At this time, 210 countries all over the world are facing the global crisis brought about by the spread of the COVID-19 pandemic. This pandemic has still not let up & not only resulted in loss of lives but also has had a destructive effect on business, and the global economies because of lockdowns which have restricted movement. This outbreak of COVID-19 has brought the economies around the world to a halt. So this is a new event for a world entirely and application of old laws on this new situation has proven to be difficult, these unpredictable state of affairs, both – businesses which are required to fulfill contractual obligations as well as businesses expecting performance under time-bound contracts – are facing ambiguity towards the performance of contracts leading to parties imagining breaches of contract and evaluating their rights and remedies for the same.
‘Force Majeure’ is an “event or effect that can be neither anticipated nor controlled and includes both acts of nature and acts of people.” This clause is ordinarily used to refer to a contractual term in which one or both of the parties can be excused from fulfilling the contractual obligations of a contract, on the happening of specific events beyond their control. These extraordinary events or circumstances are events beyond human control most likely to be an act of God (like a natural calamity) or events such as war, strikes, riots, crimes (but not negligence or wrong-doing, predictable/seasonal rain) which could neither be controlled nor predicted and eventually will make the performance of contracts impractical or impossible.
In India, the concept of force majeure has found its way under the Indian Contract Act, 1872, Section 32 enforces that if a contract is contingent on the happening of an event which event becomes impossible, the contract becomes void. A force majeure clause is only a temporary reprieve to parties from fulfilling its obligations as per a contract upon the manifestation of a force majeure event. Another aspect of this is a force majeure event that transpires before the contract, it is then dealt with by a rule of positive law under Section 56 of the Act. This section deals with contracts obligating parties to fulfill impossible obligations or acts which subsequently become impossible or unlawful.
Supreme Court of India has interpreted Section 56 of the Act and concluded that the word “impossible” has not been used in the Section to imply physical or literal impossibility. Rather the performance of an act may not even be literally impossible, but impracticable and useless from the point of view of the object and purpose of the parties. This is the principle of frustration, an aspect of the discharge of a contract inculcated in the statute, intervening impossibility or illegality as laid down under Section 56 of the Indian Contract Act.
A contract may contain an implied or express term interpretation of which would stand discharge the contract on the happening of certain unforeseen events, this dissolution of the contract will be as per the terms of the contract itself and such cases would be outside the purview of Section 56, to be dealt with under Section 32 of the Act. Contracts every so often contain such force majeure clause that are negotiated amongst parties beforehand also specifying the events that qualify as force majeure events such as, acts of god, wars, terrorism, riots, labour strikes, embargos, acts of government, epidemics, pandemics, plagues, quarantines, and boycotts. These events even if not explicitly declared in the force majeure clause, may contain a catch-all phrase, in addition to the explicitly declared events. A catch-all phrase would have similar language to “including, but not limited to” or “any cause/ event outside the reasonable control of the parties”. The events of force majeure must, however, pass the following tests;
- Externality- the event must not be created by the defaulting party’s fault;
- Unpredictability- the circumstances are inevitable and unforeseeable;
- Irresistibility- the occurrence of the event makes execution of the contract wholly impossible.
COVID-19 considered under the Force Majeure clause in India
The Ministry of Finance notified on 19th February 2020 that the disruption of supply chains due to the spread of coronavirus is to be considered a case of natural calamity and Force Majeure clause can be invoked, wherever considered appropriate, following due process. Many contracts however which might not contain the Force Majeure clause explicitly defining the execution or procedures to be followed to claim benefits under this clause due to the COVID-19 outbreak in such cases the affected parties can claim reprieve the ‘Doctrine of Frustration’ specified under Section 56 of the Indian Contract Act, 1872.
COVID-19 has affected cross-border trade, real estate market, specially the developers, the home-buyers and the commercial lease arrangements, EPC (engineering, procurement & construction), joint-venture agreements as well as M&A deals in India. As the businesses capacity to meet their contractual obligations has become impossible due to restriction in movement, stoppage of production, increase in costs due to scarcity of raw materials components, labour shortages, shortage of funds, and disruption in the supply chains.
Even though a pandemic like Covid-19 falls within the ambit of a force majeure clause, it does not relieve a party from the performance of contractual obligations. The force majeure event must have a direct impact on the non-performance and the party seeking to rely on the force majeure event is also under duty to explore alternate means of performance. Indian companies in various sectors have already however have already declared a force majeure such as Gateway Terminals India Private Limited, Adani Ports in Gujarat, Indian Oil, and Mangalore Refineries.
The current jurisprudence as it stands; has put the onus of demonstrating whether COVID-19 has actually affected performance of the specific contractual obligations heavily on the party seeking to have its non-performance excused. These circumstances have resulted in litigation in a catena of commercial contracts as it is a matter of interpretation by the courts whether a contract containing force majeure clause will cover such restrictions in movement and lockdowns imposed by the Government.
The recent interim Order by Hon’ble High Court of Delhi in M/s Halliburton Offshore Services Inc. v. Vedanta Limited has shown the evolution of the jurisprudence. The need of the hour, however, is that instead of having piece meal notifications, there is a new for a codified law which will exempt affected parties from having to perform its obligations under the contract during the period of such lockdowns & for such lockdowns to be considered as force majeure. The time has come that there should be a law for force majeure instead of only relying on Section 32 of the Indian Contract Act or the contractual requirements.