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Significance of Force Majeure in light of COVID-19

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 remuneration.
     
  • 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 becomes void.

The Apex Court in the case of Energy Watchdog v. CERC (2017) 14 SCC 80 held that:
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 that:

  1. an unforeseeable event has occurred
  2. performance has been made impossible
  3. 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., 725 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 (1920) 2KB 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 that:
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 impossibility.11

Conclusion
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.

References:
  1. Economic Times, Coronavirus & its impact on various sectors, (Mar.25, 2020, 14:00 PM), https://economictimes.indiatimes.com/.
  2. Akanksha Maker, Potential impact of Covid-19 on Indian aviation and tourism, ECONOMIC TRAVELLER (Apr.06, 2020, 17:36 PM), https://www.businesstraveller.com
  3. Anumeha Chaturvedi, Oyo suspends payments to hotels; Partners say clause not in contract, ET (Apr.14, 2020, 19:00PM), https://m.economictimes.com/
  4. Smaran Shetty & Pranav Budhilal, Force Majeure, Frustration and Other Irresistible Force': Lease Agreements and COVID-19, BAR AND BENCH (Apr. 15, 2020, 16:25 PM) https://www.barandbench.com
  5. Krishna Kanta Chakraborthy & Shilarze Saharoy, How field workers are coping with loss of pay during covid-19, TOI, (Apr. 20, 2020, 14:30 PM) https://timesofindia.indiatimes.com/
  6. JSTOR, Force Majeure. Impossibility of Performance as a Defence. Force Majeure. The Yale Law Journal, vol. 31, no. 5, 1922, pp. 551–552. (Apr. 26, 2020) www.jstor.org/stable/789388.
  7. Laurence Lieberman, The forgotten Force Majeure clause and its relevance today under Indian and English Law, BAR AND BENCH (Apr.20, 2020, 10:20 AM), https://www.barandbench.com/
  8. Rajat Prakash, Covid-19: Analysis of Contractual Obligations and Force Majeure, INDIA LEGAL (Apr.07, 2020, 15:10 PM)https://Www.Indialegallive.Com
  9. Encinas, Carlos A., Clause Majeure?": Can A Borrower Use an Economic Downturn or Economic Downturn-Related Event to Invoke The Force Majeure Clause in Its Commercial Real Estate Loan Documents? Real Property, Trust and Estate Law Journal, vol. 45, no. 4, 2011, pp. 731–776., JSTOR (Apr.26, 2020) www.jstor.org/stable/23058673.
  10. Rabello, Alfredo Mordechai, The 'Impossible Contract': From Roman Law to the Unidroit Principles of International Commercial Contracts and the Principles of European Contract Law, SSRN (October 24, 2015). Fundamina 16 (1) 2010, p. 346. https://ssrn.com/abstract=2679332.
  11. Ewan Mckendrick, Force Majeure And Frustration Of Contract 404-06 (2d ed. 1995).

Written By: Soujanya Muthyala - I'm a law student from Gitam School of Law, Visakhapatnam

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