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April, 2020

COVID-19 IMPACT: “FORCE MAJEURE” - IS IT A SHIELD

The COVID-19 pandemic has affected the subsisting commercial arrangements and relationship
amongst businesses across the world. The World Health Organization (WHO) declared the Covid-19
outbreak as a ‘Public Health Emergency of International Concern’ on January 30, 2020 and it was
official declared to be a ‘Pandemic’ on March 11, 2020.
 
The Governments world-wide immediately have swung into action and imposed lock-down etc; even
the masses are seen reciprocating the call and have taken the same in stride.
 
However, beneath this spirit to overcome, there is an undertone of anxiety and an atmosphere of
uncertainty surrounding the numerous commitments and contractual obligations with which Businesses
and Corporations are invisibly bound. The execution and performance aspect under contracts which
govern a variety of legal relationships between governments, corporates and individuals have come
into some trouble.
 
Such pressure is natural to be experienced in societies where rule of law governs the relationships of
its subjects and the contractual obligations are considered sacrosanct. Yet, no one can deny the
smallness of human grit in comparison to the indomitable will and the force of nature. When faced with
such circumstances, a legal system based on the rule of law itself makes accommodation for failure to
comply and perform, which even the most faithful and determined may experience.
 
The privity and general sense of obligations is then required to give way to and consider the otherwise
atypical element of fairness in contracts and it is then that the principle of ‘Force Majeure’ assumes
importance. It deals with delays, non-performance or aberration in performance of contractual
arrangement in times when forces beyond control and contemplation of parties to contract impact the
performance of such contracts and arrangements.

The Ministry of Finance, Government of India, on February 19, 2020 issued a notification stating that
Covid-19 shall be regarded as ‘Force Majeure’ clause, in terms of the Manual for Procurement Goods,
2017 and should be considered as a case of natural calamity. Further on March 20, 2020, another
notification for extension in Scheduled Commissioning Date of Renewable Energy Projects considering
disruption of the supply chains due to spread of COVID-19 globally, as a Force Majeure (FM) event
was issued by the Ministry of Finance.

Background

In general parlance, Force Majeure means superior force or uncontrollable event or effect that
releases one from fulfillment of contractual obligation. The legal theory for non-
performance of a liability due to an unforeseen event has evolved over time.
 
Force majeure is common clause in contracts that fundamentally frees both parties from legal
responsibility or obligation when an extraordinary event or circumstances beyond the control of the
parties arises. The theory of ‘Force Majeure’ effects all or part of the obligations of one or both
parties.

The international norm on the concept of “Force Majeure”, finds usefully incorporated in the United
Nation Convention on Contracts for International Sale of Goods (CISG), Article 79 Impediment
Excusing Party from Damages states the following:
 
“(1) A party is not liable for a failure to perform any of his obligations if he proves that the failure was
due to an impediment beyond his control and that he could not reasonably be expected to have taken
the impediment into account at the time of the conclusion of the contract or to have avoided or
overcome it or its consequences.

(2) If the party's failure is due to the failure by a third person whom he has engaged to perform the
whole or a part of the contract, that party is exempt from liability only if:

(a) he is exempt under the preceding paragraph; and

(b) the person whom he has so engaged would be so exempt if the provisions of that paragraph were
applied to him.
 
(3) The exemption provided by this article has effect for the period during which the impediment exists.
 
(4) The party who fails to perform must give notice to the other party of the impediment and its effect
on his ability to perform. If the notice is not received by the other party within a reasonable time after
the party who fails to perform knew or ought to have known of the impediment, he is liable for
damages resulting from such non-receipt.
 
(5) Nothing in this article prevents either party from exercising any right other than to claim damages
under this Convention.”
 
The aforesaid Article does not refer to force majeure, impossibility, frustration, hardship, and other
terms that have their independent recognition in legal system. The language of the Article gives a plain
and generic expression that can be related to the concept of force majeure, impossibility, and
frustration.

Article 79 needs to be read and interpreted without any reference to Domestic Law Principles.

Force Majeure under Indian Law

 
The concept of “Force Majeure” is considered differently under civil law and common law. In most civil
law countries such as China, France etc., the concept of “Force Majeure” is codified.
 
In most common law countries such as India, England etc. the concept of “Force Majeure” is not
codified and finds mention and is usually incorporated as a clause, which finds mention in the

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agreement between the parties.
 
“Force Majeure” or “Act of God” is a standard clause that finds reference in most contracts, is not
commonly invoked and exempts a party from performing its contractual obligations which have
become impossible or unfeasible due to an event or effect which the parties could not have foreseen
or controlled. This clause usually covers unforeseeable incidents such as natural calamities, war,
sudden change of government policies etc.

"Force Majeure” is not expressly stated. The Doctrine can be traced under Section 32 and 56 of the
Indian Contract Act, 1872.
 
Section 32 deals with “Contingent Contracts”, in which the performance of the contractual obligations
is contingent on the happening or non-happening of an event. For general contracts, Section 56
embodies the “Doctrine of Frustration”.
 
For ease of reference Section 32 and 56 of Indian Contract Act, 1872 are as follows:
 
“Section 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.”
 
“Section 56: Agreement to do impossible 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, by reason of some event which the promisor could
not prevent, unlawful, becomes void when the act becomes impossible or unlawful.
 
Compensation for loss through non-performance of act known to be impossible or unlawful.—Where
one person has promised to do something which he knew, or, with reasonable diligence, might have
known, and which the promisee did not know, to be impossible or unlawful, such promisor must make
compensation to such promisee for any loss which such promisee sustains through the
nonperformance of the promise.”

In M/s. Alopi Parshad & Sons Ltd. vs. Union of India  [(1960) 2 SCR 793], the Hon’ble Supreme
Court after setting out Section 56 of the Indian Contract Act, 1872 held that it is only when a
consideration of terms of the contract, in the light of the circumstances existing when it was made,
showed that they never agreed to be bound in a fundamentally different situation which had
unexpectedly emerged, that the contract ceases to bind. It was further held that the performance of a
contract is never discharged merely because it may become onerous to one of the parties.
 
Courts have generally construed “Force Majeure” clause(s) narrowly accepting the event as triggering
the consequences of “Force Majeure” if the particular event clearly falls within the ambit and scope of
a “Force Majeure” clause. “Force Majeure” clauses generally have a notification requirement and
hence complying fully with the notice requirements is imperative for parties seeking to invoke the
“Force Majeure” clause.
 
The burden of proof of demonstrating the existence of “Force majeure” is on the party asserting
existence of the same.

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In a recent judgment Energy Watchdog v. CERC [(2017) 14 SCC 80] the Hon’ble
Supreme Court,  referring to the decision Satyabrata Ghose v. Mugneeram Bangur & Co., [1954
SCR 310] held as follows:
 
“Where the Court finds that the contract itself either impliedly or expressly contains a term, according
to which performance would stand discharged under certain circumstances, the dissolution of the
contract would take place under the terms of the contract itself and such cases would be dealt with
under Section 32 of the Act.  If, however, frustration is to take place de hors the contract, it will
be governed by Section 56.”
 

(Emphasis supplied)

 
The judgment also summarized the concept around Force Majeure. It was held that the force majeure
clause will not normally be construed to apply where the contract provides for an alternative mode of
performance, and that the application of the doctrine of frustration must always be within narrow limits
and will not apply so long as the fundamental basis of the contract remains the same.

Further in Dhanrajmal Gobindram v. M/s Shamji Kalidas and Co. [(1961) 3 SCR 1020] the Hon’ble
Supreme Court of India held that the term “Force Majeure” is a wider concept. It was also observed
that the numbers of Force Majeure clauses are drafted differently and is limited to a few situations
only.
 
 Government of India Notifications on Force Majeure
 
During the initial outbreak of COVID-19 the Procurement Policy Division of Department of Expenditure,
Government of India issued a notification dated February 19th, 2020 bringing attention to the Force
Majeure Clause as per the Manual of Procurement of Goods, 2017 quoting para 9.7.7., which for ease
of reference the same has been reproduced as follows:

“9.7.7 Force majeure clause

 

A Force Majeure (FM) means extraordinary events or circumstances beyond human control such as
an event described as an act of God (like a natural calamity) or events such as a war, strike, riots,
crimes (but  not  including  negligence  or  wrong-doing,  predictable/seasonal  rain  and any other
events specifically excluded in the clause). An FM clause in the contract frees both parties from
contractual liability or obligation when prevented by such events from fulfilling their obligations under
the contract. An FM clause does not excuse a party’s non-performance entirely, but only suspends it
for the duration of the FM. The firm has to give notice of FM as soon as it occurs and it cannot be
claimed ex-post facto. There may be a FM situation affecting the purchase organisation only. In such a
situation, the purchase organisation is to communicate with the supplier along similar lines as above
for further necessary action. If the performance in whole or in part or any obligation under this contract
is prevented or delayed by any reason of FM for a period exceeding 90 (Ninety) days, either party may
at its option terminate the contract without any financial repercussion on either side.”

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Please click here to view & download the Notification dated February 19,  2020

Additionally, the Ministry of New & Renewable Energy issued a notification with respect to Renewable
Energy Projects stating that due to the impending pandemic. The parties (solar project developers)
can invoke Force Majeure clause to avoid financial penalties if they miss the contractual obligations
are not honoured in the given situation.
 
Please click here to view & download the Notification dated March 20, 2020
 
Difference between Concept of “Force Majeure” & Doctrine of Frustration
 
A force majeure clause characterizes a contracting party to terminate the contract, for the purpose of
alleviating parties from performing their contractual obligations and / or liability for contractual non-
performance, when there is an extraordinary event which is beyond the control of the parties (e.g.
Epidemic, Pandemic, Act of God) that prevents or delays that party from fulfilling their obligations
under the contract.
 
However, there are several prerequisites which must be satisfied before a party can successfully
invoke a force majeure clause.
 
Whereas, in an absence of the Force Majeure contract, parties might be able to terminate the contract
on the ground that the contract has been frustrated. The affected party could claim relief under Section
56 of the Indian Contract Act, 1872, however, in order to claim the doctrine of frustration, it is well
settled that the performance of the contractual obligations has become impossible by reason of some
event which the party could not avert and that the impossibility is not self-induced by the party or due
to its negligence.
 
The Force Majeure clause is creature of contract; on the other hand, “Doctrine of Frustration” is a
common law principle.
 
For contracts relating to the supply of raw materials, assumingly where there is outage or shortage
due to lockdown, in such circumstances the impossibility of performance of contract should be
evaluated.  As a result of COVID-19, the delays occurred can be regarded as steady and highly
dynamic which might affect the intendment of the contract and in these circumstances the doctrine of
frustration will be applicable.
 
The application of doctrine of frustration is more narrower in approach as compared with force majeure
yet it might act as an asset in the situations where it can be assumed that the  performance of the
contract is impossible.

Illustrative Impact of “Force Majeure” on following situation

 
Rent/ Lease Agreements

COVID-19 has affected the Rent/Lease Agreements. The lockdown caused due to the COVID-19 has
created a chaos in the realty sector. In the usual practice, the Builders Agreement contain the Force
Majeure clause and as highlighted above if such arrangements contain a clause for Force Majeure the
same can be evaluated for being invoked in the given circumstances.

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If one refers or considers lease agreement entered in ordinary course and such
agreements do not contain a Force Majeure Clause, then in such situation, the question arises
whether Section 56 of Indian Contract Act, 1872 shall be attracted. Indian Courts have shed their
views on such situations. In Raja Dhruv Dev Chand v. Raja Harmohinder Singh [1968 AIR
1024] the Hon’ble Supreme Court observed that Section 56 of the Indian Contract Act, 1872 has
limited application to covenants under a lease and would not apply to cases where the transfer is
completed.

The Hon’ble Apex Court further analysed, as to whether or not, rent is payable by the lessee due to a
Force Majeure can fall within the meaning of Section 108(e) of Transfer of Property Act, 1882 & the
scope of Transfer of Property Act, 1882 and held as follows:

“where the property leased is not destroyed or substantially and permanently unfit, the lessee cannot
avoid the lease because he does not or is unable to use the land for purpose for which it is let to him”

Further it important to observe the view taken by the Hon’ble Madras High Court in the matter Kodi idi
kondaiyan chettiar v. P Sivasamy [1998 (2) CTC 641] observed that the lessee is entitled to
abatement of rent when there is no provision regarding the obligation of the tenant to pay rent after the
property is destroyed/unfit for use.

Aviation and Hospitality Sector

(I) Aviation Industry

The outbreak has impacted the aviation sector massively, with the international passenger commercial
travel ban that has been imposed almost in majority part of the world, the Aviation sector is bound to
suffer further acute losses. The Indian aviation sector contributes a reported $72 billion to the national
GDP. The International Air Transport Authority (IATA) has estimated the loss incurred by the global
airlines during pandemic to be $252 billion in 2020 and in the second quarter, it is estimated to be a
net loss of $39 billion. Global airlines may have to refund tickets to the time $35 billion during the
second quarter. In such prevailing circumstances, the Force Majeure clause can be considered, basis
of the contractual agreement. Whether, the presence of the Force Majeure agreement, would permit
the parties to waive off the performance of their obligations, as long as it were presented by Force
Majeure.

(II) Hospitality Sector

The spread of the corona virus has brought the hospitality sector into a sudden freeze. For the tourism
sector Covid-19 is turning into the biggest crisis. The World Travel and Tourism Council (WTTC) has
predicted the loss for the tourism sector to be approximately US$22 billion. This would also result in
job loss of 50 million people and the travel sector shrinking by 25 per cent in 2020.
 
As far as, Indian tourism and hospitality sector are concerned then there is a potential job loss of 38
million expected.
 
Hotel operators, franchisors and owners should scrutinize carrying out a review of key contracts to
actuate whether the impact of the outbreak establishes a Force majeure event. It is advisable to the
contracting parties to consider invocation of Force Majeure clause in situation of suspension and non-
performance of its obligations and payments.  Confiding on the wording of the contract, an event that

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amounts to Force Majeure may relive one or all parties from performance of, or suspend
performance of, their contractual obligations. Considering the present scenario, if Force Majeure
applicability is dicey, then in such circumstances, Doctrine of Frustration evaluated for its application.
 
Due to ongoing situation, entities in such sector might not be in a realistic situation to perform its
obligations arising out of such contracts.

Workplace
 
The outbreak of this pandemic has also brought up employment law issues. The lockdown has
changed the whole scenario of the workplace, many employers are being forced and are attempting
taking difficult decision and has affected the business of very many.
 
Having a clause of force majeure in contracts would play a major role in such pandemic. Therefore,
the workplace/employment decision will majorly implicate written contracts and collective bargaining
agreements which compromise “Force Majeure” covenants that excuse performance, if such
envisaged events occur.
 
If there are no express Force Majeure clause which do exists to excuse non-performance then the
common law “Doctrine of Impossibility and Frustration” may come into play.

ASC Legal Comments

It has therefore become imperative now, than ever before, to evaluate situations which merit

consideration of application ‘Force Majeure’ as a doctrine in situation(s) wherein the COVID-19
pandemic and the lockdown has created unwarranted legal implications under non-contractual
relationships.
 
For instance; Global Tax Administrations & Jurisdictions, guided by the Organization of Economic
Cooperation and Development (‘OECD’) have been advised that the provisions
under International Tax Treaties, which characterize and establish taxing rights between two tax
jurisdictions, on basis of happening/ fulfillment of certain conditions, may consider ‘COVID-19’ as
a ‘force majeure’ situation, even though such situations are not specified in ordinary course.
 
The impact which COVID-19 and the resultant lock-down has created, is an unprecedented event,
which is very unique when compared with any ‘Force Majeure’ situation which the Courts have dealt
with till now, because this has not only paralysed contracting parties, but systems altogether and is
thus much global in outreach and pervasive in terms of its impact.

Therefore, Till now the Courts have held that non-performance or termination of contracts by virtue
of ‘Force Majeure’ does not operate automatically and is somewhat predicated upon the
drafting/existence of the relevant covenants/clauses, However, now it will be interesting to see
Judiciary’s response wherein no ‘force majeure’ clause existed and how circumstances would weigh.
 
Nonetheless, during the Covid-19 outbreak, it will still be of utmost significance to notify all the
concerned parties in an affected contractual situation, about the presence of the ‘Force Majeure’ event

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under the said respective contracts and consequences emanating therefrom.
 
We are confident that the Hon’ble Courts are well poised to deal with the situation, in sub serving the
cause of justice.

Hope the above would be useful.

In case of any assistance/ further clarification required, please do let us know.

Please note that in the light of potential  impact of COVID-19 Pandemic, we are currently
operating at the usual capacity, but working remotely to mitigate the risk and spread of the
virus. Wherever possible, shall perform client meetings "online" rather than face-to-face,
keeping in view all government guidelines with respect to outstation travels, including
international travel. We would strive in ensuring that professional practice and client
commitments are adhered to and well taken care of during these challenging times.

Wishing Good Health

With kind regards,

Aseem & Team

FOR PRIVATE CIRCULATION ONLY

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thereunder at the time of compiling of the said newsletter. This newsletter is for information and
general guidance purposes only. We have no responsibility for the persistence and the accuracy of the
information relied upon for the purposes of compiling this newsletter and the said update does not
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Legal disclaims all responsibility for any damage caused by error/ omissions whether arising from
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