A. MEANING OF FORCE MAJEURE
What is Force Majeure?
The term ‘Force Majeure’ is a Latin term which essentially translates into superior force in English or an act of God. In business (and legal contracts) it means those uncontrollable events (such as war, labour stoppages, or extreme weather) that are not the fault of any party and that make it difficult or impossible to carry out normal business. For example, a company may insert a force majeure clause into a contract to absolve itself from liability in the event it cannot fulfil the terms of a contract (or if attempting to do so will result in loss or damage of goods) for reasons beyond its control.
In India, Force Majeure is not defined in any of the statute however, the Indian Contract Act 1872 (the “Act”) allows that any agreement which is impossible to perform would be void. The first paragraph of section 56 of the Act states that “an agreement to an act impossible in itself is void”. The second paragraph of section 56 of the Act states that “A contract to do an act which, after the contract is 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.”
The first paragraph mentioned above lays down a simple principle of initial impossibility and the second paragraph lays down the effect of subsequent impossibility. Sometimes, the performance of a contract is possible when the contract is made but becomes impossible or unlawful upon happening of an event which could not have been prevented. The above doctrine is called the Doctrine of Frustration which is an English law doctrine which essentially lays a positive rule relating to frustration. There can be no agreement on altered circumstances.
The alternation of circumstances must be such as to upset altogether the purpose of the contract. A situation may be classified as a commercial hardship and may make the performance unprofitable or more expensive but is not sufficient to excuse the performance as it does not fundamentally change the situation as to frustrate the contract. This doctrine of frustration or impossibility shall not apply to a situation so as to excuse the performance but where the performance is practically cut off. Change of circumstances is a valid ground for a contract to get frustrated. In P.D. Mehra v Ram Chand Om Prakash [AIR 1952 Punj 34], it was observed that if there are unanticipated change of circumstance, it will have to be considered whether this change of circumstances has affected the performance of the contract to such an extent as to make it virtually impossible or extremely difficult. It was held in Satyabrata Ghose v. Mugneeram Bangur & Co. [1954 SCR 310] that that the word “impossible” has not been used in the Section in the sense of physical or literal impossibility. The performance of an act may not be literally impossible, but it may be impracticable and useless from the point of view of the object and purpose of the parties. If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do.
The application of force majeure has again been elaborately explained by the Supreme Court in the case of Energy Watchdog v CERC and Others [(2017) 14 SCC 80].
B. SCOPE OF FORCE MAJEURE CLAUSE
A force majeure provision may set out an exhaustive list of events or circumstances that constitute events of force majeure. Commonly listed items are occurrences such as adverse weather conditions, explosions, fire, acts of God and other natural catastrophes. It is not clear whether in the selection of the above descriptions of events or circumstances, the outbreak of COVID-19, which is a biological entity that can cause an infectious disease, would fall within the contemplated use of the provision.
The concept of force majeure is wide enough to accommodate man-made interventions such as wars, blockades, strikes and legislative and executive interference and can even be extended on account of changes in law, economic hardship, and accidental damage to specified facility.
Alternatively, a force majeure provision may set out an inclusive list that recites several events or circumstances for the purposes of illustration only, with a catch-all provision that force majeure relief will also be extended on account of any other event unless that other event is specifically named in a list of excluded items.
In any event, the interpretive rule of ejusdem generis – that when a list of specific items belonging to the same class is followed by general words, the general words are to be treated as confined to other items of the same class – will be used to determine contractual intention.
A force majeure provision may exclude outright certain events such as changes in either party’s market factors, a party’s inability to finance its obligations under the agreement or the unavailability of funds to pay amounts when due, breakdown or failure of plant or equipment caused by normal wear and tear or by a failure to properly maintain such plant or equipment from constituting events of force majeure.
Occasionally, events that are carved out of force majeure can be brought back within its fold if those events were themselves the consequence of an event of force majeure. For example, in some PPAs in the solar power sector in India, the unavailability or late delivery of equipment, although not an event of force majeure by itself, may constitute an event of force majeure if it was the consequence of an event of force majeure.
Force majeure related language used in most contracts vary widely and, therefore, it is important to review these clauses carefully. Some contracts list specific examples of force majeure events that automatically meet the standard upon the happening of such event, while others rely on generic language usually included in such force majeure clauses.
A 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. In the event of a dispute as to the scope of the clause, the courts are likely to apply the usual principles of contractual interpretation.
A COVID-19 pandemic could make it more difficult for parties to perform their contractual obligations. There are two possible instances, which may suggest that a force majeure clause covers a pandemic: (a) if the contractual definition of a force majeure event expressly includes a pandemic. Inclusion of pandemic to the list of force majeure events will provide clarity as to whether COVID-19 outbreak would trigger a force majeure clause in a contract; or (b) if the force majeure clause covers extraordinary events or circumstances beyond the reasonable control of the parties. Such general, catch-all wording may be invoked if it is determined that the factual circumstances caused by the pandemic are beyond reasonable control of the affected party. Having said that, 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.
The party claiming force majeure is usually under a duty to show that it has taken all reasonable endeavours to avoid or mitigate the event and its effects. This is a subjective standard and will be interpreted on a case-to-case basis. The force majeure event or circumstance must be causative to the contractual breach and a party claiming force majeure is typically required to establish that it was the force majeure event (and not some other factor) that caused the party to be unable to fulfil its contractual obligations.
Force majeure clauses commonly contain a prompt and time bound notification requirement, which can operate as a contractual condition precedent to relief or not. Such provisions are generally enforceable, and so complying fully with all notice requirements will be important for parties seeking to invoke force majeure. Courts place the burden on the party asserting force majeure defence to demonstrate the existence of force majeure. Such clauses are construed strictly by the courts.
Effect on Contract
The language of the force majeure clause will determine the remedies available to the parties.
Some contracts may provide for immediate termination of the contract upon the happening of the force majeure event. Others may provide that the contract will be put on hold until the force majeure event is resolved. Some contracts may provide for limitations in time after which either party may terminate the agreement with written notice to the other (i.e. if non-performance caused by the event is prolonged or permanent). Others may require the contract to remain in effect until the force majeure event is resolved. Some contracts will only allow for certain obligations to be suspended.
In particular, the following aspects should be kept in mind:
a. The general concept means that events or conditions beyond the reasonable control of one party should not cause them to be held liable under the terms if that event or condition prevents the performance of the obligations of the contract. Some contracts list examples of force majeure events that automatically meet the standard. Others list events that must still meet the definition of force majeure. One may also rely on generic clauses usually included in force majeure clauses, such that the COVID-19 is an ‘Act of God’.
b. Force majeure provisions vary widely – The language used in most contracts vary widely and, therefore, it is important to review these clauses carefully.
c. Duty to mitigate and exercise reasonable diligence? – If a ‘duty to mitigate’ obligation is imposed under the contract, then the meaning of ‘reasonable diligence’ becomes important. This is a subjective standard and will be interpreted on a case-to-case basis. It also needs to be analysed if there are any obligations to use ‘best endeavours’ to mitigate the effects of a force majeure event.
d. Does the event have to be foreseeable? – Most contracts provide that for an event to qualify as force majeure, it must be unforeseeable or not reasonably foreseeable.
e. Notification requirements – Most contracts require notice to the other party to invoke a force majeure provision. Some also provide deadlines for making such notice to make the claim effective.
f. Can the contract be put on hold or cancelled? – Some contracts provide that it can be put on hold until the force majeure event is resolved. Some contracts provide for limitations in time after which either party may cancel the agreement with written notice to the other. Others require the contract to remain in effect until the force majeure event is resolved.
g. Burden of proof – The party that relies upon the force majeure event generally has the burden of proof and such clauses are construed strictly by the courts.
h. Keep records – Copies of critical correspondence and other communications should be maintained if disputes arise later. This can be particularly important in establishing that the company has done all that was reasonably possible to mitigate the losses.
An Anticipatory Breach
A party that demonstrates its intent not to perform under a contract can cause an anticipatory breach of contract which would excuse the other party from its own performance obligations.
For this reason, in addition to considering its own ability to perform, a party should consider whether its counterparties can and/or will meet their obligations under the contract.
Insurance and Indemnity Agreements
Companies should evaluate which insurance rights might cover losses arising out of a party’s inability to meet its contractual obligations. Depending on the policy and specific facts, business interruption insurance policies may provide coverage.
Indemnity rights under contracts may provide relief from claims arising from commercial disruptions.
Notice and Communications to Counterparties
Parties considering any of the above issues should carefully review the notice requirements in their agreements. Failure to comply with formal notice requirements—which may require prompt notice and regular updates—can prejudice a party’s ability to excuse non-performance or secure indemnification.
Beyond the strict letter of an agreement, early communication with counterparties may help avoid disputes and promote coordinated solutions.
Organizations facing the possibility that they will be unable to perform under existing contracts, or facing the risk of non-performance by counterparties, will need to proactively and promptly review relevant contracts, and recognize that early communication may be critical. And companies not currently negotiating agreements should consider whether to include provisions expressly allocating and mitigating the commercial risks from COVID-19.
Termination of the Agreement
A standard force majeure clause provides for termination of the agreement if the force majeure event continues for a specific period of time.
If a party serves an initial notice reporting their inability to perform the obligations under an agreement due to an onset of force majeure, then the party can terminate the agreement by serving another notice, in case the force majeure event continues. The Termination clause will not be a risk to the party and the party will be suitably compensated for the work already done.
In addition to the above, the parties may consider invoking other contractual clauses to limit or exclude liability for non-performance – such as price adjustment clauses, material adverse change clauses, or limitation or exclusion clauses. The ability to invoke such clauses will depend on the wording of the relevant clauses and how they are construed by courts.
Furthermore, companies should also consider the ramifications of non-performance clauses under the agreement, such as liquidated damages clauses and penalty clauses under which the extent of non-performance has been predetermined and agreed by the parties.
SCOPE OF FORCE MAJEURE CLAUSE
A force majeure clause could either include very specific events such as fire, explosions, wars, strikes, legislative and executive interference or generic terms such as any event beyond the reasonable control of the parties or act of God or economic hardship. Such clauses save the performing party from the consequences of non-performance of its contractual obligations. However, the courts may apply the rule of ejusdem generis to determine the contractual intention which rule presumes that a general term following a specific term would be confined to the same meaning as the preceding specific terms.
Certain events may be specifically excluded as force majeure such as market factors, party’s inability to finance its obligations under the contract, lack of funds to meet the payment obligations or breakdown or failure of plant or equipment. At the same time, events may also be brought within the fold of force majeure if such events were themselves consequences of a force majeure event. Therefore, it is essential to review a force majeure clause and its consequences judiciously and with caution.
It is important to bear in mind that a force majeure clause is not and cannot be implied under Indian law. It has to be expressly provided under the contract and accordingly the consequences would follow.
While the outbreak of the COVID-19 (declared a pandemic by the World Health Organisation on 11.03.2020) along with the lockdown may have impeded parties from performing their obligations under a contract, it cannot be said that COVID-19 would qualify as force majeure in every case. There may be a force majeure clause which specifically mentions the words ‘pandemic’ or ‘epidemic’ which would bring COVID-19 within its ambit or could use terms such as ‘regulation or law of the legislature or any statutory authority’ which could cover the decision of the lockdown imposed.
The bone of contention would be a general force majeure clause (similar to one discussed above) where it would have to be seen whether the consequences / events caused by the pandemic (including the restrictions imposed by the nationwide lockdown) were beyond the reasonable control of the party claiming the benefit of force majeure. Therefore, in the present circumstances, exemption from performance of contractual obligations would depend on the wording of the force majeure clause including the consequences that would flow from invoking the force majeure clause as also the nature of obligations enshrined in the contract.
CLAIMING THE BENEFIT OF FORCE MAJEURE
The party claiming the benefit of force majeure is under a duty to show that all reasonable steps to avoid or mitigate the event and its consequences have been taken. The said party also has to show that there is a causative link to the contractual breach which means that it is on account of a force majeure event (and not otherwise) that a party is not in a position to perform its end of the bargain under a contract. Consequently, the party claiming the benefit would have to show that it would have been able to perform its obligations but for the force majeure event and that it was the force majeure event alone which was enough to cause hindrance to performance of the contractual obligations.
What has to be analysed on a case-to-case basis is whether the contractual obligations could have been accomplished despite the disruptions caused by COVID-19. In this process, it is essential to ensure that parties do not use COVID-19 and the lockdown as a blanket to camouflage a contractual breach that would have occurred irrespective of the occurrence of such events. For instance, where a building was to be completed by January 2020 or February 2020 and has been delayed due to the fault of either the developer or the allottee, the benefit of force majeure may not available to either party since both COVID-19 and the nationwide lockdown would have no bearing on the delay. Besides this, the requirements of sending a prompt notice (unless the contract provides for a specific period within which the notice must be issued) should also be borne in mind in order to claim this benefit since failure to observe the same could affect a party’s ability to claim exemption from performance of contractual obligations.
INVOCATION OF FORCE MAJEURE: EFFECT ON CONTRACT
Most contracts usually provide for the consequences of invocation of force majeure clause such as the immediate termination of the contract itself or may provide termination as an option if the force majeure event is prolonged leading to continued non-performance; suspension of either all/some contractual obligations for the duration of the force majeure event; or may provide complete immunity to the party from performing any contractual obligation.
REAL ESTATE SECTOR: COVID-19, NATIONWIDE LOCKDOWN AND FORCE MAJEURE
COVID-19 coupled with the nationwide lockdown has led to an unprecedented crisis which has impacted the global economy and has led to disruption in the steady flow of revenue and income across sectors. The present circumstances have aggravated the fate of an already distressed sector with restrictions such as suspension of construction activities, non-availability of man-power or raw materials. While this crisis persists, there is a growing ambiguity as to whether force majeure can be used to exempt parties from their financial obligations under different contracts such as lease agreements or apartment buyer agreements.
The Real Estate (Regulation and Development) Act, 2016 only refers to force majeure under Section 6 wherein the registration granted under Section 5 may be extended by the authority due to force majeure. However, the definition of force majeure under Section 6 does not specifically include an epidemic or pandemic within its ambit. While associations such as Confederation of Real Estate Developers Association of India (CREDAI) has proposed inclusion of COVID-19 within the realm of this Act, the Maharashtra Real Estate Authority has already taken a step in this direction and provided that “For all registered projects where the completion date/revised completion date/extended completion date expires on or after 15th March 2020, the period of validity for registration of such projects has been extended by three months and project registration certificates with revised timelines for such projects would be issued subsequently. Further, the time limit of all statutory compliances in accordance with RERA due in March, April and May have been extended to 30th June 2020”.
Lease Agreements: Obligation to pay rent amid COVID-19
In an attempt to contain the spread of COVID-19 in India, all commercial establishments, malls, shops etc. have been closed which has led to suspension of all business activities. Consequently, there is either negligible or zero income for the tenants of such establishments who are now overwhelmed with the obligation to pay rent under their lease agreements while scrambling to take care of their employees, staff and personal expenses that continue even during the lockdown.
Payment of rent in the presence of the force majeure clause:
Exemption from payment of rent under an agreement because of COVID-19 and the lockdown would be available only if such a relief has been explicitly included in the force majeure clause or any other clause under the lease agreement. Waiver of rent is usually available to a tenant on account of damage to or destruction of the premises leading to its unavailability for use. Therefore, the wordings of the force majeure clause have to be carefully evaluated and waiver of rent cannot be claimed as a matter of right, unless specifically provided under the agreement. In the event, the agreement allows suspension of rent or payment of money (without additional qualifications) due to a force majeure event, the concerned party should invoke the said clause and intimate its counter-party at the earliest.
In case of a general force majeure clause, a tenant may argue that because of the pandemic and the lockdown, it has been unable to use and occupy the premises or that due to lack of business / generation of revenue/income it cannot pay rent. In doing so, the tenant may claim waiver of rent by attempting to bring the present circumstances within the ambit of force majeure. This argument may not be tenable in as much as COVID-19 coupled with the lockdown has only led to a temporary closure of premises as opposed to rendering the premises permanently unfit for use and occupation. Further, rent under a lease agreement is payable towards the exclusive use and possession of the premises as opposed to the ability of the tenant to operate the establishment or the health of the business or actually occupying the premises. Even during the lockdown, the premises continue to be in possession of the tenant and there is no suspension of these rights. Unless specifically stated in the agreement and subject to the nature of the contract, the inability to conduct business and generate revenue cannot be claimed to seek waiver of rent. A commercial difficulty or onerous condition cannot be taken as a ground to avoid performance of contractual obligations [See Alopi Parshad & Sons Ltd. v. Union of India AIR 1960 SC 588]. Similarly, tenants of residential premises may cite financial inconvenience to seek waiver of rent, however, in such cases a lot would depend on the wording of the force majeure clause.
Payment of rent in the absence of force majeure clause:
In the absence of such clauses, it is doubtful that a tenant can fall back on the doctrine of frustration of contract (which eventually leads to termination of the contract) and seek waiver of rent. In the case of Raja Dhruv Dev Case in T. Lakshmipathi and Ors. vs. P. Nithyananda Reddy and Ors. [AIR (2003) SC 2427] it was held that the doctrine of frustration is not applicable when the rights and obligations of parties arise under a transfer of property such as a lease.
However, if an untoward event or change of circumstance upsets the very foundation upon which the parties entered into the agreement, the contract can be held to be frustrated under Section 56 of the Indian Contract Act, 1872. [See Energy Watchdog vs Central Electricity Regulatory Commission and Ors. (2017) 14 SCC 80].
The doctrine of frustration of contract under Section 56 of the Contract Act, 1872 triggers only when performance is absolutely impossible and the contract automatically comes to an end from the date of impossibility. In the present circumstances, the parties will have to assess and decide whether COVID-19 together with the lockdown has destroyed the object and purpose of their contract or has altered the contract entirely beyond foresight. This doctrine involves the discharge of the contract by reason of supervening impossibility or illegality which was beyond the contemplation the parties at the time when they entered into the contract. [See Satyabrata Ghose v. Mugneeram Bangur & Co. and Another, AIR 1954 SC 44: 1954 SCR 310]
On the other hand, when an event of force majeure/irresistible force takes place, Section 108(B)(e) of the Transfer of Property Act, 1882 provides the tenant with an opportunity to determine if an event under the said Section has permanently affected his ability to use the premises. Section 108(B)(e) of the provides that “if by fire, tempest or flood, or violence of an army or of a mob, or other irresistible force, any material part of the property be wholly destroyed or rendered substantially and permanently unfit for the purposes for which it was let, the lease shall, at the option of the lessee, be void …”. If so, the law imposes a strict obligation on the tenant to give a notice under Section 108(B)(e) of the Act, 1882 to the landlord. If the tenant fails to give such notice, the lease is deemed to remain unaffected regardless of a force majeure event. Once such a notice is sent, the lease stands terminated. A tenant can only seek the benefit of Section 108(B)(e) if the lease is duly registered under the Registration Act, 1908. In the absence of registration, tenants may have to examine their protection under common law for a month to month tenancy.
Therefore, under Section 108(B)(e) of the Transfer of Property Act, 1882, it would be important to establish that COVID-19 is an instance of ‘irresistible force’ and has also rendered the property permanently unfit for the purpose for which it was leased out. However, it is unlikely that Section 108(B)(e) of the Act, 1882 would apply in the present situation in as much as COVID-19 coupled with the lockdown has not permanently affected the ability of a tenant to use the leased premises. [See Shankar Prasad & Ors. v. State of M.P. & Ors. [ILR (2013) MP 2146]. Further, this notice must be issued only after due caution since the effect of the same would be termination of the contract.
On March 29, 2020, the Ministry of Home Affairs inter alia ordered waiver of rent for labourers, migrant workers and students by landlords for a period of one month. However, in the absence of any similar order/notification for commercial leases or force majeure clause or any clause allowing suspension of rent or payment obligations during force majeure, tenants of commercial establishments may have to resort to cordial negotiations with their landlords and may also consider deferment of rent during this period. While issuing such notification/order, the Government must bear in mind that there are many who rely on rent from the tenant for sustenance and do not have any alternative source of income.
Even through the lockdown, tenants have not been deprived of the possession of the premises and the obligation to pay rent has not extinguished by mere non-use or non-occupation of the premises (unless mentioned in the contract). For instance, an analogy could be drawn with the decision of the Government providing for moratorium in payment of EMIs against loans (for whatever purpose it may have been availed) whereby the Government has not waived payment of EMIs; it has only been deferred (which is optional and not compulsory for the customer). Thus, the obligation to pay the EMIs has not been extinguished and it would still be payable.
Interestingly, the United Kingdom has passed the Coronavirus Act, 2020 which inter alia suspends the ability of a landlord to take an action of forfeiture for business tenancies in England and Wales to protect the business tenants who cannot pay rent.
Given the uncertainty in this extraordinary crisis and no sight of return to normalcy anytime soon, both parties must carefully review their force majeure clause (if any) and in the absence of such clause, they must consider reaching a middle ground where both parties could bear some loss. However, if there is a dispute on whether the present events qualify as force majeure or there is breach of any contractual obligation or unnecessary / frivolous claims of frustration of contract, the parties may have to seek remedy under their respective dispute resolution clauses provided in the agreement.
A lot will also unravel as and when different contracts (with or without force majeure clauses) are before courts for determining whether COVID-19 together with the restrictions of the nationwide lockdown can qualify as a force majeure event in a particular case. The courts will also have to carefully review the force majeure clause (if any) to see to what extent can a party be excused from performance of contractual obligations. The application of the doctrine of force majeure and the doctrine of frustration would vary immensely across different sectors. While the fate of existing contracts remains to be explored; going forward the outbreak of a pandemic and the extent of restrictions that may be imposed to contain its spread will change the way clauses are framed in a contract and maybe also modify the existing laws to secure the interests of both parties to a contract.
Aditya Parolia is one of the leading counsels in India for Corporate, Commercial, Real Estate and Consumer disputes. He has been instrumental in many land mark judgments passed under Insolvency & Bankruptcy Code and Consumer Protection Act. Aditya is a Partner at PSP Legal, Advocates & Solicitors, a law firm known for its diverse practice areas and revolutionary approach to tackle with the issues. Aditya is Master of Laws in Commercial and Financial Services Law from National University of Singapore (NUS). His academic qualifications also include Post-Graduation Diplomas in International Laws from institutes like Indian Society of International Law and special courses from international academies like Hague Academy of International Law. He is a member of bar associations like YIAG, YICCA, DHCBA and SCBA. Aditya has served on the panel of various government organizations including Union of India, NBCC, Delhi Development Authority, BSNL, and many other PSUs.
Aditi Sinha is an Associate at PSP Legal, Advocates & Solicitors. Ms. Sinha graduated from GLC Mumbai 2018 & has been working extensively on corporate & commercial disputes.
Disclaimer: The views or opinions expressed are solely of the author.