The aftermath of the closure of commercial and private establishments due to the
lockdown deteriorated the Indian economy. It affected various sectors including
commercial contracts. Consequently, contractual obligations and terms of the
contract are being reanalysed to validate force majeure or act-of-god clauses.
Many companies have started taking protection under these clauses to escape or
retard their commitments in the contract. Hence, this exaggerates the relevance
of the force majeure clause in an agreement.
Impact of COVID-19 on Indian Economy
The trade impact of the coronavirus for India is estimated to be about $348
million.1 Private consumption, investment and external trade which are the three
main contributors to GDP will be affected the most.2 The lockdown has had a
negative impact on various sectors leading to indebtedness.
- Aviation Sector: Travel ban across India and globally due to coronavirus
has added fire to the already loss-making Aviation sector. Airlines can invoke
Force majeure clause in the current situation to suspend its contractual
obligations. This can mitigate heavy losses to at least some extent. Air Deccan
has already halted its operations and kept its staff on sabbatical without
- Hospitality Sector: With no tourists, hotels across the country
are incurring hefty losses. Oyo has already invoked FMC on their contracts
with the hotel owners. It also proposed a revenue share model in their
agreements. But the hotel owners refused the invocation of FMC claiming that
it was not present in the contract they signed.3 Oyo can still terminate its
contractual commitments by invoking S.56 of Indian Contract Act.
- Real Estate Sector: Even after the lift-off there will be labour
scarcity which will further intensify the delay. The demand for houses and
property has dwindled. The relationship between lessor and lessee is also at
stake as the workplaces are not being accessed. The Apex Court in its landmark
judgment of Raja Dhruv v. Raja Harmohinder Singh (1968) held that, the rule of
force majeure and doctrine of frustration under S.56 of Indian Contract Act is
not applicable to lease deeds but is instead regulated under Transfer of
Property Act, 1872.4
- Banking Sector: The companies are seeking FMC in their contracts
requesting banks to impede payments and reorganise past loans. Consequently, RBI
issued guidelines directing banks and non-bank financial institutions to grant a
three-month moratorium on loan repayments. But most commercial property
insurances and business interruption insurance exclude pandemics and epidemics
or any disease related disturbances.
- Sports Sector: Many major sports events are suspended or
postponed due to the pandemic. Tokyo Olympics, World Indoor Championships Nanjing, Euro 2020
have been postponed to 2021. IPL, Asian Championships (Badminton), National
Basketball Association (NBA), FIH Pro League have suspended their events. As a
result, federations, event organisers, players, groundsmen, umpires are equally
impacted and incur heavy financial damages.5
What is Force majeure?
Force majeure has its genesis from Roman law, meaning “superior force” and
sometimes also refers to acts of God.6 The legal doctrine, “Clausula rebus sic
stantibus” implies that the contractual obligations are binding only if the
issues persist the same as they were at the time of initiating the contract. The
Roman law recognizes this principle tempering the sanctity of contract.7
The force majeure clause (FMC) relieves one or both the parties from liability
to execute contractual commitments when performance is impeded by an
unforeseeable event beyond the parties' control (Industrial Finance Corporation
of India vs. Cannanore Spinning & Weaving Mills Ltd (2002) 5 SCC 54). These
events usually include war, natural calamities, terrorist attack, government
policies, plagues, pandemics etc.
The Indian Contract Act, 1872 not in any way elucidates the term force majeure
But there is still some reference that can be made in Section 32 which deals
with enforcement of contracts contingent on an event happening. It states that
the performance of the contractual obligations is contingent on the happening or
non-happening of an event. If the event becomes impossible then the contract
The Apex Court in the case of Energy Watchdog v. CERC
(2017) 14 SCC 80
If the contract contains an express or implied force majeure clause then the
dissolution of the contract would take place under the terms of the contract
itself and such case would be dealt with under S.32 of the Act.
The Court further stated that in the case where alternative ways of performance
are available there the force majeure clause would not be applicable.
To implement successfully the defence of force majeure the promisor must show
- an unforeseeable event has occurred
- performance has been made impossible
- all reasonable measures have been taken to alleviate the consequences
Another important aspect is that the non-performing party should notify the
other party regarding the force majeure event which is preventing them from
executing their contractual obligations (Sabine Corp. v. ONG Western, Inc.
F. Supp. 1157 (W.D. Okla. 1989).
The major purpose behind FMC is to protect the contracting party from the
consequences of any occurrence over which he has no control (Dhanrajamal
Gobindram vs. Shamji & Co., AIR 1961 SC 1285).8
Can COVID-19 be considered?
On 19-02-2020 the Ministry of Finance and Government of India notified that
corona virus will be safeguarded by FMC and should be taken into account as a
natural disaster. It also informed that the provision does not entirely excuse
the non-performance of a party but only halts it for a period of time.
The non-performing parties relying on FMC must primarily look whether the
contract has pandemic mentioned in the FMC and the consequences of such
occurrences. It is also substantial that the parties should particularly include
the clause before entering into any contract. For the parties to take the
defence of force majeure solely depends on how the courts interpret the clause.
McCardie J in the famous English case of Lebeaupin v Crispin
714 states that:
A force majeure clause should be construed in each case with a close attention
to the words which precede or follow it, and with a due regard to the nature and
general terms of the contract'.
In addition to wording of the force majeure clause it-self, a court elucidating
a force majeure clause will consider the state's common law notions of clause
and excuse to contract performance.9
But what if the contract does not include
an FM clause specifically mentioning the term pandemic?Impossibilium nulla obligatio est
The legal maxim, states that there is no obligation to do impossible things.10
Though the non-performing parties did not include the FMC while contracting the
terms initially, they can still invoke the doctrine of frustration under Section
56 of the Indian Contract Act. This doctrine was first laid down in a historic
English case, Taylor vs. Caldwell,
(1861-73) All ER Rep 24 which held
if some unforeseen event occurs during the performance of a contract which makes
it impossible of performance, in the sense that the fundamental bases of the
contract goes, it need not further performed, as insisting upon such performance
would be unjust
The doctrine of frustration differs from force majeure in the circumstances
where the impossible event occurs after entering into a contract and that the
parties could not contemplate it at the time of executing the contract. Such
contracts are void under S.56 of Indian Contract Act.
The Supreme Court of India in its momentous decision of Satyabrata Ghose v.
Mugneeram Bangur & Co
., (1954) SCR 310 elucidated the scope of S.56. It states
that a mere impracticality of performance is sufficient to decide a force
majeure event and it is not essential for the act to become literally
impossible. It further held that the word “impossible” in S.56 does not mean
physical or literal impossibility.
Where French law differs, however, is in the rule that technical performance
excludes the defence and takes into account only physical or legal
In tough times like of a pandemic, force majeure clause or doctrine of
frustration are the great saviours to any business. Even if there is no force
majeure clause in a contract, parties can still take help of S.56 to discharge
their obligations. It mainly depends on the interpretation of the terms of the
contract. The aggrieved party can claim for remedy under restitution for any
performance received to the other party. Henceforth, parties entering into new
contracts should carefully incorporate the terms and clauses to avoid any
trouble in future.
Written By: Soujanya Muthyala
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- I'm a law student from Gitam School of Law, Visakhapatnam