COVID-19 as a Force-Majeure under Indian Contract Act, 1872

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What is Force Majeure?

“Force Majeure” is a French term, derived from the Latin expression “Vis Major”, which relates to a wider aspect wherein the parties to a contract face certain unavoidable natural situations, which are deemed to be considered beyond the reasonable control of the parties. Black’s Law Dictionary literally states “Force Majeure” as an event of effect that can neither be anticipated nor controlled by the parties. It includes both of acts of nature (for eg., floods and hurricanes), and the acts of people (for eg., riots, strikes, wars, etc.). It refers to the principle whereby, an occurrence of an event or a situation which is not reasonably within the control of, and would not have been avoided or overcome by a party to the contract, and which would prevent or delay the certain party to the contract from performing some or all the contractual obligations provided under the purview of the contract. Due to such acts, the party shall be relieved from such liability which might otherwise result as the party’s failure to abide by such contractual agreements from performing those affected obligations. The sole intention of such “Force Majeure” clause in a contract is to relieve the party from consequences for non-performance of the contractual obligations over which it has no control.

Force Majeure in relation to the Indian Contract Act, 1872

‘Force Majeure’ is considered essentially as a common law principle, with no statutory definition under the Indian Laws. However, Section 32 and Section 56 of the Indian Contract Act, 1872, relate to the term and applicability of “Force Majeure” depending on the contract and the language used. These sections provide that, if an act which is to be performed pursuant to a contract, becomes impossible to perform, such an act shall be considered void.

The relevance of these two sections are provided hereunder as follows –

  • In case of express or implied clause in a contract, agreements are dealt under Section 32;
  • In case of Force Majeure events occurring outside the purview of the agreements, Section 56 comes into effect.

According to Section 32 of the Indian Contract Act, 1872 –

“32. Enforcement of Contracts contingent on an event happening – Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.”

Thus, as per Section 32, a party to a contract containing a Force Majeure clause must necessarily prove –

  1. That the event causing the non-performance of such act must be included in the Force Majeure clause;
  2. Such non-performance must be caused owing to the said event;
  • Such non-performance must be beyond the reasonable control of the party to the contract;
  1. That there was no existence of any other mode of performance of such act.

Section 56 of the Indian Contract Act, 1872, states that –

“56. Agreement to do impossible act – An agreement to do an act impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful. A contract to do an act which, after the contract made, becomes impossible or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Compensation for loss through non-performance of act known to be impossible or unlawful. Where one person has promised to do something which he knew or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such promisee sustains through the non-performance of the promise.”

For the purpose of invoking Section 56, the contract must be valid and performance of such contract must not be completed, or partially completed. The performance must be impossible to act upon by way of facts or law. There must be a presence of a substantial event which has to be considered beyond the reasonable control of the party who intends to claim frustration.

Thus, Section 56 of the Indian Contract Act, 1872, ideally deals with agreements that eventually become unlawful or impossible to further execute due to intensity of a particular event. If the contract is deemed to be impossible after such event the doctrine of frustration comes into play. Supposedly, if a party is knowingly or capable of knowing by decent examination and inspection, proposes a contract that would be impossible to act upon or might be unlawful, and the other party is unaware of such fact, then the promisor can be held liable of compensation for the promise.

However, the word “impossible” provided in Section 56 does not necessarily mean that the execution of the contract shall be impossible. It can be implied as the unfulfilled goal that the parties had in mind with regard to the successful execution of the contract.

In case of an unfavourable incident which leads the parties to build their bargain, the contract can be said to be ‘impossible’. The terms ‘frustration’ and ‘impossibility’ can be used in an exchangeable manner.

The Supreme Court, in several cases, including Satyabrata Ghosh v/s. Mugneeram Bangur & Co. and Energy Watchdog v/s. CERC, has applied some important tests in order to consider the validity of Force Majeure events –

  1. Does the event qualify as a Force Majeure under the contract?
  2. Was the risk of non-performance was unforeseeable and able to be mitigated?
  3. Is the performance truly impossible to carry out?

COVID-19 Pandemic as a Force Majeure

The Indian law and the judiciary do not explicitly define a pandemic as a Force Majeure. Thus, the inclusion of a pandemic as an ‘Act of God’ or a Force Majeure lies questionable. Hence, the Supreme Court, in the Divisional Controller case, stated that an Act of God is an unanticipated natural event, free from human mediation. Any predictable event cannot be implied as an Act of God or a Force Majeure, and thus, a person not fulfilling his obligations under a contract shall breach the contract on unfulfilled obligations of such contract. The Apex Court had also stated that, “A pandemic also occurs along the same lines. No one can predict or control a pandemic.”

On 19 February, 2020, the Government of India released an official notification with regard to Force Majeure for the first time, considering the COVID-19 situation. The Deputy Secretary of the Government of India along with the Ministry of Finance notified explicitly in paragraph 9.7.7 of the Manual of Procurement of Goods, 2017, adding COVID-19 as a Force Majeure. The notification stated that all construction/work contracts, goods and services contracts and the PPP contracts with government agencies which ought to be completed on or after 20 February, 2020, have the right to invoke the Force Majeure clause. Thereafter, they will get an extension of three to six months at no extra cost or penalties.

Soon after, the Ministry of New and Renewable Energy also released a notification on 20 March, 2020, stating that all renewable energy agencies and the Ministry of New and Renewable Energy were obliged to consider COVID-19 as a Force Majeure. This notification directed the agencies to encourage delays because of the disruption in the supply chain caused due to the outbreak of COVID-19.

On 18 May, 2020, the Ministry of Road Transport and Highways released a notification whereby it declared COVID-19 as a Force Majeure event and provided various relief measures. Subsequently, on 3 June, 2020, the Ministry released another circular reiterating COVID-19 as a Force Majeure event and provided extended reliefs for the unforeseen situation.

Similarly, the Reserve Bank of India and the Securities Exchange Board of India had also introduced a number of relief measures, such as imposing moratorium/deferment of 3 months on payment of loan instalments as well as interest on working capital facilities, and exemptions from several compliances and disclosure requirements. Furthermore, the moratorium was extended under the purview of the severity of the situation. At the same time, the Insolvency and Bankruptcy Code, 2016, brought in its second amendment wherein immunity was granted from initiation if IBC proceedings of the default rise after 25 March, 2020, for a period of six months and such further period not exceeding one year until further notified.

Case Laws Recognizing COVID-19 as a Force Majeure

Various courts in India have recognized COVID-19 as Force Majeure. They have been leaning on to authorize the particular advantages accessible under the different government notifications, or the legally binding agreements that have been released throughout the pandemic period. Subsequently, since there has not been much penetration of the contract by the contractor, the oppressed party, thus, had to conjure to the Force Majeure clause.

One of the first cases requesting relief under Section 56 of the Indian Contract Act, 1872, during the lockdown because of COVID-19 was Standard Retail Pvt. Ltd. v/s. G.S. Global Corp & Ors. The petitioner in this case, Standard Retail Pvt. Ltd., argued that the contract stood terminated on account of frustration, impossibility and impracticability. On the other hand, the respondent, G.S. Global Corp & Ors., with its office located in South Korea, was supposed to supply steel products to the petitioner. The Bombay High Court held that no relief could be granted to the petitioner since steel distribution was considered as an essential service, with no restrictions in its movement.

The much celebrated judgement of M/S Halliburton Offshore Services v/s. Vedanta Limited & Anr., was one of the earliest judgements. In this case, the petitioner, Halliburton, was obligated under a contract to develop three blocks in Rajasthan for Vedanta Ltd. Owing to the lockdown, Halliburton was not in a condition to complete the work within the allotted time frame. And thus, Halliburton decided to invoke the Force Majeure clause under Section 56 of the Indian Contract Act, 1872. However, Vedanta Ltd. raised objection towards this, and threatened to terminate the contract. Thus, Halliburton Offshore Services decided to move the Delhi High Court. Furthermore, it was specifically held by the Delhi High Court that COVID-19 shall be considered as a Force Majeure event. It has also been stated by the Hon’ble Court that whether COVID-19 would justify non-performance or breach of contract must be examined on the facts and circumstances of each case, and only in genuine cases wherein the party was prevented, or could justify its non-performance caused due to the epidemic/pandemic. The judgement also held that a Force Majeure clause must be interpreted narrowly, and in case there is a breach from before the COVID-19 period, then the party to the contract shall not be entitled for benefit from the Force Majeure clause. The court also stated that lockdown caused due to COVID-19 shall prima facie a Force Majeure event.

In the case of South Delhi Municipal Corporation v/s. MEP Infrastructure Developers Ltd., the Delhi High Court cited the notification released on 18 May, 2020, by the Ministry of Road Transport and Highways. The contractor had to fulfil the payment due to the employer for the toll collected. Herein, the judgement granted relief to the respondent South Delhi Municipal Corporation by invoking the Force Majeure clause in the contract. Furthermore, the court extended such relief to the respondent until 90% of the normal resumed like the pre-lockdown phase.

Conclusion

Laws related to the implementation of invoking the Force Majeure clause seems to be quite settled. It is pertinent that the contract itself provides for the Force Majeure and reliefs therefrom, and hence, the aggrieved party is bound to follow such duly processed notifications, relevant to the contract. While providing reliefs under the Force Majeure clause, the court must adhere within the four corners of the contractual provisions. However, COVID-19 being such an unprecedented event, and that nobody could ever contemplate while entering into the contract, as well as the sufferings caused due to the various steps of the taken by the Government to contain the spread of the virus, has indeed affected all the industries, although the degree of impact varies from sector to sector.

Thus, the Government has been providing voluntary relief to the various affected sectors, but the question lies in the fact as to whether such reliefs are enough. The judiciary has also been inclined to the enforcement of the specific benefits that are available either under Government notifications, or under the contractual terms, as the case may be, provided that there has not been any breach within the purview of the contract and the invocation of the Force Majeure clause by the aggrieved party has been done in a valid and true manner, based on the circumstance as it may deem fit.

About the Author: Debargha Chatterjee is a 5th-year (10th semester) B.A.LL.B. student at Jogesh Chandra Chaudhuri Law College, Calcutta University.

Note: The views in this article are personal only.

 


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