Force majeure during COVID-19

Author : Gopika Sasi

Introduction

Apart from the catastrophic impact that COVID-19 continues to unleash on human beings and countries worldwide, its outreach has also reached commerce and business.

Existing contracts have become difficult or even impossible to perform. Contracts have to be reconsidered, contractual rights and obligations must be reassessed and how performance can be completed has to be examined. The term “force majeure” has assumed relevance in the contractual context for businesses today and heard most often. The “force majeure” clause translates to “superior force”. This is a contract provision that relieves the parties from performing their contractual obligations when certain unforeseeable circumstances that are beyond their control arise, making performance inadvisable, illegal, impossible, or commercially impracticable. As per Section 56 of the Indian Contract Act, an agreement to do an impossible act is itself void.

English law does not have a principle of force majeure. And thus, the circumstances in which this clause will apply will depend on:

1. the contract including a force majeure clause and 
2. the precise wording of that clause.

The clause force majeure includes both acts of nature such as landslides, hurricanes or floods, and acts of man such as wars, strikes, or riots. Such a clause would relieve the defaulting party of its obligation under the contract. Although force majeure is not statutorily defined and the parties are free to agree to the contractual term, the law accepts that a force majeure clause is binding. 

Concept of force majeure under the Indian Jurisprudence

Usually, the concept of force majeure is mixed up with the doctrine of frustration in the contract law. But these two are entirely different from each other.

Indian statutes do not define or specifically deal with the concept of force majeure. The legislators have dealt with this concept to some extent as is clear from Section 32 of the Indian Contract Act, 1872 dealing with contingent contracts. [3]

The essentials of the force majeure clause include the following:

• An unforeseeable intervening event occurs.
• The parties to the contract did not expect such an event to happen. 
• Such an unforeseeable event makes the performance of the obligations under the contract impracticable or impossible.
• The parties to the contract have taken all possible measures to perform the obligations under the agreement or at least to mitigate the damage.
• The party that claims relief under force majeure, will have the burden of proof to show that the force majeure event has affected such party’s performance of the contract.

For a party to have the benefit of force majeure, it shall have to fulfill the conditions specified in the force majeure clause. The terms and conditions constituting the force majeure clause are decided by the parties before the execution of the contract.

Section 56 of the Indian Contract Act enshrines the doctrine of frustration of contract. This is a statutory remedy. It is the happening of an act outside the contract and such an act makes the performance of a contract impossible.[4]

The current scenario

The outbreak of COVID-19 has brought the economies around the world to a halt. It has not just resulted in the loss of life but also harmed commerce, business, and global economies. The bottom line for every commerce or business to grow is the contract is the agreement between the parties.

On account of this pandemic, the situations may arise in a series of commercial contracts in which a party, without any fault on its part, is not able to perform its part of the contract. 

The question of whether the outbreak of COVID-19 and the lockdown period that was ordered by the State and Government would be sufficient to invoke the clause of force majeure in contract became the most important concern for all business and commerce. This can only be answered by considering the following factors:[6]

1. By establishing a causal connection between the force majeure event and the obstacle to the performance of the contract.
2. Harmonious construction with all the provisions

     3. Compliance with the condition precedents contained in the force majeure clause.

Government notification in view of COVID-19

The Ministry of New & Renewable Energy dated March 20, 2020:

It has termed COVID-19 as a force majeure event. Considering the disruption of the supply chains due to the spread of coronavirus in China or any other country as a force majeure event, it has decided to grant time extension in Scheduled Commissioning Date of RE Projects.

Government of India dated February 19, 2020:

It was issued by the Deputy Secretary of the Government of India. This memo gave rise to force majeure in respect of contracts dependent on supply chains, however, the courts may not apply the same principles in all commercial contracts. This memo does not provide blanket protection to all commercial contracts but only covers a limited purview.

The Ministry of New & Renewable Energy vide Office Memorandum dated April 17, 2020:

This memo reiterated that COVID-19 as a force majeure event. It also decided that all the Renewable Energy implementing agencies of the Ministry of New and Renewable Energy (MNRE) will treat lockdown due to COVID -19 as Force Majeure. It also directed that all Renewable Energy implementing agencies may grant an extension of time for the aforesaid projects on account of lockdown due to COVID -19. [8]

COVID -19 can be considered a force majeure event if:

• the clause specifically defines pandemics or epidemics as such.
• the clause does not provide an exhaustive list of the event.
• when the clause uses generic words or phrases such as natural calamity, national interest, travel restrictions, or government decision.[9]

Parties who are making claims of force majeure should keep in mind the following:

A party affected by the COVID-19 outbreak should take necessary steps to record and document the steps it is taking to mitigate or prevent the impact of the COVID-19 outbreak on its capability to perform its obligations under the contract.

A party claiming force majeure should consider carefully how the force majeure event is framed, and the consequences that are said to flow from that event.

For example, a party could claim that the COVID-19 outbreak constitutes the force majeure event or a disruption in its supply chain or the supply of labor or it could rely upon a supervening government regulation. [10]

Judicial precedents

M/s Halliburton Offshore Services Inc. v. Vedanta Limited[11]

The Hon’ble High Court of Delhi decided that the lockdown done by the Government because of the outbreak of the coronavirus was prima facie like a force majeure. In the present case, the contract entered into between the parties contained the force majeure clause which was allegedly invoked by the petitioner and thus the Court, therefore, stayed the invocation of bank guarantees by Vedanta Ltd. 

Naihati Jute Mills Ltd. v. Hyaliram Jaganath[12]

In this case, the contract that was binding on the parties was an ordinary contract of sale and purchase where the buyer agreed to purchase from the seller 2000 bales of Sadipur N.C. Cuttings. The contract was made in the standard form as prescribed by India Jute Mills Association. But the contract could not be performed on account of the change of the policy of the government imposing total prohibition of import of Pakistan jute. Thus restricting the import license to the seller. 

The Government of India issued warnings in March 1958 that import of Pakistan jute would be permitted to the absolute minimum and the jute mills should satisfy their needs by purchasing Indian jute. The buyer was aware that licenses are not freely issued. The application by the buyer on import license by the buyer was refused on account of personal disqualification and not because of any force majeure. The Supreme Court thus decided that because of the change of policy of the Government, there lies no question of the performance of the contract becoming impossible and that the contract is not frustrated merely because of the circumstances.

Satyabrata Ghose v. Mugneeram Bangur & Co[13]

The question that arose, in this case, was whether a normal contract for the sale of land was discharged and came to an end because of certain supervening circumstances which affected the performance of a material part of the contract that was entered into by the parties. The judiciary examined the circumstance, terms, and nature of the contract to determine whether the supervening circumstances have substantially prevented the performance of the contract as a whole. The most material point regarding the contract that the court looked into was that there was no time limit within which drains and roads were to be made and there was no understanding between the parties concerning the same either. The court considered that the existence of war conditions has made the performance of the contract difficult than in times of peace and finally concluded that the performance of the contract in question is not impossible, so the contract is not frustrated at all.

Alopi Parshad & Sons Ltd. v. Union of India[14]

In this case, M/s Alopi Parshad and Sons Ltd. were acting as agents to the Government of India. These were engaged in purchasing ghee for the army. They were to be paid on a cost basis for the work. The work was in progress. But Second World War intervened. The rates that were fixed in the peacetime was altered by the wartime conditions. The court after considering all the material facts of the contract concluded that the contract is not frustrated merely because the circumstances, in which the contract was made, are altered and the performance of the contract had not become unlawful or impossible. The contract was performed by the agents and they received remuneration which was expressly stipulated to be paid.

Conclusion

The situation of the sudden outbreak of the coronavirus, which was followed by lockdowns and restriction on movement as declared by the Government and a halt to the economic activities is something which no average and the reasonable contracting party could have foreseen at the time of entering into the contract. The aforesaid exceptional circumstances may only result in litigation in a chain of commercial contracts according to the current jurisprudence. The courts can interpret whether a contract containing a force majeure clause would cover such restrictions in movement and lockdowns imposed by the Government. The recent judgment in the case of M/s Halliburton Offshore Services Inc. v. Vedanta Limited[15] where the court gave an interim order is a step in evolving the jurisprudence in this direction.

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[1] Tushar Behl, How the Bombay High Court is Changing Force Majeure Amid COVID-19, https://www.jurist.org/commentary/2020/05/tushar-behl-force-majeure-india-covid19/, last accessed on 25 September 2020.

[2] Tushar Behl, How the Bombay High Court is Changing Force Majeure Amid COVID-19, https://www.jurist.org/commentary/2020/05/tushar-behl-force-majeure-india-covid19/, last accessed on 25 September 2020.

[3] The Economic Times, What is force majeure? The legal term everyone should know during Covid-19 crisis, https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis/articleshow/75152196.cms, last accessed on 26 September 2020.

[4] Chandrasekhar Tampi and Ankur Khandelwal, Contracts and force majeure during a pandemic: a view from India, https://www.lexology.com/library/detail.aspx?g=9bc92fe4-4c8c-42c8-811b-55449dddd831, last accessed on 25 September 2020.

[5] Chandrasekhar Tampi and Ankur Khandelwal, Contracts and force majeure during a pandemic: a view from India, https://www.lexology.com/library/detail.aspx?g=9bc92fe4-4c8c-42c8-811b-55449dddd831, last accessed on 25 September 2020.

[6] The Economic Times, What is force majeure? The legal term everyone should know during Covid-19 crisis, https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis/articleshow/75152196.cms, last accessed on 26 September 2020.

[7] Taruna Dua, Geetanjali Sethi, Force Majeure in Times of COVID-19: Challenges And The Road Ahead,https://www.mondaq.com/india/litigation-contracts-and-force-majeure/930674/force-majeure-in-times-of-covid-19-challenges-and-the-road-ahead,last accessed on 24 September 2020.

[8] Taruna Dua, Geetanjali Sethi, Force Majeure in Times of COVID-19: Challenges And The Road Ahead,https://www.mondaq.com/india/litigation-contracts-and-force-majeure/930674/force-majeure-in-times-of-covid-19-challenges-and-the-road-ahead,last accessed on 24 September 2020.

[9] Janice M Ryan, Understanding Force Majeure Clause, https://www.venable.com/insights/publications/2011/02/understanding-force-majeure-clauses, last accessed on 2 September 2020.

[10] Janice M Ryan, Understanding Force Majeure Clause, https://www.venable.com/insights/publications/2011/02/understanding-force-majeure-clauses, last accessed on 2 September 2020.

[11] M/s Halliburton Offshore Services Inc. v. Vedanta Limited, O.M.P. (I) (COMM)& I.A. 3697/2020

[12] Naihati Jute Mills Ltd. v. Hyaliram Jaganath, A.I.R. 1968 S.C. 522.

[13] Satyabrata Ghose v. Mugneeram Bangur & Co, A.I.R. 1954 S.C. 44.

[14] Alopi Parshad & Sons Ltd. v. Union of India, A.I.R. 1960 S.C. 588.

[15] M/s Halliburton Offshore Services Inc. v. Vedanta Limited, O.M.P. (I) (COMM)& I.A. 3697/2020.