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Covid-19

COVID – 19, Force Majeure and Performance of Contracts

The sudden and unforeseen outbreak of COVID-19, resulting in lockdowns, movement restrictions, travel bans, restrictions on entry of foreign nationals, etc., has not only severely impacted domestic and international businesses but also hampered the performance of contracts. The World Health Organization has characterized COVID-19 virus as a “pandemic”1 . Recently, while recognising the effects of COVID-19, the Supreme Court of India, in exercise of its powers under Article 142 of the Constitution of India2 , extended the “limitation period” in all cases. 

Thus, it has become crucial for businesses to ascertain whether COVID-19 could be classified as a “Force Majeure” event to excuse/delay/suspend/cancel performance of their contractual obligations and the steps that may be taken to safeguard their interests. 

I. What is a “Force Majeure” event? 

The Black’s Law dictionary defines Force Majeure as: “An event or effect that can be neither anticipated nor controlled; esp., an unexpected event that prevents someone from doing or completing something that he or she had agreed or officially planned to do. The term includes both, acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes and wars).” 

Force Majeure clauses are often included in contracts to excuse performance or absolve a party from liability arising on account of occurrence of events that are beyond the control of the parties. It may include events like acts of war, riots, fire, flood, hurricane, earthquake, epidemic, pandemic, strikes, lockouts, slowdowns, prolonged shortage of supplies, governmental action prohibiting or impeding any party from performing its obligations under the contract causing its frustration. 

II. Law relating to Force Majeure in India 

In India, the law relating to Force Majeure is contained in Sections 32 and 56 of the Indian Contract Act, 1872 (“Contract Act”). A Force Majeure clause cannot be implied under Indian law. It must be expressly provided for under the contract. 

Contracts with a Force Majeure clause: 

In contracts containing an express Force Majeure clause, the dissolution/termination of the contract would take place under the terms of the contract itself. In India, such clauses are governed by Section 32 of the Contract Act which stipulates that 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. 

Courts generally interpret Force Majeure clauses narrowly and may not accept a particular event as a Force Majeure unless it clearly falls within the ambit of a clause contained in the agreement. 

Contracts without a Force Majeure Clause - Doctrine of Frustration 

Where a contract does not contain a Force Majeure clause or an event does not fall within the Force Majeure clause, the affected party could claim relief under the doctrine of frustration under Section 56 of the Contract Act which inter alia provides 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. 

However, in order to claim that the contract is frustrated, it must be shown that the performance of an act is literally impossible or has become impracticable and useless from the point of view of the object and purpose of the parties. In the present circumstances, one would have to show that COVID-19 has changed the circumstances totally, to upset the very foundation of the contract, thereby rendering it impossible to perform3.

III. Is outbreak of COVID-19 a “Force Majeure” event? 

In order to determine whether a Force Majeure clause would cover the outbreak of COVID-19, it will need to be examined whether: 

i. the definition of Force Majeure events contained in the contract specifically includes a ‘pandemic’ or ‘epidemic’; and/or 

ii. the Force Majeure clause covers ‘extraordinary events’ or ‘government action’ or ‘circumstances beyond the reasonable control of the parties’ or such other ‘catch-all’ phrases. Such broad wording may be used to invoke the clause if it is determined that the factual circumstances caused by the pandemic are beyond reasonable control of the affected party. 

Having said that, it is pertinent to note that COVID-19 is unlikely to give rise to a valid Force Majeure defence under every contract and in every circumstance. Some essentials to be kept in mind before evaluating this remedy are enumerated below: 

1)  ‘Assessment of Impact’ of COVID-19 on the performance of contracts, i.e., whether it has resulted in partial failure of performance, complete incapability to perform, delay which if extended beyond a reasonable limit could strike at the root of the contract or it results in mere commercial hardship for one party. 

2)  The operational aspects of the commercial transaction and the type of Force Majeure clause in the contract to determine if this could trigger the said clause or frustrate the contract. 

3)  If the contract contains provisions relating to liability for delays or price escalations, it ought to be assessed in case the delay or price escalation occurs due to a Force Majeure event. 

4)  Identify the governing law applicable to a particular contract. This is particularly important in Common Law jurisdictions like India and England, where a Force Majeure clause can only be invoked if it is expressly incorporated in the contract. 

 

IV. Force Majeure and Government Contracts in India

In India, various Government departments, like the Department of Expenditure, Procurement Policy Division, Ministry of Finance has issued Office Memorandum No. F. 18/4/2020-PPD4 , the Ministry of New & Renewable Energy has issued Office Memorandum No. 283/18/2020-GRID SOLAR5 seem to have taken a position that the COVID-19 outbreak could be covered by a Force Majeure clauseAlthough the above memorandums are restricted in their applicability to the contracts referred therein but the same may hold persuasive strength when imported to contracts with similarly worded clauses. 

 

1 https://www.who.int/csr/disease/swineflu/frequently_asked_questions/pandemic/en/

2 Order dated 23.03.2020 in Suo Motu Writ Petition (Civil) No. 3/2020 in Re: Cognizance for Extension of Limitation

3 See Satyabrata Ghose v. Mugneeram Bangur & Co. and Anr. AIR 1954 SC 44 and Energy Watchdog v. C.E R.C & Ors. 2017 SCC Online SC 378

4 https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf 5 https://mnre.gov.in/img/documents/uploads/file_f-1584701308078.pdf