When WHO classified COVID-19 as a ‘Pandemic’, it triggers a Force Majeure Clause which expressly accounts for Pandemics. After the outbreak of the coronavirus its started showing effects on the economies around the world particularly to maintain operations and fulfil existing contractual obligations in all sectors.
The rights and obligations of parties under their respective contracts are surrounded by doubt, where it is likely that the contracts may get suspended, differed or even get terminated. The abilities of the companies to maintain steady operations and perform their respective contractual obligations has been affected by the COVID-19 around the globe. Perhaps the companies will take recourse to force majeure clause contained in their contracts in order to mitigate the impact related to delayed operation and non-performance of the contracts inter alia.
What is Force Majeure?
The ‘Force Majeure’ term is derived from French language. Which means ‘a superior force’. In general terms it is defined as ‘A clause in contracts that essentially frees both the parties from liability or obligation when an astounding event or circumstances, beyond the control of human power or parties of the contract like- war, riot, strike, epidemic or Act of God (like – hurricanes, tsunamis, earthquakes, etc) the period for which such an event continues such as 15 to 60 days.
In Black’s Law Dictionary it is defined as – “an event or effect that can be neither anticipated or controlled”. Or when parties of the contract officially planned or agreed on doing or completing something but it gets prevented due to an unexpected event or circumstances.
Objective and importance of Force Majeure Clause
The objective of the clause to allocate the risk and puts the parties on notice of events that may get suspended or gets terminated. Or to save the parties from the consequences of anything over which the parties of the contract have no control. The clause generally identifies the events which may lead to circumstances beyond the control of parties of the contract. The importance of the force majeure clause in an exceedingly contract, particularly one in every of any length in time, can’t be overstated because it relieves a celebration from an obligation under the contract or suspends. The way the notice for such an event has to be sent to the other party by email, fax or registered post and the notice should reach within the reasonable time to the party. If a party claims for force majeure, they will be given the right to not perform the contract or to suspend the contract for a certain period of time without breaching the contract.
Force Majeure in India during COVID-19 pandemic
In India, on February 19,2020 an office memorandum was issued by the department of Expenditure, procurement policy division, Ministry of Finance in relation to the government’s manual for procurement of Goods,2017, which serves as a guideline by the government. Concluding from the memorandum we can say that the COVID-19 can be covered under Force Majeure clause on the basis that it is a natural calamity, ‘due procedure’ should be followed by any government department seeking to invoke it.
According to Supreme court of India, the honourable court clarified in 2017 that force majeure clause cannot covered under economic hardship. Thus, COVID-19 should be covered under epidemic or pandemic or under natural calamity in the Force majeure clause. Now it is important to understand if the parties of the contract are unable to fulfil their obligation during the lockdown Implemented by the Government, Therefore, in order to invoke the contract, the clause should also contain the term ‘lockdown’ in it.
The declaration of the pandemic – without any reference in a force majeure clause will not automatically constitute the clause, in order to constitute the clause, the court will focus on contractual language, whether the event is specified in it or not. If the clause is covered under COVID-19 as a qualifying event by the WHO (World Health Organisation) and by the Government, the parties will not need to establish that the event was unforeseeable, but will need to present that they took every step to migrate the damage and the also performance of the contract is actually impossible, so as to invoke the provisions of the contract. The pandemic cannot be called Force majeure event if the parties of the contract, are able to somehow continue operations, either digitally or partially. Even if there is an extended time within which they can complete their obligations, post the lockdowns.
Therefore, calling the pandemic a blanket force majeure event can be incorrect depending on the contractual obligations and ways to perform the same and thus, may lead to disputes between parties of the contracts.
In India, Force majeure is governed by the Indian Contract Act, 1872. As the clause is not a codified law in India, it is governed by chapter III of the contracts act dealing with Contingent contracts, or more particularly we can say section 32 of Indian Contract Act, 1872.
Doctrine of Frustration in India
When there is an absence of Force majeure clause, the contracts will deal with the rule of positive law under section 56 of Indian Contract Act, 1872.
The effects of the outstanding event or circumstances will have to be examined to establish whether it renders the contract impossible, unlawful or impractical to perform and due to which the contract is rendered void automatically.
Since the doctrine suggests that if circumstances have made it impossible for the contract to continue in any manner, so no damages have to be borne by either of the parties and if court finds out that that the doctrine was misused or one party tried to deceive the other party, the court can decide the damages to be paid by the guilty party. Therefore, when there is no other recourse available or all the negotiations fails, this doctrine works as a last resort.
The entire jurisprudence on the subject has been discussed in the case of ‘Energy watchdog vs. CERC (2017) stated by Justice Nariman of the Supreme court.
Judicial Precedents-
(a) Satyabrata Ghose v. Mugneeram Bangur & Co. (1953)
(b) Alopi Parshad & Sons Ltd. v. Union of India (1960)
(c) Dhanrajamal Gobindram v. Shamji Kalidas & Co. (1961)
(d) Coastal Andhra Power Limited v. Andhra Pradesh Central Power Distribution Co. Ltd. (2019)
Conclusion
However, while such a certificate may be used to argue that a contract cannot be performed during the pandemic, COVID-19 is unlikely to give rise to force majeure clause defence under every contract and in every circumstance because there are different contracts and governing law which specify different requirements for different situations. Therefore, companies are well advised to carefully evaluate which party must ultimately bear the financial losses and proactively mange the legal risks cause by the COVID-19 pandemic.
Author: AYUSH CHOUBEY,
Jagran Lakecity University, 1st Year