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. 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.
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,
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.
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
The Supreme Court in Halliburton Offshore Services Inc v Vendanta Limited and
, 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. 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:
- Conduct of the parties before the force majeure event
- Deadlines within the contract
- Steps needed to be taken and
- 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.
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.
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.
- Indian Contracts Act (1872), s32
- Indian Contracts Act (1872), s56
- Available at: https://thewire.in/law/tenancy-agreements-covid-19-lockdown-force-majeure
- 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/
- Available at: https://www.jurist.org/commentary/2020/05/tushar-behl-force-majeure-india-covid19/