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The COVID-19 virus, that broke out late in 2019, originating from China has, since then only continued to worsen. Early in 2020, the COVID-19 was labelled a pandemic, i.e. the spread of the virus was no more contained within certain regions- all the countries faced a threat of its population being affected by the virus. The virus, being novel and having a form that had never been seen before, spread vigorously around the world. There are no forms of treatment that can cure a patient and there exists no vaccine yet. Therefore, in order to prevent the spread of the virus and safeguard their populations countries have mandated social distancing measures and have gone into complete lockdowns for months together, restricting the movement of people around the country.
Due to such extensive restrictions, various businesses are beginning to see situations wherein, they might not be able to honour their obligations under various contracts. In order to be able to ensure that such non-performance of obligations does not lead to a violation of the provisions under various contracts, companies and businesses have begun looking into the possibility of using the defence of Force Majeure, translating from French to mean ‘Superior Strength’.
Explaining Force Majeure: Basic concept
Before delving into the qualifications required for Force Majeure to become a successful defence for non-performance of obligations, one first needs to understand the basic definition of the term Force Majeure. Black’s Law Dictionary defines Force Majeure to be ‘an event of 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’. Indian statutes do not exclusively deal with Force Majeure, and no definition to the same can be found within the legal framework in Indian, some respite is provided by the Indian Contracts Act, 1872, under Section 32 of the Act. This Section talks about the contingency of contracts, stating that if the completion of an obligation is dependent on the occurrence of another event, and the occurrence of the event is rendered impossible, then the Contract becomes void.
Contracts often have a Force Majeure clause within them. These clauses also generally define what would constitute Force Majeure for that specific contract. For example, these conditions could be Act of God, wars, internal disturbance within the country, sanctions, trade embargos etc. Even in the instance that the occurrence of a specified event is not explicitly mentioned to be a qualifier for the Force Majeure clause to be applicable, the language of these clauses usually also contains a ‘catch-all’ phrase. These ‘catch-all’ phrases are usually worded along the lines of ‘inclusive of, but not limited to’, to ensure that even if there is an unforeseen event that occurs affecting the contract, the parties have the ability to void it. The only common standard to be applied to the events qualifying to be Force Majeure is that the occurrence of the event could definitely not be foreseen by either of the parties to the contract.
Relevence of Force Majeure
As already stated before, a Force Majeure clause in a contract is invoked to void the contract in a condition that the performance of obligations under a contract are rendered impossible due to the occurrence of an unforeseen event. The effects of invoking a Force Majeure clause can usually be characterised into the following three means:
- The performance of the obligation is suspended till such a time as the obligation can be carried out after the impossibility of the occurrence of the event is mitigated.
- The time limit within which the obligation is to be performed is extended to accommodate any difficulties caused due to the occurrence of the event.
- The obligations under the contract are completely voided, and the parties are not bound by the terms of the contract.
In conditions where there are unforeseen and unfortunate circumstances wherein one party to a contract cannot fulfil an obligation due to no fault of theirs, and due to an event that could in no way be foreseen by the organisation, it is necessary to protect such organisations. Without according protection to such parties, they would become liable to damages if sued by other contracting parties for non-performance of obligations. Being sued for an obligation which has been rendered impossible and being forced to pay damages goes against the very tenets on which contract law is based upon.
Recognition of COVID-19 as Force Majeure
One of the first and straightforward means of inclusion of COVID-19 as a Force Majeure is if the terms epidemic/ pandemic are mentioned within the Force Majeure clause itself. This would directly recognise COVID-19 as a qualifier for invoking the clause as a legitimate reason to void or suspend obligations under a contract. This is because COVID-19 has been declared as an epidemic within the country, and as a Pandemic by the World Health Organisation in all international transactions.
However, complications arise if epidemics or pandemics are not considered to be valid reasons to invoke the Force Majeure clause under the specific contract. In these conditions, what should be considered is if COVID-19 can be included under one of the other criteria mentioned in the contract. The Principle of Ejusdem Generis comes into play herein. It needs to be seen the extent to which the conditions mentioned in the contract can be extended to, and whether COVID-19 fits into those interpretations.
One of the most popular means of trying and fitting the COVID-19 into the Force Majeure clause is by applying the principle of Vis Major or Act of God, a common principle to be mentioned in most Force Majeure clauses. Even though there exists no clear jurisprudence in the Indian jurisdiction to suggest that the occurrence of an Epidemic or a Pandemic could be considered as an Act of God, the Indian Supreme Court has given judgements based on similar lines. In the judgement delivered by the Supreme Court in the case of The Divisional Controller, KSRTC v Mahadeva Shetty, [2003 7 SCC 197]the court mentioned that the interpretation of the term ‘Act of God’ could be extended to the effects of all of nature’s forces, which occur with no intervention from human beings. However, the Supreme Court also laid out a caveat mentioning that every instance of a natural calamity or disaster does not obliviate any and all obligations of the parties bound by a contract.
Another complication arises wherein the Force Majeure clause is in itself extremely restrictive in its operation, or if there is an astounding absence of a Force Majeure clause in the Contract itself. This would then lead the parties into pursuing the more general principles of Contract Law in India, i.e. the provisions of the Indian Contract Act 1872. Parties would be specifically referring to Section 32 of the Indian Contract Act, 1872 and Section 56 of the Act. Section 32 of the Act in this prerogative has already been discussed in previous sections herein. Section 56 of the Indian Contract Act, 1872 speaks about the frustration of a contract, wherein the contract is stated to become ‘frustrated’ due to the inability of either party to perform their functions/ obligations, after the formation of the contract. In these instances, parties would be required to meet the thresholds of Section 56 in being able to state that the occurrence of the COVID-19 Pandemic has so critically changed the situation that the basis of the bargain between the Parties itself has been upset.
The Force Majeure clause as a concept has the major purpose of protecting the companies and businesses against unforeseen effects falling out of situations similar to current times. In the current instance, it would in fact be right to allow businesses and companies in binding contracts to save themselves from being sued by invoking the Force Majeure clause. In current times, with extreme restrictions on the movement of people, even within their own localities, even if not intra-country or inter-country, the inability of the parties to a contract to perform their obligations becomes increasingly possible. Protection must be accorded to the parties in these instances to prevent substantial financial harm being caused to them due to cases of violation or breach of contract being filed against them in these testing times.
However, this does not entail that a free pass is given to all parties claiming the Force Majeure clause due to the COVID-19 situation. Every contract and the situations surrounding the contracts must be comprehensively analysed. Attention must be paid to the type of obligations that are required to be performed by the party to the contract and test the effects that the COVID-19 situation would have on their performance. If there exist substantial hindrances to the performances of such obligations, then untendered support must be given to such parties, and effective solutions towards either suspending/ postponing/ cancelling obligations under the contracts so as to not harm the situations of both parties.
The COVID-19 and the times that we currently live in are nothing like history. In these great times of uncertainty, it is of utmost importance to protect economies, businesses and all the financial institutions of the world. A higher level of sensitivity towards issues is required, along with the lowering of thresholds of various laws. The same is true for the Force Majeure clauses of various contracts during this time. Current times warrant a different, easier, and less complicated approach towards businesses and companies that are bound towards contractual obligations. In ensuring that the thresholds of law are maintained, one must not lose sight of the imminent rebuilding of entire economies and communities after the end of the current crisis, and the utmost sensitivity that needs to be displayed both now, and then.
Author: Ajeeth Srinivas. K from School of Law, CHRIST (Deemed to be University).
Editor: Muskaan Garg from Jindal Global Law School, O.P. Jindal Global University, Sonipat, Haryana.