COVID-19 | Force Majeure: An Indian perspective

Updated: Apr 25, 2020





The novel corona virus (COVID-19) is seeing a firm advance and spread in Indian states and the world. COVID-19 has been declared as a pandemic by the World Heath Organisation and subsequently the Indian Government has released an advisory on social distancing. The gravity of the pandemic soaring by the day has seem to have committed itself to dishevel any existing Contracts and its terms.


In the current scenario, the pandemic has taken over most performance promises under contractual obligations in businesses and amongst individuals. It is only going to further increase the uncertainties for businesses and individuals with more businesses (particularly suppliers) failing to keep their end of performance promises or performance liabilities. The greatest inefficiency in business carry outs is becoming the lack of and inefficient performance of contractual liabilities which are eventually giving rise to a number of prospective complaints against the counter parties on account of failure of contractual performances. Now, there seems to arise varied situations out of this declared pandemic which has become of utmost importance to be addressed and discussed.


Where there is a delay or temporary interruption in performance as according to the terms of the contract, whether due to legitimate prevention from performing their contractual liabilities or meaning to bypass an inauspicious deal, businesses have been inquisitive about whether COVID-19 may be considered as an event of 'force majeure'. We have prepared a short checklist of how to review your contract to analyse and answer this question.



“Businesses have been inquisitive about whether COVID-19 may be considered as an event of 'force majeure'.”

A clause to protect from consequences beyond one’s control


The Government of India, on 19th February, 2020, vide an Office Memorandum No. 18/4/2020-PPD, has clarified that the disruption of the supply chains due to spread of coronavirus in China or any other country should be considered as a case of natural calamity and “force majeure clause” may be invoked, (wherever considered appropriate).


Force Majeure, literally means 'greater force' and is derived from French. The concept is established under Sections 32 and 56 of the Indian Contract Act, 1872. The Doctrine of Frustration, is a special case of impossibility and as such comes under Section 56 of the Indian Contract Act. This provision acts as the protector of parties to a contract in situations where a contract has been frustrated and there prevails an impossibility to perform the contractual obligations due to unforeseeable conditions. The presence of this clause in a particular contract relieves a party to perform its contractual obligations under certain circumstances typically known as the 'force majeure events' which includes Acts of God such as hurricane, flood, earthquake, volcanic eruption like natural disasters, wars or war like situations, labour unrest, strike, pandemics or epidemics etc.


'Force Majeure' and the Indian Courts


A force majeure clause must be present in a contract so that it could turn to the protection of parties in a scenario of enforcement of 'force majeure'. In the absence of this clause in the contract, the court determines whether the parties may avail such a dodge.


In Dhanrajmal Gobindran v Shamji Kalidas [1], the Court observed that force majeure is a term of wide import and includes act of God, war, insurrection, riot, civil commotion, strike, earthquake, tide, storm, flood, explosion, fire break down of machinery, etc. the intention of the contractual clause is to save the performing party from the consequences of non-performance of contractual liability over which he has no control.


The Indian law with regard to ‘force majeure’ has been further established by a seminal decision in the case of Satyabrata Ghose v. Mugneeram Bangur & Co.[2] the Hon’ble Supreme Court of India discussed its take on determination of impossibility in the statute in the context of unserviceable performance of a contract.


The relief is given by the court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement. Here there is no question of finding out an implied term agreed to by the parties embodying a provision for discharge, because the parties did not think about the matter at all nor could possibly have any intention regarding it. When such an event or change of circumstance occurs which is so fundamental as to be regarded by law as striking at the root of the contract as a whole, it is the court which can pronounce the contract to be frustrated and at an end. The court undoubtedly has to examine the contract and the circumstances under which it was made.”


In other words, it is not essential that the performance of an act should literally become impossible, impracticality of performance, from the point of view of the parties, and considering the object of the agreement, will also be considered. Where an unanticipated event or change dismantles the very foundation upon which the parties entered their agreement, the same may be considered as “impossibility”.


In Govindbhai Govardhanbhai Patel v. Gulam Abbas Mulla Allibhai [3] the Court held the meaning of the expression “impossible of performance” as used in Section 56 means 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.


Further, the effects of non-frustration of the contract in entirety was established in the case of Energy Watchdog v. CERC [4], it was observed that, “It has also been held that applying the doctrine of frustration must always be within narrow limits.”


The facts of the case were such that, Adani Enterprises was selected as the successful bidder for 1000 MW of power by the Gujrat Urjaa Vikas Nigam Limited (GUVNL). A power purchase Agreement was signed between Adani Enterprises and GUVNL. Subsequently, Haryana Utilities also selected Adani Enterprises for 1424 MW and entered into a power purchase Agreement followed by a similar bidding process.


Changes in Indonesian laws eventually increased the export price of coal from Indonesia, instead of the price that was prevalent in the last 40 years. Adani Enterprises filed a petition under Central Regulatory Electricity Commission seeking discharge from the performance of the contract on account of Force Majeure. Central Regulatory Electricity Commission refused, therefore compelling Adani Enterprises to move the apex Court.


The Supreme Court held that “neither was the fundamental basis of contract dislodged, nor was there any frustrating event except for the rise in price of coal as pointed out. Alternative modes of performance were available to Adani Enterprise, even though at a higher price. Therefore this does not frustrate the Contract, as a whole.”


An exhaustive understanding and analysis of the terms of an existing contract whether there may or may not be any ‘force majeure’ clause that includes relief of performance due to impossibility or frustration of contract due to pandemic can help to determine the availability of relief under ‘force majeure’. Parties seeking relief under ‘force majeure’ may attempt to invoke other contractual clauses like limitation clauses, price adjustment clauses, material adverse change (MAC) clauses to limit or eliminate liability for non-performance. The burden of proof heavily lies upon the parties who seek to claim ‘force majeure’ and such clauses are strictly construed by the court. This deliberation differs from case to case and a scenario based understanding has been established for an in depth assessment of the same.


Footnotes:


[1] AIR 1961 SC 1285


[2]AIR 1954 SC 44


[3] 1977 2 SCR 511


[4] (2017) 14 SCC 8


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