Is Force Majeure a Savior or a Tormentor During the COVID-19 Lockdown?

Introduction

The meaning of the terms of the ‘Force Majeure’ can be traced in in Black’s Law Dictionary, as ‘an event or effect that can be neither anticipated nor controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled.

Roman law recognized that the principle of sanctity of contract can be tempered by a competing principle ‘clausula rebus sic stantibus’, which means obligations under a contract are binding only as long as matters remain the same as they were at the time of entering into the contract.

A force majeure clause typically spells out specific circumstances or events, which would qualify as force majeure events, conditions which would have been fulfilled for such force majeure clause to apply to the contract and the consequences of the occurrence of such force majeure event.

Applicability

Since the concept pf ‘Force Majeure’ is stipulatory in nature and not statutory one can take resort to this clause only if the same is covered by the said clause in explicit terms.

So while taking umbrage under this clause one has to first find out whether there is such Force Majeure Clause or not and if yes then whether the incident mentioned therein is covered by the party taking its help. In other words, A force majeure in a contract would typically include an exhaustive list of events such as acts of God, war, terrorism, earthquakes, hurricanes, acts of government, explosions, fire, plagues, or epidemics or a non- exhaustive list wherein the parties simply narrate what generally constitute force majeure events and thereafter add “and such other acts or events that are beyond the control of parties”.

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 the performance.

Therefore, the wordings of the clause(s) also becomes very important. Some contracts provide that it can be put on hold until the force majeure event is resolved. Some contracts provide for limitations in time, after which either party may cancel the agreement with written notice to the other. Others require the contract to remain in effect until the force majeure event is resolved. The burden of proof lies with the party who wants to invoke the force majeure clauses, and the Courts have traditionally interpreted these clauses in a very strict manner.

In other words, the Litmus test is whether the event that gave rise to a party’s non-performance under the contract falls within the definition of force majeure in the contract, whether the event is covered by the force majeure clause, and whether the non-performance was caused by the relevant event.

In that context, it is prudent to highlight the following points while drafting the Force Majeure Clause in an agreement to be executed between the parties:

1. The event which shall be considered as force majeure (general examples include the act of God, earthquakes, tsunamis, labour strikes, war, the act of terrorism, pandemic);
2. The period for which such an event continues (such as days/weeks/months etc.). The way the notice for such an event has to be sent to the other party (such as by email, fax, or registered post and within what time of the event occurring should the notice reach, eg. 7 days);
3. The need arises the methods for resolution of the situation (such as suspension or termination of the agreement in case a force majeure event continues beyond the stipulated timeline); and
4. The legal consequences for the parties (in general, the party who claims force majeure will be given the right to not perform the contract at all or at least for a certain time without breaching the contract or possibility of dispute and damages for incorrect invoking of force majeure). This issue would be discussed in a later part of this discussion.

Lack of Force Majeure Clause

The brief discussion made above makes it clear that when a Force Majeure clause covering the epidemic like Covid-19 is duly mentioned the party at fault can take resort of it for temporary suspension of the performance. However, what will happen if there is no such clause and the clause is silent about any Pandemic like situation. Then the party seeking avoidance of the performance of the contract can take the aid of section 56 of the Indian Contract Act which is known as the law of Frustration or Supervening Impossibility as well.

Under the doctrine of frustration, the impossibility of a party to perform its obligations under a contract is linked to the occurrence of an event/circumstance after the execution of a contract and which was not contemplated at the time of execution of the contract.

However, under in case of a force majeure, parties typically identify, before the execution of a contract, an exhaustive list of events, which would attract the applicability of the force majeure clause.

This concept is based upon twin Latin maxim – i. lexicon cogit ad impossiblia i.e. law does not recognize what is impossible and ii. Impossibilium nulla obligato est , i.e. what is impossible

Does not Create an Obligation

‘Impossibility’ under S.56 doesn’t mean literal impossibility to perform (owing to strikes, commercial hardships, etc.) but refers to those cases where a supervening event beyond the contemplation and control of the parties (like the change of circumstances) destroys the very foundation upon which the contract rests, thereby rendering the contract ‘impracticable’ to perform, and substantially ‘useless’ given the object and purpose which the parties intended to achieve through the contract. In Satyabrata Ghose v. Mugneeram Bangur, war condition was known to the parties while entering into the contract such that they were aware of the possible difficulty in the performance of the contract, in such circumstances, the requisition of property did not affect the root of the contract. Secondly, no stipulation as to time was provided in the agreement such that the work was to be completed within a reasonable time. Still, having regard to the nature of the development contract and the knowledge of the war conditions prevailing during the contract, such a reasonable time was to be relaxed. Therefore, the contract had not become impossible of performance under S.56.

A contract is not frustrated merely because the circumstances in which it was made are altered. The Courts have no general power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events.

The application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions, and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances. Since the subject matter of the doctrine of frustration is a contract, and contracts are about the allocation of risk, and since the allocation and assumption of risk is not simply a matter of express or implied provision but may also depend on less easily defined matters such as “the contemplation of the parties”, the application of the doctrine can often be a difficult one. In such circumstances, the test of “radically different” is important: it tells us that the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances. “Performance by itself would not amount to a frustrating event. The same learned author also states that a mere rise in price rendering the contract more expensive to perform does not constitute frustration.

Therefore, frustration will apply when an unforeseen event makes it impossible – through no fault of either party – to perform the contract but the contract has not catered for that. The unforeseen event is so fundamental that it strikes at the root of the contract and far beyond what was contemplated by the parties when they entered the contract. It renders further performance impossible, illegal, or makes it radically different from that contemplated by the parties at the time of signing the contract.

The legal effect of a finding that a contract is frustrated is that all parties are discharged from their obligations. It is a high threshold, but in current circumstances, the English and Indian courts might be more open to frustration arguments.

Difference Between Force Majeure and Law of Frustration 

The parties shall be excused if substantially the whole contract becomes impossible of performance or, in other words, impracticable by some cause for which neither was responsible. The spirit of force majeure and the doctrine of frustration have been embodied in sections 32 and 56 of the Indian Contract Act.

While the doctrine of frustration is a common law principle, the force majeure clause is a creature of contract. It is a civil law concept that has no settled meaning in the common law. It must be expressly referred to and defined in a contract.

In the words of  Justice RF Nariman of the Supreme Court in the case of Energy Watchdog vs. CERC (2017)-  “Force majeure” is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied clause in a contract, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs dehors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract. “

Therefore, in the absence of a force majeure clause, any party could also invoke the doctrine of frustration under Section 56 of the Indian Contract Act, 1872. To invoke the same, parties must show that the performance of a contract has become impossible, and the arrangements and conditions have become fundamentally different from those envisaged in the contract. The parties also have the option to invoke several clauses such as price adjustment clauses, limitation or exclusion clauses, material adverse change clauses, and many others such clauses to limit the liabilities arising from non-performance or the partial performance of the contractual obligations. The ability to invoke such grounds would depend on the wording of the Contracts, the application of case-laws on these clauses, and how these clauses would be interpreted by the tribunals, courts, and other adjudicatory bodies.  

The effects of the force majeure event will have to be examined to establish whether it renders the contract impossible, unlawful, or impractical to perform and due to which the contract is rendered void automatically. If it is established that the circumstances have materially affected the parties and obligations and there is no way to continue the contract while such circumstances exist, the contract is voided and both contracting parties are discharged of their subsequent obligations and neither party has the right to sue the other party for breach of such contract. It leads to immediate termination of the contract and there are no positive steps taken to try and rectify the situation.

Typically, where a force majeure event is not specifically covered under a contract, frustration of a contract may be claimed by the affected party, however, if the case is opposite and a particular event is covered as a force majeure event under a contract, frustration of such contract can not be automatically claimed.

Vis Major or ‘Act of God’ in Latin is defined as an “overwhelming, unpreventable event caused exclusively by forces of nature, such as an earthquake, flood, or tornado.]‘Force Majeure’ is wider than ‘Vis Major’/ ‘Act of God’ since the former encompasses both natural and artificial unforeseen events whereas the latter contemplates only natural unforeseen events. In fact, ‘Vis Major’/ ‘Act of God’ forms a sub-set of ‘Force Majeure’. The Supreme Court has, in Dhanrajamal Gobindram v. Shamji Kalidas & Co.recognized 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.

Analysis of Its Merits & Demerits

As it is found out that Force Majeure is a shield which is used if the contract is sought to be avoided by a promisor, it is necessary to know whether it is for the general good in the realm of civil jurisprudence or escape route for the erring party. The following practical situations may bring light to this.

1. In case of lease agreements, if force majeure events are not specified in the lease agreement, the same shall be governed by the provisions of the Transfer of Property Act, 1882 (T.P. Act) instead of the doctrine of frustration (s. 56 of the Indian Contract Act). As per the provisions of the T.P. Act, if rent is not paid for 3 consecutive months the landlord can initiate a proceeding for eviction. Certainly, COVID-19 has not led to the destruction of leased premises or rendered lease premises permanently unfit to use. Therefore, relying upon COVID-19 to terminate a lease agreement by either party would essentially depend upon the terms of the agreement terms and in the absence of any explicit reason for termination, it would be difficult to successfully contest the force majeure claim. The logical solution would be to negotiate on modification or waiver for rent for a few months. Since it is within the domain of privity of contract the Government can pass any blanket order on this issue.                                                              In the very recent decisions of the Delhi High Court in Date of decision: on 21st May 2020 in  RC. REV. 447/2017 RAMANAND & ORS. … Appellants have held that “ The fundamental principle would be that if the contract contains a clause providing for some sort of waiver or suspension of rent, only then the tenant could claim the same. The force majeure clause in the contract could also be a contingency under Section 32 which may allow the tenant to claim that the contract has become void and surrender the premises. However, if the tenant wishes to retain the premises and there is no clause giving any respite to the tenant, the rent, or the monthly charges. Would be payable”.
2. In the field of private employment which consists of blue-collar and white-collar employees, the blue-collar employees or the ‘ workmen’ are better placed since they are secured under the beneficial legislation of the Industrial Disputes Act which makes it a lengthy and cumbersome procedure for any establishment to reduce the salary or retrench the workforce or even to declare a lockout. Others are also covered by the Shops and Establishment Act, 1947. For the while collar employees, the job contract alone decides their fate. In any event for such skilled and managerial ranked employees, the employer retains the sole power to termination at its discretion. The only varying factors are notice pay for a few months. In absence of any legislation in this filed the employees are most vulnerable during an economic slowdown like this. For this, the employer need not take shelter under the Force Majeure clause.
3. In the case of construction or manufacturing activities where the contract is often delegated to sub-contractors the law of vicarious liability comes into play. Usually, companies engage contract workers in manufacturing processes. It is now a settled position in law that the principal employer shall be responsible to make payments to its contract workers in case the contractor fails or refuses to pay wages. Hence the companies are liable to make payments to their contract workers only where services have been received and payments are pending. As the Government Order of 29.03.2020 does not make any distinction in full time and contract workers, companies need to clear any and/or all existing dues of their contract workers. Any non-compliance of the Order would attract severe penalties in addition to those provided in the labour laws.
4. Section 3 of the Epidemic Disease Act, 1897 states that any person who disobeys any regulation made under it would be punishable under the Indian Penal Code, 1860 and Section 4 of the same also provided that no suit or legal proceedings can be made against any person for anything done by them under the Epidemic Disease Act. Furthermore, Section 73 of the Disaster Management Act, 2005 states that no proceedings can be initiated against any person acting in good faith in pursuance of the regulations framed under it.

Hence, non-fulfilment of obligations under the contracts cannot lead to legal proceedings if the same were affected by the lockdown imposed by the government or owing to any hindrances caused by COVID-19, in the performance of obligations arising out of a contract by either party, as long as it is sufficiently established that the situation that had arisen was such that it was impossible for the party seeking exemption from performance, to perform its part of the contract.

Any party to a contract can either invoke the Force Majeure clause or the Doctrine of Frustration under Section 56 of the Indian Contract Act. However, in situations where the same cannot be done, and an obligation is required to be fulfilled, the same can be suspended by mutual consent of the parties.

Escape Route 

As per the Common law, ( Ralli vs Compania) impossibility, as a rule, is not an excuse for non-performance. The following perceived impossible circumstances explain the situation.

The promisor can take resort to the difficulty in performance to avoid the circumstances even if the event is uncontemplated. E.G- A orders B for the supply of steel for construction purposes which due to COVID- 19 Lockdown was difficult to be supplied due to disruption of transport giving rise to increased transport cost. If there is Force Majure clause B can seek an extension of time but once the construction activities are allowed even during the lockdown and there is No Force Majeure Clause B can not take shelter under section 56 to frustrate the contract.

• The Promisor cannot avoid the contract only because the heavy profit originally expected could not be realized.
• The promisor cannot seek discharge of the contract for failure of a third-person upon whom he relied upon for the performance of the contract. Expl. – A promised to supply 50 kg cottage cheese to B- a shop owner for preparing sweetmeats which is not prohibited in many states like WB due to the Covid-19 lockdown. However, due to a lack of proper transport, the vendors of A failed to supply him with the cheese ( Chhana) in time. A cannot seek discharge of contract only because his vendors failed to supply him the product in time.
• For non-fulfilment of one object when the contract was entered into for getting several objects executed, the contract cannot be discharged at the behest of the Promisor. Expl- A entered into a contract with for the supply of 200 kg of Chhana to B- a shop owner for its supply of sweets to a marriage party. Due to lock down the marriage party was cancelled. B cannot seek discharge as he can still use the cheese ( Chhana) for making sweets for its shop.

In the recent case of Standard Retail Pvt. Ltd. and Ors. v. M/s. G. S. Global Corp & Ors.,⁴⁰ the Bombay High Court had to deal with the plea of Force Majeure and Frustration of contract due to Covid-19 pandemic which was raised by a group of Indian Steel importers, who sought an injunction on the encashment of Letter of Credits in favour of South Korean exporters. The Court, however, held that the force majeure clause does not apply to importers and that Letter of Credit is an independent transaction unconcerned with the underlying disputes. It was further observed that as per notifications and advisories issued by the Government of India, the distribution of steel was categorized as an essential service and there was no restriction of movement. Furthermore, it was observed that lockdown is temporary, for a limited period, and therefore, cannot be relied upon for frustration of contract.

In another case of Halliburton Offshore Services Inc. v. Vedanta Ltd. and Anr. during the Covid-19 period before the Delhi High Court, the parties were involved in the integrated development of certain blocks in Rajasthan. The petitioner sought a stay on the invocation of bank guarantees for one week from the lifting of the lockdown on the ground that the work would have been completed if not for the lockdown. The plea was opposed on the ground that it is merely an afterthought and that several reminders were being sent since 2019. It was contended on behalf of Vedanta Ltd. that an injunction against the invocation of bank guarantee can only be granted in case of serious fraud. The Court, however, from various case laws put forth, observed that even in cases where ‘irretrievable or irreparable injury’ or ‘special equities’ existed, the invocation of bank guarantees may stay. The Court, after due consideration, took a liberal view and granted an ad-interim injunction in favour of Halliburton Offshore Services Inc. noting that the COVID-19 pandemic and lockdown were prima facie Force Majeure events, beyond the comprehension of any party.

Governmental Intervention

On February 19, 2020, the Indian Government issued Office Memorandum, stating that the Covid-19 pandemic shall be considered as natural calamity and the force majeure clause may be invoked wherever necessary. It should be noted however that the memorandum was related to Government contracts. As a result, it would only serve as an indication of private contracts.

The Ministry of New & Renewable Energy concerning solar project developers vide office memorandum dated March 20, 2020, has declared that parties can invoke the Force Majeure clause to avoid financial penalties if they miss the contractual obligations on account of COVID-19. Similarly, other ministries have issued respective notifications about invoking of the Force Majeure clause.

Section 3 of the Epidemic Disease Act, 1897 states that any person who disobeys any regulation made under it would be punishable under the Indian Penal Code, 1860 and Section 4 of the same also provided that no suit or legal proceedings can be made against any person for anything done by them under the Epidemic Disease Act. Furthermore, Section 73 of the Disaster Management Act, 2005 states that no proceedings can be initiated against any person acting in good faith in pursuance of the regulations framed under it.

It is worthwhile to mention here that the Supreme Court by its order on 23.3.2020 using extraordinary power under Article 142 of the Constitution of India has extended the time limit for proceeding under section 138 NI Act and Arbitration and Conciliation Act, 1996 till further order.

Conclusion

Hence, non-fulfilment of obligations under the contracts cannot lead to legal proceedings if the same were affected by the lockdown imposed by the government or owing to any hindrances caused by COVID-19, in performance of obligations arising out of a contract by either in part, as long as it is sufficiently established that the situation that had arisen was such that it was impossible for the party seeking exemption from performance, to perform its part of the contract. Therefore, calling the pandemic or lockdown a blanket force majeure event can be incorrect depending on the contractual obligations and ways to perform the same and thus, may lead to disputes between contracting parties.

However, the damages have to be borne by either party since the doctrine suggests that circumstances have made it impossible for the contract to continue in any manner. If the courts are of the opinion that the doctrine was misused or one party tried to deceive the other party, the court can decide damages to be paid by the party misusing the contract. Thus, this doctrine must be used as a last resort when all other negotiations fail or there is no other recourse available.

It should be noted that the courts in India follow the contract strictly in terms of force majeure clauses. The burden is on the party claiming the force majeure clause to prove that the contract must be rescinded on account of certain force majeure events. As the courts always favour the performance of contracts, the courts do not favour parties resorting to the frustration of contracts and termination unless there is compelling evidence that the contracts cannot move forward and there are no other positive steps to be taken except for terminating the contract. The courts do not entertain applications for this merely because the contract has now become too expensive, or that there is an inconvenience or difficulty, especially if a valid and practical alternative exists.

Therefore, the court may dismiss any applications related to the frustration of contract if there is the slightest chance to expect that partial obligation is possible or if it seems that the circumstances would change very soon or if sub-contracting is possible if there is only a delay but eventual delivery is possible. Thus, there must be definite reasons to show that the contract has become impossible and it must be terminated to invoke the doctrine of frustration.

In cases where the courts dismiss such claims of force majeure or doctrine of frustration, the courts may order specific performance of the contract or award damages if losses have incurred due to non-performance of delay of the contractual obligations. Section 65, 73-75  of the Indian Contract Act is a guiding factor on this so no party can get enriched at the cost of another sailing the boat under COVID- 19 air.

These provisions of the Indian Contract Act, 1872, lays down certain rules to determine the amount of compensation upon the breach of a contract. The ground rule is, on the breach of a contract, it is the entitlement of the suffering party to receive compensation from the party who breaks the contract for losses sustained due to the breach. Here are some rules:

• The suffering party can claim compensation for any loss arising naturally in the usual course of events.
• Even if the party knew that on the breach of the contract, they might suffer certain losses, he can claim compensation.
• Special damages, if any, can be claimed only if the suffering party has given notice about it earlier. Also, the party suffering a loss is expected to take reasonable steps to minimize it.
• The suffering party cannot claim compensation for indirect or remote losses/damages.

Also, while estimating the loss incurred, all the means which existed to remedy the inconvenience caused by the non-performance of the contract should be considered.

References

1. Halsbury Laws of India Volume 9 Page 16
2. Chitty on Contract, 33^rd
3. Mulla on Indian Contract
4. Supreme Court Cases
5. Satyabrata GhoseMugneeram Bangur & Co., 1954 SCR 310 : AIR 1954 SC 44.
6. Raja Dhruv Dev ChandRaja Harmohinder Singh, (1968) 3 SCR 339: AIR 1968 SC 1024.
7. Naihati Jute Mills Ltd. v. Khyaliram Jagannath, (1968) 1 SCR 821 : AIR 1968 SC 522.
8. Ganga SaranFirm Ram Charan Ram Gopal, 1952 SCR 36 : AIR 1952 SC 9.
9. DDAKenneth Builders & Developers (P) Ltd., (2016) 13 SCC 561 : AIR 2016 SC 3026.

Devajyoti Barman, a hard-core litigation practitioner for the last 20 years having his area pf practise primarily in the field of civil, constitutional, corporate, arbitration and criminal laws in High Court, Calcutta and Supreme Court of India is a law columnist as well.

He has degrees of LL.B, PGDHRD and LL.M at his credit and has been empanelled by various Navratna PSUs, Incorporated Companies Real Estate Firms and Bank to represent them before the High Court, Calcutta. He is an Arbitrator and Corporate practitioner before the NCLT, Kolkata Bench as well.

He runs a law firm under the trade name of Ace Legal having its pan Indian presence. He can be reached at www.acelegalfirm.com. 

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