The Author, Divyansh H Rathi is Managing Partner, Lexidem & Rathi - A Global Law Firm. He is practicing in Supreme Court and Delhi High Court.
The Coronavirus Pandemic has wreaked havoc not only on the human lives as well as economies worldwide. The spread of pandemic has caused disruption in the supply chains which will eventually effect that performance of the contracts as the performance will be delayed, interrupted, or even cancelled.
(A) COVID-19 Pandemic
- COVID-19 the respiratory illness which is affecting most countries and has been declared as a pandemic event by WHO.
- From the worst affected countries like China, Italy, Spain, USA, coronavirus is slowly and steadily spreading to the other parts of the world. All the Governments are trying to contain the spreading of the COVID-19 throughout the issuance of increasing restrictive orders (such as, among others, commercial activities’ shut down, smart working implementation and movement and transportation restrictions) like Indian Government has imposed complete nationwide lockdown to prevent the spread of the deadly virus which has claimed thousands of lives across the continents.
- Such emergency could be qualified as a Force Majeure Event.
- Then, what happens to commercial contracts?
(B) Indian Law: Force Majeure
- The law pertaining to Force Majeure (a French phrase which means ‘superior force’) is embodied under Section 56 of the Indian Contract Act, 1872.
- Section 56 of the Indian Contract Act states that, “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 becomes void when the act becomes impossible”.
- Force Majeure events encompasses situation such as an act of god or natural disasters, war or war-like situations, labour unrest or strikes, epidemics, pandemics, etc. The intention of a force majeure clause is to save the performing party from consequences of something over which it has no control over. Force Majeure is an exception to what would otherwise amount to a breach of contract.
- Hence, it is necessary to verify, on a case-by-case basis, if the non-fulfilment of the contract should be excused due to Coronavirus Pandemic and not being qualified as a breach of contract.
(C) Force Majeure under International Law
- Which are the applicable rules under International Law?
(1) UNIDROIT Principles state that non-performance by a party is excused if:
- “that party proves that the non-performance was due to an impediment beyond its control; and
- that party could not reasonably be expected to have taken into account such impediment at the time of the conclusion of the contract or to have avoided or overcome it or its consequences” (see Article 7.1.7 of UNIDROIT Principles).
(2) The ICC Force Majeure Clause 2003, essentially following UNIDROIT Principles, states that:
- “where a party to a contract fails to perform one or more of its contractual duties, the consequences set out in paragraphs 4 to 9 of this Clause will follow if and to the extent that party proves that:
[a] its failure to perform was caused by an impediment beyond its reasonable control; and
[b] it could not reasonably be expected to have taken into account the occurrence of the impediment at the time of the conclusion of the contract; and
[c] it could not reasonably have avoided or overcome the effects of the impediment. (See Paragraph 3 (e)).
- Epidemic event is expressly included into the notion of “impediment” (see Paragraph 3 (e)).
(3) Convention on Contracts for the International Sale of Goods (CISG) follows the same rules and principles of UNIDROIT Principles and of the ICC Force Majeure Clause 2003 (see Article 79 of CISG).
- As a conclusion, such as Indian Law and also applying the International Conventions, the current COVID-19 Pandemic may be qualified as a Force Majeure event.
(D) Brief Overview of Case Law on Force Majeure and Epidemic Events
- Supreme Court of India in Satyabrata v. Mugneeram (1954 SCR 310) expounded that the Doctrine of Force Majeure was based on the impossibility of performance of Contract. SC Bench stated that the Section 56 of the Indian Contract Act laid down the positive law and thus does not leave the matter to be determined according to the intention of the parties.
- Supreme Court of India in Energy Watchdog v. Central Electricity Regulatory Commission (2017) 14 SCC 80, 2017 Latest Caselaw 307 SC, enunciated that, “in so far as a force majeure event occurs de hors the contract, it is dealt with by rule of positive law under the Section 56 of Indian Contract Act. The Performance of an Act may not be literally impossible, but it may be impracticable and useless from point of view of the object and purpose of the parties”.
- Guiding Opinion of Shanghai Higher People's Court on February 8, 2020 [one of the most recent caselaw addressing COVID Pandemic]
“If the parties are unable to perform due to the impact of the epidemic or their performance has a significant impact on the rights and interests of the other parties, they shall follow the principles of fairness, good faith, etc. and aggregately consider factors such as the agreement between the parties, the development stage of the epidemic, the causal relationship between the epidemic and the inability to perform or difficulty in performing the contract and the level of impact of the epidemic”.
(E) Effect of COVID-19 Force Majeure Pandemic on the Contracts:
- Contracts may have a clause providing for immediate termination of the contract upon the happening of the force majeure event.
- Some Contracts may provide that the contract will be put on hold until the force majeure event is resolved.
- Contracts may provide for limitations in time after which either party may terminate the agreement with written notice to the other (i.e. if non-performance caused by the event is prolonged or permanent)
- Contracts may remain in effect until the force majeure event is resolved. Some contracts will only allow for certain obligations to be suspended.
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