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An Overview on Force Majeure in relation to COVID 19

The COVID 19 has took over our lives and the apparent normalcy and is now changing into a new normalcy. This shall require a lot of changes that need to be imbibed and to deal with not just financial crises but economic crises at large throughout the globe.

This outbreak has also disrupted the contractual obligation that parties got into before, whereas now parties have started considering to rescind the existing contracts or terminate them. This is been done through using the clause of Force Majeure in their contracts, which before this pandemic was just another precautionary clause in the contracts but has suddenly become the reason of declaring impossibility of performance of the contract.

Before discussing further, Force Majeure in French means "superior force"—as an event or effect that can be neither be anticipated nor controlled.  The term is commonly understood to encompass both acts of nature, such as floods and hurricanes, and acts of man, such as riots, strikes, and wars. It further defines Force Majeure clauses as contractual provisions that address circumstances in which contractual performance becomes impossible or impracticable due to events that could not have been foreseen, and are not within a party's control.[1]

As per the Indian Law, there are two major provisions in the Indian Contract Act, 1872 that talk about the impossibility of performing a contract. Section 32 of the Indian Contract Act, 1872 [2] talks about contracts that are contingent contract and are based on happening or non-happening of an event to fulfill the contract and Section 56 of the Indian Contract Act, 1872 [3] deals with frustration of contracts, which makes the performance of contract impossible either by reason of it being unlawful or merely impossible by the promisor to perform it.

During this unprecedented outburst, parties are resorting to Force Majeure clause for their delayed operations or for non-performance of the contracts, before we talk about the in-depth approach of various courts when parties taking such recourse.

We need to understand the commonly associated principle in contracts of Rebus sic stantibus [4] which states that a contract can only be terminated if the contracts becomes inapplicable owing to a fundamental change of circumstances. This principle serves as an escape clause for any party who wants to regal out of their contractual obligation but need to prove there has been a fundamental change that incapacitates them before.

The courts have interpreted the Force Majeure clause taking in mind if the said contract obligation is subject to a fundamental change and whether the promisor is permanently incapable of performing the contract or whether its mere temporary in nature.

The Government of India has also rolled a notification vide its Memo No. F. 18/4/2020 PPD dated 19-02-2020 issued by the Deputy Secretary of Govt. of India, Ministry of Finance which stated, 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 Force Majeure clause.

In this regard it is clarified that it should be considered as a case of natural calamity and Force Majeure clause may be invoked whenever considered appropriate, following due procedure.” But the question that this notification did not address and which the courts shall have to look upon is whether the Covid 19 pandemic has brought about a fundamental change in the existing contracts. To answer that question, we shall have to look upon the court rulings on the same.

In the case of Energy Watchdog Vs. Central Electricity Regulatory Commission and Ors.,[5] commercial impossibility of a contract was talked about, in this case it was held that if the promisor were supposed to fulfill the contract through some deal with another party which eventually became possible does not make the contract impossible, it merely becomes a temporary difficulty. Hence, the court held Force Majeure clause shall not apply if alternative modes of performance are available.

The Court also relied upon the ruling of the seminal case of Satyabrata Ghose v. Mugneeram Bangur and Co., [6] wherein it was held that where the contract itself impliedly or expressly contains a term stipulating the circumstances under which the contract would stand discharged, the dissolution of the contract would take place under the terms of the contract itself.

Thereafter, during the nationwide lockdown the Bombay Court heard the matter of, Rural FairPrice Wholesale Ltd. & Anr. vs IDBI Trusteeship Services Ltd. & Ors. [7] and stated that due to the pandemic the whole share market has collapsed hence directed the bank to not act upon the sale notices and a direction was given to withdraw any pending sale orders for the pledged shares.

The case of Standard Retail Pvt. Ltd vs Gs Global Corp And Ors [8] was heard by the Bombay High Court wherein it ruled that since the lockdown would be for a limited period, it could not come to the rescue of a steel importer so as to enable it to resile from its contractual obligations to make payment and did not provide any interim measures as was provided in the previous case.

There was another pertinent judgement of M/s. Halliburton Offshore Services Inc. vs Vedanta Limited & Anr., [9] in which the Delhi High Court was brought before the issue pertaining to Bank Guarantees for a contractual obligation and the Petitioners wanted to restrain the same through Force Majeure as they couldn’t perform their obligation owing to the nationwide lockdown.

The Respondent argued that the plea of Force Majeure was an afterthought and the Petitioner merely wanted to piggyback on the COVID-19 crisis and reap benefits therefrom. The Court negated the arguments of the Respondent and stated none of the parties could have predicted the unprecedented lockdown and if it were not to happen then the Petitioners have mentioned categorically that they were in the process of completing the Project.

Hence, the Court put a stay on the invocation and encashment of bank guarantees in the light of the current scenario.

A similar issue was raised in the case of Indirajth Power Private Limited v. UOI & Ors [10] wherein the petitioner sought for refraining the Central Bank from appropriating the Bank Guarantee as the petitioner were unable to fulfill the contractual obligation due to the lockdown and if the bank guarantee will be invoked then that money shall be taken from the working capital of the petitioner which will make paying employee salary and all over-head expenses difficult and might get pushed towards becoming an NPA.

The court however after looking at the facts wherein the Petitioner had got a 12-month extension which was before the pandemic, but the Petitioner was unable to perform its obligation had compelled the Respondent to invoke the Bank Guarantee. Hence, the court dismissed the prayer of the Petitioner.

The study of provisions and case laws of the Force Majeure clause asserts that the courts have not resorted to straightjacket principles while applying the concept of Force Majeure, the applicability or non-applicability has largely been based on infact three facets, Primarily, whether the party seeking Force majeure for its impossibility in performance of contract is due to a temporary impossibility or shall it remain a permanent one.

Secondly, whether that impossibility has a direct relation with the unprecedented act which the party articulates to be Force Majeure. Thirdly, whether party claiming the impossibility can determine alternative viable mode of satisfying the contractual obligation, if so then Force majeure shall not apply to all those cases.

A deeper scrutiny also brings about that India needs a new codified law in the aspect of Force Majeure as the Section 32 and Section 56 of the Indian Contract Act, 1872 fall short in throwing the appropriate light on situations like the pandemic which are unprecedented and leaves the courts open to their judicial interpretation as and when they are faced with Force Majeure cases.

  1. Black Law Dictionary (11th Edition, 2019)
  2. Section 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.
  3. Section 56: Agreement to do impossible act: An agreement to do an act impossible in itself is void. Contract to do act afterwards becoming impossible or unlawful. – A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
  4. Clausula rebus sic stantibus is a clause in international conventions (international agreements or treaties) that provides for the unenforceability of a treaty due to fundamentally changed circumstances
  5. (2017)14 SCC 80
  6. 1954 AIR 44, 1954 SCR 310
  7. Commercial Suit (L) 307 Of 2020
  8. Commercial Arbitration Petition (L) No. 404 Of 2020
  9. O.M.P. (I) (COMM)& I.A. 3697/2020
  10. W.P.(C) 2957/2020 & CM Nos.10268-70/2020

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