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Overview Of Force Majeure In India In Times Of Covid-19

The Indian Contract Act, 1872 proclaims under section 37 that:
The parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law.

The Covid-19 pandemic has indisputably been an extended period of loss. This loss has manifested in as much a humanitarian form as that of a commercial and economic one.

The restriction of movement along with loss of lives is the predominant factor impeding the fulfilment of commercial contracts in the pandemic 'era'. It is not only detrimental to the financial and moral health of the breaching party, but also equally threatening to the party at the other end of the contract.

Nevertheless, given the enterprising nature of legal professionals and scholars, a much-needed solace is found in the principles of Force Majeure and Frustration of contracts in the Indian Contract Act,1872.

In light of Force Majeure or the frustration of contracts, unlike singular and transient events, COVID-19 is ongoing and unprecedented when it comes to situations the legal field has taken cognizance of in the past. So to say, a tsunami or an earthquake is an event that occurs once in most scenarios in the sense of disrupting legally obligating activities. However, the pandemic manages to continuously call for government authorized restrictions and general precautions which may prevent transportation and work in full capacity, consequentially breaching duties of a contract.

Given the implications of Covid-19 on pre-existing contracts, it would not be far-fetched to assume that potential parties to a contract have begun incorporating multiple provisions to insulate the dealings of the contracts from the collateral effects of the pandemic.

For the sake of the following article, I would focus on an analysis of the commercial implications of COVID- 19 in terms of construing contracts and their non-fulfilment.

What Is Force Majeure?

A company or corporation may insert a Force Majeure clause in case it intends to get rid of liability arising if it cannot potentially fulfil a responsibility stipulated by a given contract or if performing such stipulated duties would lead to a sizeable loss in reality- on account of reasons beyond its own control.

The concept of Force Majeure in India has not explicitly been dealt with on a statutory level. Nevertheless, the following definition noted by Pollock and Mulla would be fruitful to explore- "A party is excused of non-performance, if it proves that non-performance was due to an impediment beyond its control, and it could not have reasonably been foreseen by it at the time of making of the contract, nor could it have avoided or overcome it or its consequences"[1]

Force majeure, in terms of its literal roots, holds parity with the Latin term Vis Major, which in turn translates to 'superior force'. Nevertheless, these terms hold no congruence when it comes to their conventional usage in the legal context. It has been noted in Dhanrajmal Gobindram V. Shamji Kalidas & Co., that:
"The expression force majeure is not a mere French version of the Latin expression vis major. It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in force majeure. Judges have agreed that strikes, breakdown of machinery, which, though normally not included in vis major are included in force majeure."[2]

The intent of the force majeure provision in the field of Indian Contract Law can essentially be construed "to save the performing party from the consequences of anything over which he has no control"[3]

Force majeure has a wider scope than Vis major, wherein Force Majeure includes events that are both, human-influenced and natural. Vis major solely includes unanticipated events which have natural roots. So to say, Force Majeure would include the event of war, but Vis Major would not.

Legal Basis Of The Provision
The concept of Force Majeure has not been explicitly mentioned under any Indian statute. Nevertheless, Indian legislators have dealt with the topic to an extent, under section 32 and Section 56 of the Indian Contract Act, 1872.

In multiple decisions, most notably Energy Watchdog v. CERC[4], the apex court has stated that section 32 of the Contract act would be relevant in case the Force Majeure event is affiliated with a clause in the contract. On the other hand, in case the Force Majeure event is not concerned with a clause in the said contract, section 56 of the Contract Act would be applicable.

Section 32 deals with contingent contracts or contracts which are substantially based on the occurrence of a given event. Such contracts cannot be enforced by the law till the time this event of significance has occurred. Moreover, the contract becomes void if the event in regard has become impossible to perform.

On the other hand, section 56 of the Contract Act deals with the failure of performance in a two-fold manner. Firstly, it conceives a situation where the performance of a contract has become impossible consequently. Secondly, and more primarily, it renders all agreements to perform impossible acts, void.

Characteristics Of A Force Majeure Clause-

Foremost, the unforeseeable event which has occurred must not have been under the ambit of either parties' assumption as a possibility in the future upon signing the contract. Secondly, this event of significance must have made the performance of the parties' contractual duties impossible, or sufficiently impractical for the party to not make sense for it to perform the same. It is also conducive in this regard to identify whether a given party has taken any steps to perform the said obligations in the contract at all.

The postulate regarding sufficient impracticality was propagated in Satyabrata Ghose v. Mugneeram Bangur & Co.[5]

Express And Implied Terms In A Given Force Majeure Clause

Typically a Force Majeure clause is exhaustive in nature in the sense that it provides the list of events that would constitute a force majeure event. As a natural consequence, the author believes that it would be of outstanding significance to further define and discuss terms such as 'pandemic' in the legal field, as subsequent contracts would be witnessing more of such events.

Moreover, it is also given that a majority of the contracting population did not mention 'pandemic' or related terms specifically on account of the unprecedented nature of this public health catastrophe.

Therefore, it would be a prerogative of a contracting party to definitively establish whether the events in a given Force Majeure agreement are entirely exhaustive or simply descriptive in nature.[6]

On the other hand, concerning implied or rather open-ended terms, the inclusion of words such as 'unforeseen' and 'beyond reasonable control of the parties' may be construed to include Covid- 19 as a Force Majeure event under a given Force majeure clause by a sympathetic court of law.[7]

To supplement the same, not only has the finance ministry referred to Covid- 19 as a 'natural calamity', but the government has also declared the pandemic situation a disaster under the Disaster Management Act, 2005.[8] Nevertheless, further clarification is given, where the "invocation of FMC does not absolve all non- performances of a party to the contract, but only in respect of such non-performance as is attributable to a lockdown situation or restrictions imposed under any act or executive order of the government on account of the COVID-19 global pandemic. It may be noted that, subject to the above- stated, all contractual obligations shall revive upon the completion of the period."[9] The condition that the contractual obligations shall be revived upon the completion of the period of inconvenience serves as an ideal segue into the distinction between the frustration of a contract and Force Majeure.

Discerning Force Majeure From Frustration Of A Contract

As has been noted in the preceding text, Force Majeure implies the occurrence of an external event, free from the influence of the party seeking relief from the contract. Nevertheless, it must be noted that Force Majeure essentially implies a temporary suspension of contracts instead of permanent cessation of performance or permanent relief from performance. So to say, once the external event has ceased to exist, the performance of the duties of the party seeking relief, must be fulfilled. In the case that this performance is still not resumed, the party must turn to the termination of the contract. It can essentially be termed as a contractual remedy, the terms of which are decided before the execution of the contract by the contracting parties.[10]

Nevertheless, in cases where the occurrence of a supervening event has disabled the party seeking relief, from performing the obligations of the contract altogether, it can be referred to as the frustration of a contract. Section 56 of the Indian Contract Act, 1872 deals with the frustration of contracts. The crux of the provision of frustration of contracts is the 'impossibility' of performance. It is vital that this section be interpreted prudently and pragmatically, not giving too much lenience. It is mainly because a given situation can appear to be seemingly impossible when it might not be absolutely so. In a condensed manner, the frustration of contracts can be regarded as the happening of an act that is outside the control of the contract and such an act makes the performance of the said contract impossible.

Additionally, the supervening event in the case of frustration of contract should also not have been present before the contract was instituted or while the parties were in contemplation of the said contract. The event must be adequate to disturb the commercial essence of the contract. Given the temporary nature of potential lockdowns under the ambit of Covid-19, the parties seeking relief by the way of frustration of the contract must prove that the nature of their given obligation was time-sensitive.

Force Majeure With Reference To Covid-19

It is possible that a given contract explicitly sets out the conditions which would necessarily precede the invocation of the Force majeure clause. For instance, the contracting parties can decide if such an invocation would require a full hindrance of contractual obligations or a partial one would be adequate.

The latter half of such an invocation rests upon the understanding and discretion of the court which rules such a contest of the clause. The court would take into account as to how COVID- 19 was specifically responsible in the non-fulfilment of, or hindrance of the performance of the contract.

Typically, a court would take into account the presence of or lack of a direct causal link between the non- performance of the contractual obligations and the force Majeure event the party seeks relief under. The court will also look after the clause's place with other covenants of the contract and ensure harmonious construction. Finally, the court would look into the conditions set forth by the respective Force Majeure clause and test the same against the given facts of the case.

Moreover, as has been mentioned before, a mere difficulty in performing the contract would not result in a justification to invoke the force majeure clause of a given contract. It has to be disruptive enough to affect the essence of contractual obligations or become counter-productive to the commercial essence if performed under the given circumstances. Moreover, it was held in the Energy watchdog case that an increase in the cost of performance of the contractual obligations would not amount to impossibility or cause enough to invoke a force majeure event.[11] Therefore, even though the cost of conducting business may have increased on account of Covid-19, it may not suffice to invoke the Force Majeure clause.

On top of parties' proof that such non- compliance would not have occurred 'but for' the Covid- 19 based event, the same event must have occurred without any of the parties' own faults.[12] Considering that any potential lockdowns do not count as faults of the party, such a condition may bear some comfort to parties seeking relief. However, this is particularly relevant to certain industries such as the shipping industry, where certain shipments can be made upon the procurement of appropriate governmental licenses. If a party fails to simply procure such licenses, the court may not be sympathetic to their attempt to seek relief - as the supervening event took place because of the party's own fault.

A strong example of a case that highlighted the vitality of direct causation between the supervening event and the non- compliance of contractual obligations was Coombs V. Nolan, wherein the deciding court took into account the alternative means which were available to the party seeking relief. More specifically, the judges evaluate whether these alternative means were turned to, for the performance of the contractual obligations. In this particular case, the party seeking relief had attempted to acquire the commodity in regard (horses) from localities nearby and also offered to pay twice the conventional amount to procure horses and unload ships.

The language used in the contract would also affect its interpretation and subsequent potential relief granted by the judges. For instance, a clause that requires that the parties be " prevented" by the Force Majeure event will be interpreted differently from a more direct causal link laid down in the contract- such as " impeded" or being "hindered" in the performance of the contractual obligations.[13]

In furtherance, it should be noted that the Bombay High Court, in Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp & Ors.[14] did not grant an injunction since it could not find direct causation between the pandemic situation and the non- performance of stipulated contractual duties of the parties. In this case, the commodity in regard was steel, which was ruled as an essential commodity during the lockdown imposed on account of the Covid- 19 Pandemic and the aggrieved party could not claim relief for non- performance. Interestingly, even the ambit of working at home may not be considered a valid ground for the lack of performance, since work can still resume- even though it might be inconvenient.

Finally comes the question of the Covid-19 pandemic comprising an act of god. While there exists little precedent in terms of a direct interpretation of pandemics historically, meaning can be extrapolated from The Divisional Controller, KSRTC v. Mahadava Shetty[15], where it was noted that an act of God amounts to an operation of natural forces which are free from anthropological intervention. This unanticipated natural event cannot work as a justification for non- performance, in case it could even be briefly anticipated.[16]

Conclusion
Force Majeure remains a legal concept which can duly save parties from counter-productive performance of contractual obligations. Nevertheless, due to the lack of statutory base, it can also be designated as a precarious tool, the misuse of which would be onerous upon the courts of India to prevent. This is also a reason as to why courts look to establish direct causal links between the supervening event and the non-performance by parties.

Conclusively, force majeure can be established as a particularly intriguing legal concept, when taken the public-policy context into account- primarily so, because at least courts in India have precedentially not addressed a pandemic situation directly.

End-Notes:
  1. Frederick Pollock and Dinshah Mulla, Indian Contract And Specific Relief Acts (16th edn, Lexis Nexis 2019
  2. Dhanrajmal Gobindram V. Shamji Kalidas & Co., AIR 1961 SC 1285
  3. Dhanrajmal Gobindram V. Shamji Kalidas & Co., AIR 1961 SC 1285
  4. Energy Watchdog v. CERC[1954] SCR 310
  5. Satyabrata Ghose v. Mugneeram Bangur & Co. 1954 SCR 310
  6. Zarir Bharucha, 'Force Majeure And Frustration Of Contracts During COVID-19 - Coronavirus (COVID-19) - India' (Mondaq, 2020)
  7. Zarir Bharucha, 'Force Majeure And Frustration Of Contracts During COVID-19 - Coronavirus (COVID-19) - India' (Mondaq, 2020)
  8. Department Of Expenditure Procurement Policy Division & Kotluru Reddy, Force Majeure Clause (2020).
  9. Department Of Expenditure Procurement Policy Division & Kotluru Reddy, Force Majeure Clause (2020).
  10. Zarir Bharucha, 'Force Majeure And Frustration Of Contracts During COVID-19 - Coronavirus (COVID-19) - India' (Mondaq, 2020)
  11. Energy Watchdog and Ors. vs. Central Electricity Regulatory Commission and Ors., (2017) 14 SCC 80
  12. Boothalinga Agencies vs. V.T.C. Poriaswamy Nadar, AIR 1969 SC 110
  13. Aditya Sikka, Adarsh Saxena and Drishti Das, 'FORCE MAJEURE IN THE TIMES OF COVID -19' (Cyril Amarchand Mangaldas Blog, 2020)
  14. (BHC, 8 April 2020)
  15. The Divisional Controller, KSRTC v. Mahadava Shetty, 2003 7 SCC 197
  16. Adarsh Saxena, Aditya Sikka and Drishti Das, 'Force Majeure In The Times Of Covid-19' (India Corporate Law, 2020) accessed 23 December 2020.

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