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Effect Of Force Majeure Clause In Light Of Covid-19

As of now, 210 nations around the globe are going through the worldwide emergency because of Covid-19. Coronavirus/Covid has been formally announced as a pandemic by World Health Organization on March 11, 2020. This pandemic has brought about loss of lives as well as has adversy affected business, trade and the worldwide economies by virtue of lockdowns and limited development.

This pandemic hence has its fluctuated ramifications on the business world. There have been sure interruptions to the economy in the past also containing, yet not restricted to Gujarat seismic tremor in 2001 and the Indian Ocean Tsunami in 2004. The episode of Covid-19 anyway has carried the economies around the globe to an end.

The reality for any business or trade to develop is the agreements gone into between the gatherings. The law of agreements sets out the proportional commitments of the gatherings. According to Section 37 of the Indian Contract Act, 1872, the gatherings to an agreement should either perform, or offer to play out, their particular guarantees, except if such execution is shed or pardoned under the arrangements of this Act, or of some other law.

By virtue of this pandemic, the circumstances may emerge in a catena of business contracts wherein a gathering, with no deficiency on its part, can't play out its piece of the agreement.

In the light of the previous, it is essential to get to and examine the business consequences of Covid-19, regardless of whether the current circumstance of lock downs can be considered as power majeure, intently dissect the idea of Force Majeure in the light of current law and the differentiation between power majeure and principle of dissatisfaction of agreement.

Force Majeure and Vis Major:

'Force Majeure' signifies an "occasion or impact that can be neither foreseen nor controlled and incorporates the two demonstrations of nature (e.g., floods and typhoons) and demonstrations of individuals (e.g., uproars, strikes, and wars).

'Vis Major' (signifying 'Demonstration of God' in Latin) is characterized as an "mind-boggling, inescapable occasion caused only by forces of nature, for example, a seismic tremor, flood, or cyclone."

'Force Majeure' is more extensive than 'Vis Major'/'Demonstration of God' since the previous includes both characteristic and counterfeit unanticipated occasions while the last mulls over just regular unexpected occasions. Indeed, 'Vis Major'/'Demonstration of God' really frames a sub-set of 'Force Majeure'. The Supreme Court has,in Dhanrajamal Gobindram v. Shamji Kalidas & Co., ecognized the distinction between 'Act of God'/'Vis Major' and 'Force Majeure'.

Notwithstanding the differences, the effect of both the terms is to excuse non-performance of a party and prevent a party from being liable for a breach of contract whilst also saving the non-performing party from the consequences of something over which it has no control.

How Is A Force Majeure Clause Defined Under A Contract?

Force majeure related language used in most contracts vary widely and, therefore, it is important to review these clauses carefully. Some contracts list specific examples of force majeure events that automatically meet the standard upon the happening of such event, while others rely on generic language usually included in such force majeure

Can A Force Majeure Clause Be Implied Under The Contract?

A force majeure clause cannot be implied under Indian law. It must be expressly provided for under the contract and protection afforded will depend on the language of the clause. In the event of a dispute as to the scope of the clause, the courts are likely to apply the usual principles of contractual interpretation.

Consequences of Force Majeure:

The gatherings to any new agreement ought to likewise think about whether either of the gatherings ought to reserve the privilege to end the understanding in case of a drawn out force majeure occasion, regardless of whether brought about by the COVID-19 pandemic, legislative reaction measures, or different components. An end right might be suitable for specific agreements, for example, contracts in regards to items with short timeframes of realistic usability or time-delicate administrations, or in regards to items or administrations that have promptly accessible substitutes, among different zones.

Statutory Provisions under Indian Law and absence of a Force Majeure Clause:

The Indian Contract Act, 1872 ("Act") contains two provisions which are relevant to Force Majeure and Act of God. Area 32 of the Act deals with unforeseen contracts and entomb alia gives that if a contract is based on the happening of a future occasion and such occasion becomes unimaginable, the contract gets void. Segment 56 of the Act deals with frustration of a contract and gives that a contract becomes void entomb alia in the event that it gets incomprehensible, by reason of an occasion which a promisor couldn't forestall, after the contract is made.

In a line of choices starting from Satyabrata Ghosh v. Mugneeram Bangur[15] to Energy Watchdog v. CERC[16], the Supreme Court has held that when a force majeure occasion is relatable to a clause (express or suggested) in a contract, it is administered by Section 32 of the Act whereas if a force majeure occasion happens dehors the contract, Section 56 of the Act applies.

Indian Jurisprudence on the concept of Force Majeure:

Force majeure is often mixed up with the doctrine of frustration of contract. But these are completely different concepts.

The concept of force majeure has neither been defined or specifically dealt with under the Indian statutes. However, the legislators have to some extent dealt with this concept as is clear from Section 32 of the Indian Contract Act, 1872 dealing with contingent contracts.

Section 32 of the Indian Contract Act, 1872 reads as follows:

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."

From contractual perspective, a force majeure clause provides temporary reprieve to a party from performing its obligations under a contract upon occurrence of a force majeure event.

Contracts often contain a force majeure clause that is negotiated between parties and specifies the events that qualify as force majeure events such as, acts of god, wars, terrorism, riots, labour strikes, embargos, acts of government, epidemics, pandemics, plagues, quarantines, and boycotts.

If the event that is alleged to have prevented performance under the contract, such as an epidemic, is specifically mentioned in the force majeure clause and the event occurs, then the affected parties may be relieved from performance.

Even if such event is not specifically mentioned in the force majeure clause, many force majeure clauses contain a catch-all phrase that is in addition to the specifically mentioned events. A catch-all phrase would have similar language to "including, but not limited to" or "any cause/ event outside the reasonable control of the parties".

Although such catch-all language is construed ejusdem generis depending on the width of the language of the catch-all phrase, it could be argued that an epidemic/ pandemic like Covid-19 falls within the ambit of the force majeure clause. Even otherwise (i.e. even in the absence of such catch-all language), if 'Vis Major', 'Act of God' has been specifically included as a force majeure event, it can be contended that an epidemic like Covid-19 is an 'Act of God'.

Causation and Mitigation:
Even if a pandemic like Covid-19 falls within the ambit of a force majeure clause, that, by itself, would not relieve a party from performance of contractual obligations. The force majeure event must have a direct impact on the non-performance and the party seeking to rely on the force majeure event is also under duty to mitigate and/or explore alternate means of performance.

The judgment of the Orissa High Court in Sri Ananda Chandra Behera v. Chairman, Orissa State Electricity Board provides:
some guidance on the causal link between the force majeure event and the resulting situation by citing, with approval, the decision of the House of Lords in Greenock Corporation v. Caledonian Railway Co. where it was held that:

"´┐ŻAn accident may be an act of God if it has resulted directly from natural causes without human intervention. It is true that in most cases human and natural agency co-operate to produce the result, but the immediate and direct cause is alone to be looked at in determining whether the act is that of God or man. When a ship is cast away in a tempest, this would not have happened but for the act of the owner in sending her to sea but the loss is the act of God for all that."

Complex issues pertaining to causal link could also arise where the immediate and direct cause is not the Covid-19 pandemic itself but the actions of authorities in response to the same, e.g. lockdown, curfew or restrictions on movement of people and goods. Such actions of authorities may, depending on the language of the force majeure clause, constitute a separate and independent force majeure event that excuses performance of a contract.

In the aforementioned recent decision of the Bombay High Court in Standard Retail (supra), the absence of a direct causal link between Covid-19 pandemic and the non-performance was one of the other grounds on which the Court refused to grant an injunction. An injunction restraining the encashment of letters of credit was sought inter alia on the ground that the underlying contract for sale of steel had become impossible to perform due to Covid-19 pandemic and the nation-wide lockdown. However, the Court observed that distribution of steel was an essential service and, since there were no restrictions on its movement, performance of the contract was not affected.

Another instance where the performance of a contract may not be affected due to Covid-19 pandemic is where employees of an organisation in the service industry have to isolate themselves at home. Depending on the nature of the service, it could be argued that since employees can continue working from home, there is no impact on delivery of services. Similarly, any non-performance due to an economic downturn or other general business conditions resulting from the Covid-19 pandemic are not likely to be sufficient to seek excuse from performance of a contract on ground of force majeure.

The language of the force majeure clause in a contract may also have a bearing on how direct the causal link between the force majeure event and the non-performance sought to be excused thereby must be. A clause that requires a party to be "prevented" by the force majeure event from performing its obligations will likely be construed as requiring a more direct and proximate causal link than one which only requires the party to be "impeded" or "hindered" in the performance of its obligations.

The force majeure clause (or, if the contract contains a 'best efforts' clause, then such a clause) may require parties to take reasonable efforts to perform the contract by alternate means. Even in the absence of an express provision, the party seeking to rely on a force majeure event to excuse its non-performance will have to demonstrate that it was unable to perform its obligations despite having taken steps to mitigate the effect of the force majeure event.

For instance, in Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH, the House of Lords found that despite the closure of the Suez canal (the customary route for shipping the goods from Africa) leading to a longer and more expensive shipping route around the Cape of Good Hope, that the contract was not fundamentally altered, it had only become more onerous to perform, and as such, was not frustrated.

Moreover, even in Coombs v. Nolan (supra), the Court took into consideration alternate means of performance of a contract. Particularly, the Court took into consideration that the defendant had attempted to acquire horses even from nearby localities and also offered to pay more than double the amount to acquire horses to load/unload the ships/freights.

Concluding Observations:
While a few legally binding gatherings may look to resile from the authoritative commitments considering the Covid-19 pandemic, fruitful dependence on either the power majeure condition in the significant agreement or on Section 56 of the Act for doing so is certifiably not guaranteed. The onus of determining if Covid-19 really influenced execution of the particular legally binding commitments in a specific case lies vigorously on the gathering trying to have its non-execution pardoned.

While checking whether the Covid-19 pandemic (and additionally activities by experts accordingly thereto) fall inside the extent of the important power majeure provision is a decent beginning stage, issues, for example, causal connection and obligation to relieve likewise should be analyzed to evaluate the overall qualities and shortcomings of such gathering's stand. Important letters and correspondence (counting power majeure sees) ought to likewise fastidiously report not simply the way that a power majeure occasion has happened, yet in addition the particular impacts of the equivalent on the authoritative commitment which the gathering looks to be pardoned from performing.

Award Winning Article Is Written By: Mr.Divyanshu Divyam
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Authentication No: SP327269360874-29-0923

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