IMPACT OF COVID-19 : A BRIEF

The outbreak of COVID-19, the pathogen causing coronavirus has been widely reported and the suffering-causing consequences still continue. Countries around the world have imposed mass travel bans, temporary lockdowns and extremely restricted human movement. The World Health Organisation has declared the outbreak as a pandemic. The pandemic has impacted the ability of companies around the globe to maintain steady operations and perform their respective contractual obligations. On Monday, 9 March 2020, the WHO said that the threat of a coronavirus pandemic “has become very real” and that the spread has reached “pandemic proportions”[1].

In the present scenario arising due to the COVID -19 pandemic, the Government of India has also taken steps to safeguard the interest of parties in commercial contracts. The Ministry of Finance, Government of India vide an office memorandum dated 19.02.2020 recently clarified with respect to ‘Manual for Procurement of Goods, 2017’, and declared that in the event of any disruption in the supply chains due to spread of corona virus in China or any other country, such situation will be covered in the Force Majeure Clause (FMC) in the contract. It is further clarified that such a situation should be considered as a natural calamity and Force Majeure clause may be invoked, wherever considered appropriate, following the due procedure.[2]

The COVID-19 coronavirus poses severe challenges to the global economic and commercial market. There have been direct commercial impacts on specific sectors, with interruptions to supply chains, challenges in meeting contractual obligations and implications under funding arrangements, etc. Perhaps the companies, in order to mitigate the impact related to delayed operation and non-performance of the contracts, inter alia will take recourse to force majeure clause contained in their contracts. In the current COVID-19 (coronavirus) pandemic, there has been much discussion of parties being released from performance as a result of “force majeure.”

FORCE MAJEURE

The law relating to Force Majeure (a French phrase that means ‘superior force’) is embodied under Sections 32 and 56 of the Indian Contract Act, 1872.[3] The term has been defined in Cambridge Dictionary[4] as follows:

“an unexpected event such as a war, crime, or an earthquake which prevents someone from doing something that is written in a legal agreement”.

The expression force majeure is borne out from the “Code Napoleon” and has a wider meaning than “act of God”, though it may be unclear if this includes all “causes you cannot prevent”.[5] 

Invocation Of Force Majeure :

As a result of invocation of Force majeure, the performance of the contract is not merely suspended but the affected party is expected to continue to perform its obligations to the extent not prevented by an event of force majeure. The party claiming force majeure is under an obligation to prove that it has taken all reasonable endeavours to avoid or mitigate the force majeure event and its effects. This being subjective standard, differs from case to case and therefore needs to be interpreted accordingly.[6]

Whether Covid-19 Will Be Considered as A ‘Force Majeure’ Event?

Section 32 of ICA which states that, “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. 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”. It provides for the discharge of contingent contractual obligations, and a force majeure event has been regarded as a contingency.

Whether a contractual obligation can be avoided on the grounds of force majeure is a factual determination based on the specific terms of the contract. Force majeure clause cannot be implied under Indian law. It must be expressly provided for under the contract and protection afforded will depend on the language of the clause.

FRUSTRATION OF CONTRACT – AN ALTERNATIVE REMEDY?

Parties who wish to define a wider set of circumstances when failure to perform a contract will be excused and the consequences of failure are generally free to do so. Clauses which deal with these matters are commonly called force majeure or hardship clauses. Many commercial contracts do not contain these types of clauses and, in those cases, a party affected by the COVID-19 outbreak would need to try to rely on the doctrine of frustration to find grounds to be excused from contractual performance.

Impossibility and frustration are often used as interchangeable expressions.[7] Section 56 of the Act allows for temporary discharge of obligations on grounds of impossibility in the instance of any untoward event or change in circumstance that is totally dehors the “very foundation”[8] upon which the parties entered their agreement. Under English law, frustration is so much concerned with the change in circumstances that it cancels the base of the contract as a whole or in case of performance makes it different with that which was in consideration by the parties in the beginning and is concluded by the legal order.[9]

ANALYSIS OF JUDICIAL PRECEDENTS

In Phillips P.R. Core, Inc. v. Tradax Petroleum Ltd., 782 F.2d 314, 319 (2d Cir. 1985), it was observed that the basic purpose of force majeure clauses is in general to relieve a party from its contractual duties when its performance has been prevented by a force beyond its control or when the purpose of the contract has been frustrated.

 In a landmark judgement titled Energy Watchdog Vs. Central Electricity Regulatory Commission reported at 2017 (4) SCALE 580, Justice R.F. Nariman of the Supreme Court opined that the event leading to frustration which is relatable to an express or implied clause in a contract, is governed by Section 32 of the Act and if it occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Act. Under the prevailing circumstances, reliance on Section 54 of the Act depends upon the following conditions:

  1. a valid and subsisting contract between the parties;
  2. there must be some part of the contract yet to be performed; and
  3. the contract after it is entered into becomes impossible of performance, i.e., subsequent impossibility.

For instance, in the landmark case of Tsakiroglou & Co. Ltd.v Noblee ThorlGmbH, 1961 (2) All ER 179 it was observed that mere closure of the Suez Canal, given that there existed an alternative route to transport goods (through the Cape of Good Hope), did not qualify as a condition for the frustration of contracts on the sole ground that the alternative route was longer than the original route.

CONCLUSION

The party claiming force majeure is under an obligation to prove that it has taken all reasonable endeavours to avoid or mitigate the force majeure event and its effects. This being subjective standard, differs from case to case and therefore needs to be interpreted accordingly. In some contracts, if the period of force majeure is prolonged, parties may be permitted to terminate the contract depending on the practical difficulties being faced by them. However, it is also essential that even if the force majeure clause within the agreement is inclusive of the terms epidemics and pandemics, the party affected has to generally prove its interference with the performance of the contractual portion. It is important to note that doctrine of frustration, though similar in effect to the doctrine of force majeure, is more restrictive. The doctrine of frustration will also not relieve a party from performing a contractual obligation simply because the event complained of has made the performance more difficult or expensive. Although, whether a party can be excused from a contract on account of Covid-19 being declared a pandemic is a fact-specific determination that will depend on the nature of the party’s obligations and the specific terms of the contract.

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Utkarsha Nikam graduated from Government Law College, Mumbai in 2019 and is presently working with the Real Estate Team of Kanga & Company, Mumbai. Previously, she has gained a vast array of legal experience by interning with multifarious law firms in Mumbai. You can reach her at utkarsha.nikam0101@gmail.com.

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[1] https://www.businessinsider.in/science/news/the-world-heath-organization-says-the-threat-of-a-coronavirus-pandemic-has-become-very-real-as-global-cases-surpass-110000/articleshow/74557707.cms

[2] No. F18/4/2020-PPD, Ministry of Finance.

[3] Read more at: https://www.bloombergquint.com/coronavirus-outbreak/covid-19-coronavirus-force-majeure-and-impact-on-commercial-contracts

[4] https://dictionary.cambridge.org/dictionary/english/force-majeure

5] Elzekiel Abraham Gubray Vs Ramjusroy Golabroy, AIR 1921 Cal 305:33 CLJ 151:63 IC 267 (DB).

[6] https://singhania.in/safeguards-in-force-majeure-in-india/

[7] Satyabrata Ghose vs. Mugneeram Bangur and Others, AIR 1954 SC 44, paragraph 10. 5. Chitty on Contracts

[8] Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310

[9] Chitty on Contracts, Volume I, (31st Edition), Sweet & Maxwell

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