The Author, Kajal Bhatia is advocate practicing in  Supreme Court of India and various forums of Delhi. She mainly deals in IBC and white-collar crime cases including money laundering.

What was once a bustling and lively country, one virus has put everything to a standstill.  COVID-19 emerged out of a thin air leading to disturbance in the whole life cycle. The outbreak has spread to more than 50 countries leaving parties in a state of anxiousness about their contractual arrangement. In the wake of a pandemic, increasing cases of delayed operations and non-performance of the contracts would have none other option than to take recourse of force majeure clause.

  1. INTRODUCTION

Where will the outbreak of COVID-19 pandemic fall in the legal sense? Will it qualify to be considered as Force Majeure even in the absence of the express condition in the contract or lead to frustration of the whole contract? Various dictionaries, articles, precedents define and interpret Force Majeure differently.

Force Majeure (or vis major) is a French term meaning Superior Force. According to Black’s Law Dictionary Force majeure is as ‘An event or effect that can be neither anticipated nor controlled’. Surprisingly the Indian Contract Law enacted way back in the 18th Century does not define the Force Majeure and the same needs to be interpreted in the light of Section 9 and 32 of the Indian Contract Act, 1872 ("Act"). Within the blurry lines emerges the Doctrine of Frustration enshrined in Section 56 of the Act.

  1. THE BATTLE OF EXPRESS, IMPLIED, AND ABSENCE OF CLAUSE

Irrespective of an express or implied clause, neither force majeure nor the doctrine of frustration will relieve the parties of their obligations, as much will depend upon the facts of each case, provisions, mitigating effect, supervening impossibilities and legalities and the subsequent effects.

Force Majeure Clause

Most of the contracts encompass a force majeure clause, which excuses a performing party of its contractual obligations in the event of supervening impossibilities, which may either be expressly provided or impliedly through open-ended words and sweeping languages, to name a few, "any event or circumstance beyond the reasonable control of the affected party", "unforeseen", "extraordinary", etc.

Before we understand the essential ingredients of this clause, it is apposite to analyze whether COVID-19 is a type of event that would trigger the relevant clause?

Till recently, the contractual obligations were followed as per the language of every contract. However, the outbreak of COVID-19 has created a state of confusion amongst many as to consider the same in which category but the Indian and Foreign Government has categorized it under various heads from time to time, which are as follows:

  • 17 February 2020- The China Council for the Promotion of International Trade (CCPIT) revealed that it had already issued over 1,600 ‘Force Majeure certificates’ to firms in 30 sectors, covering contracts worth over $15 billion.
  • 19 February 2020- The Department of Expenditure, Procurement Policy Division, Ministry of Finance, India issued an Office Memorandum about government’s ‘Manual for Procurement of Goods, 2017’, which states that the COVID-19 outbreak is considered as a case of natural calamity and Force Majeure Clause (FMC) may be invoked, wherever considered appropriate, following the due procedure. [1]
  • 11 March 2020- The World Health Organization (WHO) categorized the COVID-19 virus as 'Pandemic'. [2]
  • 11 March 2020- Government of India invoked powers under the Epidemic Diseases Act, 1897 to enhance preparedness and containment of the virus and declared COVID-19 a 'notified disaster' under the Disaster Management Act 2005.[3]
  • 20 March 2020- The Ministry of New & Renewable Energy for ‘solar project developers’ released an Office memorandum, declaring to treat delay on account of disruption of the supply chains due to the spread of coronavirus in China or any other country, like Force Majeure. [4]

Therefore, to sum up, the force majeure clause in the light of recent COVID-19, includes both, an act of nature/god (earthquake, natural calamities, etc.) and acts of people (riots, strikes, war, etc.). Thus, any event, which is outside the control of parties, prevents one or both parties to perform their contractual obligation invoke the Force Majeure clause.

The sine qua non for invoking this clause is that there should be a valid contract between the parties and the said contract is yet to be performed but it becomes impossible to perform due to supervening impossibilities. Pertinent to note, that you cannot apply a blanket rule over every difficult situation in performing the obligations, instead the parties are required to demonstrate that the supervening circumstances were the sole reason for non-performance. Moreover, it is relevant to note that the non-performance should not have occurred due to the default of either party and the party claiming the benefit must establish that they have used reasonable efforts but the same was beyond its control.

Doctrine of Frustration

In the absence of force majeure clause, the parties to the contract need to resort to Section 56 of the Indian Contract Act, which renders every contract as void when its performance is impossible or unlawful, thus the performing party is discharged on the principle expressed in 'lex non cogit ad impossibilia', meaning thereby that the law does not compel a man to do which he cannot possibly perform. Thus, where parties have expressly or impliedly not agreed to any such term, the application of the doctrine of frustration is a most natural consequence and is binding as it has the force of the law of the land and as soon as the frustrating event occurs, the parties are automatically released from their respective obligations without any action.[5] Thus, the legal principles relating to the impossibility of performance under force majeure clauses, apply equally to the frustration of contracts.

Force Majeure over Doctrine of Frustration

Given the circumstances, it would be very difficult for every contract, which does not expressly, or impliedly contain a force majeure clause to be frustrated. The doctrine of frustration results in termination of the contract while the force majeure clauses can either suspend or extend the duration for the performance of the contractual obligations. Pertinently, mere delay in performance of the contract because of an outbreak of pandemic and subsequent lockdown is not sufficient to frustrate a contract; rather the delay should be such, which upsets the very foundation and commercial basis of the contract. Apropos word "impossible" used in Section 56, it is clear that the same has not been used in the sense of physical or literal impossibility. The performance of the act may not be literally impossible but it may be impractical and useless from the point of view of the object and the purpose, which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can be very well be said that the promisor finds it impossible to do the act which he promised to do. [6]

Hence in the light of unparalleled turmoil caused by novel COVID-19 and extended period of lock-downs, the parties seeking to frustrate their contracts need to go a step ahead and demonstrate that time was the essence of the contract and delay would frustrate it.

  1. APPLICABILITY OF LAWS

In India, the Indian Contract Act, 1872 (Act) governs the contracts. Section 9 of the Act encompasses the expression of clauses however Section 32, the contingencies, which are applicable in cases of Force Majeure while the Doctrine of Frustration is a statutory remedy enshrined in Section 56 of the Act.

The Force Majeure clause is a contractual creation, thus needs to be read in harmonious construction with other provisions. To illustrate, since this COVID-19 is once in a million years which was not anticipated by anyone, thus the contracts need to be interpreted apropos the Disaster Management Act and various other circulars/guidelines/ordinances issued by the Government from time to time.  Whereas, the root of the doctrine of frustration is found in the decision of Taylor vs. Caldwell (1861-73) All ER Rep 24). Interestingly, prior to this decision, the law of contracts in England was too rigid. In the year 1954, the Supreme Court of India in a landmark case of Satyabrata Ghose vs. Mugneeram Bangur & Co. and Anr (1954 SCR 310) laid down that the word "impossible" used in Section 56 does not mean physical or literal impossibility but much wider than that and if the untoward event upsets the very foundation upon which the parties entered into the agreement, the contract can be held to be frustrated. Thereafter in the case of Alopi Prashad & Sons vs. Union of India (AIR 1960 SC 588), the Apex Court opined that a contract is not frustrated merely because the circumstances in which the contract was made, are altered and there is no general liberty reserved to the courts to absolve a party from liability to perform his part of the contract, merely because on account of uncontemplated turn of events, the performance of a contract may become onerous. In Sushila Devi vs. Hari Singh (AIR 1971 SC 1756), the applicability of the doctrine of frustration in a lease was examined and concluded that the supervening events should take away the basis of the contract and it should be of such a character that it strikes at the root of the contract. The Apex Court in the case of Energy Watchdog vs. Central Electricity Regulatory Commission (2017 14 SCC 70) examined the circumstances and cases in which Force Majeure clause and the doctrine of frustration can be invoked and held that the need to determine the allocation of risk in contracts is a primary step. Further, it was held that mere incidence of expense or delay or onerousness is not sufficient to invoke the doctrine of frustration, there has to be as it were a break in identity between contracts as provided for and contemplated and its performance in the new circumstances.

  1. IMPACT OF COVID-19

The worldwide impact of the outbreak, consequential lockdowns, and various suspensions by the Government from time to time has caused an alarming case of global economic slowdown, extreme disruptions of commercial activities and has also affected day-to-day business transactions. Therefore, in the light of categorization of COVID-19 by the Government and its various agencies there is a need to extend the scope of force majeure and assess the same under term "extraordinary event" and various other synonyms.

Impact on Commercial Contracts

The parties to the contract should carefully examine the terms of their transaction and address the issues which have left them in a situation of perplexes, to name a few:

  • The outbreak of COVID-19 has resulted in delayed operations of conducting due diligence, audit reports, inspections, etc.,
  • Delay in closing the M & A transactions within the fixed time frame;
  • In terms of the warranty limitation clause, claims related to this novel outbreak should be considered under the head of specific warranties and not under general.
  • Many contracts would be terminated and at this hour it would be apposite for the parties to decide if the termination event had already occurred or is likely to occur and take an informed decision.
  • The defaulting party may be forced into insolvency due to the non-performance of its contractual obligations.

Civil Law vs. Common law

A unique feature of common law contract law is that it is subjected to limited exceptions and it leaves it up to the contracting parties to set out in their contract all the terms that will govern their contractual relationship and such terms would not be altered by legal principles existing outside of the contract itself, in contrast to contracts governed by the laws of civil law jurisdictions.

Civil Law countries such as China, etc., have a codified law, therefore the contracts do not require a specific provision of force majeure, while on the other hand, common law countries like England, India, etc., is not codified, therefore it has to be expressly provided in the contracts.

  1. CONCLUSION

The illumination is up in the air, one way to sidestep this existential dilemma is that the Government brings Nuanced clarity that will help the parties to arrive at a win-win solution as the crisis now is without precedent and the support from the government is the Need of the Hour.

Picture Source :

 
Kajal Bhatia