COVID-19 AND FORCE MAJEURE

Force majeure translates literally from French as superior force. It’s a common clause in legal
contracts
that allows either party to limit their liability in the face of some unforeseeable, extraordinary event. In
English, the term is often used in line with its literal French meaning, but it has other uses as well,
including one that has roots in a principle of French law.
In business circles, "force majeure" describes those uncontrollable events or circumstances beyond
human control such as an event described as an act of God (like natural calamity, war, strike, riots,
etc)
that are not the fault of any party and that make it difficult or impossible to carry out normal business
and
perform the contractual liability despite of readiness and willingness. Generally, on the activation of
the
Force Majeure clause in the contract, it absolves both parties from contractual liability or obligation
under
the contract. The relevant provisions are embodied under Sections 32 and 56 of the Indian Contract
Act,
1872
In the present scenario and circumstances where the world is at standstill axis due to pandemic
coronavirus, it is likely that performances under many contracts will be delayed, interrupted, or even
cancelled. There would be chances that the suppliers in contracts may seek to delay and/or avoid
performance (or non-performance liability) of their contractual obligations and/or terminate contracts,
either because Covid-19 has legitimately prevented them from performing their contractual
obligations, or
because they are seeking to use it as an excuse to extricate themselves from an unfavorable deal.
Also,
parties may also cite Covid-19 as a basis for renegotiation of price or other key contractual
provisions (e.g
volume of materials exported from or imported into affected areas due to shifts in supply and
demand).
Thus, in this set of facts and circumstances, it becomes important to ascertain the answer to the
question
that whether Covid-19 will be considered as a ‘force majeure’ event? Generally “Force Majeure”
clause is
that any event or circumstance or combination of events and circumstances including those stated
below
that wholly or partly prevents or unavoidably delays an Affected Party in the performance of its
obligations
Published in Articles section of www.manupatra.com
(*) Authored by: - RamitMehta
Advocate, Rajasthan High Court. Managing Partner,Mehta chambers- Law offices.
under this Agreement, but only if and to the extent that such events or circumstances are not within
the
reasonable control, directly or indirectly, of the Affected Party and could not have been avoided if the
Affected Party had taken reasonable care or complied with Prudent Utility Practices.
Moresoever, Force Majeure can be classified to be Natural Force Majeure Events and Non Natural
Force
Majeure Events. The present widespread of coronavirus which has caused to lockdown the entire
nation
falls within the ambit of Non Natural Force Majeure Events and the COVID-19 could make
performance of
the contractual obligations to be more difficult.
In the persisting circumstances, the consideration of the COVID-19 pandemic to be Force Majeure
depends on the fact that the clause of Force Majeure is incorporated in the Contract to be
considered. A
force majeure clause cannot be implied under Indian law. It must be expressly provided for under the
contract and protection afforded will depend on the language of the clause. In the event of a dispute
as to
the scope of the clause, the courts are likely to apply the usual principles of contractual
interpretation. In
case, if the a force majeure event clause expressly includes a pandemic events then Covid-19
outbreak
would activate a force majeure clause in the contract. Although, whether a party can be excused
from a
contract on account of Covid-19 being declared a pandemic is a fact-specific determination that will
depend on the nature of the party’s obligations and the specific terms of the contract.
As a matter of fact, the Ministry of Finance, Govt of India has already issued an office memorandum
dated 19th February, 2020 inviting attention to para 9.7.7 of the “Manual for procurement of Goods,
2017”
issued by Department of Expenditure, stating that disruption of the supply chains due to spread of
coronavirus will be covered in the Force Majeure clause (FMC) and should be considered as a case
of
natural calamity and FMC may be invoked, wherever considered appropriate, following the due
procedure. The supply can be ranging from articles, material, commodities, livestock, medicines,
furniture,
fixtures, raw material, consumables, spare parts, instruments, machinery, equipment, industrial
plants,
vehicles, aircrafts, ships, railway rolling stock, assemblies, sub assemblies, accessories, or such
other
goods etc.
This requirement of causation is likely to be the key battleground in COVID-19 force majeure cases
in the
months and years to come, and the focus in any eventual litigation or arbitration will certainly be on
whether any travel restrictions, quarantines imposed, lack of available employees or similar
specifically
impacted the project or party at issue in the period of time surrounding the notice of force majeure.
Some force majeure clauses will expressly state that the party seeking to rely on it was “prevented”
from
performing due to the force majeure event. If the clause is drafted in this way, the party typically
must
show that performance of its obligations would have been possible “but for” the COVID-19 outbreak
(or
the governmental measures taken in response) and that there is no alternative way in which the
obligation can be mitigated or discharged. A key issue likely to arise in this context is the nature of
governmental measures taken, and whether such measures are mandatory or advisory in nature,
together with whether any governmental measure (e.g. the shutdown of a specific plant) was in fact
requested by or instigated by the party then claiming force majeure. A party relying on a force
majeure clause must also show that there are no reasonable steps that it could have taken to
mitigate or
avoid the effects of the force majeure event.
All hope is however, not lost for the party if the contract does not contain force majeure provisions as
the
party may nevertheless be able to rely on the common law doctrine of frustration of contract. The
doctrine
will apply where an unforeseen event either renders a contract impossible to perform or makes the
outcome of the performance radically different from what was envisaged by the parties at the time
the
contract was formed.
Published in Articles section of www.manupatra.com
(*) Authored by: - RamitMehta
Advocate, Rajasthan High Court. Managing Partner,Mehta chambers- Law offices.
Also, it is important to draw attention to Doctrine of Frustration. The said doctrine has its root of the
English law which express this doctrine that acts as a device to set aside contracts where an
unforeseen
event either renders contractual obligations impossible, or radically changes the party's principal
purpose
for entering into the contract. The said Doctrine of frustration has been enshrined in Section 56 of
the
Indian contract act 1872 which deals with those cases where the performance of
contract has been frustrated and the performance of it has become impossible to perform due to any
unavoidable reason or condition. Although the frustration principle is subject to a very high threshold,
it is
possible to envisage a range of factual circumstances in which COVID-19 and the ensuing
governmental
response measures could be construed as a frustrating event.
If the force majeure clause refers to pandemics and/or epidemics, then it will almost certainly be
applicable given that the World Health Organization on 11th March 2020 declared COVID-19 a
pandemic. However, the position becomes more uncertain where the clause may, for example, refer
to
an “act of God” without further definition. If the outbreak does fall within the scope of the clause, it
must
then be determined to what extent the contractual obligations are affected. It is possible for example
that
some obligations within the contract are not impeded by the outbreak and some obligations may
simply
be postponed. Therefore, both parties will need to closely scrutinize the relevant evidence, including
the
timing of the alleged performance difficulties as compared to the spread of COVID-19 and
corresponding
government measures taken in the particular place of operation at a given time.
For the above reasons, it can clearly be stated that there is also a risk involved on the party who
intends
to invoke the force majeure clause in the contract. If a party declares force majeure but is not
contractually entitled to do so, it may expose itself to a claim for repudiatory breach of contract and
the
other party may be entitled to claim damages as a consequence.
It is important to note that doctrine of frustration, though similar in effect to the doctrine of force
majeure,
is more restrictive. Courts will generally not allow a party to use doctrine of frustration as a tool to
escape
a bad bargain. The doctrine of frustration will also not relieve a party from performing a contractual
obligation simply because the event complained of has made the performance more difficult or
expensive.
Economic hardship is not a ground for invoking doctrine of frustration.
CONCLUSION
Since, it depends on what has been stated and incorporated in the clause of force majeure in the
contract; it becomes utmost necessary at this point of time of pandemic situation to analyze the key
contracts and the clauses inculcated therein. Further, it would be best suitable to invoke clauses like
that
of escalation, price adjustment, liquidated damages and such so as to avoid the suffocation of the
amount
involved in the commercial contracts and get the amount in circulation. It is crucial that businesses
and
consumers are aware of their rights under the contracts they have entered into, under the common
law
and under statute so that they are prepared when confronted with an inability to perform their
contractual
obligations as a result of COVID-19. Of course, it is always advisable to seek the advice of a lawyer
in
such circumstances.