PERFORMANCE OF CONTRACTS IN TIMES OF COVID-19 – DETERMINATION OF THE RELEVANT PERIOD

OF THE FORCE MAJEURE EVENT.

INTRODUCTION

On a perusal of the various notifications issued by the government as well as available literature on the
subject, there appears to be consensus on the fact that the widespread outbreak of COVID-19 has
disrupted the functioning of most industries globally, and shall be construed as a force majeure event for
the purpose of most commercial contracts both in India and abroad.

Force majeure literally means an ‘irresistible compulsion’ or a ‘superior strength’. Legally speaking, force
majeure amounts to unforeseeable circumstances that prevent a party/ parties from fulfilling their
obligations under a contract and is usually included in most contracts as a boiler-plate clause. This
means that in the event of an occurrence that may be construed to be a force majeure event within the
scope and purview of the respective clause, the parties may be discharged from performing their
obligations under the contract for the limited duration of subsistence of the force majeure event.

In addition to the implied or express duty to mitigate losses that is usually imposed on a party seeking to
invoke a force majeure clause, a party seeking to rely on or invoke a force majeure clause may also be
required to comply with any procedural requirements thereunder - such as a requirement to give notice
of its intention to rely on the clause to the other party within particular timescales and formalities
required for the service of notices.

General practice as well as judicial precedents suggest that a formal notice is a pre-condition to the
affected party’s entitlement to claim relief through invocation of force majeure clause. This, in addition
to being a widely followed commercial practice, usually forms part of the force majeure clause itself
whereby a party claiming application of force majeure and thus its inability to perform its obligations, is
required to put the other party to notice of frustration of the contract and application of such an
unforeseeable event that made the fulfilment of its obligation an impossibility. The notice serves two
purposes- first, it notifies the opposite party of the affected party’s inability to fulfill its obligations; and
second, the date of such notice is relevant in the determination of the period for which performance of
the affected party may be excused. Further, the relevant clause of the contract may additionally require
the notice to state the anticipated consequences and duration of the force majeure event.

WHAT IS THE RELEVANT PERIOD FOR THE FORCE MAJEURE EVENT?

Unlike in the case of a fire or a natural disaster, wherein it is easy to identify the start date and the date
on which such a force majeure event may be limited to, the outbreak of COVID-19, in the absence of an
effective vaccination, is dynamic and the end is unpredictable, leaving patterns as to its spread to be
hypothesised and predicted by medical and data experts. In the usual course, force majeure period
refers to the period of time beginning on the first day that a force majeure event prevents a party from
performing its obligations hereunder and ending on the date that such event no longer prevents the
applicable party from performing its obligation hereunder.

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This raises a question as to from what date the spread of the COVID-19 is to be considered a force
majeure event and to what extent it may be considered as having only caused hardships for the affected
party. In this regard, it becomes relevant to examine the timeline of the spread of the virus.

THE COVID-19 TIMELINE

A pneumonia of unknown cause detected in Wuhan, China was first reported to the World Health
Organization (WHO) Country Office in China on 31 December 2019 which was later found to be on
account of the coronavirus (which subsequently came to be known as COVID-19) that has now
consumed a majority of the countries in the world. On 30 January 2020, the WHO went on to declare
the outbreak as a Public Health Emergency of International Concern. On the same date, India reported
its first confirmed case in Thrissur, Kerala. Subsequently on 11 March 2020, the widespread of COVID-19
was characterized by the WHO as a pandemic.

As of 10 March 2020, India had reported its first fifty confirmed cases of patients having tested positive
for COVID-19 spread across thirteen states. This was followed by various directives and orders that were
issued by various departments of the Central and State Governments.

One of the first notifications in this regard was issued by the Ministry of Finance, Government of India
on 19 February 2020, whereunder it was clarified that the disruption of supply chains due to COVID-19 is
to be considered ‘natural calamity’ and the relevant force majeure clause to be invoked in relation to the
Manual for Procurement of Goods 2017, which serves as a guidebook for the procurement of goods.
Subsequently, several advisories pertaining to prohibitions on mass gatherings and travel advisories
were issued by the Government of India.

On 20 March 2020, the Ministry of New and Renewable Energy (MNRE), Grid Solar Power division, had
notified that all renewable energy implementing agencies of the MNRE were to treat delay on account
of disruption of the supply chains due to the spread of COVID-19 as force majeure.

On 23 March 2020, the Hon’ble Supreme Court by taking suo moto cognizance by powers conferred
under Article 142 read with Article 141 of the Constitution of India in re: ‘Cognizance for extension of
limitation’ for the situation arising out of the challenge faced by the country on account of COVID- 19
and resultant difficulties that may be faced by litigants across the country within the limitation period,
ordered that a period of limitation in all such proceedings, irrespective of limitation prescribed under
the general law or special laws, whether condonable or not, shall stand extended with effect from 15
March 2020 till further orders. The said order was also made binding on all courts, tribunals and
authorities.

On 24 March 2020, when the number of positive cases had reached approximately 500, a 21 - day
lockdown was ordered by the Government of India in exercise of the powers under section 6(2)(i) of the
Disaster Management Act, 2005. In pursuance thereof, the Ministry of Home Affairs notified guidelines

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to the other ministries and departments for measures to be taken for containment of COVID-19, setting
out very clearly the establishments which were considered essential and were allowed to function
during the aforesaid 21 - day period. Additionally, the operation of all domestic flights and flights
operated by non-scheduled operator permits were deferred. On the same date the Ministry of Finance
also announced various reliefs including extension of filing deadlines, extension of due dates, reduction
of interest and penalties, extension of deadlines for filing GST returns, etc. The said notification was
supplemented by addendums dated 25 March 2020 and 27 March 2020, respectively, widening the
ambit of the earlier notification.

In the aforesaid background, while it is clear that the present circumstance is to be construed as a force
majeure event, there is a lack of clarity as to when such period could be said to have commenced. While
the Ministry of Finance had issued a notification to this effect as early as on 19 February 2020, the
notification as to a complete lockdown and stoppage in the operation of industries, except those
specifically exempted, was issued more than a month later on 24 March 2020.

It has been propounded time and again that courts have no general power to absolve a party from the
performance of its part of the contract merely because its performance has become onerous on account
of an unforeseen turn of events. [Satyabrata Ghose v. Mugneeram Bangur & Co.: 1954 SCR 310].
Further, it is imperative that a reasonable period is to be considered for determining the subsistence of
force majeure. Practically, it would be absurd to argue that if lockdown is lifted after 21 days that on the
22nd day, the other party is expected to be up and running. For instance, in determining the relevant
period it would be imperative to consider practical issues like – remobilisation of labour (for eg. migrant
workers are presently unavailable) and other logistical issues. In this background, while the notification
dated 19 February 2020 may have a high persuasive value when imported to other contracts, it may be
necessary to examine the facts and circumstances in which relief on account of such force majeure event
is being claimed. In some cases, while it may be plausible to argue that the relevant period began as on
date of the first notification dated 19 February 2020, in other cases, such a relevant period may not have
begun until the date of the lockdown itself. For some other contracts, it may be somewhere in between
19 February 2020 and 25 March 2020.

Moreover, a force majeure event such as a fire or a flood may subsist for a few minutes/ hours/ days but
the impact may persist for much longer, till it is practically possible to resume functioning. This is also
usually accounted for, for the purpose of determination of the relevant period of force majeure,
otherwise it would result in an absurd interpretation and the very purpose of the force majeure clause
would be defeated. In addition to the question as to when the relevant period begins, a more pressing
question is when does the relevant period end. It is evident that the relevant governments have
introduced temporary relief to all affected parties by way of directives, guidelines and notifications,
however, needless to mention that a claim for relief under the force majeure clause on the one hand,
and duty to notify and duty to mitigate losses on the other, go hand in hand. Given that there is a lack of
clarity on what the circumstance shall be in the country after 14 April 2020, i.e., after the lockdown is
lifted, it may be imperative to re-examine what could constitute the relevant period for the applicability
of the force majeure clause.

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CAN THE REQUIREMENT OF A NOTICE INVOKING THE FORCE MAJEURE CLAUSE BE DONE AWAY WITH?

The second question that arises is whether in the prevailing situation, the requirement of a force
majeure notice may be dispensed with, in case of an existing Government Notification having the effect
of an executive order prohibiting movement/ trade, which in essence forms the law of the land. In
recent times, we are witnessing an unprecedented situation coupled with various notifications issued by
the Central and State Governments (as mentioned above) suggesting/ providing preventive measures, in
so far as also amounting to lockdown of movement and trade to contain further spread of the
pandemic.

It is also a settled position of law that a contract will be dissolved when legislative or “administrative
intervention has so directly operated upon the fulfilment of the contract for a specific work as to
transform the contemplated conditions of performance” [MD Army Welfare Housing Organisation v.
Sumangal Services: (2004) 9 SCC 619]. However, the effect of an administrative intervention has to be
viewed in the light of the terms and conditions of the contract, and, if the terms show that the parties
have undertaken an absolute obligation regardless of administrative changes, they cannot claim to be
discharged [Avtar Singh, Contracts & Specific Relief, 10th Edition]. In such circumstances, if a contract
does not mandate provision of notice of force majeure, a party claiming the present circumstances to be
a force majeure event may dispense with the obligation or mandate to put the other party to notice.

However, it may also be considered that the requirement or mandate to put the other party to notice of
a force majeure event may also vary in case of the contract being a domestic or an international one.
Parties to a domestic contract cannot claim to have no knowledge of the existing laws and regulations
prevailing within the country which are applicable to one and all within the realm of such sovereignty.
On the other hand, an international party may not be aware of a country’s internal legislative or
administrative directives. Therefore, in specific relation to international contracts, it is a settled principle
that the party who fails to perform must give notice to the other party of the impediment and its effect
on its ability to perform. In fact, the specific manner in which a force majeure event is to be
communicated as per the terms of the contract assumes significance. For instance, whether the contract
provides for a written notice to be given to a particular official and/or a particular address by post/
courier and/or email, etc. is a relevant factor which needs to be assessed on a case to case basis
considering logistical difficulties during the lockdown which may make it difficult, if not impossible to
strictly comply with all the notice requirements. If the inability to strictly comply with the notice
requirements can be reasonably justified by the party invoking force majeure, it is likely that the courts/
arbitral tribunals may take a lenient approach as long as fundamentally the notification requirement has
been complied with and a notice has in fact been issued in one mode (say email only) and receipt
thereof is not disputed.

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, it is liable for damages resulting from such
non-receipt. [Marcel Fontaine & Filip de Ly, Drafting International Contracts: An Analysis of Contract

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Clauses 403 (2006).; UNIDROIT Principles of International Commercial Contracts 2010, art. 7.1.7(3)].
Further, this is in line with Article 79(4) of the United Nations Convention on Contracts for the
International Sale of Goods, which provides that “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.”

CONCLUSION

In this background, it is imperative to notify the opposite party of each directive that has been or will be
notified by the relevant government on account of COVID-19, that may affect the operation of business
and therefore a party’s ability to fulfil its obligations, so as to do away with technical impediments in
seeking relief under the force majeure clause of the contract. Further, it is also recommended that
notice requirement has to be liberally construed as it may not be practicable to issue notice by post/
courier in the prevalent situation and an email notice should be good enough as long as its receipt is not
disputed.

In the aforesaid context, it is evident that given the dynamic nature of the effect that the virus has had
on businesses, it may be wiser to determine what the relevant and reasonable force majeure period
would be on a case to case basis. However, given the unprecedented catastrophic situation we are faced
with, it is imperative that a reasonable period be considered for determining the subsistence of force
majeure. Further, while it may be argued that for the limited purpose of domestic contracts, the
government notifications themselves may be sufficient to claim relief under the applicable force
majeure clause, in the absence of notice of force majeure having been sent by the affected party; it is
advisable that such procedural requirements are complied with by parties to the best of their abilities.

-Jeevan Ballav Panda, Shalini Sati Prasad and Meher Tandon

“The views of the author(s) in this article are personal and do not constitute legal / professional advice of
Khaitan & Co. For any further queries or follow up please contact us at jeevan.ballav@khaitanco.com,
shalini.prasad@khaitanco.com and meher.tandon@khaitanco.com.

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