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Whether Coronavirus (Covid-19) Is A Trigger Threshold For Force Majeure Event-Under Indian Scenario

Coronaviruses (CoV) are a large family of viruses that cause illness ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS-CoV) and Severe Acute Respiratory Syndrome (SARS-CoV). Coronavirus disease (Covid-19) is a new strain that was discovered in 2019 and has not been previously identified in humans.[1]Covid-19 has rapidly evolved from a local threat to a global one with tragic human losses that take precedence over its economic impact. Nevertheless, significant economic damage has been triggered by the unprecedented steps taken to contain the virus outbreak: shutdowns at the workplace, manufacturing damage, closures at the port and suspension of travel by air.

Force Majeure clauses are typically used in commercial contracts in case such specified conditions prohibit contractual obligations from being fulfilled. The term Force Majeure synonymous with the Latin word Vis Major means superior force which involves acts of God (such as earthquakes or tsunamis) and other destructive and unpredictable actions of man, such as industrial action.

Law pertaining to Force Majeure can be traced under Sections 32 and 56 of the Indian Contract Act 1872 as we see that Force majeure is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied Clause in a contract, such as the PPAs before us, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs de hors the contract, it is dealt with by a Rule of positive law Under Section 56 of the Contract.[2]


Section 32-Enforcement of contracts contingent on event happening[3]:
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[4]-
An agreement to do an act impossible in itself is void.

Contract to do an act afterwards becoming impossible or unlawful:
A contract to do an act which, after the contract is 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.
Compensation for loss through non-performance of act known to be impossible or unlawful.— Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise.

Within this context, it is important to decide if Covid-19 is to be regarded as a case of Force Majeure (FM)?

  • Considering the damage to the supply chain and business’s caused by the Covid-19 outbreak, production under several contracts is likely to be postponed, disrupted, or even cancelled. Contracting parties (especially suppliers) may try to delay and/or prevent the fulfilment or liability for non-performance of their contractual obligations and/or terminate contracts, either because Covid-19 has legally prohibited them from meeting their contractual commitments or have tried to use them as an excuse for getting out of the contracts which they have already entered into.
     
  • A party to a contract will only be able to consider FM to excuse non-performance if there is a FM clause in the contract. Apart from the concept of frustration, English common law has no general concept of force majeure, and FM cannot be implied into an English lawcontracts, also in the case of Kel Kim Corp. v. Central Markets, Inc[5] it was held “mere impracticability of, or unanticipated difficulty in, performance is not sufficient to excuse performance under” such clause.
     
  • Even if the contract does contain a FM clause, it is still not certain that a party will be able to rely on it to protect against claims for non-performance as a result of the difficulties caused by the coronavirus outbreak. Because of their serious impact on the parties' rights and obligations.


Typically, a party will have to show that:

  • an FM event has occurred which is beyond its control; and
  • it has prevented, hindered or delayed its performance of the contract; and
  • it has taken all reasonable steps to avoid or mitigate the event or its consequences.[6]

The Manual for Procurement of Goods 2017issued by the Ministry of Finance states under clause 9.7.7i.e. Delays in Performance of Contracts-
A Force Majeure (FM) event means extraordinary events or circumstance beyond human control such as an event described as an act of God (like a natural calamity) or events such as a war, strike, riots, crimes (but not including negligence or wrong-doing, predictable/seasonal rain and any other events specifically excluded in the clause). An FM clause in the contract frees both parties from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract.

An FM clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the FM. The firm has to give notice of FM as soon as it occurs and it cannot be claimed ex-post facto. There may be an FM situation affecting the purchase organisation only. In such a situation, the purchase organisation is to communicate with the supplier along similar lines as above for further necessary action. If the performance in whole or in part or any obligation under this contract is prevented or delayed by any reason of FM for a period exceeding 90 (Ninety) days, either party may at its option terminate the contract without any financial repercussion on either side.

Notwithstanding the punitive provisions contained in the contract for delay or breach of contract, the supplier would not be liable for imposition of any such sanction so long as the delay and/ or failure of the supplier in fulfilling its obligations under the contract is the result of an event covered in the FM clause.[7]

The Ministry of Finance vide an office memorandum dated February 19, 2020,in concerning the aforesaid para on force majeureclarified that:
Disruption of supply chains due to the spread of COVID-19 should be considered a case of natural calamity and therefore, force majeure clause can be exercised where necessary, subject to due process enforcement as specified in the aforementioned paragraph. The Ministry of Finance has indicated that the provision does not completely justify a party's inability to perform but just suspends it for a period of time. Moreover, the individual must inform force majeure at any such extraordinary occurrence as soon as it happens, and the same cannot be argued ex-post facto.[8]

What can be done in this current scenario?
Look at your current contracts. Firstly, is there a force majeure clause in your contract? If so, look to see if it contains any wide or particular provisions where Covid-19 can fall under.

Also as per the latest Ministry of Finance vide an office memorandum dated February 19 2020, Covid-19 is being considered as a case pertaining to natural calamity and hence if the contract mentions natural calamity in the force majeure clause then non-performance of contract can be exercised by the contracting parties stating Covid-19 as a force majeure event.

You may need to begin negotiations with your counterparts on the future application of your force majeure provisions, depending on the specific language of your force majeure provision and how to adequately counter any possible Covid-19 impacts. If the rule includes arequirement for a written notice, be sure to comply with that. If your contracts do not include a force majeure clause, these conversations can still be productive, particularly if the main objective of any given contract can be frustrated or become impracticable because of Covid-19's impacts.

It was interpreted in Industrial Finance Corporation of India Ltd by the Hon'ble Supreme Court. Vs. The Spinning & Weaving Mills Ltd. and Ors Cannanore[9] that the Statute (Indian Contract Act 1872) itself has recognised the doctrine of frustration and encompassed within its ambit an exhaustive arena of force majeure under which non-performance stands relaxed by reason of an impediment beyond its control which could neither be foreseen at the time of entering into the contract nor can the effect of the supervening event could be prevented, avoided or overcome. Hence In non-governmental and other arrangements where there is a force majeure clause in a contract, the criterion is whether the Covid-19 outbreak will fall under the meaning of that provision.Contracts to be performed in future are based on expectations.

If each party is equally well informed as to the data on which expectations must be based, it may be said that these expectations are the basis or footing on which the contract is made. It would, of course, be absurd to suggest that if such expectations are not realized the basis has gone and the contract is frustrated.[10]

In order to approach court for a force majeure event it must be established by the parties that an attempt must be made for performance of the said contract in spite of the event by resorting to alternatives.[11]

If a force majeure clause is not included in the contract, or if the Covid-19 break is beyond the scope of that provision, the parties will have to find out if the common law doctrine offrustration as stated in section 56 of Indian Contracts Act 1872 would come as a rescue to savethe contracting party from meeting its respective obligation.

Conclusion
Usually, FM clauses exempt one (or both) party to a contract from performing their duties, in whole or in part, upon occurrence of unwanted or unforeseen circumstances outside the control of that group. Although some contracts may specifically list epidemic or a similar word as an FM incident, there may be more general references to other contracts as Certain contracts may include more traditional references as FM events to acts of god or events beyond the control of the parties as FM events Counterparties may argue that COVID-19 is an FM event which excludes them from their contractual obligations.

Although COVID-19 may be considered an FM event as per the latest guidelines, it is necessary to note that the party alleging an FM event will still need to prove that it hindered or impeded the party from meeting its contractual obligations. In these matters, the courts will apply a high threshold and usually holds that a contract should not be discharged merely because it was more onerous or costly.

End-Notes:

  1. Coronavirus (as seen at) https://www.who.int/health-topics/coronavirusretrieved on 15th March 2020.
  2. Energy Watchdog and Ors. vs. Central Electricity Regulatory Commission and Ors (2017 3 AWC 2692 SC).
  3. Section 32-Indian Contract Act 1872(as seen at) http://legislative.gov.in/sites/default/files/A1872-09.pdf retrieved on 17th March 2020.
  4. Section 56- Indian Contract Act 1872 (as seen at) http://legislative.gov.in/sites/default/files/A1872-09.pdf retrieved on 17th March 2020.
  5. 70 N.Y.2d 900 (1987).
  6. Coronavirus: Can it be a Force Majeure event? (as seen at)https://www.hfw.com/Coronavirus-Can-it-be-a-Force-Majeure-event-Feb-2020 retrieved on 21st March 2020.
  7. The Manual for Procurement of Goods 2017 (as seen at) https://doe.gov.in/sites/default/files/Manual for Procurement of Goods 2017_0_0.pdf retrieved on 15th March 2020.
  8. Ministry of Finance vide an office memorandum dated February 19, 2020(as seen at)https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf retrieved on 15thMarch 2020.
  9. AIR 2002 SC 1841.
  10. Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696.
  11. Gulf Oil Corp. v. F.E.R.C, 706 F.2d 444 (3d Cir. 1983).

Written By: By: Aman A Ohri - 3rd Year Student, Hidayatullah National Law University   

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