IS COVID-19 A FORCE MAJEURE IN COMMERCIAL CONTRACTS?
Updated: Jun 16, 2020
Written by: Nandini Tripathy, Symbiosis Law School, Hyderabad
Meaning Of Force Majeure
The term has its foundation from French, that means “extra pressure”. Collins Dictionary defines “pressure Majeure” as “irresistible force or compulsion consisting of will excuse a party from performing his or her part of a settlement”
The term has been described in Cambridge Dictionary as follows:
“a sudden event such as a conflict, crime, or an earthquake which prevents a person from doing something that is written in a felony settlement”.
In Merriam Webster Dictionary, the term has been described as “advanced or irresistible force” and “an event or impact that can't be moderately expected or managed”.
In light of COVID- 19, a pertinent question which can stand upright here is whether or not COVID- 19 shut down may be regarded as a force majeure occasion for all of the agreements, presenting a leeway to the events claiming the impossibility of overall performance? Further, whether such non-compliance with the phrases of the settlement will neither be regarded as a “default devoted with the aid of any birthday party” nor a “breach of agreement”? The popular principle is that an event can appear as a pressure Majeure occasion on fulfillment of the subsequent situations:
• An sudden intervening occasion happened: The event should be one which is beyond the manage of either of the events to the agreement, much like an Act of God;
• The events to the settlement assumed such an event could now not arise: A party’s non-performance will no longer be excused wherein the occasion stopping performance became predicted or become a foreseeable danger at the time of the execution of the agreement; and
• The unexpected event made contractual overall performance not possible or impracticable: For instance, can the provider of debentures say that there is no default if the issuer is unable to redeem the debentures? Whether an occasion has made contractual overall performance impossible or impracticable needs to be decided on a case-to-case foundation. It is to be analyzed whether or not the trouble is so extreme with a view to deeply have an effect on the birthday party, and thereby developing an impossibility of overall performance. This must be, but, relative to the counterparty as a way to create an impossibility of overall performance.
• The events have taken all such measures to perform the obligations beneath the agreement or at least to mitigate the harm: It is needed that a party searching for to invoke force majeure clause need to observe the necessities set forth the agreement, i.e., To provide be aware of the alternative birthday celebration as quickly because it became aware of the force majeure occasion, and need to concretely display how the said situation has directly impacted the overall performance of responsibilities underneath the settlement.
Some Landmark Rulings in India
Deliberating on what's to be taken into consideration as a pressure Majeure, in the seminal decision of Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310, the Hon’ble Apex Court had adverted to Section fifty-six of the Indian Contract Act. The Supreme Court held that the phrase “not possible” has now not been used inside the Section in the feel of bodily or literal impossibility. To determine whether a force majeure event has passed off, it is not important that the performance of an act ought to actually turn out to be not possible, a trifling impracticality of performance, from the factor of view of the events, and considering the item of the settlement, can also be covered. Where an untoward event or unanticipated exchange of condition upsets the very foundation upon which the events entered their agreement, the identical may be taken into consideration as “impossibility” to do as agreed.
Subsequently, in Naihati Jute Mills Ltd. V. Hyaliram Jagannath, 1968 (1) SCR 821, the Supreme Court additionally referred to the English regulation on frustration and concluded that an agreement is not pissed off merely because the situations in which it turned into made are altered. In widespread, the courts don't have any energy to absolve a party from the performance of its part of the contract merely because its overall performance has to turn out to be onerously resulting from an unexpected flip of activities. Further, in Energy Watchdog v. CERC (2017) 14 SCC 80, it became observed as follows:
While some of the agreements do have a force majeure clause, one query which could get up is whether the excuse of force majeure occasion be taken handiest if there's a selected clause within the agreement or event otherwise? Typically, in all of the agreements, whether or not the promisor is underneath the obligation to right away inform the promisee in case of occurrence of any event or incidence, any force majeure occasion or act of God such as earthquake, flood, tempest or typhoon, etc or different similar happenings, of which the promisor grow to be aware, which is reasonably expected to adversely have an effect on the promisor, or its capacity to perform responsibilities beneath the agreement.
The terms of the settlement and the purpose has to be understood to determine the effect of force majeure clause. In Phillips P.R. Core, Inc. V. Tradax Petroleum Ltd., 782 F.2d 314, 319 (second Cir. 1985), it turned into determined that the simple reason of force majeure clauses is in fashionable to relieve a party from its contractual responsibilities while its performance has been averted with the aid of a force past its manage or while the reason of the contract has been frustrated.
The next query that may get up is whether or not each pressure Majeure leads to frustration of the agreement? For example, if the settlement turned into the hiring of an automobile on twenty-fourth March, the prevalence of COVID- 19 may additionally just have the impact of changing the timing of performance. In some different instances, the event may additionally only affect one a part of the transaction. Therefore, the impact of the pressure Majeure occasion can't be generalized and shall range depending on the nature of the transaction. Usually, the occurrence of a pressure Majeure occasion presents the promisee with a right to terminate the settlement, and take all vital movements as it is able to deem healthy. For example, in case of hire, if the lessor considers that there's a threat to the system, the lessor may additionally seek repossession of the leased gadget.
Further, in case the pressure Majeure event frustrates the very rationale of the settlement, then the events are below no obligation to perform the settlement. For example, if the settlement (or overall performance thereof) itself turns into illegal due to any government notification or alternate in law, which arises after the execution of the agreement, then such agreements do no longer have to be accomplished in any respect. In such cases, if the settlement contains a force majeure or similar clause, Section 32 of the Indian Contract Act could be applicable. The stated segment stipulates that contingent contracts to do or not to do something if an unsure destiny event occurs, cannot be enforced via law except and until that occasion has occurred; If the occasion turns into not possible, such contracts turn out to be void. Even if the settlement does now not incorporate a selected provision to this effect then in this kind of case doctrine of frustration beneath Section fifty-six of the Indian Contract Act shall follow. The phase gives that an agreement to do an act which, after the settlement is made, turns into not possible, or, by means of the motive of some event which the promisor could not prevent, illegal, becomes void while the act turns into not possible or unlawful.
At one cease of the spectrum is the rule of “absolute contracts” laid down in the seventeenth century in Paradine v. Jane in which a person who “binds himself via contract truly to do a thing… cannot break out legal responsibility for damages” on the idea “that as occasions turned out of performance is futile or even not possible" at the other give up, is proving discharge of settlement due to impossibility/ frustration on the premise of erosion of the essential bargain among the events.
Between the 2 extremes, it was but natural that an intermediate contractual mechanism for risk allocation could evolve. Such evolution has resulted in multiple sorts of clauses-- an “excellent endeavors” clause, an “affordable endeavors” clause, a clause which pins liability or loss of it based on a specific contingency, and so forth. A force majeure clause is nothing however a chance allocation mechanism in a settlement.
The role is exceptionally summed up by means of the US Supreme Court in Day v. the U.S. therefore:
“One who makes a contract by no means can be certainly positive that he could be capable of performing it while the time comes, and the very essence of it is that he is taking the hazard inside the limits of his information… But while the scope of the know-how is constant, this is simply another manner of announcing that the contractor takes the hazard of the barriers to that volume. “
Although force majeure is regularly blended up with the concept of frustration, it is simply a contractual treatment (even though the existence of circumstance precedents/ contingencies is recognized through Section 32 of the Indian Contract Act, 1872 (ICA)). Frustration, on the other hand, in the Indian context, is a statutory treatment enshrined in Section 56 of the ICA. While the latter outcomes in the discharge of the agreement altogether, the previous is simplest a chance allocation clause, which at high-quality creates a temporary exemption from overall performance (difficulty to the terms of the clause). Since “force majeure” is a contractual mechanism, plenty is at stake in how the force majeure clause is built.
Contents of a typical Force Majeure clause
Generally, at the same time as a settlement between parties is operational, situations might also stand up which can be beyond the contemplation and reasonable control of the events to the agreement. These conditions generally tend to render impossible, the performance of the settlement by means of the events. These conditions are termed as ‘pressure majeure’ occasions. The time period ‘force majeure’ is a French time period derived from the Latin expression, ‘vis important’ or ‘superior pressure.’
Force majeure clauses are of many types-- the primary kind affords for a limited list of activities that the events agree might represent a force majeure occasion for the functions of the agreement. These events commonly include conflict, civil strife, epidemics, acts of Government, and so on. A 2d type is wherein the events agree that each one those events that couldn't have been pondered at the time of execution of the settlement, and that is beyond the affordable manipulate of both birthday parties, constitute a force majeure event for the motive of the agreement. Hybrid variations of the two and more than one variant of those are manifestly feasible since the clause is absolutely left to the parties. The precept to be kept in mind whilst decoding a force majeure clause is that it should be narrowly construed.
Usually, a pressure majeure clause might offer that neither birthday party (or in some instances one unique party) could make a declare because of a pressure majeure occasion. Some pressure majeure clauses might also offer for a termination choice in case the occasion continues over a distinct term.
Whether the outbreak of COVID-19 and the following lockdowns ordered by the Central and State Governments would represent a force majeure occasion is dependent on the specific wording of the clause. Where “epidemics” or “acts of Government” are part of the pressure majeure clause, it's far maximum probably that a Court/ Arbitral Tribunal could preserve that the existing occasions might represent a force majeure occasion situation to:
a) Proof of causation
b) Harmonious construction with different provisions
c) Complying with the condition precedents contained within the force majeure clause.
Each of those problems is discussed separately.
A) Proof of causation
Establishing a causal hyperlink between the force majeure occasion and dilemma to performance of the agreement is a pre-requisite to assert the gain of a force majeure clause. As part of organizing this take a look at, the celebration searching for to benefit from the pressure majeure clause have to display, first, that it would have been capable of carrying out its duties but for the force majeure occasion; second, that the force majeure occasion itself changed into enough to cause the non-performance as in opposition to being one of the many reasons for non-performance. On this foundation, it becomes held that where a charterer couldn't establish its capability to deliver the products, despite the fact that the shipment turned into made impossible by using a distinctive feature of a force majeure event (bursting of a dam in this case), the charterer couldn't take recourse to the force majeure clause.
Applying this test to the existing situation, the primary question to be replied stays whether or not contractual compliance could have been achieved in spite of the effect of the COVID-19 and the COVID-19 advisories (travel advisories dated 17.01.2020, 05.02.2020, 02.03.2020, and 19.03.2020, amongst others) and eventually the lockdown by way of Governmental Orders (Central lockdown for a length of 21 days vide the Ministry of Home Affairs Order dated 24.03.2020 and multiple men or women kingdom lockdowns on in advance dates). The 2d query that desires to be replied is whether a celebration is the use of the pressure Majeure as a mere excuse to protect a breach that would have happened even within the absence of COVID-19 advisories and/ or lockdowns.
Applying this rationale, neither a party which could have executed its responsibilities remotely (such as a designer who could have designed an infrastructure task remotely) nor a celebration who was besides in breach notwithstanding the pressure Majeure event (including an employer who had no longer yet acquired the website to handover to the contractor for the creation and who can't establish that it's far in a function to gather the identical throughout the length of the pressure Majeure event) can take gain of the force majeure clause.
Another state of affairs might be wherein the preliminary breach by using one party caused the alternative birthday celebration to go through the effect of the force majeure occasion consisting of a construction task which was purported to be concluded via February 2020 but was given behind schedule by means of 2 months because of one party’s breach. In this sort of scenario, the pressure Majeure event might have had no effect and therefore the breaching celebration will not be absolved of legal responsibility.
B) Harmonious creation with other provisions
Since a pressure Majeure clause is a contractual introduction, the supply will be examined harmoniously with other provisions. Hence, despite the fact that the force majeure clause might itself offer that neither birthday celebration can be entitled to make a claim, the equal cause of motion might also suit in the ambit of some other clause which might also entitle a celebration to make a claim. In such a state of affairs, the 2 clauses would be harmoniously construed and via doing so, it may still be possible for a party to make a declare.
To illustrate, maximum Power Purchase Agreements and some infrastructure contracts incorporate a “Change in Law” clause, which entitles one of the parties to assert certain extra charges in the event of a detrimental effect with the aid of an “exchange in law.” In such a state of affairs, it can be viable to argue (based totally at the wordings of the character clauses) that the lockdown Order, which became made pursuant to a rule (Section 10(2)(l) of the Disaster Management Act, 2006) ended in an alternate in regulation and therefore this becomes a case where parties had agreed that repayment becomes payable. There may be different clauses as well such as a “Suspension clause” which may be relevant in positive instances. In all such cases, the force majeure clause will ought to be read harmoniously with the opposite provisions of the contract to decipher what the intention of the parties became. Hence, even though an occasion may additionally qualify as a pressure Majeure event, in case there may be a specific provision allocating threat in relation to the event, the unique provision might be carried out on the basis of the rule of thumb of lex specialis derogat legi generali i.e., the special prevails over the overall.
C) Complying with the circumstance precedents contained in the force majeure clause
Most contracts have a notification requirement vis-à-vis the occurrence of the stated pressure Majeure event, which stipulates that the non-acting celebration notifies the performing celebration approximately the prevalence of the pressure Majeure occasion and the subsequent impossibility to perform the works. Indian Courts have held such notification as an obligatory contractual requirement, failing which the force majeure clause will now not be attracted. This is glaringly on the basis that because the force majeure clause is a creation of the settlement, the pre-conditions in the agreement for bringing into play the stated clause will have to be adhered to.
Concluding Remarks - When The Force Majeure Clause Is Attracted Does The Loss Always Lie Where It Falls?
The well-known presumption is that in case of a pressure Majeure event, the loss lies in which it falls on the grounds that neither birthday party is responsible to the opposite for a loss prompted due to an occasion beyond its manipulate. However, a case for claiming repayment may be made in the following instances:
A) By establishing that the purpose of the loss isn't always virtually the pressure Majeure event however the other birthday party’s breach,
B) Where the force majeure occasion falls inside the ambit of any other risk allocation clause (together with an “exchange in regulation” clause) which presents for payment of reimbursement by one celebration, and
C) Where the pressure Majeure clause itself is restricted in scope.
The exceptions cited may not be exhaustive and it's miles likely that with unique truth situations emerging, the jurisprudence on this vicinity would broaden substantially.
Before concluding, it is suitable to emphasize that not one of the examples given in this text relates to contracts where time is of the essence, given that it's miles more likely that such contracts would stand annoyed owing to the impossibility.
COVID- 19 has been declared as a virulent disease by means of the World Health Organisation, and the Ministry of Health and Family Welfare has issued an advisory on social distancing, w.R.T. Mass accumulating and has positioned tour restrictions to prevent spreading of COVID-19. On nineteenth February 2020, vide a workplace memorandum O.M. No. 18/4/2020-PPD, the Government of India has clarified that the disruption of the deliver chains due to the outbreak of coronavirus in China or every other the USA Must be taken into consideration as a case of natural calamity and “pressure Majeure clause” may be invoked, wherever taken into consideration appropriate, following the due method.
In view of the present-day situation in which COVID- 19 has a global impact, and is ensuing in a continuous sharp decline inside the marketplace, it's far crucial to understand the relevance of force majeure clauses and the effect thereof.