Invoking Force Majeure In Times of Covid-19' And Its Impact On Contracts

to COVID'19 and government imposed restrictions, contracting parties are likely to invoke the doctrine of 'Force Majeure' in order to absolve themselves from performing their contractual obligations. Whether a party can be completely absolved from performing its obligations would depend on the nature of Force Majeure clause incorporated in the contract and if it is wide enough to include a pandemic. Moreover, irrespective of individual contractual clauses whether a pandemic would independently qualify as a Force Majeure event also needs to be looked at in light of relevant provisions of the Indian Contract Act, 1872.

1. Concept of Force Majeure And Types of Clauses

The term 'Force Majeure', was used by common law countries in the early twentieth century and its origin can be traced back to the Napoleonic Code.^[4]

Force Majeure falls under the broad category of an Inevitable Accident and is often confused with the concept of 'Act of God'.^[5] The term 'Act of God' includes all causes of an inevitable accident which are occasioned by basic forces of nature and are not connected with any agency of man or any other cause directly or indirectly, on the other hand^[6], the definition of Force Majeure is considered to hold much wider connotations which not only includes natural forces but also includes other causes which may not be related to nature and can be connected to human agency directly and indirectly, but on whom the humans involved in the incident do not have any control or the incident whose happening was inevitable.^[7]

Black's Law Dictionary defines the term Force Majeure as a 'superior force'- an event or effect that can be neither anticipated nor controlled.^[8] It further defines Force Majeure Clauses as contractual provisions that address circumstances in which contractual performance becomes impossible or impracticable due to events which could not have been foreseen and are not within a parties control. Collins Dictionary defines "force majeure" as an "irresistible force or compulsion such as will excuse a party from performing his or her part of a contract". ^[9] The term has been defined in Cambridge Dictionary as "an unexpected event such as a war, crime, or an earthquake which prevents someone from doing something that is written in a legal agreement".^[10] From the above definitions, the concept of Force Majeure seems to have the following ingredients:

· The event and non-performance were due to circumstances beyond a party's control;^[11]

· The unexpected event made contractual performance impracticable;

· No reasonable steps could have been taken to avoid or mitigate the event or its consequences.^[12]

It is pertinent to note that generally Force Majeure clauses in contracts are incorporated to temporarily claim suspension of performance of obligations by either of the parties under the contract during the continuation of the event that has made performing the obligations impractical or impossible and not to enable termination of the contract itself. The rationale behind having such clauses is that there are unforeseeable circumstances that either parties may not be able to anticipate at the time of executing the contract. However, if an event like war, strike, natural calamities, lockdown etc. happens then it might not allow either of the parties to perform their part of the contract and in such a situation it would only be equitable to allow suspension of performance of obligations by either of the parties. It is imperative to take note of the fact that Force Majeure does not apply as a matter of rule. It is a very subjective defence that needs to be interpreted and analysed on a case by case basis. There are multiple kinds of Force Majeure clauses. Some clauses provide an exhaustive list of events that may be considered as Force Majeure events while some clauses are open ended, inclusive and capable of wider interpretation. Depending on the nature of clause, it shall have to be considered whether an event can be considered a Force Majeure event for the purpose of that particular contract.

For instance, in the recent case of Halliburton Offshore Services v. Vedanta Limited^[13], Hon'ble Delhi High Court held that lockdown because of COVID'19 is in the nature of Force Majeure and stopped Vedanta from invoking bank guarantees as performance could not be completed because it involved overseas travel.

On the other hand, in the case of Standard Retail Private Limited v. M/s. G. S. Global Corp & Ors.^[14], Hon'ble Bombay High Court refused the petitioners who relied on Section 56 of the Act for termination of contract and enforced the Force Majeure clause on various grounds such as:

• As per the lockdown guidelines, distribution of steel was essential service and there were no restrictions imposed on its movement;
• The Court refused ad-interim reliefs as letter of credit was considered to be an independent transaction. The court also observed that the wordings of the clause implied that it was only applicable to the exporters.

Thus, Force Majeure Clause cannot be seen as a blanket protection for non-performance of contracts. Parties shall have to show that they have taken all the reasonable steps towards performance of contract and that there is direct correlation between the pandemic and non-performance of contract.

1. Indian Perspective: Invoking Force Majeure And Doctrine Of Frustration

The origin or roots of Force Majeure and doctrine of frustration of contract lie in the English Law. The English Law on this subject has evolved from the case of Tailor v. Caldwell^[15] and Krell v. Henry^[16] wherein for the first time English Courts held that even though there was no specific provision in the contract it was implied that the contract would be frustrated when the subject matter of the contract itself became impossible of performance. This principle later on evolved as the 'Doctrine of Implied Condition'. Prior to these cases the position of law on this subject in England was extremely rigid. Courts were seen to have no power to interfere or alter the conditions of the contract which the parties had agreed to, irrespective of the circumstances.

Under Indian Law, the concept of Force Majeure has not been specifically referred to, however its manifestation can be seen in two relevant provisions (Section 32 and Section 56) of the Indian Contracts Act, 1872. The following sections are being reproduced below for reference:

"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…."

"Section 56: Agreement to do impossible act.

An agreement to do an act impossible in itself is void.

Contract to do an 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.

Compensation for loss through non-performance of act known to be impossible or unlawful.—Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise…"

As far as the Indian law, it has given statutory force to the doctrines laid down in English Law by way of Section 32 and Section 56 of the Contract Act. Whenever there is an express term in the contract that absolves a party from performing its obligations or postpones performance of obligations, such as a Force Majeure Clause in the contract, the case has to be dealt in accordance with Section 32 of the Contract Act. However, when there is no clause in the contract and nor can any clause be read to provide for an untoward event that has made the performance of the contract impossible, Section 56 of the Contract Act shall apply.^[17]

This understanding has been reaffirmed by the Apex Court in the landmark case of Energy Watchdog v. Central Electricity Regulatory Commission^[18], holding that if there is an express or an implied clause in the contract which deals with the event leading to frustration of the contract, it should be dealt under Section 32 of the Act whereas if the event that happens is outside the scope of the contract it should be dealt under Section 56 of the Act.

Further, the Apex Court has categorically laid down principles pertaining to frustration of contract which are as follows:

i. "The Court interpreted the word "impossible" under Section 56 of the Act and said that impossibility is not just physical or literal impossibility but also impracticability.

ii. When there is no fixed time limit in the contract, delay in performance would not automatically frustrate the contract.

iii. If the contract becomes impossible to perform because of the ongoing events, the contract becomes void on its own and the obligation on the parties is discharged."^[19]

Further in the case of Mugneeram Bangur & Co. v. Gurubachan Singh^[20], the Apex Court has also held that temporary impossibility in performance of obligations under a contract does not automatically discharge the contract, unless and until time is the essence of a contract.

Thus, on reading of the above-mentioned principles it can be said the present pandemic is undoubtedly an impediment or impracticability or impossibility in performance of the contract. In fact, Government of India has specifically made the following declarations:

• The Ministry of Finance via office memorandum dated 19.02.2020 has stated that if any disruption happens in the supply because of COVID'19 in China or any other country, it will be covered in the Force Majeure Clause in the contract. ^[21]They also clarified that such a situation should be considered as a natural calamity and Force Majeure clause can be invoked if need be.

• Ministry of New & Renewable Energy with respect to 'solar project developers' vide an Office memorandum^[22] dated 20.03.2020 has stated that if parties fail to meet contractual obligations because of COVID'19 they can invoke the Force Majeure Clauses.

If the contract contains a Force Majeure Clause, it can be invoked to provide for this uncertain event, provided that the language of the clause allows the same. Typically, words like 'Government Action' or 'Lockdown' can be construed to include a pandemic related situation, if not specifically provided for in the clause. Indian Courts have consistently taken a view that Force Majeure Clauses should be widely interpreted in a manner that it doesn't negatively affect the parties who cannot perform their obligations owing to the situation which is out of their control.^[23] In this situation there is a possibility to renegotiate the terms of the contract, considering the Force Majeure situation. However, if there is no clause in the contract it shall be dealt in accordance with Section 56 of the Contract Act. If Section 56 is resorted to, it will have to be demonstrated that the contract stands frustrated owing to permanent impossibility of performance caused by the Force Majeure event, that has rendered it void.

It is pertinent to note that any delay in performance of contract shall not by itself frustrate the contract. Invoking Force Majeure generally postpones the performance of obligation by a party, which it is unable to perform due to the unprecedented event. If time is not the essence of the contract and the contract is capable of performance even after such delay, the party may not be held liable to pay damages for delay in light of the Force Majeure event but the contract will still have to be performed by that party. However, if the contract is such where time is of essence and delay would be fatal and would topple the foundation of the contract, the contract would stand discharged due to impossibility of performance.

A peculiar situation that can arise is when there is a Force Majeure Clause in the contract, however it is so rigidly worded that the present pandemic cannot be read to fall into it. In that case, since the present pandemic is not covered under the contract, the concerned party shall be in breach of the contract. Possibility of renegotiating the contract in such cases is generally negligible, unless the parties agree to take a considerate view and do not claim damages for non-performance of obligations.

The question that now arises for consideration is whether the present pandemic is a temporary impossibility or a permanent one. Since pandemic is an event that may survive only for a few months, it would be proper to treat it as a temporary impossibility. Since this impossibility is not permanent and shall stand cured with time, it can be said that for the purpose of Section 32 and 56 of the Act, a contract will stand frustrated on account of this pandemic only if time was the essence of the contract. In all other cases invoking Force Majeure clause would at the most postpone performance of obligations and will not absolve the parties from performing their obligations.

Having said that, it needs to be remembered that all contracts are different from one another and while applying the law as it stands today, what needs to be seen is the direct impact of pandemic on the performance of obligations by a party.