Explained: Force Majeure clause in contracts and the outbreak of Covid-19

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A steady flow of money, goods and services, and the people to make them flow is essential to a healthy economy and that flow is severed at present by lifesaving stay-at-home orders. The human tragedy of the Corona virus outbreak continues to deepen and has wreaked havoc worldwide affecting hundreds and thousands of people and also had a growing impact on the global economy. The Covid-19 pandemic has transformed many businesses and organizations ranging from small to large business owners as well as many industries. This outbreak by-all-odds has disrupted many businesses and indeed the global economy, as it has forced businesses across the world to suspend their operations. It has been a huge challenge for many industries, there is no doubt that Covid-19 situation has impacted every single job function and has created a deep economic distress.

The extraordinary commotion brought about by Covid-19 has influenced many ordinary performances of different contractual obligations.

Many business organizations have contented to revise various contracts in reference to supply chains, production and manufacturing and other economic activities which have been impeded at present. The provisions of force majeure clauses in a particular contract implies to certain contractual conditions, which entitle one or both the parties to a contract, to prevent or remove a specific performance, which constitutes happening of a “force majeure event”, which will precede in continuation to influence the expected performance of the contract or the revisions or renegotiations mentioned in the contract[1].

This article aims to discover and analyze the force majeure clause in the course of contracts impacted severely in the phase of Covid-19. This article will be also focusing on answering certain questions such as:

  • Whether the outbreak of coronavirus in India can be considered as happening of a force majeure event?
  • What happens when there is no such force majeure provision in a contract is mentioned?
  • What sort of penalties will be imposed upon under cases of improper use of force majeure clause?

And many major concepts, provisions and its impact relating to the same.

The definition of the term “force majeure” as stated under Black Law’s Dictionary, “An event or effect that can be neither anticipated nor controlled”[2], which implies an event of inevitable or of unavoidable nature, which can neither be controlled or is of unforeseeable nature, such as, event caused by forces of nature, earthquake, floods, pandemic, tornado, tsunami or wars, strikes, riots etc. The term “Force Majeure” constitutes its literal meaning as application of greater force, which originates its expression from French language and has been interpreted under French civil law and also applied its principles in the common law system considering it as acceptable to derive their legal systems. Force Majeure refers to a provision or clause constituted in contracts which prevents or removes liability for certain fateful or unavoidable and natural adversities which in turn interrupts ordinary course of events and halts the expected performances of parties to contract[3]. There are certain conditions mentioned under the French law relating to the concept of force majeure to be accepted as defense in a particular situation, and,

The essential conditions required for the force majeure clauses are as follows[4]:

  1. At first, there must be happening of an unforeseeable event,
  2. The expected performances to constitute the contract must become impossible,
  3. It must encompass human actions or beyond the control of any human being,
  4. The event must be external to the parties of the parties of contract,
  5. All sorts of measures must be taken in order to mitigate the particular damages,
  6. And, the burden of proof goes on to the affected party so as to show that non-performance of the contract has an effect on them.

All the necessary conditions mentioned above, when fulfilled, the provision of force majeure clause will be applicable in the contract and the parties to the contract are excused to perform the expected obligations or duties in reference to the contract.

In short, Force majeure removes liability for all the events of uncontrollable or natural catastrophes that stops the completion of ordinary performances or activities or obligations required to constitute the contract under which no parties in reference to the contract can be held accountable. For example, X and Y enter into a contract to where, X has to deliver goods to Y, but due to an unexpected occurrence of flood, X was unable to deliver goods to Y. In this situation, there exists happening of an unforeseen event and it was not foreseeable when the contract was executed, here, neither of the parties to the contract will be held liable due to non-performance of the contract and it is suitable to mention the clause of force majeure so as to take defense in court.

And for the most part, it can be considered as a concept which involves an Act of God, also called as Vis Major as stated under Black Law’s Dictionary, “A greater or superior force; an irresistible force. A loss that results immediately from a natural cause without the intervention of man, and could not have been prevented by the exercise of prudence, diligence, and care”[5]. Often, the concept of Force Majeure is misunderstood as Vis Major (Act of God) because of somewhat similarity in the relating concepts but the major difference between them is the concept of Force Majeure consists of both the types of unforeseen events, i.e., natural as well as the artificial, whereas the concept of Vis Major consists of application of its provision only on natural unforeseen events. In the case of Dhanrajamal Gobindram v. Shamji Kalidas and Co.[6], it was observed by the Supreme Court that, the concept of Vis Major is considered as the subset of Force Majeure. The courts of United States of America and United Kingdom have considered or held the outbreak of covid-19 as an Act of God, whereas the Indian courts, there has been no such specific information relating to the institution of the outbreak of covid-19 under events caused by Act of God.

Now, the major provisions relating to the concept of force majeure clauses in contingent contracts are Section 32 and Section 56 of the Indian Contract Act (ICA) of 1872. In Indian Law, the term “force majeure” has not been defined or specifically discussed under any particular statute, but to some extent its application or related concepts has been discussed under sections 32 and 56 of ICA, 1872.

As stated under Section 32 of the ICA, 1872, 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[7], implies that it is considered as necessary of happening of a certain event so as to the enforcement of contingent contracts and the same will be declared void if the event is not likely to happen. Also, as stated under Section 56 of ICA of 1872 or the Doctrine of Frustration, that, An agreement to perform an act that is impossible in and of itself is null and invalid[8], implies the agreement to do an impossible act under which if the contract to do an act is made, if declared as unlawful or impossible to perform in relation to the act in particular, and cannot be prevented further by the promisor, becomes void. The Doctrine of Frustration comes into operation when any particular contract becomes impossible of performance or the change in certain circumstances which influence the performance of the contract, the performance of the contract will become impossible due to any sort of intermediating or superseding event. The Doctrine of Frustration applies when a particular contract does not provide for any exclusions covering Covid-19[9].The key effect of both the clause of force majeure and the doctrine of frustration may lead to discharge of a particular contract and relieve the parties to the contract from their expected performances or obligations[10]. Under English Law, the provision of force majeure is considered to be a contractual remedy and if the contract is silent in relation to the force majeure clause, remedies provided under the English law will not be implied to that contract.

Now, the major issue arises is that whether the outbreak of coronavirus in India can be considered as happening of a force majeure event and if the parties are unable to perform the expected or ordinary contractual obligations due to the outbreak of Covid-19, whether they could seek help from the force majeure provision for the non-performance of the contract?

On the date of 19th February of 2020, Ministry of Finance of the Government of India issued its memorandum and declared that the disruption of supply chains due to the effect of Covid-19, will be covered under force majeure clause and be considered an event caused by natural calamities. It is considered as an unforeseeable or uncontrollable event and event caused by forces of nature, which encompasses human actions and must be included in the category of “force majeure event” and should be taken into account under the provision of force majeure and put into action whenever necessary. Also, it has been clearly stated in the memorandum that, “An FM clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of FM” [11]. However, this memorandum was only issued in relation to the government contracts but will also be turning out to be as an indication to the private contracts.

Also, one of the important things to note here, that all the disrupted contracts would not be included and are unable to take the defense of the force majeure provisions on the non-performance of the contract due to any unforeseeable event. There are three important conditions onto which the provision of force majeure is depended upon:

  • It is a substantial condition that the provision of force majeure must be included in the contract before entering into the same[12].
  • The concerned parties to the contract relying on the provision of force majeure, must check whether the term “pandemic” is mentioned in the contract before entering into the same.
  • Thirdly, it is majorly dependent upon how the clause or the provision is interpretated by the court which varies from case to case.

In the case of, Standard Retail Pvt. Ltd. v. M/S G.S Global Corp. and Ors.[13], the case was filed by the petitioner in Bombay High Court and not the respondent stating that the petitioner was unable to complete the payment obligation due to the outbreak of Covid-19 and lockdown in many areas of the nation, in relation to the supply of steel products by the respondent to the petitioner. The petitioner party relied on seeking the defense of the force majeure clause which was specifically included in the contract. The court dismissed the contract and held that the provision of force majeure mentioned in the cannot be applied to the petitioner, rather it will only be applicable to the respondent party but as all the expected obligations were performed by the respondent, it will not be considered as the factor that can be held against the respondent. The court also cleared the misunderstood concept of force majeure clause or the doctrine of frustration and its application in the phase of covid-19, it stated that the minor hardship of non-performance of the contractual obligations of the petitioners due to the outbreak of covid-19 and lockdown is not considered as a valid ground so as to use it against a seller.

Also, in the case of Lakeman v. Pollard[14], under which in relation to the work done by the labourer who left his job early due to the outbreak of the cholera epidemic and was unable to complete his contract, the owners of the mills seek compensation and considered this as a breach of contract by the labourer. Later, it was held by the Supreme court implying the application of the provision of force majeure, that this will not be considered as a breach of contract as the cholera epidemic is merely an Act of God and the expected performances or ordinary obligations in relation to the contract were discharged.

Another case of Energy Watchdog v. Central Electricity Regulatory Commission[15] , under which it was observed by the Supreme Court that a particular contract can only be considered as an excuse a party or remove or prevents its liability to perform its contractual obligations only when the events are explicitly mentioned in that particular contract which basically interpretating that impossibility of the performance of the contract.

The above analysis deals with contracts containing the provision of force majeure, but there may be such circumstances when the provision of force majeure is not mentioned in the contract. In such instances, if there is no such provision of force majeure mentioned in a particular contract, the aggrieved party is entitled to ask for required remedy as per section 56 of the Indian Contract Act (ICA), 1872 which implies the doctrine of frustration, states that the agreement to do an impossible act under which if the contract to do an act is made, if declared as unlawful or impossible to perform in relation to the act in particular, and cannot be prevented further by the promisor, becomes void. This implies that as in a particular contract, the parties to the contract have the ability to prove the impossibility of non-performance of the contract and mustn’t be further performed. Having said that, when seeking remedy of the doctrine of frustration or section 56 of ICA, it must be remembered that the party must have the burden of proof and that impossibility and the non-performance of the contract is an essential element.

Now, there are certain penalties relating to the improper use of the provision of force majeure in India and in term of force majeure clauses, the courts in India have strict compliance policies for the contracts. Unless and until, there exists a compelling evidence that the contracts cannot be further executed, the court will not grant permission to the parties or favor them in order to resort or adopt to the process of frustration of the contracts. The courts in India with reference to the provision of force majeure, unless there is existence of valid alternative, do not taken into consideration the application for above situation based on the grounds of expensive cost, grounds of inconvenience or any other invalid or inappropriate ground.

In cases of the following, the court is empowered to dismiss any sort of application when,

  • there is a chance to perform partial-obligation to the contract,
  • there is a change of circumstance in future which will affect the expected or ordinary performances of the contract,
  • possibility of sub-contracting of the contract,
  • slightest reason to determine the possibility of the contract,

Thus, it is very important to keep in mind that the impossibility of the contract and non-performance expected activities of the contract as well as termination of the contract is necessary to put into action the doctrine of frustration. Also, the above mention claims have been dismissed by the court, the court offers award the respective damages to the parties to the contract when impossibility of contract has taken place due to an unforeseeable event and provides specific performance of a particular contract.

Hence, force majeure clauses provide relief to the parties to the contract and removes or prevent their liability when due to an unforeseen event, causes non-performance of fulfilling of the expected requirements of the contract or result in an impossibility of the contract. Having said that, the doctrine of frustration as well as the force majeure clauses in a particular contract play vital and indispensable role as since the pandemic, the contracts of force majeure were examined carefully and in a detail manner and within the era of global disruptions caused due to the outbreak of covid-19 many companies are facing difficulty to perform contractual obligations and here, from this point the term “force majeure clause” plays a very important role as it grants relief to the parties to the contract and under which they cannot be held accountable.

 Here, the doctrine of frustration can be considered as a savior when in case of the contract not consisting of the provision of force majeure. The courts determine and interpret its decision varies from case to case as every case has different terms and also depends on negotiation between the parties of the contracts.

It must be remembered that parties should be able to identify the source of non-performance of a particular contract and the wordings like pandemic-epidemic must be included force majeure provisions to imply the impact of deadly outbreak of covid-19 and other worldwide outbreak outbreaks that had severe impact on thousands of people as well as the global economy. Therefore, contracts containing force majeure clause must be carefully examined as it contributes to contractual defense which will be particularly depending upon the express terms of a respective contract.

Bibliography

  1. Abanti Bose, Force majeure clause in contracts in the phase of COVID-19 – iPleaders iPleaders (2021), https://blog.ipleaders.in/force-majeure-clause-contracts-phase-covid-19/  (last visited Aug 11, 2021).
  1. Soujanya Priya, Significance of Force Majeure in light of COVID-19 Legalserviceindia.com, https://www.legalserviceindia.com/legal/article-3002-significance-of-force-majeure-in-light-of-covid-19.html  (last visited Aug 14, 2021).

Case Laws:

  1. Dhanrajamal Gobindram v/s. Shamji Kalidas & Co., AIR 1961 SC 1285, (1961).
  2. Standard Retail Pvt. Ltd vs. M/s. G.S. Global Corp And Ors, (2020).
  3. Lakeman v. Pollard. 43 Me. 463, (1857).
  4. Energy Watchdog vs Central Electricity Regulatory, (2017).

[1]Abanti Bose, Force majeure clause in contracts in the phase of COVID-19 – iPleaders iPleaders (2021), https://blog.ipleaders.in/force-majeure-clause-contracts-phase-covid-19/  (last visited Aug 11, 2021).

[2]Force majeure clauses: protecting against the unforeseeable, Lexology (2021), https://www.lexology.com/library/detail.aspx?g=e44183ab-74cf-4f2d-906a-7d7850427953  (last visited Aug 12, 2021).

[3]Marshall Hargrave, Force Majeure Can Help a Contractor Avoid Catastrophe Liability Investopedia (2021), https://www.investopedia.com/terms/f/forcemajeure.asp  (last visited Aug 12, 2021).

[4] Tarun Dua, Geetanjali Sethi, Force Majeure In Times Of COVID-19: Challenges And The Road Ahead – Coronavirus (COVID-19) – India Mondaq.com (2020), https://www.mondaq.com/india/litigation-contracts-and-force-majeure/930674/force-majeure-in-times-of-covid-19-challenges-and-the-road-ahead  (last visited Aug 14, 2021).

[5](2021), https://www.latestlaws.com/wp-content/uploads/2015/04/Blacks-Law-Dictionery.pdf  (last visited Aug 14, 2021).

[6]Dhanrajamal Gobindram v/s. Shamji Kalidas & Co., AIR 1961 SC 1285, (1961).

[7]Section 32 in The Indian Contract Act, 1872, Indiankanoon.org (2021), https://indiankanoon.org/doc/124768/  (last visited Aug 13, 2021).

[8]Abanti Bose, Force majeure clause in contracts in the phase of COVID-19 – iPleaders iPleaders (2021), https://blog.ipleaders.in/force-majeure-clause-contracts-phase-covid-19/  (last visited Aug 13, 2021).

[9] Zarir Bharucha, Force Majeure And Frustration Of Contracts During COVID-19 – Coronavirus (COVID-19) – India Mondaq.com (2020), https://www.mondaq.com/india/litigation-contracts-and-force-majeure/972106/force-majeure-and-frustration-of-contracts-during-covid-19  (last visited Aug 14, 2021).

[10]legal India, Force Majeure Clauses & Doctrine of Frustration Of Contract Legalservicesindia.com (2021), http://www.legalservicesindia.com/article/1211/Force-Majeure-Clauses-&-Doctrine-of-Frustration-Of-Contract.html  (last visited Aug 13, 2021).

[11]Doe.gov.in (2020), https://www.doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf  (last visited Aug 14, 2021).

[12]Soujanya Priya, Significance of Force Majeure in light of COVID-19 Legalserviceindia.com, https://www.legalserviceindia.com/legal/article-3002-significance-of-force-majeure-in-light-of-covid-19.html  (last visited Aug 14, 2021).

[13]Standard Retail Pvt. Ltd vs. M/s. G.S. Global Corp And Ors, (2020).

[14]Lakeman v. Pollard. 43 Me. 463, (1857).

[15]Energy Watchdog vs Central Electricity Regulatory, (2017).

Author: Sejal Garg, University of Petroleum and Energy Studies (UPES), School of Law, Dehradun

Editor: Kanishka VaishSenior Editor, LexLife India.

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