COVID -19 dropped itself like a bomb on industries, consumers and economies. The world is still putting itself together from this crisis. The business fraternity however, has never really anticipated any sort of complication or even for that matter, viewed their ‘force majeure’ clauses seriously. Now, that many contracts hinge on ‘force majeure’, a series of questions arise on its invocation. This article looks to condense available material on ‘force majeure’ and looks at the steps ahead.
Force Majeure and general clause:
The term ‘force majeure’ originates from the Code Napoléon of France, that translates to mean ‘superior force’ or ‘greater force’. Ordinarily, this means a drastic or a fundamental change to the substance of the contract that is brought about by an event that was neither anticipated by the parties nor under their control, resulting in non-performance of their contractual obligations.
In India, since the concept of force majeure is not codified into law, it would be necessary to coin this as part of the contract. Scores of precedents have held that the contract overrides the law and therefore ‘force majeure’ clauses are now part of the standard clauses in any contract along with confidentiality and dispute clauses.
Several examples of force majeure clauses exist. One such instance is as under:
a. The event of ‘force majeure’ such as an act of God, fire, earthquake, flood, accident, an act of governmental authority, lockout or any event beyond the reasonable control of any of the parties that hinder the performance or render it impossible;
b. The duration of force majeure event – typically between 15-60 days;
c. The manner in which this clause needs to be invoked including notices etc.;
d. Suspension or termination of agreement in case the event continues beyond the stipulated period.
Most often, drafting a ‘force majeure’ clause lacks inclusion of details. For instance, majority of the ‘force majeure’ clauses, do not specifically mention ‘pandemic’ or even ‘epidemic’ for that matter, as an event.
Indian Contract Act & Force Majeure:
Although the term ‘force majeure’ finds no presence under the Contract Act, 1872 (“the Act”), its doctrine can be found embodied under Section 32[1] of the Act which renders a contract void when an event upon which performance of contract is contingent becomes impossible.
Essentially, COVID-19 will find a mention in contracts in the form of epidemic, pandemic, or even natural calamity. However, it is noteworthy that where the failure to perform an obligation is primarily due to lockdown implemented by the Government, the force majeure clause must also contain term ‘lockdown’, for it to be invoked. One can also argue that since the lockdown is a result of COVID- 19 and the pandemic, reliance can be placed on the term pandemic in a ‘force majeure’ clause.
The COVID-19 pandemic or the resultant lockdown, will not be treated as ‘force majeure’, if there are other methods of performing the terms of the contract. Having said that, performance of the contract may be suspended during the operation of ‘force majeure’ event and performance may be suitably extended. Parties have the option of renegotiating and modifying the contractual terms, termination is the last step if the force majeure event continues beyond the time prescribed under the contract.
Therefore, construing COVID-19 lockdown a ‘force majeure’ event will depend on the contractual obligations binding the parties and the manner of its performance.
Several questions have been raised on the fact that some contracts do not stress on ‘pandemic’, ‘epidemic’, ‘disease’ etc. While some parties may rely on the general phrase ‘any other unforeseeable event, not under the control of either of the parties’, a reference may be drawn to some Government notifications and departmental circulars across board, which have declared COVID- 19 and the lockdown as a natural calamity/disaster.
The Ministry of Finance has for instance, by way of an office memorandum dated February 19, 2020[2] with respect to ‘Manual for Procurement of Goods, 2017’, clarified and declared the disruption in supply chains which is a result of COVID-19 from China or any other country, such a disruption will be covered as ‘force majeure’.
The Ministry of New & Renewable Energy with respect to solar project developers, vide office memorandum dated March 20, 2020[3] has declared that parties can invoke the force majeure clause to avoid financial penalties if they miss the contractual obligations on account of COVID-19.
The Karnataka RERA Authority, through its Circular dated April 06, 2020 extended the registration of all real estate projects by a period of three months, in cases where registration is expiring after March 15, 2020 and has also extended the timelines for compliance of the RERA Act by a period of three months.
The Ministry of Electronics and Information Technology[4] has decided to provide rental waiver to small housed in STPI premises (MSMEs, Start-ups) in the country from March 1, 2020 till June 30, 2020 i.e. for 4 months period as of now.
While these notifications, memorandums and circulars do not have a binding effect for all contracts, these will have some persuasive value to bring COVID- 19 and the lockdown under the ambit of force majeure, if there are specific terms in the clause.
Doctrine of Frustration under Indian Law
Where a contract does not feature a ‘force majeure’ clause, Section 56[5] of the Act in the context of doctrine of frustration will be examined. Section 56 creates 2 kinds of impossibilities: (1) Impossibility existing at the time of the making of the contract, and (2) A contract, which is possible and lawful when made, but becomes impossible and unlawful thereafter due to some supervening event. Para 2 of Section 56 above, will have a relevance given the pandemic and lockdown.
For such a clause to be invoked, the following are the requirements:
a. a valid and subsisting contract between the parties;
b. there must be some part of the contract yet to be performed; and
c. the contract becomes impossible of perform.
The consequences of the ‘force majeure’ event will have to be assessed to determine whether it renders the contract impossible, unlawful, or impractical to perform and thereby frustrate its performance. Where it is established that the conditions have materially affected the parties and their obligations and where there is no way to perform the contract during the existence of such conditions, the contract is annulled and both contracting parties are discharged of their subsequent obligations. Under these circumstances, neither party has the right to sue the other party for breach of such contract.
The Supreme Court had interpreted the concept of ‘force majeure’, in Satyabrata Ghose v. Mugneeram Bangur & Co.[6], under Section 56 of the Contract Act. The Supreme Court in this case held that the word “impossible” ‘has not been used here in the sense of physical or literal impossibility’[7]. The determination of whether a ‘force majeure’ event has actually occurred, does not centre around its impossibility alone – a mere ‘impracticality of performance’ (given the subject-matter of the contract), will also suffice. When an ‘untoward event’ or ‘unanticipated change of circumstance’ changes the very foundation of the contract between the parties, this event will be considered a ‘force majeure’ and the contract therefore impossible to perform.
While there have been many judgments on this issue and scores of articles on this topic, we look at one recent decision of the Supreme Court in Energy Watch Dog v. CERC[8] to buttress the fact that “economic hardship” cannot be considered a ‘force majeure’ event. The judgment also has various other aspects, which are extracted as under:
“37. It has also been held that applying the doctrine of frustration must always be within narrow limits. In an instructive English judgment namely, Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH[9], despite the closure of the Suez canal, and despite the fact that the customary route for shipping the goods was only through the Suez canal, it was held that the contract of sale of groundnuts in that case was not frustrated, even though it would have to be performed by an alternative mode of performance which was much more expensive, namely, that the ship would now have to go around the Cape of Good Hope, which is three times the distance from Hamburg to Port Sudan. The freight for such journey was also double. Despite this, the House of Lords held that even though the contract had become more onerous to perform, it was not fundamentally altered. Where performance is otherwise possible, it is clear that a mere rise in freight price would not allow one of the parties to say that the contract was discharged by impossibility of performance.
38. This view of the law has been echoed in ‘Chitty on Contracts’, 31st Edition. In paragraph 14-151 a rise in cost or expense has been stated not to frustrate a contract. Similarly, in ‘Treitel on Frustration and Force Majeure’, 3rd Edition, the learned author has opined, at paragraph 12-034, that the cases provide many illustrations of the principle that a ‘force majeure’ clause will not normally be construed to apply where the contract provides for an alternative mode of performance. A more onerous method of performance by itself would not amount to a frustrating event. The same learned author also states that a mere rise in price rendering the contract more expensive to perform does not constitute frustration.”
The term impossibility and frustration are often used interchangeably. In a situation where there is no force majeure clause, Section 56 and doctrine of frustration comes to rescue. Frustration is a common law doctrine. It is concerned with the change in circumstances that can wholly destroy the object or foundation of the contract or make performance fundamentally different from what the parties contemplated in the beginning. Hence under English Law, one needs to establish functions by the English Code and under Indian Law, impossibility or frustration has been statutorily covered under Section 56 of the Act. If a party can prove that an unforeseen event has destroyed the object of the contract, or fundamentally changed the nature of performance, then the contract would be said to be frustrated and it would automatically come to an end.
Evidence of force majeure:
It should be noted that the Courts in India follow the contract strictly in terms of force majeure clauses. In a case where the contract must be rescinded on account of a force majeure event, the burden to prove is on the party claiming force majeure. Unless there is compelling evidence that a contract cannot be performed under any circumstance, the Courts do not favour parties resorting to frustration of contract and termination.
The following may form as evidence for invoking force majeure:
- National and State Government notice and guideline imposing restriction of trade,
- News articles related to COVID-19 outbreak, quarantines, restricted travel and mandatory shutdown of airports, trains stations and seaports,
- Cargo booking and freight agency agreement,
- Cancelled flight or train ticket or anything other documents relating to travel itinerary, and
- Cancelled visa or rejected visa application.
Judicial Precedents during Lockdown
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Bombay High Court – Pledge of Shares: Rural Fairprice Wholesale Ltd. v. IDBI[10], March 30, 2020 Rural Fairprice Wholesale Limited (RFWL) has raised INR 670 crores in debt via insurance of NCDs – secured by shares held by Future Corporation Resources Private Limited (FCRPL) in future retail limited (pledged shares):
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Delhi High Court – Classification of NPA: Anant Raj Ltd v. Yes Bank[11], April 6, 2020
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Bombay High Court – Invocation of LC’s: STANDARD RETAIL PVT. LTD. V. G.S. GLOBAL CORP[12]. , APRIL 8, 2020
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Bombay High Court — Transcon Iconica Pvt Ltd. v. ICICI Bank[13] , April 11, 2020
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Delhi High Court: Invocation of Bank Guarantees: Halliburton Offshore Services Inc. v. Vedanta Ltd.[14] , April 20, 2020: On an application filed by Halliburton Offshore Services Inc., which sought to restrain Vedanta Ltd. from encashing 8 bank guarantees issued in its favour to secure performance of obligations under a contract to drill petroleum wells, the Delhi High Court granted interim relief observing that the petitioner is not engaged in, stricto sensu, in the production of petroleum, but is, rather, engaged in drilling of wells, which activity is substantially impeded by the imposition of the lockdown and thereby an ad interim injunction, restraining invocation or encashment of the bank guarantees, till the expiry of exactly one week from May 3, 2020 was granted. |
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Delhi High Court: Ramanand v. Dr. Girish Soni[15], May 21, 2020 Application made by the petitioner (tenant), seeking suspension of rent on account of ’force majeure’ due to COVID-19 lockdown, the Single Judge observed that:
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**Authors are Founder and Senior Associate respectively with Shivadass & Shivadass (Law Chambers). The contents and comments of this document do not necessarily reflect the views/position of Shivadass and Shivadass (Law Chambers) but remain solely of the author(s). For any further queries or follow up, please contact admin@sdlaw.co.in.
[1] Section 32, Contract Act, 1872
[3] Noti. No. 283A8/2020-GRID SOLAR
[4] Months’ Rental Waiver to the IT Companies Operating from (STPI) dt. 16-4-2020
[5] Section 56, Contract Act, 1872
[6] 1954 SCR 310
[7] See, para 9 of Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310
[8] (2017) 14 SCC 80
[9] [1961] 2 WLR 633 : 1961 (2) All ER 179
[10].Rural Fairprice Wholesale Ltd. v. IDBI, 2020 SCC OnLine Bom 518
[11] Anant Raj Limited v. Yes Bank Limited, 2020 SCC OnLine Del 543
[12] Commercial Arbitration Petitions Nos. 404 to 408 of 2020, judgment dated 08.04.2020
[15] RC. REV447/2017, order dated 21-5-2020