This Article is written by Akshma Gupta. (currently pursuing my B.A, LLB degree from the University of Petroleum & Energy Studies, Dehradun)
FORCE MAJEURE AT THE TIME OF COVID-19
The term Force Majeure was in a lot of use at the time of COVID-19. Around the world, the lockdown was imposed in many countries which restricted human movement, travel was banned and domestic and international trade was put on halt. Various sectors such as Aviation Sector, Hospitality Sector, Real Estate Sector, Banking Sector and Sports sector were affected. Such an unanticipated situation that was out of control lead to the impossibility of the performance of contractual obligations and thus a need to invoke the Force Majeure clause arose.
Force Majeure in French means “a superior force”. Force Majeure is defined as “an event or effect that can neither be anticipated nor controlled; especially, an unprecedented event that prevents someone from doing or completing something that he or she had agreed or officially planned to do. The term includes both, acts of nature (e.g., floods and hurricanes) and acts of people such as public disorders, strikes[i]. In other words, ‘force-Majeure refers to “events outside the control of the parties and which prevent one or both the parties from performing their contractual duties”[ii]. In the Indian Contract Act, Force Majeure has not been defined, however, the supreme court has defined force majeure – “where reference is made to “force majeure”, the intention is to save the performing party from the consequences of anything over which he has no control”[iii]. Force Majeure Clause relieves one or both the parties to a contract from the liability if the performance is made impossible due to the occurrence of an unforeseen event that was beyond the control of the parties. The Hon’ble Supreme Court in Dhanraj Gobindram’s[iv] case observed that force majeure includes any event over which the performing party has no control.
Section 32 and 56 of the Indian Contract Act deals with the situations of Force Majeure. Section 32 states “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.[v]”
In the context of a force majeure clause providing for the contingency upon the happening of a force majeure event, the Supreme Court interpreted the clause to be governed by Section 32 and not Section 56[vi]. To decide whether the force majeure clause can be a contingent contract in relation to the event, the factor to decide this can be the change in the parties’ obligations in the contract which changed upon the occurrence of a situation. If no such clause is there or the event doesn’t come under the scope of the clause then section 56 would apply. In “Energy Watchdog v. CERC, the court held: If the contract contains an express or implied force majeure clause then the dissolution of the contract would take place under the terms of the contract itself and such case would be dealt with under S.32 of the Act”[vii]. It further stated that if there is an alternative to complete the performance of the obligations then the Force Majeure clause would not be applied. Conditions to implement the Force Majeure clause-
- Occurrence of an unforeseen event.
- Impossible performance.
- Reasonable measure taken to reduce the consequences.
Section 56 states “Agreement to do impossible act. —An agreement to do an act impossible in itself is void. Contract to do an act afterwards becoming impossible or unlawful. —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.Compensation for loss through non-performance of an 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 promisee for any loss which such promisee sustains through the non-performance of the promise.[viii]”
Section 56 can be used when the contract does not have a Force Majeure clause for such events which make the contract performance impossible. According to this section, an agreement to do an act that is impossible is void. “The section requires that the event meet the threshold of ‘impossibility’. Once the event is shown to have rendered the contract impossible to perform, the contract stands frustrated / or declared void. Consequently, the performance of the contract is excused without the levy of damages”[ix].
World Health Organization on 11th March 2020, declared COVID-19 as a Pandemic. On 19th February, 2020, the finance ministry and the department of expenditure. declared that COVID-19 needs to be considered as a natural calamity and invocation of force majeure must be considered wherever appropriate. A similar memorandum was passed by the Ministry of New & Renewable Energy, which declared the disruption in the supply chain due to COVID-19 as a force majeure event. Also, the biggest container terminal in India, which is run by Maersk at Mumbai port, as well as Adani Ports in Gujarat, already declared force majeure, joining oil refiners IOCL and Mangalore Refineries and Petrochemicals Ltd.
According to the McCardie J. decision at the court of King’s Bench; “A force majeure clause should be construed in each case with close attention to the words which precede or follow it, and with due regard to the nature and general terms of the contract. The effect of the clause may vary with each instrument”[x].
Whether COVID-19 shut down will be considered as a Force Majeure event for all the agreements?
The parties of the contract can take relief either under the Force Majeure Clause or under section 56 of the Indian Contract Act. To determine whether the force majeure clause covers pandemic or not:
- When the parties have agreed & documented the invocation of Force Majeure clause in the deed then such invocation would depend upon the wording, scope and ambit of the definition of a force majeure event. If the parties have specifically included words like pandemic/epidemic then invocation of force majeure clause can be done.; or
- If the clause covers extraordinary events or circumstances beyond the reasonable control.
- Force majeure clauses comes in all shape and size, typically, such a clause defines a set of events that are supervening ones from beyond the contractual sphere of controls- such as act of God, fires, strikes, riots. This list can be endless hence, by generic language, any incident or event beyond the control of the relevant affected party or parties comes in the ambit of a ground to force majeure.
However, if both the above instances are not expressed in the contract then the party can claim the impossibility of performance under section 56 of the Indian Contract Act. In “Taylor vs. Caldwell, 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 bases of the contract go, it need not be further performed, as insisting upon such performance would be unjust”[xi].
In“Satyabrata Ghose v. Mugneeram Bangur & Co., elucidated the scope of Section 56. It states that a mere impracticality of performance is sufficient to decide a force majeure event and it is not essential for the act to become literally impossible. It further held that the word impossible in Section 56 does not mean physical or literal impossibility”[xii].
Before taking relief on the basis of the Force Majeure Clause:
- The party claiming the force majeure clause needs to comply to the all the procedures in the force majeure clause. In many clauses issuance of notice before claiming force majeure relief is a condition. In “Himachal Sorang Power Ltd v. Central Electricity Regulatory Comm. & Anr., it was explicitly mentioned in their contract that; in order to invoke the Force Majeure, the party has to give notice to the other party of the existence of the Force Majeure event”[xiii].
- The provisions of force majeure clause require that the party affected must show that all reasonable efforts are taken to avoid the event.
- The relief depends on the language of the force majeure clause mentioned in the contract.
- Many states have invoked the Epidemic Diseases Act, 1947 which restricted commercial activities and the public movement. Due to change in law the activities have been disrupted and thus a relief of price adjustment or extension of time period or both can be given to the affected party.
- Insurance policies needs to be carefully analysed to see if the losses can cover in these policies.
Covid -19 is a supervening event beyond the control of any part of a contract. Hence the affected party has a right to get relief under the Force Majeure clause or under section 56 of the Indian Contract Act. Force Majeure clause or Frustration of contract cannot be applied directly, it depends upon the circumstances and facts of the case. The situation of COVID-19 can fall under two categories. First, when the contract expressly mentions force majeure clause and second when there is no force majeure clause then section 56 can be invoked.
[i] Black’s Law Dictionary, 11th Edition.
[ii] P. Ramanatha Aiyar’s Advanced Law Lexicon, 5th Edition.
[iii] Dhanrajamal Gobindram vs. Shamji Kalidas and Co, AIR 1961 SC 1285.
[iv] Dhanrajamal Gobindram v. Shamji Kalidas and Co. AIR 1961 SC 1285.
[v]The Indian Contract Act, 1872, 2021 Bare Act Lexis Nexis.
[vi] National Agricultural Co-Operative Marketing Federation of India v. Alimenta S.A. Civil Appeal 667 of 2012.
[vii] Energy Watchdog v. CERC (2017) 14 SCC 80.
[viii]The Indian Contract Act, 1872, 2021 Bare Act Lexis Nexis.
[x] Lebeaupin v Crispin  2 KB 714].
[xi]Taylor V Caldwell  3 B&S 826.
[xii] Satyabrata Ghose v. Mugneeram Bangur & Co., (1954) SCR 310.
[xiii] Himachal Sorang Power Ltd v. Central Electricity Regulatory Comm. & Anr., 2015 SCC OnLine APTEL 148.