Overview

The unfortunate pandemic outbreak has affected personal, professional and economic condition all over the world. On March 11, 2020 the World Health Organization has declared COVID-19 as a ‘Pandemic’. With increase in number of cases around the world and cities under lockdown, business has come to a literal halt, derailing global economies across sectors barring a few. Apart from that, COVID-19 has caused undue hardship to many parties in the performance of their contractual obligations, while rendering others completely incapable of performance. This inability or difficulty faced by the businesses to perform their obligation due to the outbreak was unforeseeable. Therefore, in this FAQ, we will focus on the impact of COVID-19 on performance of contracts, considering Indian laws and cases.

What is Force Majeure?

According to Black’s Law Dictionary, the term ‘force majeure’ means an event or effect that can be neither anticipated nor controlled[1]. It covers situations where the unforeseen event may render the performance of the contract impossible only during the limited time in which the event is in operation, thereby providing a window for resuming normal contractual obligations after the event ceases to operate.

A force majeure clause in the contract exempts both the parties from contractual liability when prevented by stipulated or specified events from fulfilling their obligations under the contract. The Parties to the contract may mutually decide over the list of events to be categorized under this clause which includes acts of war, riots, fire, flood, hurricane, earthquake, explosion, strikes, lockouts, slowdowns, prolonged shortage of supplies, governmental action prohibiting or impeding any party from performing its respective obligations under the contract causing its frustration.

What legal provision governs the claim for Force Majeure in India?

Indian Contract Act does not specifically provide for Force Majeure. However, Section 32 of the Indian Contract Act, 1872 deals with the concept with respect to Force Majeure. The section reads as

32. Enforcement of Contracts contingent on an event happening – 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.”

Most of the contracts in India contain a force majeure clause. The intention of this clause is to save the performing party from the consequences of breach arising from an event over which it has no control. It is therefore an exception for a breach of contract. Whether force majeure can be invoked to excuse liability for non-performance would depend on the nature and general terms of the contract, the events which precede or follow it, and the facts of the case.

How have the Courts in India interpreted Force Majeure?

The Indian courts, including the Supreme Court in the case of Dhanrajamal Gobindram[2] have held that the term ‘force majeure’ has wide meaning and it covers such events over which the parties have no control. The main intention of this clause is to save the performing party from the consequences of non-performance of their part under the contract. Further, the court held that for determining a force majeure event, it will take into consideration the language used in the clause as well as the intention of the parties.

Can Force Majeure clause be invoked in the light of COVID-19?

In a situation envisaging force majeure, it is upon the party to elect to invoke the force majeure clause in the contract in order to excuse itself from performance under the contract. Here, it is important to take into consideration the terms and conditions of the contract and the intention of parties. For invoking the force majeure clause, one must see whether the clause present in the contract covers extraordinary events or circumstances beyond the reasonable control of the parties.

However, in light of COVID-2019, the Ministry of Finance has issued an Office Memorandum[3] dated February 19, 2020 on ‘Force Majeure Clause’. It states that “A doubt has arisen if the disruption of the supply chains due to spread of corona virus in China or any other country will be covered in the Force Majeure Clause (FMC). In this regard it is clarified that it should be considered as a case of natural calamity and FMC may be invoked, wherever considered appropriate, following the due procedure as above.” Further it provides that “a force majeure clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the force majeure. The firm has to give notice of force majeure as soon as it occurs and it cannot be claimed ex-post facto…If the performance in whole or in part or any obligation under the contract is prevented or delayed by any reason of force majeure for a period exceeding ninety days, either party may at its option terminate the contract without any financial repercussion on either side”.

Although parties to the contracts may take the Office Memorandum into consideration, it would not serve as a binding document. If a dispute arises with respect to acceptance or rejection of the Office Memorandum, it will entirely depend on the Court or the arbitral tribunal to interpret the force majeure clause. Further, force majeure may include terms like ‘any other happening’, ‘act of god’, etc., and it will entirely depend on the court’s interpretation and the language of the contract to determine whether a pandemic like COVID-19 is covered or not in such a clause.

Who has the burden of proof to establish a Force Majeure Event?

The burden is on the party claiming force majeure defense to prove the existence of such an event.

Is there any requirement prior to invoking the Force Majeure Clause?

In general, the force majeure clause requires a time bound notice to be given by the party who is unable to perform his part of the contract due to such unforeseeable event. However, the clause may have some specific requirements to be complied by the party depending upon the terms and conditions agreed between them. It is important to comply to any such requirements if any, prior to invoking force majeure clause.

What are the consequences after invoking Force Majeure Clause?

Once the force majeure clause is invoked by a party, the contract may or may not terminate. The consequence would entirely depend on the nature and terms of the contract agreed between the parties. For proper analysis of the remedies available to the parties, a thorough scrutiny of the contract is necessary.

What happens if the contract does not include Force Majeure Clause or the Force Majeure clause in the Contract does not cover such an event?

In aforesaid situations, the parties to the contract can claim relief under section 56 of the Indian Contract Act, 1872 dealing with ‘doctrine of frustration’. The Supreme Court in the case of Energy Watchdog[4], observed that:

““Force majeure” is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied clause in a contract, such as the PPAs before us, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract.”

Hence, in the event the contract does not include a force majeure clause, or the existing clause does not encompass a particular event, the parties could avail the remedy under the ‘doctrine of frustration’.

What is the Doctrine of Frustration?

Section 56 of the Indian Contract Act, 1872 states that any act which was to be performed becomes unlawful or impossible to perform after the contract is made, and which the party could not prevent, then such contracts becomes void. It lays down a rule of positive law and does not leave the matter to be determined according to the intension of the parties.

How have the courts interpreted the word ‘impossible’ provided under section 56 of the Indian Contract Act, 1872?

The Supreme Court has held that the word “impossible” has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible, but it may be impracticable and useless from the point of view of the object and the purpose which the parties had in mind at the time of entering into the contract. Further, if an untoward event or change of circumstances totally upset the very foundation upon which the parties negotiated their understanding, it can very well be said that the promisor found it impossible to perform the act which he promised to do.[5] Therefore, when any such event occurs, which is beyond the control of the parties and which frustrates the very object of the contract or renders it difficult to perform, the parties can claim relief under this doctrine.

What happens when the performance of contract has become commercially difficult and not impossible?

The parties can negotiate and mutually agree to suspend the contracts and revive the same after an agreed period of time. However, the party need to perform cost analysis to see whether it is viable to renegotiate or terminate the contract altogether.

Does a party need to restitute the other party for any advantage received?

Section 65 of the Indian Contract Act, 1872 provides that in case a party receives any advantage under a contract at the time when the agreement is discovered to be void, he is required to restore such advantage to the person from whom the same was received. However, this is not an absolute rule and the extent of restitution will depend on various factors like the degree of loss suffered by a party, etc. Further, at times the parties to a contract expressly provide that the risk of supervening events shall be borne by one of them, or that they will apportion it, or deal with it in various ways such as suspension of performance, compensation, refund, restitution or discharge. Therefore, careful analysis of the contract is essential to determine if restitution may be enforced.

What happens if there is disagreement with respect to Force Majeure clause or failure to establish claim of frustration?

In such scenario, the parties need to analyze the dispute resolution clause provided under the contract and assess the course of action due to disagreement. In many of the contracts now a days, the dispute resolution clause provides for an arbitration, which may be a quicker mode of resolution than approaching a court of law.

Conclusion

In the light of current situation, the critical analysis of force majeure clause in the contract is crucial. The parties need to look at the contracts closely. Apart from the language used in the contract, the intention of parties, terms and condition agreed between them becomes essential. Further, one needs to understand the business operations and transactions of the company in the relevant industry or sector, to understand the ambit of contractual clauses dealing with impossibility of performance. It is therefore judicious for the parties to seek legal advice and scrutinize the contracts to protect themselves.

 

[1] Black’s Law Dictionary, Edition 11 (2019)

[2] Dhanrajamal Gobindram vs Shamji Kalidas And Co., AIR 1961 SC 1285.

[3] https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf

[4] Energy Watchdog vs Central Electricity Regulatory Civil Appeal Nos.5399-5400 of 2016

[5] Satyabrata Ghose Vs. Mugneeram Bangur and Co. and Anr. (AIR 1954 SC 44)

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