Blog Details

Author - Tushar Sharma and Abhishek Singh

Introduction:

The Government lockdowns, the threat to life, and livelihood have rendered the business houses reeling into uncertainty. As there seems no deadline for the lockdowns along with the fact that there is no vaccine or curable drug is making the situation even worse. In this situation, one of the major challenges being faced by the business houses is failure in performing contractual obligations. 

This gives rise to a debate, whether this pandemic can be termed as a ‘Force Majeure’ event or an ‘Act of God’ or can give the party a scope to plead frustration of the contract due to the impossibility of performance. If the answer to this is yes, then what can be its implications in the near future? 

Force Majeure – The unforeseeable territory

According to Blacks’ Law dictionary a ‘Force Majeure’ event can be termed as “an event or effect that can be neither anticipated nor controlled is unexpected and which prevents someone from doing or completing something that he or she had agreed or officially planned to do”.

In today’s business world, it’s a general practice to incorporate force majeure clauses in the contracts. The clause or the contract generally incorporates mostly all the circumstances which may lead to the invocation of the ‘Force Majeure’ clause. It is evident that the choking of the supply chain due to nationwide lockdown and other hindrances has led failure in performing contractual obligations. The real challenge of the business houses lies in the apprehension of whether this pandemic is a ‘Force Majeure’ event or just a tool to renegotiate the terms of the contract under the garb of ‘Force Majeure’.

The answer to this apprehension can be found in the fact that force majeure does not extinguish all obligations of the parties to perform the contractual obligations. It does not defer the performance rather they are under an obligation to perform the obligations to the extent possible until it is hindered by force majeure event. So, when the performance gets hit by any event and the parties have exhausted all possible measures to deal with the unforeseeable situation within the time frame as agreed by the parties, then parties may terminate the contract in view of the force majeure clause. 

Force Majeure Clause in COVID-19 – The Indian way-out

To deal with the apprehension pertaining to misuse of the force majeure clauses, on February 19, 2020, Ministry of Finance, Government of India came out with an Office Memorandum (No.F.18/4/2020-PPD) which mentioned that “a force majeure clause does not excuse a party’s non-performance entirely, but only suspends it for a duration of the force majeure” and it does not operate like an ex-post-facto event. It goes on to add that if there is a delay in performance of any part of the contract or whole of the contract during the event of force majeure for a period of more than 90 days then the parties are free to terminate the contract without facing any financial repercussions from both the sides.

In India “Force majeure” is governed by the Indian Contract Act, 1872. It can be express or implied clause in a contract, and is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 of the Contract and is dealt with by a rule of positive law under Section 56 of the Contract. 

Section 56 provides for the contractual obligations which become impossible by “reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful”. In this situation, one can argue that COVID-19 falls under the purview of section 56 of the Indian Contract Act, 1872, however before arriving at any conclusion; one has to take note of the provisions regarding contingent contracts under section 32 of the Act. “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”. 

The jurisprudence with respect to Force Majure has evolved over a period of time, which includes the common law principles as well as the judicial scrutiny carried by the courts in India. In Taylor vs. Caldwell, (1861-73) All ER Rep 24 , it was held that if some unforeseen event occurs during the performance of a contract which makes it impossible of performance, in the sense that the fundamental basis of the contract goes, it need not be further performed, as insisting upon such performance would be unjust. It was followed in Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310, and the apex court adverted to second paragraph of Section 56 and held 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. It was further held that where the Court finds that the contract itself either impliedly 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 de hors the contract, it will be governed by Section 56.

Further, in M/s Alopi Parshad & Sons Ltd. v. Union of India, 1960 (2) SCR 793,apex court held that, the Act does not enable a party to a contract to ignore the express covenants thereof and to claim payment of consideration, for performance of the contract at rates different from the stipulated rates, on a vague plea of equity. 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.

Similarly, in Naihati Jute Mills Ltd. v. Hyaliram Jagannath, 1968 (1) SCR 821, the court concluded that a contract is not frustrated merely because the circumstances in which it was made are altered. The Courts have no general power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events.

In a nutshell, force majeure is a defense which a party pleads in cases of non-performance of contractual obligations. According to Indian jurisprudence the ingredients to take the plea of force majeure clause and whether COVID-19 satisfies all the conditions are discussed below:

• Does the event render the performance of contract impossible? 

An event will only qualify to be a force majeure when the very foundation of the contract on which the parties negotiated upon gets jeopardised. The circumstance in question should knock down the core basis of the contract because of a drastically changed event that could never be foreseen or visualised or contemplated. The maxim “non haec in foedera ven” becomes relevant in this scenario which literally means “it was not this which I had promised to do”. The Indian courts time again upheld that the contracts which have become impossible to perform need not be performed.

• Was the event unavoidable and can only economic hardship result to force majeure?

It is a settled principle in law that any fluctuation in price, the sudden increase in price or financial turmoil cannot be claimed while taking the defense of force majeure. 

With respect to the tests laid down in (i) and (ii), it is to be noted that it cannot be denied that COVID-19 is going to cripple the economy and thus making the performance of contracts costly and difficult due to increased cost of labour, social distancing norms, lockdowns, paying salary to the employees, etc. However, if there is an alternative method or mode of performance is available then the force majeure cannot be claimed for impossibility to perform. The key term being here is the word impossibility to perform. It should be an absolute condition of impossibility of performance. 

• Is the event foreseeable?

The event at hand has to be absolutely unforeseeable and even any early warning signal or sign can make the defense of force majeure unenforceable.

Having a glance at the timeline of the spread, there can be a debate regarding the lockdown by the Government because if we take the international practices into consideration then the lockdown was foreseeable to some extent. Also, the lockdown is temporary in character. Though it was not foreseeable it can be concluded that contracts can be performed once normalcy returns. 

• Is there a causal link?

One more important test is the test of causation. To prove force majeure, one has to prove that the non-performance is a direct result of the COVID-19 pandemic. It cannot be remote consequence.

Conclusion

By the tests discussed above, it becomes more and more clear that to plead the defense of force majeure the threshold is very high. The force majeure clause will not normally be construed to apply where the contract provides for an alternative mode of performance. It is clear that a more onerous method of performance by itself would not amount to a frustrating event. There can be no defined strategy or a formula to evaluate the impossibility of the performances. Although it cannot be denied that this pandemic is going to exponentially increase the number of force majeure cases in commercial contracts. The Bombay High Court on April 8, 2020 in Standard Retail Pvt. Ltd. and Ors. v. M/s. G. S. Global Corp & Ors held that the defense of Force Majeure cannot be pleaded in the cases of supply of essential services like steel. It said the force majeure although it entails within itself events like epidemics, however, that cannot absolve the suppliers of essential services from performing their contractual obligations because there is a strict guideline in the country regarding allowed movements of essential goods and services.