Force Majeure clause in the outbreak of COVID-19

Introduction

When the world is facing the unprecedented situation due to outbreak of novel coronavirus (COVID-19), the lockdown and movement restrictions imposed by the Government of India/State Governments (“Government”) as a precautionary measure against the COVID-19 has brought many businesses to a halt which largely affected the operation of the industries. In view of the current scenario the country is facing, the Government vide an office memorandumⁱ has interpreted and clarified that COVID-19 should be considered as a case of natural calamity and “Force- Majeure” clause may be invoked, wherever considered appropriate.

What is “Force -Majeure”?

The term “Force-Majeure” has been definedⁱⁱ as “an event or effect that can be neither anticipated nor controlled”. The term “Force-Majeure” has not been defined in any Indian legislation. However, the Supreme Court in its judgementⁱⁱⁱ has agreed with the view taken by McCardie J. in Lebeaupin v. Crispin^iv in which it has explained the term “Force-Majeure” as not a mere French version of the Latin expression” vis major” but undoubtedly a term of wider importance. Where reference is made to “Force-Majeure”, the intention is to save the performing party from the consequences of anything over which he has no control. To invoke a "Force-Majeure" clause, it should be proved by the performing party that the occurrence of such event is beyond the control of the performing party and as such the performance of the obligation is delayed / frustrated to perform.

When contracts have a “Force-Majeure” clause

Whether outbreak of COVID-19 can be treated as a “Force-Majeure” event depends on how the "Force-Majeure" clause has been worded in the contract. In contracts, wherever the clause explicitly mentions about the events such as government restrictions, pandemic, natural calamity, court orders etc, in those scenarios the clause can be easily invoked. The burden of proof on those contracts is on the party invoking the clause. However, in contracts where clause does not explicitly mention any such events or in general mention provisions such as “any other happening of an uncertain event”; then the reliance may be placed on those words of the provision to invoke clause on occurrence of uncertain events, Interpretation of the words “any other happening” can be derived from the judgement of Orissa High Court pronounced in Md. Serajuddin vs State of Orissa^v wherein, by applying the principle of “Ejusdem generis” it was held that the quoted words are to be read and understood in wider context to include all or any such event(s) which are of similar nature and type viz unforeseen events which are already mentioned in the "Force-Majeure" clause.

Therefore, COVID-19 and consequent government restrictions can fall within the ambit of "Force-Majeure" yet the same depends on the contingencies mentioned in the contract explicitly or impliedly.

When contracts do not have a “Force-Majeure" clause

The contracts which do not have any specific clause of “Force-Majeure”, then the legal remedy available to parties in such scenario is the “Doctrine of frustration” evolved from Section 56 of the Indian Contract Act, 1872 (“Act”). The grounds for applicability of “Doctrine of frustration” are – (i) destruction of subject-matter - the doctrine applies in such cases where the actual and subject matter of the contract ceases to exist; (ii) change of circumstances - this applies in those scenarios where the changes of the circumstances have impacted the performance of the contract to such an extent that the performance of the contract becomes impossible and the parties are discharge from the further performance as they did not promise to perform the impossibility. The Supreme Court in its judgement of Satyabrata Ghose vs Mungneeram Bangur & Co^vi. has explained the meaning of the term “Impossibility” under section 56 of the Act that the word impossibility does not mean “physical” or “literal” impossibility but it refer to those cases where a supervening event destroys the foundation of the contract upon which the contract rests and the performance of the contract becomes impracticable in view of the object and purpose of the contract made between the parties; (iii) non-occurrence of contemplated event - there are times when the performance of the contract remains possible but due to non-occurrence of the event as contemplated by the parties being a reason to enter into a contact, makes the contract impossible to perform; (iv) death or incapacity of a party - where there is nature of the terms of the contract which requires personal performance by the party, then in the event of death or incapacity of the person to perform the part of his obligation puts an end to a contract; (v) Government or Legislative Intervention - a contract will cease to exist where the any of the legislative or administration has directly operated upon the fulfilment of the contract; and (vi) intervention of war - the principle of frustration shall apply where the intervention of war or warlike conditions directly impacts the performance of the contract.

However, the Supreme Court in its judgement of Energy Watchdog & Ors vs Central Electricity Regulatory Commission^vii has held that the doctrine of frustration shall not apply where there are alternative means available to the party of performing the contract. There may be times when the performance of the contract is possible when it is made but subsequently some event happens which renders its performance impossible or unlawful which could not be foreseen by either of the parties which makes the contract void but the contract would still remain in existence for resolution of disputes arising under or in connection with it^viii .

Conclusion

It is advised that the contract should include a ‘Force-Majeure” clause which will be beneficial to the parties, in case of any unforeseen event(s) occurs which effects the performance of the contract. For effective enforceability of the “Force-Majeure” clause in a contract, it is advised to have these important aspects amongst others: - (i) particular/specified event(s) occurrence of which will trigger the “clause”; (ii) procedure to invoke the clause such as requirement of sending a notice within a reasonable time by the affected party to the other party of its inability to perform some or all obligation(s) of a contract due to occurrence of event (specified/unforeseen); and (iii) the automatic termination of the contract if the “essential” obligation(s) can’t be met within a reasonable time due to the occurrence of "Force-Majeure" event.

(i) Ministry of Home Affairs through Order No. 40-3/2020-D, dated 24th March, 2020

(ii) As per Black Law’s Dictionary

(iii) Dhanrajamal Gobindram vs Shamji Kalidas & Co., AIR 1961 SC 1285

(iv) 1920-2 KB 714

(v) AIR 1969 Ori 152

(vi) 1954 AIR 44

(vii) 2017) 14 SCC 80

(viii) The Naihati Jute Mills Ltd vs Hyaliram Jagannath 1968 AIR 522

This update is by Harshita Sharma, Advocate & Associate at Agarwal Jetley & Co., Advocates & Solicitors. Contact: Email: contact@agarwaljetley.com or Mob: (+91) - 9922628447