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Applicability of Force Majeure Clause and Covid-19

The whole world has suffered a major crisis and is continuously fighting the Covid-19 crisis. People across the globe are facing huge repercussions due to it. There was particularly a huge disruption in economic activities as the imposition of lockdown prevented the smooth functioning of businesses, leading to a great impact on the existing contracts. Several contractual parties started to reconsider the need for modifying and terminating their contracts.

In this, a new concept emerged i.e. the use of Force Majeure Clause. Parties trying to escape losses and in need of a solution started to take the shed of the Force Majeure Clause. Force Majeure Clause in Latin means superior force. It's an event that is unanticipated and outside the control of people. Therefore, parties who entered the contract before the pandemic and couldn’t comply with their obligation started to use the Force Majeure Clause.

Now it is to be decided that whether we can consider pandemic under the Force Majeure Clause? and would it be applicable as the Indian Contract Act doesn’t deal with it specifically. Also, whether all the commercial contracts where non-performing parties are unable to perform their contractual obligation can take its remedy.

Through the cases, it's observed that it is not the scenario and its applicability depend on the terms of case and the clause of the contract. Sec 56 of the Indian Contract Act can be used by the parties in case their contract does not contain Force Majeure Clause. The interpretation/application of use of force majeure clause in other countries is also discussed in brief.

Introduction
Globally all the countries are facing a major crisis due to the coronavirus pandemic. The cases are exponentially rising and to control it several countries had announced nationwide lockdown. Due to this all the sectors are disturbed; be it political or economical or social. All this has caused huge disruption in economic activities, as the lockdown prevented the smooth functioning of businesses, leading to a great impact on the existing contracts.

The continuation of the contracts and fulfilling the contractual obligations had become difficult for the contractual parties. In all this, the use of Force Majeure Clause was highlighted and came into limelight. And in this paper, I would be covering whether the force majeure clause would be applicable in the current scenario of Covid-19 outbreak.

Where, Part 1 deals with the brief introduction of force majeure and force majeure clause in a contract. Part 2 deals with Indian jurisprudence concerning the force Majeure clause and its applicability with the help of a few cases. Part 3 deals with the remedy available in the absence of a force majeure clause. Part 4 deals with how in other countries the force majeure clause is applied/ interpreted.

What is Force Majeure?

Force Majeure in Latin means ‘superior force’. It has been defined in the Black Law’s Dictionary as ‘an event or effect that can be neither anticipated nor controlled.’ The term includes events which are act of nature example volcano, tsunami, earthquake, volcano etc and acts of people example war, riots, strike.[1]

Vis Major’ (Act of God) is defined as an “overwhelming, unpreventable event caused exclusively by forces of nature, such as an earthquake, flood, or tornado.” [2]

A lot of times force majeure is mistaken for Vis Major. Force majeure includes both types of unforeseen events i.e. natural and artificial events whereas, Vis Major comprises only natural unforeseen events. In fact, Vis Major is a subset of Force Majeure. Supreme Court of India, in the case of Dhanrajamal Gobindram v/s. Shamji Kalidas & Co., has recognized this distinction.[3]

Notwithstanding the difference, the main aim of these two is to excuse the parties to contract from performing their contractual obligations without any threat of breach of contract. The parties won’t be held liable for non-performance in case of an unforeseeable situation on which they do not have control occurs.

Force Majeure Clause in Contract
In simple terms, Force Majeure clause refers to events or circumstances that are unforeseeable or not reasonably foreseeable at the time of execution of the contract.

Example:
A and B enter into a contract were A has to deliver goods to B but due to the sudden occurrence of flood he is unable to deliver goods.

In this example the flood is the unforeseeable event which both the parties could not reasonably foresee while entering into the contract. And since it was an unforeseeable event the performing party is excused from the performance. But it is pertinent that the force majeure clause should be inserted in the contract to take its defence.

The force majeure clause is included in contracts very often. The clause is framed as mutually agreed by the parties and includes events such as the wars, act of God, terrorism, riots, labour strikes, embargos, acts of government, epidemics, pandemics, plagues, quarantines, and boycotts. If any event mentioned in the clause happens and prevents the performance of the contract, then in this scenario the affected parties may be relieved from the performance as explained in the above example. This clause in a way provides a temporary break to the parties from their contractual obligations if such an event occurs.

If such an event is not specifically mentioned in the clause then, many force majeure clauses include words or phrases which are in addition to the specifically mentioned events. The phrase could have a language which is inclusive like “including, but not limited to” or “any cause or event outside the reasonable control of the parties”.[4]

The pre-requisite things for invoking the Force Majeure clause are [5]:

  1. The Event should be an unforeseeable event
  2. Due to the occurrence of such an event, the performance of the contractual obligations must become impossible
  3. The event that occurred must be beyond human control
  4. All measures should have been taken to mitigate the damages
  5. The affected party has the burden of proof to show that the force majeure event has affected the performance of such party as per the contract.
When the above-mentioned conditions are fulfilled, one can successfully apply the force majeure clause in their contract and be excused from performing their contractual obligations in case such force majeure events take place.

Indian law on the concept of Force Majeure
In India, the concept of Force Majeure has neither been defined nor specifically dealt with under any statutes. But legislators have dealt with it to some extent under section 32 and section 56 of the Indian Contracts Act, 1872.

Section 32 of the act deals with contingent contracts and reads as follows:

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."

Example
A makes a contract with B to buy B’s horse if B marries C. This contract cannot be enforced by law unless and until B marries C.

So, if an unprecedent event occurs like pandemic or flood and its being mentioned in the clause then the contract becomes contingent as it depends on happening and non-happening, i.e. if it occurs the parties must have agreed beforehand what to do in such situation, whether to suspend or cancel the contract.

Sec 56. of the Act deals with frustration of a contract and provides that a contract becomes void inter alia if it becomes impossible, by reason of an event which a promisor could not prevent, after the contract is made.

Example
A contract with B to deliver goods to B in other country. Later if A’s government declares war against the country in which the B is situated the contract becomes void when war is declared.

From above it could be seen that force majeure events can be dealt under these sections. As there is possibility that due to the uncertain event the contract can becomes void or impossible to perform.

Can Covid-19 be considered under Force Majeure?

So, now the question arises that whether the parties who entered into a contract before the Covid-19 outbreak and couldn’t complete their contractual obligations due to the lockdown could take the help of Force Majeure clause for non-performance?

On 19-02-2020 the Government of India, through its memo no. F. 18/4/2020 PPD issued by the Ministry of Finance declared that the disruption of supply chains caused by the Covid-19 outbreak should be considered a natural disaster and be covered under the force majeure Clause, and invoke it wherever necessary, following due procedure of law. [6] The pertinent point to be noted here is that all the commercial contracts entered and disrupted would not fall under it, as it is specifically limiting itself to the supply chains.

Also, not all the disrupted contract parties could take the defence of Force Majeure clause. The foremost condition to it is that the clause should be included in the contract before entering. Secondly, the non-performing parties who want to rely on Force Majeure clause should check that whether pandemic is mentioned in it. Thirdly, it also depends on how courts interpret the clause and hence its applicability varies from case to case.[7]

Another important aspect which has to be kept in mind before invoking the Force Majeure clause is that the performance must be objectively impossible, merely difficult, or uneconomical performance is not sufficient. The Supreme Court in Energy Watchdog v. Central Electricity Regulatory Commission held that only events which are explicitly mentioned in the contract can excuse a party from performing its obligations.[8] Meaning that impossible here refers to physical or literal impossibility.

In the case of Standard Retail Pvt. Ltd vs. M/s. G.S. Global Corp And Ors, the respondents had to supply certain steel products to the petitioners, and the same was complied by them.[9] But to surprise, the case was filed by the petitioner instead of respondent no 1. They said that due to the covid-19 outbreak and lockdown they won’t be able to make the payment and wanted to rely on the force majeure clause. Their contract was based on general terms and included a force majeure clause.

The Bombay High Court, while dismissing it, held that in this contract the force majeure clause was only applicable to the respondent no 1 and the petitioners could not take defence of it. Respondent no. 1 did comply with its obligations and delivered the goods but the fact that the petitioners cannot pay back, and it would suffer damages is not the factor that can be held against Respondent no 1.

The court took this opportunity and cleared the wrong concept that was prevailing concerning force majeure event and the application of Doctrine of Frustration of Contract on account of COVID-19. The court said the lockdown could not come to the rescue of the petitioners so as to resile from their contractual obligations. In short, just a little hardship in complying with the contractual obligation because of the Covid-19 pandemic is not a valid ground which can be used against a seller.

In Halliburton Offshore Services Inc. vs. Vedanta Limited and Anr, the petitioner filed an interim application for protection against the respondent. [10] It was filed against the respondent from invoking bank guarantee as the petitioner could not perform its contractual obligations due to pandemic and lockdown in the country.

The court held that the imposition of a country wide lockdown in the interest of justice would justify as special equities in the form of preventing irretrievable injustice to the Petitioner and passed an ad-interim injunction order restraining invocation of bank guarantees till the expiry of one week from 3rd May 2020, till which date the lockdown stood extended then.[11]

Remedies available in absence of Force Majeure clause

In the case of absence of provision of force majeure clause in a contract, the doctrine of frustration under section 56 of the Indian Contracts Act, could be invoked. The provision states that in case a contract to do an act becomes impossible to perform, because of some unavoidable circumstances, which the promisor cannot prevent, it will be unlawful and subsequently, the whole contract becomes void.

Through this, the parties can possibly prove the ‘absolute’ impossibility of contractual performance through an unforeseen event that occurs during the performance of a contract. In the sense that the fundamental basis of the contract should go away, and the contract need not be further performed, as insisting upon such performance would be unjust.

Epidemic/pandemic covered under the Force Majeure clause in other countries

The Courts of the United States of America and the United Kingdom have specifically stated that the pandemic/ epidemic is included in the expression ‘Act of God’.[12]

Example of the US case:
In Lakeman vs. Pollard’s case a labourer left his job early and failed to complete his work contract during the cholera epidemic among the fear of contracting the disease. [13] The mill owners in an action of seeking compensation for work done by the labour argued that the labourers had breached the contract. The Supreme Court of Maine held that contract was not breached, as the cholera outbreak was an ‘Act of God’ and due to it his duty to perform under the contract was discharged.

Example of UK law:
In Aviation Holdings Ltd. v. Aero Toy Store LLC, the non-performing party was unable to deliver an aircraft due to the dearth of pilots amid a pandemic. Here, it was held that the dearth of pilots due to a pandemic fell within the catch-all residuary wording of a force majeure clause.[14]

Conclusion
From above it could be seen that the parties can avail the force majeure clause in their contracts depending on the nature and terms of the contract. Further, the parties have to make sure that they do not have any other alternative mode of performing their contractual obligations and if they do, then they have to make use of that and in such case, the Force Majeure clause will not be applicable. Courts in India have also upheld the invocation of the clause.

But the interpretation of the courts is very stringent, and the applicability of their decision depends on case to case basis. Hence, it could be concluded that the parties can invoke the force majeure clause in India subject to that it is included in their contract. In addition to this, the doctrine of frustration can come as a saviour in case the force majeure clause is not included in the contract.

End-Notes:
  1. Blacks Law Dictionary (11th Edition, 2019).
  2. Blacks Law Dictionary (11th Edition, 2019).
  3. Dhanrajamal Gobindram v/s. Shamji Kalidas & Co., AIR 1961 SC 1285
  4. Adarsh Saxena, Aditya Sikka & Drishti Das, Force Majeure in the times of Covid -19, Cyril Amarchand Mangaldas Blog, April 30, 2020 Available at: https://corporate.cyrilamarchandblogs.com/2020/04/force-majeure-in-the-times-of-covid-19/#_ftn19
  5. Tarun Dua and Geetanjali Sethi, Force Majeure in times of COVID-19: Challenges And The Road Ahead, Mondaq, May 11, 2020.
  6. https://www.doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf
  7. Soujanya Priya, Significance of Force Majeure in light of COVID-19, Available at: http://www.legalserviceindia.com/legal/article-3002-significance-of-force-majeure-in-light-of-covid-19.html
  8. Energy Watchdog v. CERC, (2017) 14 SCC 80
  9. Standard Retail Pvt. Ltd vs. M/s. G.S. Global Corp And Ors, Bombay High Court decided on 8 April 2020. Case No 404 of 2020
  10. Halliburton Offshore Services Inc. vs. Vedanta Limited and Anr, (1988) 1 SCC 174
  11. Aniketh Nair and Dev Motta, Shelter Under ‘Force Majeure’ Clause in COVID-19 Times, Available at: http://www.lawstreetindia.com/experts/column?sid=393
  12. Adarsh Saxena, Aditya Sikka and Drishti Das, Force Majeure in the times of Covid -19, Cyril Amarchand Mangaldas Blog, April 30, 2020 Available at: https://corporate.cyrilamarchandblogs.com/2020/04/force-majeure-in-the-times-of-covid-19/#_ftn11
  13. Lakeman v. Pollard, 43 Me. 463 (1857)
  14. Aviation Holdings Ltd. v. Aero Toy Store LLC, [2010] 2 Lloyd’s Rep 668.
Written By: Riddhi Shah, Student Of Pravin Gandhi College Of Law, Mumbai University

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