Novel Coronavirus or COVID-19 has emerged as a Pandemic. On January 30, 2020 it was declared as a Public Health Emergency of International level by the World Health Organisation (WHO). On March 11, 2020, the Director of WHO declared it as a Pandemic. Starting from one region of China, now the disease has conquered the whole world. Not only this, it is making the individuals struggle for their health, but also it has hindered the businesses and has baffled the world’s economy.
In India also, this disease has made a huge impact on the business and economy. The growth rate (GDP) of the Indian economy has hit the record low of 6 years on 4.5%. During these times, many individuals, businesses, or Companies are unable to fulfill their contractual obligations due to the takeover of COVID-19 pandemic over the world. For all the organizations and individuals who are under this similar situation, an important question arises that can the Force Majeure clause work as a shield against the consequences of non-performance of the contractual obligations?
FORCE MAJEURE: MEANING & CONCEPT
‘Force Majeure’ is a French term that means ‘greater force.’ According to the Cambridge Dictionary, force majeure means “an unexpected event such as war, crime, or an earthquake which prevents someone from doing something that is written in a legal agreement.”
The concept of force majeure is not completely recognized under English law, as it is taken from the civil law. It acts as an exception to breach of contract. Generally, the force majeure clause is added in the contract to discharge the liability of the party for the performance of contract if any unanticipated situation occurs which makes the performance of contract impossible or extremely difficult. It depends on case to case and rather on the force majeure clause that whether a particular situation will act as a force majeure event and discharge the parties from the performance of contract. In absence of such clause, the party may even be sued for non-performance of contract as it is not even in party’s control, which later will be decided according to the principles of the common law. In that particular situation, the doctrine of frustration may be invoked by the performing party and claim for the frustration of contract. Therefore, it is of utmost importance to include the force majeure clause to avoid such an event and provide flexibility to the contract. The force majeure clause may include events of the war, epidemics and disease outbreaks, terrorism, strikes, natural calamities such as earthquakes, tsunami, floods, etc.
DOCTRINE OF FRUSTRATION OF CONTRACT
The doctrine of frustration of contract discharges the party from the performance of contract. The frustration of contact may occur due to 2 reasons –
- Performance is physically impossible
- Failure of an object of the contract
Section 56 of the Indian Contract Act, 1872 enumerates this concept and provides that when a contract to do an act becomes impossible due to the reason of happening of some event which was beyond the control of performing party, the contract becomes void. However, the compensation may be claimed by the promisee if such non-performance has caused any loss.
As per the doctrine, even if the act has not become impossible in the sense of literal physical impossibility but it is such that it has become useless and impracticable from the point of view of parties and object of the contract. This interpretation has been affirmed by the SC J Shah in Indian Rare Estate Ltd. v. Southern Electric Supply Co. of Orissa.
The ultimate effect of this doctrine is that the parties are relieved from the performance of contract.
One of the reasons for the frustration of contract can be the change of circumstances that may be used to cover the COVID-19 under the force majeure clause. In the case of Joseph Consultatine Line Ltd. v. Imperial Smelting Corpn., it was stated that a contract will become frustrate “where circumstances arise which make the performance of the contract impossible in the manner and at the time contemplated”.
Further, the High Court of Punjab in the case of Parmeshwari Das Mehra v. Ram Chand Om Prakash elaborated the doctrine as “it is clear that if there is an entirely unanticipated change of circumstances, the question will have to be considered whether the change of circumstances has affected the performance of a contract to such an extent as to make it virtually impossible or even extremely difficult or hazardous.” If the case is so, and such a change in circumstances is not caused due to the fault of any of the parties of the contract then, the Court will not enforce the contract.
COVID-19 AS FORCE MAJEURE
The circumstances prevailing all over the world due to the spread of pandemic Novel Coronavirus or COVID-19 has led to several difficulties in the performance of contractual obligation. Under these circumstances where there is a complete lockdown in several countries and restricted transportation, the chances are that the situation may be covered under the force majeure situation. The issue to be enlightened is that whether the particular contract contained the spread of disease as a cause, if the force majeure clause covers the ‘epidemics’ or ‘pandemics’, then it the clause will surely be invoked, but in the contracts where the clause doesn’t expressly deal with epidemics or pandemics, then the situation can be taken up to the Court, where the Court will evaluate the situation in the light that whether the circumstances made the performance of the contract impossible or extremely difficult. Another issue to be noted is whether there was a requirement of notice or not. If the notice provisions are specified, then it will act as a condition precedent.
Courts generally interpret the force majeure clauses in a narrow sense, to the extent of specifically mentioned events and similar events to those mentioned in the contract. The burden of proof is upon the party taking the defense of force majeure clause.
It is to be noted that not every contract under every circumstance can be shield by the defense of force majeure as every contract is governed by different laws and principles and therefore, the situation has to be evaluated in light of the nature of contract.
Indian Government over Covid-19 as Force Majeure
- Due to disruption in the foreign supply chain in China due to which Government contractors were facing difficulties, on February 19, 2020, the Ministry of Finance, Department of Expenditure issued an Office Memorandum through which it was clarified that “it should be considered as a case of natural calamity and force majeure clause may be invoked whenever considered appropriate.” (https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf).
- On 20th March, 2020, the Ministry of New & Renewable Energy issued an Office Memorandum wherein it was clarified to all the agencies implementing renewable energy that force majeure clause may be invoked whenever considered appropriate. (https://mnre.gov.in/img/documents/uploads/file_f-1584701308078.pdf).
- On 20th March, 2020, the Ministry of Shipping through an order conveyed to the Major Ports that he pandemic COVID-19 can be considered as a natural calamity for invoking force majeure clause. (http://shipmin.gov.in/showfile.php?lid=2228).
- On 25th March, 2020, the Ministry of Road Transport & Highways through press release advised the National Highways Authority of India (NHAI) to close the commercial and private establishments for 21 days in the wake of COVID-19 as per the guidelines of Ministry of Home Affairs. Further, it was stated that the situation may be treated as force majeure for the Concession/Contract Agreement. (https://pib.gov.in/newsite/pmreleases.aspx?mincode=69)
- On 27th March, 2020, Indian Railways through press release declared that the period from 22nd March, 2020 to 14th April, 2020 will be treated as force majeure and during the same period no charges for demurrage, wharfage, stacking, etc. shall be levied. (https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1608603)
- On 13th May, 2020, the Ministry of Housing and Urban Affairs issued an Office Memorandum wherein it advised for the extension of registration of real estate projects as force majeure under the RERA, 2016. The Ministry stated that the Regulatory Authorities may issue orders for extension of registration and completion of projects by 6 months, the time period may further be extended for 3 months if in the discretion of the authority the situation demands so, the reason for the further extension has to be recorded in writing. (http://mohua.gov.in/upload/whatsnew/5ebcfd70abb23Rera%20Act%202016.pdf)
However, the parties are not fully relieved from the performance of their contractual obligations; as the Government notifications only provide for the extension of time period for performance. Therefore, after the situation is in control and obligations under the contract has to be fulfilled.
Indian Judiciary over Covid-19 as Force Majeure
The Delhi High Court in the case of Halliburton Offshore Services v. Vedanta Ltd. the Halliburton filed an application for an interim injunction against the Respondent Vedanta Ltd. for restraining to invoke bank guarantees issued in favor of Vedanta by ICICI Bank. Earlier, the parties entered into a contract for the development of blocks in Rajasthan. The Petitioner argued that the date to complete the project was 31st March, 2020 but due to nationwide lockdown the project couldn’t be completed within the specified time. Halliburton issued a notice to Vedanta informing the above scenario and proposing to cover the same within force majeure clause. However, Vendanta refused and reserved its right to take recourse as per the contract.
Taking into consideration the circumstances prevailing all over India the single judge bench of Delhi High Court stated: “Prima facie, in my view, special equities do exist, as would justify the grant of the prayer, of the petitioner, to injunct the respondent from invoking the bank guarantees of the petitioner.”
The Bombay High Court in the case of Standard Retail Pvt. Ltd. V/s M/s. G. S. Global Corp & Ors. refused to cover the non-performance of a contractual obligation under the clause of force majeure in relation to pandemic coronavirus. The case involved the contract between two companies regarding the supply of steel identified as “essential services.” The performing party claimed that it was unable to fulfill the contractual obligation due to the nationwide lockdown in the wake of COVID-19 and therefore, prayed to restrain Bank (not a party to contract) from encashing upon the letter of credits. For the same purpose, the party claimed that the situation is covered under the force majeure situation and the contract is frustrated as per Section 56 of the Indian Contract Act, 1872. The High Court of Bombay refused to grant an injunction against the Respondent Bank observing that the force majeure clause cannot be invoked upon the Respondent Bank which was not a party to the contract.
From the above-discussed cases, it can be observed that till now there is no strictly followed judicial trend for observing COVID-19 as force majeure. As mentioned at the beginning of this Article, each and every case has to be evaluated on its facts and circumstances in the light of the concerned contract; the same has also be construed from these judicial decisions over COVID-19 as force majeure. The Government is also taking steps to cover the contracts under force majeure in particular fields where there are high chances of non-performance due to COVID-19 lockdown.
- Coronavirus disease (COVID-19) outbreak; https://www.who.int/westernpacific/emergencies/covid-19
- India’s GDP growth hits over 6-year low; analysts say economy has bottomed out; https://economictimes.indiatimes.com/markets/stocks/news/indias-gdp-growth-hits-over-6-year-low-analysts-say-economy-has-bottomed-out/articleshow/72295181.cms?from=mdr
- Indian Rare Estate Ltd. v. Southern Electric Supply Co. of Orissa, AIR 2010 Ori. 115.
- Joseph Consultatine Line Ltd. v. Imperial Smelting Corpn., 1942 AC 154.
- Parmeshwari Das Mehra v. Ram Chand Om Prakash, AIR 1952 Punj 34, 38.
- Halliburton Offshore Services v. Vedanta Ltd., O.M.P. (I) (COMM) & I.A. 3697/2020.
- Standard Retail Pvt. Ltd. V/s M/s. G. S. Global Corp & Ors., Commercial Arbitration Petition (L) No. 404 of 2020.
- Image Credits: https://www.greenbuildingafrica.co.za/