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Interplay between Force Majeure Clause and Covid19

With the new rules of Unlock 4.0 and easing down of the lockdown in an attempt to revive the economy, the infection rate is touching new levels of spike every day. The strict lockdown imposed for months in India has sent shockwaves across the already disturbed Indian economy with even lesser spending capacity, job cuts, salary cuts, shops shutting down and an unexpected -23.9% contraction in the Gross Domestic Product.

It is becoming more and more difficult for entities and people to perform their contractual obligations, demand and supply has been severely affected and established empires like PVR and Reliance retail have attempted to utilize the provision of force majeure for some protection.

What is Force Majeure and how does it offer protection?

Force Majeure translates into a superior force that prevents parties from performance due to certain events that can never be anticipated like natural calamities, war, disruptive weather conditions, etc.

The term force majeure might not find place in Indian laws but its essence is embodied in sections 32 and 56 of the Indian Contract Act. Section 32 provides that 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.[1] Section 56 of the Contract Act provides that ‘a contract to do an act which, after the contract is made, becomes impossible or unlawful or, by reason of some event which the promisor could not prevent, becomes void when the act becomes impossible or unlawful.[2]

So, under these provisions, parties can avail some protection from performance leading to frustration of a contract due to unforeseeable events that is beyond any entity or individual’s control. Most contracts have force majeure clauses to absolve them of any obligations under uncontrolled circumstances for instance the ongoing pandemic of Covid 19.

In Energy Watchdogs v CERC and Ors, the Supreme Court held that a tenant can delay the payment if there is a clause pertaining to it but if there is no precautionary force majeure clause, a tenant cannot waive off his/her liabilities.[3]

How does it play out?
By a mere insertion of a force majeure clause in a contract does not waive off the liabilities of parties. Performing and honouring the contracts is essential to this legislation and there is no convenient way to get out contractual responsibilities. Even though the Government declares Coronavirus as a force majeure event, parties have to prove that this event directly affects their ability to perform the contract. So, the language of the clause is tantamount to determine what event fractures a contract and eventually makes it void due to non-performance.

The Supreme Court in Halliburton Offshore Services Inc v Vendanta Limited and Anr, have held that every violation in performance of a contract cannot be directed towards the ongoing pandemic and that force majeure clauses are interpreted narrowly.[4] There needs to be a “real reason and justification’ as to why the party has failed to honour the contract. For more clarity the court laid down certain factors to monitor the situation better and assess whether it is justified for a party to fail to perform and these are:
  1. Conduct of the parties before the force majeure event
  2. Deadlines within the contract
  3. Steps needed to be taken and
  4. Compliances to be made
The Bombay High Court has also been trying to alter the interpretation of force majeure and recently by its order in Standard Retail Private Limited v M/S G. S. Global Corp and Ors it held that the nationwide lockdown was not a sufficient reason to terminate the contract between the parties especially for the petitioners in this case who were pleading to restrain the bank from encashing letters of credit as its contract with respondent 1 was already frustrated because it could not be performed.[5]

The hiccup here was that respondent 1 was required to supply steel products to the petitioners from South Korea which they were successful in doing. Hence, the court held that the force majeure clause would anyway be applicable to the Respondent 1 and not the petitioner who failed to pay despite the respondent 1 complying with its obligations and shipping the product from South Korea.

Conclusion
So, Indian courts have a very clear stance to eventually honour the contract in whatever form and that does not make it easier for parties to wriggle out of it. Covid 19 has definitely changed the way contracts are drafted now and it will be more futuristic in their approach. Parties should conduct themselves in a timely manner complying with all obligations and serve notices as soon as it is determined that a contract cannot be performed due to a force majeure event.

It will be beneficial if parties maintained proper documentation of the detrimental effects of this outbreak on their contracts. Since courts’ decisions will vary from a case to case basis, evidence to accord non-compliance to Covid or any other unanticipated event will protect the sanctity of contracts.

End-Notes:
  1. Indian Contracts Act (1872), s32
  2. Indian Contracts Act (1872), s56
  3. Available at: https://thewire.in/law/tenancy-agreements-covid-19-lockdown-force-majeure
  4. Available at: https://www.scconline.com/blog/post/2020/04/25/special-equities-in-light-of-covid-19-and-its-impact-on-invoking-bank-guarantees/
  5. Available at: https://www.jurist.org/commentary/2020/05/tushar-behl-force-majeure-india-covid19/

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