By Altacit Legal
As countries world over are reeling in the clutches of the Covid-19 pandemic, many businesses have come to a complete halt, rendering them incapable of fulfilling their contractual obligations. This has led to the emergence of a new legal ambiguity with respect to the scope of the “Force Majeure” clause in contracts.
Force majeure is a French term meaning a "superior force" and boiler template force majeure clause is inserted in contracts and not commonly negotiated between parties. The primary purpose of a force majeure clause is that it accounts for the allocation of risk in case of an unforeseen eventuality and it puts the parties on notice of events that may suspend or excuse service of their respective contractual obligations.
The Indian Contract Act, 1872 does not per se define the term Force Majeure, however the same is conceptually provided for in Section 32 and Section 56. Section 32 inter alia deals with contingent contracts wherein the happening or the not happening contingent event becomes impossible, thus rendering the contract void. Section 56 inter alia embodies the principle of “Doctrine of Frustration” that is invoked when an intervening or supervening event inhibits either party from furthering their contractual commitments.
The Doctrine of Frustration stemmed from the decision of Taylor vs. Caldwell which provided that in the event of an unforeseeable event occurring during the performance of the contract thereby making its performance impossible, in the sense that the fundamental basis of the contract no longer exists, then there was no duty of performance of the obligations of the said contract and the same would be held to be void.
The scope of Section 56 was considered by the Hon’ble Supreme Court in the cases of Satyabrata Ghose Vs. Mugneeram Bangur & Co and Energy Watchdog vs. CERC wherein The Hon’ble Supreme Court had laid down certain principles to be borne in mind at the time of considering whether a particular event can be construed as a Force Majeure event. Broadly, they are (i) The word impossible as contained in Section 56 does not mean physical or literal impossibility, (ii) An event need not make the performance of a contract impossible, it was sufficient if the performance of the same is frustrated or useless from the point of view of the object of the parties, (iii) In the event an agreement has an expressed or implied Force Majeure clause, the provisions of the said clause will apply over the provisions of Section 56, (iv) The application of the provisions of Section 56 must be interpreted within narrow limits, (v) Simpliciter the rise in the cost or expense for the performance of the contract does not frustrate it, (vi) The Doctrine has no applicability in the event there is no change in the fundamental basis of the agreement and (vii) In the event alternate modes of performance is available the doctrine of Frustration and Force Majeure shall not be applicable.
The question that has now arisen is whether a pandemic can be brought under the scope of a force majeure event, thereby relieving the parties to a contract of their obligations of performance. Usually, the scope of a force majeure event is enlisted in the respective clause within the contract itself. Therefore, whether non-performance due to the Covid-19 pandemic can be brought under the force majeure clause will largely be a complex, nuanced, fact-specific enquiry based on the contractual terms, governing laws and corroborating circumstances.
The lockdown with respect to the Covid-19 outbreak broadly encompasses government action or prohibition of conduct of business; shortage of labour due to quarantine; decrease in supply or demand due to lowered purchasing capacity; difficulty in transportation, etc.
Another crucial determinant of whether an event qualifies as a Force Majeure event is the fact that the said circumstance must not be foreseeable. Thus, while determining whether the pandemic can be construed as a Force Majeure event or not, it is vital to determine whether, at the time when the parties entered into the contract, the spread of the Covid-19 virus to a global pandemic was foreseeable or not.
As far as the question of prevention, hindrance or delay is concerned, parties will have to establish how the virus outbreak has prevented, hindered or delayed performance and to what extend non-performance can be justified. The Hon’ble Supreme Court has in the case of M/s Alopi Parshad & Sons Ltd. Vs. Union of India held that “A contract is not frustrated merely because the circumstances in which it was made was altered. The Courts have no general power to absolve a party from the performance of the contract merely because its performance has become onerous on account of unforeseeable circumstances”.
The government restrictions on movement to contain the spread of the Covid-19 virus being the immediate reason for non-performance can be broadly construed as an act of the government in strict terms of interpretation. This provides an opportunity for businesses to relieve themselves of their contractual obligations if their contracts have a clause that accounts for liability in case of failure of government machinery, strikes, policy decisions, etc. There also obligation to mitigate the consequences of the force majeure event and performance must typically be resumed as soon as the effects of the event have passed.
In February 2020, the Finance Ministry of India clarified that disruption in the supply chain due to the spread of the coronavirus in China or other parts of the world qualifies as a force majeure event. There have been calls from other associations and industry federations to their respective Ministry(s) to classify the COVID 19 lockdown as a force majeure event.
It is likely that in the post-Covid-19 business scenario there will be a slew of litigations where the language, structure and tightness of contracts will be put to a litmus test to ascertain how far the virus pandemonium can be used to render contacts void and absolve the promisor from his contractual obligations and mitigate the risk associated with non-performance thereof. The judiciary will also have to consider if terms such as "disease" or "epidemic" are not expressly included, can the effects of the pandemic be covered in the broad scope of another term such as "act of God", or some other catch-all provision.
With questions of natural justice, ethics, commerce and legality crossing over, it is going to be a tight call for legal systems around the world to set a reasonable legal standard for the interpretation of force majeure clauses that can account for the disruption of business due to the Covid-19 outbreak, and also serve as a good precedent for future situations of similar pandemics.
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