Force Majeure In the Age of Coronavirus Author By: Saptarshi Dutt | Volume II Issue V |

1. Abstract:-

The human mankind, possibly before November 2019 was not even aware about the word called “Corona”. It was mostly in the month of December 2019 that this word “a novel corona virus called SARS-CoV-2” started emerging. It took few weeks before the world slowly realised the true meaning, extent and magnitude of this disease called “Coronavirus”.

The Coronavirus disease, for the first time, mostly around December 2019 first spread in China. After it started spreading, the entire world took time to understand its severity. The World Health Organisation first classified the outbreak as pandemic because of its geographical spread.

2. Introduction:-

Within few months after its outbreak, it started impacting economies throughout the world. Supply chains got severely have been radically dislocated and the rights and obligations of parties under agreements started getting affected.  

This crisis would not have affected this badly if we were not over depended upon China at least with regard to pharmaceutical industry, automobile parts, renewable sector and the electronic gadgets. At least now we realise that it is because of over dependency upon China, it is extremely difficult to wipe out China from import and export sector.

Statistics reveal that Indian pharmaceutical companies rely on China for approximately 70% of API (pharmaceutical ingredient) requirement. There is a upward trepidation if this disease continues to last for another one year manufacturing facilities of pharmaceutical companies in India will be affected enormously. The prices of drugs and medicines have already started soaring.

India is over dependent on suppliers in China for automobile parts and components. Such over dependency is also not a good sign. There is a serious apprehension, China, Japan, Thailand will face serious restrictions from ministry about import export of businesses.

In addition to it, the most important sector i.e. the renewable sector will also be affected. Records reveal that Indian Solar Power producers congregate not less than 80% of their requirements for solar cells from China. By now, in many parts of India, solar power producers are already struggling.

3. Concept of Force Majeure:-

Black’s Law Dictionary defines the term Force Majeure as a “superior force’ – an event or effect that can be neither anticipated nor controlled. [1]

Collins Dictionary defines this event as an unexpected and disruptive event that may operate to excuse a party from a contract.[2]

Thus, if we interpret the definition of Force Majeure, it will reveal those events, which are normally outside the control of the parties, prevents one or both the parties from performing their contractual obligations. The term “force majeure” varies significantly under civil law and common law as in most of the common law countries, like India, the concept of “force majeure” is not codified.

The English Law has evolved from an English Case[3] where we will find that the English Courts had held even though there was no specific provision in the contract it was implied that the contract would be frustrate when the subject matter of the agreement has itself become impossible of being executed. Few years later, this principle evolved as the “Doctrine of Implied Condition”.

Under Indian Law, one can find the manifestation of Force Majeure in section 32 and 56 of the Indian Contract Act, 1872.[4]

 “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: Agreement to do impossible act – An agreement to do an act impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful. A contract to do an act which, after the contract made, becomes impossible or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Force Majeure (S.56 of the Indian Contract Act, 1872.): A force majeure clause relieves one or both parties from liability to perform contract obligations when performance is prevented by an event or circumstance beyond the parties’ control. [5]

However, one must bear in mind that the doctrine of impossibility has no applicability in lease related agreements and/or other similar kind of contracts. In one of the case[6] the Supreme Court has held that the law on impossibility of performance will not apply to lease related contracts and/or agreements. The Court had also identified that section 56 has no applicability in cases of completed transfer thereby drawing a thin line of distinction between “completed conveyance” and an “executory contract”. The Supreme Court had opined that since lease being a completed conveyance, it cannot be invoked to claim exemption or suspension or any kind of waiver from payment of rent. The Hon’ble Supreme Court had reiterated this principle in few more cases.[7]

The last two months have seen quite a number of tenancy related cases coming up in Delhi High Courts. We have seen how the tenants are running from pillar to post praying for a complete set off or waiver. In some cases, the tenants have beseeched the Court to suspend the rent until normalcy resumes. Reliance was placed in a noted case[8] but the Court held unless the lessee avoids the lease, the obligation contained in the agreement cannot be suspended or waived. The High Court came to a finding until there is a complete annihilation of the premises, force majeure clause under section 56 cannot be enforced. Thus, the mere temporary non use of the property due to this Covid 19 cannot entitle the tenant for non payment of rend and thus the tenant must have to make payments of rent to the lessor. The Court has also held in the absence of any contractual covenants, the statutory laws of the Property Act will prevail in cases of disputes pertaining to leases and tenancies.

Literally speaking, the doctrine of frustration essentially speaks about the concept “impossibility”. If the parties can establish due to change in circumstances, the performance of the contract becomes practically impossible, legally the parties can be said to be absolved from their commitments. This is because the law does not permit any person to perform an act of impossibility.

4. Ingredients of Force Majeure:-

Of course, the nature and character varies from case to case, from characteristics to characteristics but if I am told to point out the basic features of Force Majeure, I would say that the following would be the essential features of force majeure:-

1. The contracting party has principally failed to perform its task because of events, which were beyond his control.
2. The unexpected event made contractual performance impracticable.
3. The party could not have been expected to take any steps to avoid or mitigate the event or its consequences.
4. The contractual party who was a party to the agreement did not have any malicious intention to dishonour the agreement.

The landmark case of Energy Watchdog [9]is very much useful inasmuch as this case ubiquitously specifies if there is an express or an implied clause in the contract, which may lead to frustration of contract that case should be dealt with as per section 32 of the Indian Contract Act. In some cases, we may also find the incident or the event or collective events to fall outside and the scope of the contract or that such incidents are not explicated in the contract. Such types of cases are to be governed as per section 56 of the Indian Contract Act.

Further, the Supreme Court, time and again has gone for widest range of interpretation while interpreting the word “impossibility” under the Contract Act. The Hon’ble Court has said that the word “impossibility” must not be confined to physical impossibility but should also be given a practical meaning. Thus, in the situation of “impracticability”, the Hon’ble Supreme Court has also leaned in favour of force majeure.  

Often, the following points maybe found useful dealing while dealing with force majeure clause:-

1. The Court interpreted the word “impossible” under section 56 of the Act and said that impossibility is not just physical or literal impossibility but also impracticability.
2. Where there is no fixed time limit in the contract, delay in performance would automatically frustrate the contract.
3. If the contract becomes impossible to perform because of the ongoing events, the contract becomes void on its own and the obligations on the parties is discharged.
4. Further, the Apex Court, in one of the case[10] has also held that temporary impossibility in performance of obligations under a contract or an agreement does not automatically discharge the contract, unless and until time is the essence of the contract.
5. Whether there are any other special or additional contracts to the main contracts.

It is pertinent to note generally Force Majeure clauses in contracts are incorporated to temporarily claim suspension of obligations by either of the parties under the contract during the continuation of the event that has made performing the obligations altogether impossible or nearly impractical for reasons beyond control. One must understand force majeure does not apply as a matter of rule or cannot be applied as straight jacket formula in all cases.

The Hon’ble Delhi Court held[11] that lockdown because of Covid 19 is in the nature of Force Majeure and stopped Vedanta from invoking bank guarantee as performance could not be completed because it involved overseas travel.

While, in another case[12], the Hon’ble Bombay High Court refused to pay heed to the petitioners for various reasons like:-

1. As per the lockdown guidelines, distribution of steel was essential service and that there were no restrictions imposed on its movement.
2. Ad-interim reliefs such as letter of credit were also considered to be an independent transaction.
3. The court also observed that the wordings of the clause implied that it was only applicable to the exporters.

The parameters which are to be considered when adjudicating cases for suspension of rent have been elaborately classified by the Delhi High Court in[13]

5. Is COVID-19 an “Act of God”?

In order to determine whether Covid-19 can be termed as Force Majeure event, the primary law must be examined. The event or events of that can be covered under the force majeure clause must be expressly and clearly mentioned in the contract. The failure to discharge the obligations under the agreement will depend substantially on the terms, the language and the intent of the overall contract. Whenever the disputes arise with respect to the scope of such clause, the Courts are likely to apply the common principles of interpretation to such contracts. Unless therefore the incident or the collective events fall within the definition of ‘force majeure’ clause, the courts may not accept such event so as to trigger the consequences of the ‘force majeure’ clause.

However, whether or not an individual would be entitled to be exempted from discharging its obligations under this precarious situation would have to be decided only after going through the totality of the agreement and the terms of the contract. While studying the agreement and/or trying to assess whether or not the events fall within the definition of “force majeure”, one should assess the following:-

• Whether the force majeure event in the contract expressly includes a ‘pandemic’. If the agreement expressly contains the word ‘pandemic’ as force majeure in such an instance, the inclusion of ‘pandemic’ to the list of events of a ‘force majeure’ clause would make it clear that the outbreak of Covid-19 would trigger a force majeure clause; or
• If the given force majeure clause encompasses circumstances beyond the reasonable control of the parties, in such an instance, the ‘force majeure’ clause can only be enforced if the factual circumstances of the case cumulatively show that those are beyond reasonable control of the affected party.

Apart from this, a party’s entitlement to the benefit of force majeure clause would depend on the following factors:

• In most of the commercial agreements, it is ordinarily followed that the party invoking the force majeure clause should intimate the other party within a reasonable time regarding the incident, which prompted the affected party to invoke the force majeure clause. In many cases we find the party apprising the other party with the impact and duration of effects resulting from the said event.
• There is a possibility that parties have an obligation to mitigate damages.
• Wide-ranging implications of force majeure event should also be considered. For instance, the performance of the agreement may remain standstill temporarily till the time the event continues. However, the parties may negotiate between themselves and may look to modify the terms of the agreement by amending certain portion of the agreement if the force majeure prolongs for specific timeframe.
• Documentary evidences or circumstantial evidences would play an important role while adjudicating the case. Such evidences may include (i) national and state government notice and guideline imposing restriction of trade, (ii) articles and/or information relating to COVID-19 outbreak, (iii) cargo booking and freight agency agreement, and (iv) rejected visa application.

A Division Bench of the Delhi High Court recently in one case[14] while following the dicta laid down by the Supreme Court in Energy Watchdog case observed that if unforeseen events occur during the performance of the contract, thereby making it impossible of performance, uprooting the fundamental basis of the contract, then such contract need not be performed since insisting upon the performance in such circumstances would be unjust.

By reason of the aforesaid facts, it is essential that the corporate hubs and individual parties to the agreement are extremely vigilant to protect their arrangements from the global-economic slowdown that may be difficult to avoid in the present circumstances.

In either case, the following actions may be taken into consideration while entering into commercial contracts:-

• One should first assess the totality of the agreement to find out the rights and duties of the parties with respect to clauses of force majeure, territorial jurisdiction and the termination clause if any;
• Second whether the ‘Force Majeure’ clause is temporary and/or prevents a party from performing under the agreement;
• Third, whether the party who wishes to invoke the force majeure clause has served any intimation notice in the form of notice or legal notice to the other party;
• Fourth, whether the other party has responded to such notice by way of reply letter;
• Fifth, whether the agreement (mother agreement) has been subsequently amended or repealed by way of fresh terms;
• Sixth, the concerned affected party must promptly take steps to record the steps it is taking to prevent or mitigate the impact of the Covid 19 outbreak on its ability to perform its obligations under the contract.

1. Conclusion:-

Since pandemic is an event that may survive only for momentary period, it would be proper to treat as a temporary impossibility. Since this impossibility is not permanent and shall stand cured with time, it can be said that a contract will stand frustrated on account of this pandemic only there is an explicit clause saying “time is the essence of the contract”.

One must bear in mind that a mere delay in discharging the obligations of the agreement will not by itself annul the agreement by invoking the force majeure clause. It may abreast postpone / defer it momentarily. If there is a damage clause, then the party may also be asked to pay a certain amount as damages for delay (not in all situations though) but the contract will still have to be performed by the party.

At the end I would say Covid 19 has transformed the world in many ways. It has taught the human world how a complete uncertain event can ravage the total globe and force the human kind to transform them. Continuous upgrade and adoptability can help the persons grow stronger. The world has undergone a sea change in last three months. Humans must learn to adopt and adopt fast to the tune of the situation. The faster that becomes, the better will be. We must prepare ourselves in such a manner so that in future if this type of disease happens, we are in a better position to confront against them.

[1] Black’s Law Dictionary, 2^nd Edition, Page 143.

[2] May. 29, 2020, 18:35PM, https://www.dictionary.com/browse/force-majeure.

[3] Tailor –Versus- Cadwell (1853) 3 B&S 826 and Krell –Versus- Henry (1903) 2KB 740.

[4] http://uputd.gov.in/site/writereaddata/siteContent/indian-contract-act-1872.pdf.

[5] http://uputd.gov.in/site/writereaddata/siteContent/indian-contract-act-1872.pdf.

[6] Raja Dhruv Dev Chand –Versus- Raja Harmohinder Singh & Anr. 1968 SC 1024.

[7] T. Lakshmipathi and ors. –Versus- P. Nithyananda Reddy and ors. (2003) 5 SCC 150 and Alopi Prashad –Versus- Union of India (1975) 2SCC 633.

[8] Sangeea Batra –Versus- M/s. VND Foods and Ors. (2015) 3 DLT (Cri) 422

[9] Energy Watchdog –Versus- Central Electricity Regulatory Commission (2017) 14 SCC 80.

[10] Mugneeram Bangur & Co. –Versus- Gurubachan Singh AIR 1965 SC 1523.

[11] Halliburton Offshore Services –Versus- Vedanta Limited 2020 SCC OnLine Del 542.

[12] Standard Retail Private Limited –Versus- M/s. G.S. Global Corp & Ors. Commercial Arbitration Petition (L) No. 404 of 2020.

[13] Ramanand & Ors. –Versus- Dr. Girish Soni & Anr. RC Rev. 447 of 2017, decided on 21^st May, 2020.

[14] TGV Projects and Investments Pvt. Ltd –Versus- National Highways Authority of India reported in 2019 (173) DRJ 717.