumstances will be that the COVID-19 will not qualify as a force majeure event. However, in the pandemic, in general, the implication of this decision will depend upon the cause of the loss and cause of the pandemic.

Energy Watchdog vs. Central Electricity Regulatory Commission (2017) 14 SCC 80

In this case, the Supreme Court said Section 56 will not be applicable in a situation where the party can perform the contract through an alternative mode. The facts of the case were that the plaintiff approached the court for an “increase in coal prices” as a force majeure event and held the contract as frustrated even though there was no clause in the contract providing for the same. The court refused to apply Section 56 and said that the plaintiff can still supply the coal at higher prices for performing his obligations, and it has not become impossible. The implications of this decision on account of the pandemic is clear that where the parties to a contract have an alternative means to perform their obligations, their contract will not be frustrated even if the parties have to incur a loss or certain difficulty in performing their obligations. For instance, the suppliers will be obligated to perform their obligations even if the prices of goods have been increased, and they are incurring a loss in procuring and supplying the goods. 

M/s. Halliburton Offshore Services Inc. vs Vedanta Limited & Anr. O.M.P.(I)(COMM.) No. 88/2020

This is the latest decision awarded by the Delhi High Court in determining whether COVID-19 will be a force majeure event in the contract between the parties in question. This decision holds a place in the list of landmark judgments because the judge clarified that even though in this case, the event was considered as a force majeure event, it will not be considered the same in every contract. Whether or not COVID-19 will be considered as a force majeure event will be assessed on the basis of the facts and circumstances of the case, and it will only be in the cases where the parties can establish that the non-performance due to the pandemic. This decision makes it clear that the COVID-19, in general, would not itself be qualified as a force majeure event, and it will vary from case to case. Thus, the implication of this decision is that merely because there is a pandemic does not entitle the parties to terminate the contract on grounds of force majeure or frustration. The requirement will still be the “impossibility of performance.”

Conclusion

The law pertaining to force majeure and frustration in India has developed to a great extent. Although Section 32 of the ICA does not need much interpretation and application as it completely depends on the contractual terms of the contract as to whether or not an event will be considered as a force majeure event. However, with respect to Section 56, there is a need for development in the applicability of this provision on the account of the pandemic. For instance, the applicability of the “causal link” rule as determined in the Sri Ananda Chandra case may not be fair, as a person does not have control over governmental authorities, and even if a restriction has been imposed by a person, it should still amount to force majeure if the same was out of control of the party to the contract. Also, the “alternative means of performance” standard as laid down in the Energy Watchdog case shall also be lowered because if a person is suffering losses due to the increase in prices that is out of control of the parties, it will not fulfill the objective with which the supplier has entered into a contract. It is therefore concluded that the standards of “impossibility of performance” shall be lowered to a certain level where none of the parties are unfairly disadvantaged because of the standard. 

References

 

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