This article is written by Anshita Jain, pursuing Certificate Course in Introduction to Legal Drafting: Contracts, Petitions, Opinions & Articles from LawSikho.
The COVID-19 epidemic has thrown global economic ties into disarray, wreaking havoc on workers, customers, and companies. Companies have raced to renegotiate contracts as supply chains, manufacturing, and other economic activity have been disrupted. Force majeure provisions, which are contractual conditions that enable one or both parties to stop or cancel performance if a “force majeure event” happens, have affected and will continue to influence renegotiations in many situations.
What is a force majeure clause?
Contractual concepts known as “force majeure” change the responsibility and/or liability of contracting parties if an unforeseen event or circumstance beyond their power prevents one or all of those from fulfilling their commitments.
Those very clauses might just have a wide range of effects based on how they are written, which include: exempting the injured party from performance of the contract in whole or in portion; exempting that party from a postponement in performance, enabling them to withhold or claim an ex parte order for performance; or giving that party the right to cancel the contract. We’ll focus on parties that are completely excused from performing, although enough of the ideas apply to all of these distinct types of clauses.
The idea of force majeure doesn’t quite exist in English law. As a consequence, the conditions wherein the force majeure will operate will be determined by the presence of a force majeure provision in the contract, and the specific wording of that clause.
The Indian Contract Act, 1872, governs “force majeure” in contingent contracts, notably Section 32. Whenever a force majeure event happens while the contract is in effect, it is handled under Section 56 of the Contract by a rule of positive law. Sections 32 and 56 are outlined below:
- Section 32: Enforcement of Contracts contingent on an event happening- Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.”
- Section 56: An agreement to perform an act that is impossible in and of itself is null and invalid.
Is COVID-19 an event of force majeure?
Regardless of the intensity and scope of the COVID-19 breakout, it is far from certain that a contractual force majeure term will be invoked.
Assuming that perhaps the “World Health Organization designated COVID-19 a pandemic on March 11, 2020”, if indeed the force majeure clause relates to pandemics and/or epidemics, it will very definitely apply. When the phrase, for instance, refers to an “act of God” without more explanation, the situation becomes much more unclear.
If the epidemic is covered by the provision, the amount to which the contractual duties are impacted must always be established. It’s probable, for instance, that certain contract responsibilities are unaffected by the epidemic, while others are merely delayed. As a result, both sides would be required to carefully examine the necessary facts along with the date of the alleged execution issues in relation to the proliferation of COVID-19 and the related government steps taken in the specific location of activity at a given point in time.
Force majeure provision in a contract
To be using the force majeure clause, it must be established that all the potential means of contract performance have become unattainable, and there are no other means to fulfil the contract’s duties.
What follows if there isn’t a force majeure provision in the contract?
If somehow the contract doesn’t really provide a force majeure provision, the aggrieved party may be able to seek remedy under Section 56 of the Indian Contract Act, 1872, under the theory of frustration. To assert that the contract is frustrated, the claimant party must show that the fulfilment of the contractual duties has now become unattainable owing to an occurrence that the claiming party just cannot avoid and that the impossibility is not self-induced or due to his carelessness.
Does the party invoking force majeure have a duty to mitigate?
This is indeed a flexible norm that will be used on an individual basis. The force majeure occurrence or scenario must be causal to the contractual violation, and a company alleging force majeure must generally prove that the force majeure event (rather than some other factor) prevented the party from fulfilling its contractual duties.
Penalties for improper use of force majeure in India
In regards to force majeure provisions, it should always be emphasised that Indian courts firmly adhere to the contract. The onus of proof is on the party trying to assert a force majeure clause to show that the contract should be cancelled due to a specific force majeure event. Because courts usually favour contract performance, courts don’t really support parties turning to contract frustration and cancellation unless there is convincing proof that the contracts cannot continue further because there are no other viable options. The courts do not consider requests for this simply because the contract has grown too exorbitant or because there is a hardship or challenge, particularly if there is a viable and reasonable solution.
As a result, the court may reject any motions for contract frustration even if there was a remote possibility of part obligations if the conditions are likely to transform anytime soon if subcontracting is conceivable, or if there is simply a postponement but final performance is feasible. To apply the theory of frustration, there should be specific reasons to establish that the contract has grown unattainable to accomplish and must be dissolved.
If the courts reject such claims of force majeure or the concept of frustration, they may mandate particular fulfilment of the contract or pay damages if losses have been suffered as a result of non-performance of the contractual obligations.
COVID-19: Extreme struggle or unpredictable impossibility?
It is necessary to determine the Supreme Court’s criterion in this area in order to determine if the current pandemic’s dimensions will constitute an improbability. The Supreme Court ruled in the landmark case of Satyabrata Ghose v. Mugneeram that, “The performance of an act may not be literally ‘impossible’, but maybe impracticable and useless from the point of view of the object and purpose which the parties had in mind…the performance of a contract can be said to have become impossible if an untoward event or change of circumstances beyond the contemplation and control of the parties upsets the very foundation upon which the parties rested their bargain”.
Nevertheless, in Energy Watchdog v. Central Electricity Regulatory Commission, the Supreme Court took a blurry strategy, holding that parties can initiate the doctrine of frustration and try to obtain relief from performance if they can demonstrate that performing such an act will be unworkable and powerless, taking into account the purpose and scope decided to seek and aimed to be obtained.
It’s worth noting that the Indian government has recently published an Office Memorandum on the interruption of supply chains caused by the coronavirus and if such an exceptional occurrence will be covered by the force majeure clause or not. The Government’s Memorandum was helpful in explaining that the COVID-19 epidemic should be treated as a “natural catastrophe,” and that force majeure provisions should be used wherever possible.
As a result, if parties seek to utilise the theory of frustration, they must show that the non-performance was beyond the party’s rational power. For the purposes of English law, force majeure clauses are explicit phrases that are not usually incorporated into contracts. Much relies on the contract’s conditions, particularly the force majeure provision.
Other consequences for contracts
Because of the supply chain disturbance induced by the COVID-19 outbreak, numerous contracts are likely to be rescheduled, or possibly terminated. Many companies are seeking legal ways to minimise expenses and maintain profitability as they deal with the hard economic reality of the continuing Coronavirus outbreak. Despite the fact that consumer expenditures have grown in recent months, signs of restoration are mixed at best. As a result, many firms and consumers have started reviewing contracts to see if there are any methods to get out of pricey responsibilities. The following are some of the possible outcomes of COVID-19’s curse.
1. Prices adjusting provisions
Owing to increasing expenses, such as greater supply chain strains as a consequence of COVID-19, parties may attempt to change all or portion of the contract price for commodities.
2. Constraint or exclusions provisions
Parties may continuously demand to restrict or exclude responsibility for non-performance by relying on restriction or exclusion clauses (particularly in the absence/inapplicability of a force majeure clause).
3. Change of law provisions
A party might rely on a contract’s “change of law” clause (entitling either party to cancel or renegotiate the contract if a change in the relevant legislation renders it impractical or impossible for a party to execute its contractual obligations) if the applicable law changes.
4. Supply chain logistics disruptions
Firms will be compelled to find other solutions if traditional supply networks collapse or are substantially disrupted.
5. Insolvency and hardship
The expansion of COVID-19 already has contributed to an uptick in firms in financial hardship as they strive to offset the financial consequences of supply chain difficulties and reduced client demand. Current lines of credit are being removed from firms with large public debt at a period when they really require to pay suppliers who can produce on time despite not getting consumer payments. As a consequence of travel bans and other regulations, anticipated refinance and problematic M&A activity is being stalled, making it more difficult for firms to perform and manage time-sensitive reversal plans.
Instances of force majeure clauses being a quick-fix
The emergence of COVID-19 has offered the whole force majeure jurisprudence a new lease on life. COVID-19’s early transmission from China to other parts of the globe, as well as the resulting shutdowns, were really unimaginable and unforeseen. Almost quickly, legal minds scrambled to figure out how these force majeure clauses might be triggered, what level of coverage they would provide to impacted parties, and how well the damages resulting from COVID-19 would be handled.
The Union of India’s Finance Ministry, in an Office Memorandum dated 19.02.2020, was one of the first to recognise COVID-19 in the area of contractual law. This office memorandum is groundbreaking in that it reads “para 9.7.7 of the Manual for Procurement of Goods, 2017 (which did not include ‘epidemics’ or ‘pandemics’ as a force majeure event) and expressly adds COVID-19 to the force majeure bracket, referring to it as a ‘natural catastrophe’.”
Numerous recovery policies were also incorporated by regulatory agencies such as the Reserve Bank of India and the Securities Exchange Board of India, including a three-month clampdown on payment of loan instalments and interest on working capital facilities, as well as waivers from many other compliance and disclosure prerequisites. In addition, the freeze was prolonged due to the gravity of the scenario.
This is what is still going on right now, pending the Supreme Court’s ruling. Similarly, via the Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 where the protection was given from the beginning of IBC proceedings if the failure occurred after March 25, 2020, for a period of 6 months and any further time not surpassing one year from the reported date.
One of the very first decisions in which the High Court of Delhi expressly declared COVID-19 to be a force majeure event was M/s Halliburton Offshore Services Inc vs Vedanta Limited O.M.P.(I)(COMM.) No. 88/2020. The court has noted, nonetheless, that whether COVID-19 would excuse non-performance or breach of contract must be determined based on the evidence and conditions of each instance, and only in real cases where the party was hindered or could explain its non-performance due to the epidemic/pandemic. The decision further states that a force majeure provision must be construed carefully and that if a violation occurs before the COVID-19 time, the party will not be able to utilise the force majeure clause.
COVID-19: A way forward
Undoubtedly, one of its issues is that the courts are closed. Who could have predicted it? Looking ahead, here’s a list of topics we’ll have to think about when we revise our contracts. Since COVID-19 is no longer an “unforeseeable event”, succeeding provisions may not bind to forthcoming waves. There isn’t any magic phrase that will keep us safe. Every supply chain has its own quirks, so does every other supply deal. It is our responsibility to be mindful of them. Although there is no secret pill, force majeure provisions are being restructured with COVID-19 in the account, as well as the unique situations of both parties. Given 2020’s expertise, the parties will figure out specifically what each will do.
The parameters of triggering occurrences will be wider, attempting to encompass whatever is beyond the parties’ control. These provisions will very certainly reference pandemics, supply chain failures, and government directives (e.g. lockdowns). Payment responsibilities will be specified in clauses. Many existing force majeure agreements are vague about who pays what to whom and when. As a result, many instances wind up in court, where a judge determines compensation. Upcoming clauses are likely to be considerably more precise. The duration of the disturbance will be more significant. COVID-19’s impacts have been profound, extensive, and long-lasting. Thus, a 30-day “standard” provision is untenable. We may need to keep an eye out for clauses that become broader as they attempt to compensate for various sorts of feedback loops and their possible duration of the interruption.
Escape from a situation when there is a force majeure. Most provisions now set out what occurs when a force majeure incident occurs, but it’s not what follows when the disturbance is over. More information about this might be found in future clauses. Obviously, all of this legal jargon is confusing. However, as we’ve already witnessed, failing to consider the unimaginable and being as informed as possible may be disastrous for our operations. This directs us to the next business adjustment we ought to build: risk mitigation.
It has been claimed that UK businesses that had prepared for the consequences of Brexit fared well. The simple process of assessing a single set of negative conditions ensures that remedies may be delivered rapidly, irrespective of the severity of the interruption.
The key takeaway is to remember the Scouts’ simple, ageless motto: “Be prepared”.
Conclusion and suggestions
It’s important to remember that demonstrating “frustration” in an Indian court of law would be difficult, since the courts might only be ready to construe the breakout of COVID-19 as a simple burden, and the force majeure clause’s text doesn’t quite expressly mention the pandemic. It will undoubtedly be a difficult effort.
Parties should save evidence, such as corroborating papers relating to the inability of execution, postponement, or notifications served, if any. Notices that the contract has now become impracticable to accomplish or that a force majeure event has struck must be delivered immediately. Parties must also be able to pinpoint the source of the non-performance. Examining finance and insurance contracts to ensure that any unanticipated losses are covered ought to be a top concern.
Companies involved in deals should now have the forethought to include pandemic-specific wording in Force Majeure provisions, given a much greater understanding of the worldwide, long-lasting, and deadly impacts of the Coronavirus pandemic. Parties can improve their chances of winning in court by using words like “epidemic,” “pandemic,” or “quarantine” in such provisions. The choice to seek a force majeure claim is currently an uphill struggle. Notwithstanding, the logic of asserting force majeure is far from resolved due to continually emerging case law and the ever-fluctuating circumstances of the outbreak. Contracts will have to adjust as firms and customers learn how to negotiate this new normal throughout the pandemic and afterwards.
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