With COVID-19 causing disruption in businesses, it would be imprudent to conclude that force majeure can provide a blanket relief for all contracts and under all situations
As India fights COVID-19, businesses are under pressure. News reports have covered how energy companies have received force majeure notices from customers. With lockdown in full force, demand for fuel and electricity has suffered. Gas distributors are invoking the force majeure clause in their respective agreements with marketers like ONGC and GAIL, among others, in turn serving force majeure notices to their domestic and overseas suppliers. An industry expert has termed it a “chain reaction.” It remains to be seen where the buck will stop. There are similar stories of panic and desperation in almost all sectors, inconsequential of the strata.
Post the lockdown, there is a likelihood of force majeure litigations flooding the Indian courts. Some of these parties may be genuinely affected by the current situation while for others, it could be tactical litigation as a way out of bad contracts/deals. Quite naturally then, force majeure has become one of the most searched legal terms in times when COVID-19 deepens its impact over the business world and uncertainty looms large over the performance of contractual obligation of parties under various arrangements.
The logical question to be asked is whether “force majeure,” a panacea for contracts, has gone haywire due to COVID-19 or otherwise? Let’s look at some of the judgments to analyse how our courts have viewed this clause qua the liabilities of the contracting parties in the past. In legal parlance, unplanned, unimagined and unanticipated challenges are populated under the force majeure clause in contracts. In some instances it may be implied if not expressed. This standard clause is rarely invoked but always present. This is a well-recognised legal principle and exempts a party from performing her/his/their contractual obligations or terminate the performance of its obligations when certain circumstances, which are beyond their control, arise, thus making performance inadvisable, commercially impracticable, illegal or impossible. These circumstances are typically an event or effect, which the parties could not have foreseen or controlled. Therefore, the standard definition of force majeure clause is inclusive of the likes of natural calamities, war or sudden change of Government policies. Over the last few decades, it has come to include terms like terrorism and nuclear radio activity, wherever relevant.
Force majeure is a French phrase, which means a “superior force.” This principle is well-recognised and accepted by the Indian courts as well. Sections 32 and 56 of the Indian Contract Act, 1872, are relevant to understand the scope of force majeure besides case laws developed around it. In some of the statutes there is direct reference to force majeure circumstances. Take the example of the Real Estate (Regulation and Development) Act, 2016, (RERA), which provides for extension of registration of the projects in force majeure situation even without payment of fee. In the present COVID-19 situation, RERA has already given extension to real estate projects that were expiring and that, too, without filing of any application, keeping with the spirit of social-distancing.
Similarly, the Mines and Minerals (Development and Regulation) Act has force majeure as a shield to the lessee against the non-performance of its obligations under the mining licence. However, in certain circumstances, the force majeure is expressly rejected. A case in point could be Documentary Credit, which does not get extended beyond the expiry date by any force majeure circumstances.
As regards availing relief under the force majeure clause, it must be noted that it’s a question of fact and needs to be proved in each case in order to successfully plead it in the court of law. It is, therefore, important to examine some of the crucial issues at the outset when an entity/individual is contemplating legal options based on force majeure, both as a strategy as well as the ultimate goal.
First, does the COVID-19 disruption constitute a force majeure event under the contract in question? This is less likely as the history of the virus itself is not more than three months old. Second, will COVID-19 fall under some other events referred in force majeure clauses in the contract such as an “act of god,” a “natural disaster,” “epidemic”, “Government regulations” or just something beyond the contractor’s control? This would again be a question of fact that needs to be examined on the basis of the context of the contract and the scope of its performance. Third, it needs to be evaluated as to what the given contract provides for under the force majeure clause. Does it allow for extension of time for the performance of the contracts? Or is the provision for extension with or without compensation? Once again, it needs to be seen if the entity would rather give notice and seek extension or compensation. Does the force majeure clause allow one or both parties to terminate the contract? Are there any other terms in the contract that could be read or referred in connection with the liability arising out of non-performance? Are there mechanisms within the contract that provide relief to the party? Or does it provide for modification if the contract? If the contract is of international nature, it is also advisable to look at the law that would be applicable and then consider the factual conspectus in that scenario and how that law deals with the force majeure situation.
It is only after a careful examination of the contract and expected outcome that a call should be taken about invoking the force majeure clause and engage with the counter party. It is useful to remember that courts place the burden on the party asserting force majeure defence to demonstrate its existence and that such clauses are construed strictly by the courts.
The Supreme Court of India in the case of Energy Watchdog vs CERC, (2017) 14 SCC 80 (Adani power case) dealt at length the claim of the Adanis that the change in the price of coal in Indonesia amounted to force majeure and rejected the same after examining the contract document in question. The landmark cases on the subject being Alopi Prasad & Satyabrata Ghose, the court held that “force majeure” is governed by the Contract Act, 1872. “Insofar as it is relatable to an express or implied clause in a contract, such as the PPAs before us, it is governed by Chapter III dealing with the contingent contracts and more particularly, Section 32 thereof. Insofar as a force majeure event occurs dehors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract Act.”
On another place in the judgment the findings of Satyabrata Ghose vs Mugneeram Bangur & Co is reiterated: “…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.”
It was further held that where the court finds that the contract itself, either implied or expressly contains a term, according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Act. If, however, frustration is to take place dehors the contract, it will be governed by Section 56.
Further, the court relied upon the finding in Alopi Parshad & Sons Ltd vs Union of India: “Parties to an executable contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate. For example, a wholly abnormal rise or fall in prices which is an unexpected obstacle to execution. This does not in itself get rid of the bargain they have made. It is only when a consideration of the terms of the contract, in the light of the circumstances existing when it was made, showed that they never agreed to be bound in a fundamentally different situation which had unexpectedly emerged, that the contract ceases to bind. It was further held that the performance of a contract is never discharged merely because it may become onerous to one of the parties.”
Therefore, the facts of a case as they play out before the court of law is an interplay of many dimensions and caution is required to be exercised while dealing with situations arising out of COVID-19 pandemic. The World Health Organisation (WHO) declared it as the public health crisis on January 30 and on March 11, it revised its stand and said it is a “pandemic.” Dr Tedros Adhanom Ghebreyesus, WHO director-general, rightly said, “This is not just a public health crisis, it is a crisis that will touch every sector, so every sector and every individual must be involved in the fights.” This disease was unknown till the end of the December 2019 when it was reported by China to WHO and the world is grappling with the challenge it poses. In that sense, COVID-19 is a force majeure in a manner of speaking and unprecedented; still it would be imprudent to conclude that this would provide a blanket relief for all contracts and under all situations. The need, therefore, is for careful planning, strategic thinking along with an open mind to find amicable solutions and a human heart to respond to the current challenge.
(The writers are partners at TRS Law Offices)