Force Majeure, Act of god – Applicability during Covid-19
INTRODUCTION
The raise of coronavirus, being referred as COVID-19 has been declared as a pandemic by WHO on 11th March,2020 had an inexplicable effect on nearly all the sectors. Countries across the globe has been suffering at the hand of this pandemic, it has not only impacted Indian economic system, but also impacted other countries like United States, Spain, UK, Italy, France, etc. It has halted the lives of people along with economic activities as governments of different countries-imposed lockdowns and restricted movement in order to prevent the spread of the virus. Due to this virus, there has been a pause on commercial activities and business dealing, as fulfilment of contractual obligations or contracts between parties is an essential element of any business, COVID-19 has become a hindrance for the same.
Now the question arises, will there be any lawful action against the party who is incapable to act upon the contractual commitments by an aggrieved party? because per the Section-37 of the Indian Contract Act, the parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. Thus, answer to the above question might be no, as under some circumstances if any party is unable to perform their contractual obligations, they can be excused by the law but the question of the hour “what is protecting them”? There are some exemptions provided in English law as well as Indian legislation, identified under the umbrella of the doctrine of frustration and the clause of force majeure.
Based on the contract drafting, such clauses may have many results, comprising: relieving the influenced party from doing the agreement in whole or in part; excusing that party from postponement in performance, entitling them to suspend or claim an extension of time for performance; or giving that party a right to terminate.
If an individual is incapable to perform his contractual obligations, they will not be held accountable for incompletion of their obligations provided they have a valid defense in the concept of force majeure or the common law doctrine of frustration. Force majeure clause shall commonly accept one of the methods of conceptualizing the categories of event which can, based on its affect, help a party from contractual accountability:
There might be comprising event like wars, terrorisms, earthquake, hurricanes, acts of governments, plague or epidemic. Where the term pandemic, has been used, that will undoubtedly cover Covid-19.
Concept of ‘force majeure’ under the Indian Contract Act, 1872
Sec. 56 of the Indian Contract Act 1872, which depends on the custom-based law standard known as Doctrine of Frustration' and inside which lies the idea of 'force majeure', is at present being discussed on its use. A force majeure provision, an expression got from the French language that implies an unrivaled force, is an express provision of conditions wherein execution under the contract will be pardoned or suspended for the moment.
Usually, force majeure event comprises an Act of God, war, labor unrests, pandemic, etc. and is utilized as an exclusion to what would otherwise make a violation of contract. Contrary to popular belief, the expression force majeure is born out from the “Code Napoleon” rather than the “act of God” and has broader meaning when contrasted to the end.
Sec. 56 of the Act, takes into consideration the impermanent release of commitments on grounds of inconceivability of execution of contract due to an untoward occasion or change in condition however for summoning such a provision, the sine qua non is:
(i) It must continue from a reason not achieved by the defaulting gathering's default.
(ii) The reason should be unavoidable and unforeseeable.
(iii) The reason should make the execution of the contract completely incomprehensible.
The parties guaranteeing force majeure is below a commitment in imitation of exhibit to that amount every good assignment in imitation of stay outdoors beyond yet rescue the pressure majeure occasion yet its affects had been attempted because of their benefit, in spite of the fact as this turns abroad after stand at all abstract yet contrasts beyond litigation in accordance with case. In absolute contracts the place the period on pressure majeure is broadened, parties are given the alternative to end the settlement according to more to them beside the board troubles or price offers as can also come up later.
The legal framework in India concerning this was laid down in the seminal judgment of “Satyabrata Ghose v. Mugneeram Bangur & Co. which left it upon the interpretation of judges to determine whether the factual determination based on the specific terms of the contract qualify to come under the scope of force majeure. However, In the case of Energy Watchdog v. CERC”, J. Nariman on the SC narrowed down the connection about the time period force majeure, however if precedents are according to stand looked at since that may remain summed on so the time period pressure majeure integrates within itself a vast variety of conditions. For instance, now demonetization used to be introduced by means of the government, development yet the property region was once deeply affected then within so era concerning imminency the C.E.R.C dead demonetization to lie a relevant reason according to flourish the law concerning pressure majeure yet as a consequence among a road partial such a latter dimension over meaning.
Sec. 32 of ICA,1872 discusses the enforcement of contracts dependent upon an occasion happening for example unforeseen contracts to do or do nothing dependent on if a dubious future occasion occurs, can't be enforced by law except if and until the occasion has occurred. On the off chance that an occasion gets unthinkable in itself the occasion gets void under this area. Here are a few outlines:
Description: 1) An, an individual, contracts with someone else, B, that A will pay B if B weds C. But C then dies without wedding B. So, this contract comes void.
Description: 2) A, an individual, creates a contract with another individual, B, for buying B’s horse if A survives C. This contract of responsibility can’t be enforced unless and until C dies in A’s lifetime.
Sec. 56 describes agreement to do an impossible act: A contract to do an impractical act is void in itself and bleakness of agreement or performance of agreement is the foundation of the Doctrine of Frustration. This is used as changeable expression. Usually, Doctrine of Frustration can be applied in several cases but generally valid in two cases which are: a) When the purpose of an agreement becomes not viable to carry out, or, b) When any unexpected event happens which is uncontrollable for the bound party and which creates the performance of the agreement not viable. There are various explanations of Sec. 56:
Description: 1) A, an individual, made a contract to sell the horse to B on 1st Jan. 2020. However, the horse died on 31st Dec. Consequently, the formerly created agreement among A &B becomes invalid because the purpose of the agreement does not exist.
Description 2 is more applicable to the current situation:
Description: 2) A, an Indian citizen, entered into a contract with B, an occupant of another nation for example China. Some bit of the contract was performed yet a significant segment was yet to be performed and the Government of India pronounces war on China and suspends all exchange with China. After this the contractual commitment gets void and gathering who can't play out his commitment can guarantee the safeguard of inconceivability of contract.
Given below particular circumstances in which the doctrine of frustration uses:
• Transformation of situations: An agreement will frustrate where situations arise which create the achievement of agreement impossible in the way and the time considered.
• Death or injury of Party: A party to an agreement is excused from performance of the contract if it depends upon the existence of the given individual and that individual dies or becomes too ill to do.
• Government or Legal interference: An agreement will expire when legal or managerial interference has so directly operated upon the particular performance of the agreement as to change the considered situations of completion.
The current Covid-19 epidemic meets the first condition, creating doctrine of frustration a defense against the obligations to fulfill a contract. Hence, the WHO announced Coronavirus an Act of God and parties to an agreement may utilize Coronavirus as a resistance or safeguard from legislative outcomes.
REJECTION OF FORCE MAJEURE DEFENSE BY COURT
“The Bombay HC about 8th April 2020, denied Force Majeure exemption to steel importers noting to that amount metal has been declared namely an essential situation at some stage in the lockdown. The petitions had been submitted underneath Sec. 9 concerning the Arbitration and Conciliation Act whereby the petitioners sought directions restraining the Respondents out of encasing the Letters over Credit by using invoking the force majeure item between theirs contract. The petitioners relied upon Sec. 56 of Indian Contract Act, 1972 as well as Supreme Court’s judgment in Energy Watchdog v. CERC (2017) and Satyabrata Ghose v. Mugneeram Bangure and Co. (1954) to contend that the contracts with Hyundai Corp and GS Global stood terminated as unenforceable due to frustration, impossibility and impracticability.”
Refusing the ad-interim reliefs sought via the Petitioners, the Court stated that:
The Letters over Credit based totally regarding a sovereign deal along Bank Wells Fargo or so, does now not utter in accordance with the present clashes among the Petitioner yet the Respondent.
The composition life referred in imitation of was of Cost and Freight premise. Basing atop this, the Court observed to that amount due to the fact the Respondents had agreed in conformity with their commitments and performed out theirs part of the settlement by transport products from South Korea, the abortion concerning the Petitioners after play oversea theirs commitments towards consumers then the rivalry as he would within it way undergo harms could not lie regarded as a considerable ground after bray Force Majeure. In that way, in instances it way, such is relevant in accordance with bust observe regarding to that amount the remote chance about hardship, damage and anybody pecuniary coercion would no longer stand ample after conjure Force Majeure.
The Court either depended over the pathway so much the appropriation of metal was stated as a 'basic help' and to that amount so was once no challenge about its development. Considering this, the Force Majeure situation could not pace according to the guide of the Petitioners. Besides, the Court expressed to that amount the lockdown would stand for a confined period or so much the lockdown obligation no longer keeps blamed so as much in accordance with resale beside the contractual commitments.
SOME LANDMARK RULINGS IN INDIA
Deliberate on what is to be kept in mind as a force majeure, in the seminal decision of “Satyabrata Ghose v. Mugneeram Bangur & Co.” the Court had turned away to Sec.56 of the Indian Contract Act. The SCI apprehended, up to expectation the phrase “not possible” have at present no longer been applied to the Sec. of the feel of corporal then unerring hopelessness. To determine whether or not a force majeure event has exceeded off, that is no longer significant that the performance over an action have to stand certainly turn oversea in imitation of be now impossible, an impracticality over performance, the factor of view of the events and considering the item over the agreement, may additionally also stand included. Where an untoward tournament yet casual change regarding scenario upsets the altogether basis foundation of the entered contract, the same can be taken into consideration as impossibility to do as agreed.
The Hon’ble SCI, in “Raja Dhruv v. Raja HarmohinderSingh”has made this understood by expressing that Sec. 56 has restricted application to agreements under a rent and doesn't have any significant bearing to situations where there is a finished exchange. The court additionally saw that a renter can't keep away from the rent since he doesn't or can't use the land for the reason for which it is let to him if the land is fit for utilization and thusly, S. 56 of the Indian Contract Act doesn't make a difference in that situation.
The SC in the case of “Dhanrajmal Gobindram vs. Shamji Kalidas” has held that the term force majeure is of more extensive import. Judges in the past have concurred that where the reference is made to force majeure, the aim is to spare the performing party from the outcomes from the anything over which he has no control.
“Subsequently, in Naihati Jute Mills Ltd. v. Hyaliram Jagannath, the SC moreover referred to the English law concerning frustration, and concluded up to expectation an agreement is now not pissed afar basically because the situations between which such became of performed are altered. In widespread, the courts don’t bear any strength in conformity with absolve a birthday celebration beside the overall performance regarding its portion concerning the contract only because its standard performance has become outdoors in imitation of remain onerous ensuing out of an sudden pop concerning things to do. Further, in Energy Watchdog v. CERC”, it became observed as follows:
While half about the agreements function bear a force majeure clause, one query which ought to get over is whether or not the measurement on pressure majeure occasion be performed handiest condition there’s a elected clause inside the agreement yet event otherwise? Typically, among every about the agreements, whether and now not the promisor is below the constraint in imitation of right outside acquaint the promisee among case about prevalence regarding some tournament then incidence, any force majeure occasion yet employment concerning God such as much earthquake, flood, tempest or typhoon, etc. yet one-of-a-kind similar happenings, regarding as the promisor develop according to be aware, as is moderately expected after adversely bear an impact about the promisor, yet its potential in conformity with function responsibilities beneath the agreement. The phrases concerning the contract then the cause has to lie understood in conformity with determine the impact over force majeure clause.
The following question may come up, whether or not each time majeure leads to frustration of the agreement?? For instance, if the settlement turned into 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 part of the transaction. Therefore, the impact of the pressure majeure occasion can’t be generalized and shall range depending on the nature of transaction. Usually, 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 for repossession of the leased gadget.
Further, in case the force majeure event frustrates the very rationale of the settlement, then the events are under 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 execution of the agreement, then such agreements no longer have to be accomplished in any respect. In such cases, if the settlement contains a force majeure or similar clause, Sec. 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 not incorporate a selected provision to this effect then in this kind of case doctrine of frustration beneath Sec. 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 motive of some event which the promisor could not prevent, illegal, becomes void while the act turns into not possible or unlawful.
RECOMMENDATIONS FOR PARTY INVOKING FORCE MAJEURE PROVISIONS
Parties must be cautious concerning their obligation as the circumstances continues to unfold, and must take into concern the following stages:
They should rigorously review their contract in order to determine whether the contract provides for a force majeure clause or not. And if it does, interpret the force majeure provision to ensure if an event such as COVID-19 or nation/statewide lockdown will fall within its purview. The legal principle of ejusdem generis, as well as harmonious construction, will come handy. If in doubt, it may be helpful to seek legal advice early on in the process.
Carefully discern that the inability to perform the obligations under the contract is due to the consequences (direct or indirect) of COVID-19 and no other considerations thereto.
Be vigilant in taking steps to avoid or mitigate the possible effects of COVID-19 upon your business, workforce and your ability to continue to perform contractual obligations. It will be of utmost legal importance to show that you have taken all reasonable measures to fulfil your obligation and that it was, in fact, beyond your reasonable control.
Carefully consider whether there are any time-bound notice requirements and take timely action in intimating the other party/parties.
Carefully go through the insurance policy’s terms and conditions to determine whether insurances may cover any of the expected losses.
The existence of a force majeure clause may give the parties the leeway to renegotiate their obligations under the contract. It is however imperative that the renegotiations are made keeping in mind any future obstruction that COVID-19 may cause. This is in line with the fact that for contracts that have been entered into during the continuance of the COVID-19 crisis, it will be difficult to invoke force majeure as the parties will be expected to be aware of the ongoing situation and its foreseeable consequences.
CONCLUSION
The countrywide financial crisis and an overall fall in many industries because of the epidemic of COVID-19 cannot be interpreted as an applicable cause for the frustration of each and every obligation. The interruption or postponement in performance of some contracts of a contract due to the force majeure provision varies from one obligation to another based on the fact and situation of a specific issue. The responsibility will be on the parties to underline the specific dilemma caused by the epidemic of COVID19 that stopped them to accomplish their duty and obligation in the agreement. Consequently, the burden of proof preserves that the incidence of the epidemic is the sole cause behind non-performance rest upon the party looking to claim advantages in such a provision. Furthermore, the party will be needed to confirm that there were no optional means by which the contractual commitment could have been completed and that all sensible precautions had been taken to mitigate the outcomes of these situation. Lastly, it is also pertinent to note that unlike Force Majeure clauses where the parties can delay the performance (contractual remedy) based on their situations; no such relief can be availed in Sec. 56 of Indian Contract Act.
Although verifying whether the Covid-19 epidemic fall within the scope of the appropriate force majeure provision is a good beginning point, problems like causal link and duty to alleviate also require to be studied so as to evaluate the comparative strength and weakness of such party’s position. Appropriate letters and correspondences must also thoroughly document not just the fact that a force majeure event has happened, but also the particular impacts of the same on the contracts which the party looks to be excused to perform.
Written by: -
GAURI RAJPUT
B.A., LL.B (H)
Amity University, Noida