Force Majeure And Few Judgments Pertaining To Force Majeure In The Present Pandemic
What is Force Majeure?
Force Majeure is a French term. The Merriam Webster defines force majeure as “an event or effect that cannot be reasonably anticipated or controlled” or in other words, it simply means “an act of the god.”
It has been defined in Black's Law Dictionary as “an event or effect that can be neither anticipated nor controlled”. The term includes both acts of nature (e.g. floods and hurricanes) and acts of people (e.g. riots, strikes and wars).
Force Majeure in the Indian Contract Act, 1872
“Force majeure” is not clearly defined; however, it is governed by the Indian Contract Act, 1872. It is governed by Chapter III and IV dealing with the contingent contracts, particularly Section 32 and 56 thereof.
“32. 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.”
“56. Agreement to do possible act. An agreement to do an act impossible in itself is void. Contract to do an act afterwards becoming impossible or unlawful.—A contract to do an act which, after the contract is made, becomes impossible, or, because of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”
From a contractual perspective, a force majeure clause provides temporary reprieve to a party from performing its obligations under a contract upon the occurrence of a force majeure event.
Commonly, force majeure provision could be drafted as:
“Neither party shall be liable for delay in performing, or failure to perform, any of its obligations under this agreement if such delay or failure results from events, circumstances or causes beyond its reasonable control including acts of God or natural disaster, wars, strikes, riots, or acts of terrorism. In such circumstances, the time for performance shall be extended by a period equal to the period during which performance of the obligation has been delayed or failed to be performed. If the period of delay or non-performance continues for 30 days, the party not affected may terminate this agreement by giving ten days' written notice to the affected party.”
Pandemic effect and few judgments by the Hon’ble High Court
Globally, several challenges are being faced to the economy across almost all the industry sectors due to COVID-19 pandemic. The outbreak of Covid-19 has proven not only a humanitarian crisis but also the economic crisis on a larger scale. The government worldwide are introducing countermeasures and restrictions to tackle the COVID-19 pandemic. It may be found that other parties (ies) are prevented from fulfilling their contractual obligations.
The following are notable judgments by Hon’ble High Court worth considering in the pandemic times -
1.“As made clear by the Delhi High Court in Airport Authority of India vs Hotel Leela Venture Limited, the events which discharge a contract cannot invalidate a concluded transfer. The said judgment also clarifies that Section 108 (e) of the Transfer of Property Act, which defines, inter alia, the obligations of a lessee, is a special law and would supersede the doctrine of frustration, as the latter is a part of general law contained in the Contract Act.
The lease would be void at the option of lessee only if it falls within Section 108(e), i.e. when any part of the property is wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let due to fire, tempest or flood, or violence of an army or a mob, or other irresistible force. Section 108 does not envisage epidemics or pandemics as such events.”
2. The recent order passed by the Bombay High Court on 8 April 2020 (No 404 of 2020) in Standard Retail Pvt. Ltd. v. M/s. G. S. Global Corp & Ors is, remarkably, the first case where an Indian Court while dismissing a Commercial Arbitration petition, has held that the “lockdown cannot come to the rescue of the Petitioners to resile from their contractual obligations.” In other words, a lockdown in these unprecedented times, is not a legal basis for termination or repudiation of a contract.
This article, in view of the recent ruling of the Bombay High Court, analyzes the existence of force majeure provisions in commercial contracts, with a primary focus on the position under Indian Law, the engagement of common law doctrine of frustration with the COVID-19 outbreak and the recommendations for parties to consider to safeguard their respective positions because of the aggravating situation.
The Court seized the opportunity to correct what is considered to be the wrong standard for treating a ‘force majeure event’ and the application of ‘Doctrine of Frustration’ of Contract on account of COVID-19.
According to the Bombay High Court, in any event, “The lockdown was temporary and only for a limited period, making it a bad excuse for the Petitioners to resile from their contractual obligations with Respondent No.1 of making payments for their supply.” Meaning, that mere hardship in performance of an obligation in view of the COVID-19 pandemic is not a valid objection which can be used against a seller.
3. To invoke force majeure, it is of the utmost importance that performance must be objectively impossible; merely difficult or uneconomical performance is not sufficient. Under Indian contract law, the Supreme Court in Energy Watchdog v. Central Electricity Regulatory Commission clearly laid down that only those events, which are explicitly included in the contract, can excuse a party from the performance. Meaning that a force majeure clause, at all times, will be strictly interpreted.
4. The High Court of Delhi in Ramanand & Ors. v. Dr Girish Soni & Anr rejected an application for waiver or suspension of rent on the lockdown account. The Court gave a detailed explanation of the Force majeure clause on contractual obligations. The Court held that the terms of their respective contracts govern the relationship between a landlord and tenant, a lessor and lessee and a licensor and licensee, and the question of a waiver, suspension, or any remission in rental payments would depend on the terms and conditions stipulated in each contract.
5. In another case titled Gaurav Jain vs Union of India, while dismissing a petition seeking a waiver of rent payable by tenants during a period of COVID 19 lockdown said that the power/discretion for waiving of rent vests first with the landlords, who are contractually entitled to the same. The Court further observed that “If the landlord is entitled to receive the rent/consideration in accordance with law as per the contractual agreement entered between the parties concerned, then, the Court cannot, by a general order of the nature sought by the petitioner, waive such amount.” The Supreme Court has also dismissed a petition seeking a waiver of rent by treating the national lockdown as ‘Force Majeure’ period exempting all the advocates from paying rent during that period.
Hence, before invoking force majeure clause seeking a waiver of rent, Tenants must first examine their contracts and ascertain whether they are entitled to seek a waiver of or suspension on rent payment.
Conclusion - Practical Considerations
The affected parties who wish to rely on force majeure provision should keep in mind the following legal and/or commercial points:
carefully consider the precise wording of the force majeure provision, the underlying contract as a whole and the related circumstances that have arisen. In particular, evaluate the list of non-exhaustive force majeure events which is often included and the consequences of triggering a force majeure event;
explore alternative means of performing its contractual obligations, minimising delay and/or mitigating any loss to the other party;
should be conscious of “opportunism” from unscrupulous counterparties that use the COVID-19 pandemic as an excuse to terminate an unfavourable contract;
check whether a notice is required and if so, serve the requisite notices as soon as possible in accordance with the relevant provisions of the underlying contract informing the other party of the applicable force majeure event;
keep detailed records of why and how the performance of its contractual obligations was impossible, delayed or hindered (as the case may be), as well as the relevant steps taken to find other ways to perform its contractual obligations and mitigate loss;
review any applicable insurance policies that might provide coverage for business interruption and/or contingency business disruption;
explore other practical ways to resolve the force majeure situation amicably with the other party (e.g. variation or modification of the underlying contract based on mutual agreement);
if force majeure is unavailable in the underlying contract, seek legal advice to consider other potential contractual remedies due to the COVID-19 pandemic (e.g. price adjustment clauses, limitation or exclusion clauses, change of law clauses, and/or material adverse change (MAC) / material adverse effect (MAE) clauses);
if other contractual remedies are unavailable and subject to the governing law of the underlying contract, seek legal advice to consider the application of potential statutory remedies; and
as we advance, given the COVID-19 pandemic and the related issues are no longer unforeseen events and will be under the contemplation of the parties under any new contractual arrangements, and subject to the parties’ respective negotiation powers, consider carving-out “national emergency, epidemic, pandemic, quarantines, disruption of the supply of labour, disruption of supply chains and/or transportation systems” under the force majeure provision in future contracts.
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