COVID-19 Pandemic as a Force Majeure

Introduction

The term “Force Majeure” in its literal sense means “a superior or irresistible force”. It is the happening of an event which is out of the control of mankind and, has such devastating effects that cannot be avoided. The Black’s law dictionary defines the term as, “an event or effect that can be neither anticipated nor controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.” Basically, the force majeure clause mentions about such unforeseen events arising out of natural or man-made extreme circumstances, that, the liabilities of the parties must be relaxed. When this clause is to be invoked, the situation is such that it is nearly impossible to fulfil one’s contractual obligations. Therefore, the parties need to be relieved of their contractual duties. The event must, however, be external to the conducts of both the parties. Then and only then, the clause can be invoked. Some examples would be earthquake, floods, war, etc. The situation of COVID-19 pandemic is also, in some sense, a valid case of force majeure.

Force Majeure under Indian Law

The Indian statues do not specifically define force majeure but there are some provisions under the Indian Contract Act, 1872 which can directly or indirectly give similar effect as that of a force majeure clause:

Contingent Contracts: These are such contracts where the actions of both the parties depend upon the happening or non-happening of an “uncertain future event”. Here, Section 32 [1], of The Indian Contract Act, 1872 states that until and unless the event has happened, the rights and liabilities cannot be enforced by law. If the happening of the event itself becomes impossible, than the contract by default becomes unenforceable and therefore, void. There are two main elements for any contract to be a contingent contract;
The Uncertainty, it is important that the event must be uncertain; it may or may not happen, independent of the act of the parties.
It must be an event in the future. This means, it must happen after the contract has been made.

In context of a force majeure clause providing for the contingency upon the happening of a force majeure event, the Supreme Court interpreted the clause to be governed by Section 32[2].

Doctrine of frustration of contracts: Section 56 of the Indian Contract act, 1872 directly deals with the “impossibility to perform”. This “impossibility” could be in terms of fact or law. This means, the act supposed to be performed must amount to “Impossible in fact” or “Impossible in law” i.e., illegal. Rightly so, lawful object is an essential element for any agreement to be a contract the absence of same would declare it void.[3] This section also provide for compensation. If any act becomes unlawful or impossible after the contract is made, due to any event over which the promisor did not have any control, then, on happening of such an event, such contract becomes void by default.

However, if the promisor had any knowledge or apprehension of happening of the said event and they wilfully made the contract due to which the promisee had to suffer loss. Then, it is the liability of the promisor to pay compensation to the promisee for the loss suffered by them.

Scope and Applicability of Force Majeure Clause

For the first time, the scope and applicability of statutory provisions related to force majeure event were declared in the case of Satyabrata Ghose v/s Mugneeram Bangur Co[4]. In this case, it was held that,

“In cases, therefore, where the Court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of Section 56 altogether. Although in English law these cases are treated as cases of frustration in India they would be dealt with under, Section 32 of the Indian Contract Act which deals with contingent contracts or similar other provisions contained in the Act”

This means that, in the case of existence of a specific force majeure clause in the contract, the case will be covered under the scope of Section 32. The reasoning here is that section 32 talks about conditional contracts, contracts which depend upon certain specified conditions. A force majeure event is one such condition, which determines various rights and liabilities of the parties and brings major changes to the contract. There is an intention of the parties involved about how to deal with an extreme unprecedented situation.

Doctrine of frustration

As for the doctrine of frustration, it was held that,

“the doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of Section 56 of the Indian Contract, Act.”

It is important that, there must be an impossibility to perform contractual obligations, to invoke section 56. This impossibility, however, need not be only physical it could be of such kind so as to alter the object of the contract completely or partially itself.

“This much is clear that the word “impossible” has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible, but it may be impracticable and unless from the point of view of the object and purpose which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do.”

In case of section 56, the intention of the parties to deal with an extreme situation like a force majeure event is absent. There is not any specific mention of any force majeure event in the contract itself. In instances where such event actually takes place, causing serious damage to the ability of performance of any of the parties, the contract becomes void by law.

“Section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties.”

Relevant case law

In, Energy Watchdog v CERC & Ors[5], the scope of section 32 and section 56 was further clarified. This case deals with the generation and sale of electricity to the state of Haryana as well the state of Gujarat by Adani enterprises consortium, for the same, respective power purchase agreements were entered into by both parties. Here, an important fact is that, to fulfil the obligation of generation of electricity, the adani enterprice consortium had long term fuel supply agreements from coal mines in Indonesia at fixed/ predictable prices. The court held that, even if the prices of coal in Indonesia were altered by the government and were much higher than before, there was no as such dislodging of the fundamental basis of the contract, neither happening of any frustrating event. “Alternative modes of performance were available, albeit at a higher price. This does not lead to the contract, as a whole, being frustrated”. In case of existence of alternative method for fulfilment of the contractual obligations, the force majeure clause cannot be invoked. On the other hand, since the contract had specific clause for the force majeure event, this will be covered under section 32 and, is out of scope of section 56.

Is COVID-19 a Force Majeure Event?

The answer to this question is a yes and a no. The situation of COVID-19 is a force majeure event which could not have been predicted by anyone and is a major event outside anyone’s purview. However, it is not correct to piggyback on this situation and use it as an excuse for one’s non-performance of their contractual obligations. It is the onus of the party claiming force majeure to demonstrate the effects of covid-19 into their performance. Therefore, it must be decided on case-to-case basis according to the facts and circumstances of each case.

Relevant case laws

It was held in the latest judgement, M/S Halliburton Offshore Services Inc. Vs. Vedanta Limited & Anr.[6] that,

“The question as to whether COVID-19 would justify non-performance or breach of a contract has to be examined on the facts and circumstances of each case. Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition.”

“The past non-performance of the Contractor cannot be condoned due to the COVID-19 lockdown in March 2020 in India. The Contractor was in breach since September 2019. Opportunities were given to the Contractor to cure the same repeatedly. Despite the same, the Contractor could not complete the Project. The outbreak of a pandemic cannot be used as an excuse for non- performance of a contract for which the deadlines were much before the outbreak itself.”

In, Standard Retail Pvt. Ltd. and Ors. Vs. G.S. Global Corp. and Ors.[7], there was a contract regarding supply of steel products between the petitioner and the respondent. The Bombay HC refused to grant relief to the petitioners stating that in any case there must be an “actual impossibility” to perform one’s obligations. The lockdown period is temporary which will surely be lifted someday. Even during the lockdown period, the distribution of steel has been listed as essential service, according to the notifications/ advisories of the government. The respondent had already shipped the commodity from South Korea. Here, there is no actual impossibility to fulfil one’s obligations. Therefore, this will not be covered under section 56, doctrine of frustration of contracts.

Conclusion

Force majeure is popularly also known as “act of god” clause. It is an exceptional situation which causes considerable harm to the existing conditions of a contract. Thereby, causing major changes to the obligations of all the parties in a contract. Originally, it was founded in England and for some time there was confusion regarding its applicability in India. Its nature, in India, is different than that of England as clarified in satyabharata (supra) case. In Indian jurisprudence section 32 and section 56 of the Indian Contract Act, 1872 sufficiently covers the force majeure clause. The COVID-19 pandemic is definitely a novel unfamiliar situation which will cause performances to be delayed or even cancelled. However, happening of covid-19 by itself cannot prove the inability to perform. The parties have to show the direct or indirect link between covid-19 and their performance or lack thereof. In cases where alternate methods are available the parties are supposed to fulfil their commitments by using those ways. This is because, at the end of the day, this pandemic is temporary and it will come to an end someday, soon enough. When that happens, the world will need to get back on its wheels.

References:

[1] 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.

[2] National Agricultural Co-Operative Marketing Federation of India v. Alimenta S.A. AIR 2020 SC 2681

[3] Section 10. What agreements are contracts.—All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.

Nothing herein contained shall affect any law in force in India and not hereby expressly repealed by which any contract is required to be made in writing1 or in the presence of witnesses, or any law relating to the registration of documents.

[4] AIR1954 SC 44

[5] (2017) 14 SCC 80

[6] O.M.P (I) (COMM.) No. 88/2020

[7] MANU/MH/0528/2020

[8] 2020 SCC OnLine Del 979