Impact of force majeure on commercial contracts in light of the coronavirus outbreak April 28, 2020
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The novel coronavirus (“COVID-19”) has, in some way or the other, affected almost the entire world’s population and significantly impacted businesses globally. With Covid-19 being declared a pandemic by the World Health Organisation and its consequential effect on trade and commerce, disputes have and will arise with respect to performance and enforcement of contracts. Under the present circumstances, it would be useful to examine whether the COVID-19 pandemic can be construed as a force majeure event under extant Indian laws and thereby, be used as a defense by a non-performing party to shield it from liabilities arising out of its failure to perform or delay by it in performance of its obligations under a contract.
What is Force Majeure?
The term ‘force majeure’, literally translates to ‘superior force’ and has its origins in French civil law. It means extraordinary events, situations or circumstances beyond human control. The concept of force majeure has been defined in Black’s Law Dictionary as “an event or effect that can neither be anticipated nor controlled.” The ‘event’ may include natural disasters such as floods, drought, earthquakes as well as uncontrollable events such as war or terror attacks. However, under common law in India, the concept of force majeure is incorporated in the form of the doctrine of frustration under Section 56 of the Indian Contract Act, 1872 (“Act”) and contingent contracts under Section 32 of the Act.
The doctrine of frustration present in Section 56 of the Act states that a contract will be frustrated if its fundamental purpose is destroyed or if its performance is rendered impossible because of some intervening or supervening event. If this occurs, the parties to the contract will be discharged from their obligations to perform such contract. Section 32 of the Act provides for the discharge of obligations due to the impossibility of an express contingency. In other words, if the contract expressly provides that performance is contingent on the occurrence of an event, the impossibility of the occurrence of such event would lead to the contract becoming void.
Analysis of the legal position of force majeure
Force majeure comes into effect, when circumstances or events, the occurrence of which are beyond the control of the contracting parties, rendering performance of their contractual obligations impossible. However, it may be pertinent to note that under both Indian and English law, force majeure does not simply mean anything outside the control of the parties to a contract. Its meaning and applicability depend on the particular contract, and the wording used. It is contractual language intended to anticipate unforeseen events and provide for what happens on their occurrence.
Under Indian law, a force majeure clause has to be expressly provided for in contracts, to save the performing party from consequences of anything over which such party has no control. It has to be clearly mentioned in the contract and protection given to the parties will depend upon the language and interpretation of such clause. In general, a force majeure clause is divided into two major parts: the classification of what constitutes a “force majeure event” and the operative provisions which deal with the consequences if there is a force majeure event.
Most contracts today contain detailed provisions/ clauses under which events or circumstances that may be considered as a force majeure event are expressly set out, or alternatively broad categorisations of any occurrence qualifying as a force majeure event are dealt with clearly. In such instances, the occurrence of events falling within the detailed specifics or broad categorisations, would enable a party to keep from performing its obligations under the contract by invoking force majeure.
Burden of proving occurrence of force majeure event
The burden of proving the existence or occurrence of an event which falls within the categorisation of a force majeure event is on the party seeking relief from performance of its obligations under the contract. Such party will generally be required to show that: (a) it was obstructed, hindered or delayed from performing its contractual obligations as a result of the event; (b) such event/ inability to perform was beyond its control; and (c) there were no reasonable steps the party could have taken to avoid such event or consequences.
Typically, a force majeure clause would provide that the party seeking to rely on the force majeure clause must notify the other party, within a specified time frame, of the fact that the force majeure event is hindering its performance. The notice will usually be required to include detailed information about the force majeure event and its impact on the party’s ability to perform its obligations.
Duty to mitigate
The duty to prove that reasonable steps were taken to mitigate the effect of the force majeure event is on the party seeking to enforce the force majeure clause. Even in the absence of an express obligation, for the purpose of obtaining relief, the party will be required to show that it could not mitigate the effects of the force majeure event, in order to demonstrate that the force majeure event obstructed the party from performing its obligations under the contract. The standard of care required however, would vary from case tocase.
Remedies upon invoking force majeure and consequences
Primarily, what is specifically agreed between the parties to a contract is the remedy that follows in case of claim of relief under force majeure. In some cases, it may be termination of contract upon occurrence of the force majeure event while in others, the contract may be suspended till the force majeure event ceases to prevent performance of the contract. Further, some contracts may allow for only certain obligations under the contract to be suspended and not the entire contract.
Analysis of judicial precedents
The general rule to note on enforceability of force majeure is that the courts have no power to absolve a party from the performance of its part of the contract only because its performance has become onerous on account of an unforeseen change or circumstance. Both Sections 32 and 56 of the Act highlight the law on contractual impossibility in India.
In its landmark decision of Satyabrata v. Mugneeram [1954 SCR 310], the Supreme Court discussed various theories pertaining to the doctrine of frustration and held that the premise upon which the doctrine is based is that of the impossibility of performance of the contract. The Supreme Court observed that Section 56 of the Act lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties derogating from the general idea of party autonomy which is a dominant feature of contracts.
Similarly, in the matter of Energy Watchdog and Others v. Central Electricity Regulatory Commission and Others [2017 (4) SCALE 580], relating to the interpretation and application of express force majeure clauses in certain Power Purchase Agreements (“PPA”), the Supreme Court examined whether the appellant could take recourse to the express force majeure clauses in the PPAs upon the occurrence of an event that partly prevented or hindered the performance of obligations under the PPAs. The Supreme Court observed that force majeure clauses are to be narrowly construed, and that a mere price rise rendering the contract more expensive to perform would not constitute a ‘hindrance’.
Relief in the absence of force majeure clause in contracts
Where contracts do not contain a force majeure clause, relief under Section 56 of the Act can be claimed under the ‘doctrine of frustration’. Put differently, where contracts do contain a force majeure clause, relief under Section 56 of the Act cannot be claimed.
Force majeure in the light of COVID-19
In the present circumstances, parties to private contracts that have epidemics/ pandemic covered within ‘force majeure’ related provisions/ clauses would be able to seek suspension in performance of their obligations thereunder.
In a related context, the Ministry of Finance, Government of India, has by an Office Memorandum clarified that disruption of supply chains due to the spread of COVID-19 in China or any other country should be considered as a natural calamity and force majeure clauses in contracts entered into by/ with government departments for supply of goods and services may consequentially be invoked, wherever considered appropriate, by following due procedure.
Vaish Associates Advocates View:
In the backdrop of COVID-19 and its disruptive effect on trade and commerce, it would be prudent for businesses to analyse their contracts to determine whether force majeure related provisions, where expressly provided, can be invoked (by themselves or their counter-parties) and be legally sustainable.
Further, other contractual provisions relating to material adverse change, limitation of liability, dispute resolution and termination may also be revisited to chalk out effective legal strategies in the event of litigation arising from parties seeking to suspend their contracts by invoking force majeure.
Having said that, parties cannot simply claim relief under force majeure provisions due to the COVID-19 outbreak and the consequent government lockdown. In such a scenario, one would have to prove that the discharge of obligations under such contract was not just onerous or inconvenient, but also impossible to perform. Further, in respect of contracts entered into during the continuation of COVID-19, the parties should note that a plea of suspension would not be sustainable on account of the foreseeable risk attached to such contracts, which the parties should have been well aware of at the time of its execution.
For more information please write to Mr. Bomi Daruwala at [email protected]DOWNLOAD NEWSLETTER