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Role of Force Majeure in COVID-19

The global outbreak of COVID – 19 has turned on to a disastrous turn of events, endangering the human race at large. Considering the above fact, WHO has declared it an epidemic and has urged nations to take immediate measures at war footing. Thus, the world has resorted to a complete lockdown, saving only essential industries to operate. The consideration of this lockdown as the sole ground to declare the impossibility of performance in a contract, per se, needs more clarity and fine-tuned interpretations to address the issue. This paper has discussed about force majeure clause and its essentials to invoke it.

Unlike other terms, it is not just another clause in the contract to get our attention diluted on as its benefits are vast and overarching. On the other hand, a contract sans force majeure clause would imply dire and difficult consequences to the parties. This also can decide the future position and implications of the contract. This paper also studies the implications with and without the clause and also its legal position during this crisis, which made legal luminaries moot on its purpose and exact application on contracts. This should be done to lubricate or repair the rusted and ruptured performance and to protect the future status of commercial contracts and covenants.

Introduction
The whole globe is shattered today due to the rising epidemic of COVID - 19. Every life is getting obliterated and the world is struggling to get relieved and be resilient. Due to the exponential speed in its spread, the virus has made our existence more than miserable, making us question ourselves on our survival. This unforeseen situation has also made most of the industries to avoid fulfilling the obligations specified in their commercial contracts or make delayed performance to minimize their risks and losses. This right is made available to the contracting parties through a clause known as Force Majeure. It addresses the situations at which the contract can be rescinded or delayed in its execution. It also specifies the position of the parties before and after the application of such a clause in the contract.

Many industries and companies have been contemplating to invoke the clause due to the impossibility caused on account of the massive lockdown of all commercial establishments, corporate houses and multinational corporations across the world to currently discharge the party from performing the obligation. This pandemic, being one of the vicissitudes that those companies and corporations face in their life, has led them to an incredulous position they have never foreseen or encountered.

To minimize such damages, the force majeure clause is seen as their last lifeline and is invoked also to mitigate and avoid a temporary contractual obligation. This is also necessary to protect the high-end lucrative interests of the parties arising out of their commercial contracts and other disputes involved.

What is Force Majeure Clause?

Force Majeure has its origin from French, meaning greater force.Merriam Webster dictionary defines Force majeure as:
an unexpected event such as war, crime or an earthquake which prevents someone from doing something that is written in a legal agreement.

This term commonly finds a place in contracts or agreements which can be invoked by any party to a contract who fails to perform the obligation due to some unforeseen or unexpected event. This particular clause doesn't absolve the contractual obligation completely on both the parties but suspends for the time being on the ground of impossibility of event.

Indian Contracts Act 1872 doesn't explicitly use the term force majeure, yet the doctrine can be traced in Sections 32 and 56.

Section 56 with two situations of impossibility:

  • Initial impossibility
  • Subsequent impossibility

  • Initial impossibility:

    If a contract is impossible of being performed, the parties to it will never be able to fulfill their obligation and hence such agreement is void. Impossibility here not only means physical impossibility but also a legal impossibility. Sometimes the fact that the performance of the contract is impossible or unlawful maybe within the knowledge of the promisor, but the promisee may not be knowing about the same, such a promisor must compensate the promisee for the loss sustained by the promisee resulting from the non- performance of the contract.

    Subsequent impossibility:

    The performance of the contract may be possible when the contract is entered into but because of some event the performance may subsequently become impossible or unlawful.

    The Supreme Court in the case of Satyabrata Ghose v. Mugneeram Bangur has defined thus, the word impossible has not been used in the Section in the sense of physical or literal impossibility. The performance of an act may not be impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties. If an untoward event or change of circumstance upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do.

    The main difference between section 56 and section 32 is that under section 56 a contractual obligation which is possible at the time of entering into contract becomes impossible due to any unforeseen event which is beyond the control of the party.

    However Section 32 renders the contract to be void due to the impossibility of performance due to the nonhappening of a particular event which was contemplated by the party in the contract. Section 32 will come into play when the contract is dissolved by its force whereas section 56 will occupy the field when the contract crumbles down due to an impact of a violent nature with an outside force.

    The main intention behind the force majeure clause is to save the performing party from the consequences of events that are beyond its control. However all events cannot be a Force Majeure event. It has to satisfy the essentials for the discharge of contractual obligations.

    Essentials of Force Majeure Clause

    As stated earlier, the force majeure clause is governed by Sections 32 and 56 of the Indian Contract Act 1872 for contracts made under the statutory jurisdiction of India. The contracting parties should ensure that the force majeure clause in their contracts contains the following important elements:
    • Enumeration of events that would constitute a force majeure event, based on the nature of the contract.
    • Procedure to be followed by the parties to invoke the force majeure clause.
    • Consequential happenings after the occurrence of a force majeure event, affecting the position of the parties and the legal status of the contract.
       
    These elements are essential to make the force majeure clause enforceable and binding on the parties. Many businesses and industries find it beneficial as it stresses the events that excuse them from performing their contractual obligations, at least for a while, characterizing the clause as a respite from their petrifying business surroundings. Little did they notice that all events that impede their business functions and contractual operations do not come under the ambit of force majeure clause.

    To claim the remedy under the clause available to them, the contracting parties should look after the following conditions to prove with cogent reasons that a particular event is covered under the force majeure and either party has the right to invoke the clause at that turn of event:
    • That the non-performance is caused only due to the said event.
    • That it was not aware, at the time of entering the contract, that the circumstances giving rise to the event of force majeure were likely to occur.
    • That the event cannot be predicted or foreseeable by a reasonable man with his prudent mind.
    • That the particular event is beyond control and the parties cannot influence or exploit the happenings of the event for their own personal and pecuniary interests.
    • That no reasonable steps could be taken to mitigate the losses or risks that occurred due to the particular event.
    • That no other possible alternatives are present to continue performance except rescinding the contract or coming up with a settlement plan to compensate the affected party and make good the loss occurred due to an unexpected event.

    Apart from these conditions, the parties should also look around them for suitable options for fulfilling their contractual obligations rather than citing the event and depending on the force majeure clause blindly. There should be a complete restraint on the parties to perform according to the contract. A temporary interruption in operations cannot be a permanent impossibility to leave the contract unperformed and obligations unfulfilled.

    In Syed Khursheed Ali v. State of Orissa, the Court held that where the petitioner contractor was restrained from supplying animal beef under the Orissa Prevention of Cow Slaughter Act,1960 to the respondent Zoological Park, having regard to the nature and circumstances of the transaction and implied terms, no doubt is cast that the performance of the contract on the part of the petitioner became a complete impossibility and such impossibility can be brought within the fold of force majeure.There should be a supervening impossibility to nullify the contract for its performance. In Robinson v. Davidson, there was a contract to give a music contract. As the musician was disabled by illness, the contract was held to be frustrated and so discharged by supervening impossibility.

    Moreover, the parties should prove that they have taken reasonable steps or an attempt to continue the performance, beyond which the contract is made unenforceable. A party becomes eligible to claim relief under force majeure clause only if he had taken steps to mitigate the losses arising out of such unforeseen events. Therefore, the contracting parties should be alert and aware of such provisions of law and such clauses in their commercial contracts and covenants to protect their pecuniary interests and their future position concerning the terms and conditions specified in their agreements and contracts.

    The implication of commercial contracts with and without Force Majeure Clause

    The global outbreak of COVID-19 has made businesses shut down their operations or function at the least minimum capacity. The contracting parties may resort to invoking the force majeure clause and secure their commercial interests in the contract as this is an unexpected event that they haven't foreseen.

    In Dhanrajamal Gobindram vs. Shamji Kalidas & Co., it was observed by the Court that the intention of force majeure clause is to save the performing party from the consequences of anything over which he has no control.

    1. Contract with Force Majeure Clause:

    To invoke the force majeure clause, the parties should follow the procedure mentioned in the contract itself. The party who is about to invoke the force majeure clause should have at least tried to complete his performance and fulfill his obligation, i.e., he should have attempted to continue performance before invoking the clause. This pre-requisite is very essential as it makes the clause not only practically invokable but also legally binding on the parties to the contract.

    More significantly, the party should issue a notice to the about his inability to perform his obligation due to the happening of the unprecedented event and his intention to invoke the force majeure clause to protect his financial interests to the other party. This should be adhered to when the force majeure clause is expressly mentioned in the contract.

    In Sushila Devi v. Hari Singh, the observation of the Court was that the impossibility contemplated by Section 56 is not confined to something which is not humanly possible. If the performance becomes impracticable having regard to the object and purpose, then it must be held that the performance of the contract has become impossible.

    Similarly, in Satyabrata Ghose v. Mugneeram Bangur, the Court has stated that where a contract itself contained expressly or impliedly a term, according to which it would stand discharged on the happening of certain circumstances, the dissolution of it would take place under those terms and such cases would be outside the purview of Section 56 altogether.

    2. Contract without Force Majeure Clause:

    When the force majeure clause is not expressly mentioned in the contract, then the parties have no other way than to prove their impossibility to perform the contract owing to such unexpected events. This can be done with the help of a doctrine known as doctrine of frustration.

    Doctrine of Frustration:

    Frustration is the premature determination of a contract owing to the occurrence of a supervening event making its performance impossible. The doctrine of frustration applies to a contract when the performance of it is clouded by impossibility and the parties are frustrated to continue fulfilling their contractual obligations. Thus, a contract gets qualified to be applied by the doctrine only when it is covered up by a supervening impossibility which makes the parties completely immovable from honoring the commitments made by each other in the contract. Such a contract, due to the subsequent impossibility on it, becomes void.

    Evolution of the doctrine:

    This principle was evolved as a device by which the rule as to absolute contracts is reconciled with a special exception. In Taylor v. Caldwell, the defendant agreed to let out the music hall to the plaintiff on specific dates for entertainment purposes. The hall was destroyed by fire before those dates. The plaintiff sued for damages for breach of the contract. The Court discharged the defendant from the contract as there was a supervening impossibility that made him unable to complete his performance.

    Application of the doctrine:

    To invoke the doctrine of frustration, the event should be uncontrollable and cannot be foreseen by the parties to the contract. In Gujarat Urja Vikas Nigam Ltd. v. Tarini Infrastructure Ltd. & Ors., the Supreme Court stated that only an uncontrollable event could be recognized as a factor to qualify as a force majeure event. Thus events that can be foreseeable or due to which performance can be delayed cannot come under the purview of doctrine of frustration.

    In Energy Watchdog v. CERC, it was stated that the application of the doctrine must always be within narrow limits and will not apply when there is a rise in cost or expense and also when the fundamentals of the contract remain the same even after the happening of the unexpected event.

    Therefore, relief under a force majeure clause can be claimed by the contracting parties only under such conditions and situations. It is up to the parties to prove the impossibility with cogent reasons and the Court should also adjudge and decide on the nature of impossibility which differs from contract to contract and case to case.

    Force Majeure Clause in COVID – 19 crisis

    1. COVID-19 is a Force Majeure event:
      The COVID-19 has threatened the livelihood and lives of several people. The effect of this pandemic has been so grave which resulted in the loss of lives of many people in the world. COVID-19 not only has a huge impact on the lives of people but also affected the functioning of the economy due to the scarcity of essential goods and due to a fall in production. The prices of goods have risen and there has been a crash in the supply chains. Taking this into consideration, the Ministry of Finance declared COVID - 19 as a natural disaster due to disruption of the supply chain on account of the outbreak of COVID -19 in China and other countries on February 19 by a way of an Office Memorandum. As COVID -19 was an unforeseen event that could not be anticipated, it satisfies the main essential of force majeure.
       
    2. Impact of COVID-19 in commercial contracts:
      The government has imposed Section 144 of Cr.P.C. to prevent crowding and a national lockdown has also come into effect to prevent the spread of the coronavirus. This pandemic has affected many commercial transactions in the form of contracts and covenants, thereby hugely impacting businesses and other commercial activities. It has affected cross-border trade and made it difficult for people to honor their contractual obligations. Restriction in movement, stoppage of production, scarcity of raw materials and other factors have burdened the parties to invoke the force majeure clause in their agreements to currently suspend the contractual obligation between parties to the contract.

    There are two effects on the contract
    1. Frustration of contract
    2. Temporary suspension of contractual obligations

    Frustration of contract:

    In some cases the nature of the contract or the very purpose for which the contract was entered would be destroyed by a force majeure event which would make the very existence of contract into question. In such a case by application of section 56, the contract which is impossible of performance due to an unforeseen event would be frustrated and the contract would be declared null and void. The concept of impossibility can be explained in the light of two supervening impossibility and supervening illegality.

    Impossibility of performance due to changed circumstances or destruction of subject matter or any incapacity to render personal service or when there is any fundamental change in the contract it discharges the party from contractual liability by application of the doctrine of supervening impossibility.

    For instance, an event management company enters into a contract with a DJ for performing in a party for a consideration of Rs 2,00,000. The party cannot be hosted due to the lockdown which is been imposed thus the contract gets frustrated due to the impossibility of performance due to an unforeseen event thus the contract becomes void by Section 56. Any advance given to the DJ or any benefit accrued to the party should be restored by virtue of Section 65.

    Supervening illegality is a situation wherein at the time of entering into a contract the contractual obligation could be legally performed without contravention of any law. However during the time of performance subsequent change in the law could render the contract frustrated due to the impossibility of performance.

    For example, Company A entered into a contract with company B to supply 1000 bales of cotton on March 25th. However, the Ministry of Home Affairs on March 24, has directed all the state and union territory governments to restrict the movement of citizens outside their homes and has ordered to shut down all offices and factories except manufacturing essential goods under Section 6(2)(i) of Disaster Management Act. Due to the change in law the contractual obligation cannot be performed due to imposition of law and thus the contract stands discharged due to supervening illegality.

    Temporary suspension of contractual obligations:

    In certain contracts, in which time is an essential factor, there can be an application of force majeure clause to currently suspend the contractual obligation due to the unforeseen event and the parties could alter the contract by Section 62 to postpone the performance of the contract. The force majeure clause protects the party from any civil proceeding and discharges the contractual obligation.

    There is a limitation of the implication of the force majeure clause in contracts involving essential goods or services. During COVID -19 there is no restriction in the movement and production of essential commodities or services. Recently in the case of Standard Retail Pvt. Ltd vs. M/s G. S. Global Corp & Ors, the Bombay High Court has held that the force majeure clause can be made applicable only to sellers and not buyers and the buyers cannot absolve from the liability of paying to sellers due to the reason of lockdown. It was also observed that the lockdown was for a limited period which cannot absolve the buyers from paying the amount due to the seller by an invocation of force majeure clause in the contract.

    Similarly, the Life Insurance Council has clarified that the force majeure clause in life insurance contracts will not apply in cases of COVID -19 death claims. The spiraling global and local impact of the COVID -19 pandemic has emphasized the fundamental need for life insurance in every household. The life insurance industry is taking every measure to ensure that the disruption caused to policyholders due to the lockdown is minimal, by providing them uninterrupted support digitally, be it for honoring death claims related to COVID -19 or for servicing their policy.

    Commercial hardship needed to be distinguished from impossibility:

    During COVID-19 force majeure clause cannot be applied to contracts which involve commercial hardship yet the contractual obligation is still possible of performance. Such obligations cannot be terminated by force majeure. In Tsakiroglou & Co. Ltd. v. Noblee Thori G.M.B.H., popularly known as the Suez Canal case, it was held that a contract cannot become void and liable to be set aside just by a mere commercial hardship as it is temporary and as such cannot be considered as a perpetual impossibility.

    Conclusion
    All contractual obligations cannot be frustrated by the application of the force majeure clause. Courts don't exercise an arbitrary power to absolve a party from a contractual obligation due to temporary impracticality. The doctrine of frustration is not a straight jacket formula and has to be applied differently on case to case basis. There may be commercial hardships that cannot be described, prima facie, as an impossibility.

    Parties to such contracts, in these tiring times, should also look around them to find those amenities to facilitate the performance of the contract rather than blindly relying on the situation for invoking the force majeure clause. Force majeure clause is just a temporary suspension of contractual obligation due to impossibility but not a defense to escape liability due to impracticality. The courts should apply its discretion whether a contractual obligation is still subsisting on the parties or has been discharged from the obligation on the application of the doctrine of frustration.

    Written By:
    1. Pranav.R - B.Com.; LL.B.(Hons.), B.Com.; LL.B.(Hons.) Sastra Deemed To Be University;
      Email: [email protected]
    2. Hariharan.R - B.Com.; LL.B.(Hons.), B.Com.; LL.B.(Hons.) Sastra Deemed To Be University;
      Email: [email protected]

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