When the existence of the novel Coronavirus started featuring in the news space following China’s confirmation of its spread in the month of January, 2020, it was considered a novel, elusive actuality. It did not qualify as sufficient cause for concern and alarm which could have potentially sparked much needed preparations. However, in the past three months, the number of confirmed cases and resultant deaths due to Covid-19 (the disease caused by Coronavirus) has risen exponentially across the globe leading the World Health Organisation (WHO) to officially declare the corona virus outbreak as a “pandemic” on 11-3-2020[1].
In such persisting circumstances, the Government of India, in its endeavour to contain the extraordinary outbreak of the Coronavirus and its staggering effects, declared a nationwide lockdown. In the face of the unprecedented situations which have arisen as a result of the complete lockdown, many facets of our system find themselves temporarily inoperative. The disruption of the supply chain is one such inevitable corollary. Given this context, it is likely that performances under many existing contracts will be interrupted, postponed or cancelled. Such state of affairs then throws open many questions viz: Can the present day situation posed by COVID-19 pandemic qualify as “Force Majeure”, whether or not parties to the contracts/agreements can plead for being excused from performing their part of the contract citing force majeure and how will the contracts/agreements wherein, there is no specific force majeure clause would be governed in situation of supervening impossibility etc. This article would attempt to cover answers to all the afore-mentioned questions in light of the existing statutory provisions and the law laid down by the various courts of law in form of case laws.
Meaning of Force Majeure
The concept of force majeure[2] owes its origin to Roman Law which recognised the principle of “clausula rebus sic stantibus” which provides that obligations under a contract are binding so long as the situation existing at the time the contract was entered into fundamentally remains the same. The term force majeure refers to an event or effect that can be neither anticipated nor controlled. To put it differently, any event or circumstance which is within the reasonable control of the contracting parties does not qualify as force majeure. Legally, it is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable, especially as a result of an event that the parties could not have anticipated or controlled[3]. From a contractual perspective, the concept gains significance in as much as it provides protection to contracting parties in cases of virtual and actual impossibility of performance of contract. Hence, where reference is made to force majeure, the intention is to save the performing party from consequences of anything over which he has no control[4].
Force Majeure and Contract Act, 1872
While the provisions contained in the Contract Act, 1872 neither define the term ‘force majeure’ nor do they typically spell out the specific circumstances and events which would qualify as ‘force majeure events’, nevertheless the references to the same may be gathered from certain specific provisions laid therein.
In cases where the contract entered into between the parties contains an express or implied force majeure clause, defining the type of events, such as war, terrorism, earthquakes, hurricanes, acts of government, plagues or epidemics etc., 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 Contract Act, 1872[5]. A force majeure clause should be construed in each case with a 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[6]. The relevant provision as contained in Section 32 of the Contract Act, 1872 is as follows:
32. 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.
However, when no relevant event is mentioned in a contract, the occurrence of which frustrates the very purpose of the contract, the provision contained in Section 56 of the Act comes into play. Section 56 of the Contract Act, 1872 embodies the “doctrine of frustration”. Briefly, “frustration” is an English contract law doctrine that acts as a device which serves to dissolve a contract when, as a result of an unforeseen instance, the obligations covered by it are rendered impossible to fulfil or the principal purpose for entering into the contact on the part of either party is fundamentally altered[7]. Generally speaking, the doctrine of frustration as embodied in Section 56 is relied upon for termination of contract. Section 56 of the Contract Act, 1872 reads as follows:
56. Agreement to do impossible act.- An agreement to do an act impossible in itself is void.
Contract to do act afterwards becoming impossible or unlawful. A contract to do an act which, after the contract 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 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 promise for any loss which such promisee sustains through the non-performance of the promise.
As is manifest from the perusal of the aforementioned provision, the first paragraph of Section 56 provides that “an agreement to do an act impossible in itself is void” while the second paragraph of the same lays that a contract to do an act becomes void when such an act becomes: (a) impossible; or (b) unlawful by reason of some event which the promisor could not prevent. Under Section 56, the court can proceed to grant relief on the ground of subsequent impossibility when the very foundation of the contract becomes upset by the happening of an unforeseen event which was not anticipated by the parties at the time when the contract was entered into by them[8]. Such event or change must be so fundamental as to be regarded by law as striking at the root of contract as a whole[9]. Therefore, where performance is rendered invalid by intervention of law, or where the subject-matter assumed by the contracting parties to continue to exist is destroyed or a state of thing assumed to be the foundation of the contract fails, or does not happen, or where the performance is to be rendered personally by a person who dies or is disabled, the contract stands discharged[10]. Thus, in a nutshell, it can be said that where there is clear stipulation in the terms of the contract upon which the performance of the contract is dependant, such contracts would be governed by Section 32 of the Contract Act, 1872 and wherever, there is no such stipulation in the contract, such contracts would be governed by Section 56 of the Contract Act, 1872 in cases a supervening impossibility arises. The said applicability of Section 32 vis-à-vis Section 56 of the Contract Act, 1872 has recently been delved into by the Supreme Court of India as an ancillary issue in National Agricultural Cooperative Marketing Federation of India v. Alimenta S.A.[11]
Whether situation posed by COVID-19 pandemic qualifies as Force Majeure event?
In response to the potential ramifications of the Covid-19 pandemic in the functioning of the economic and industrial machinery, notifications and advisories have been issued by the Government of India in an attempt to bring in some semblance of stability.
For instance, on 19-2-2020, the Ministry of Finance, Government of India issued a notification[12] clarifying that the disruption of supply chains due to the spread of coronavirus should be considered as a case of natural calamity and force majeure clause may be invoked, wherever considered appropriate, following due procedures. The aforementioned notification further stipulates that “coronavirus should be considered as a case of natural calamity and force majeure may be invoked, wherever considered appropriate, following the due procedure…a force majeure clause does not excuse a party’s non performance entirely, but only suspends it for the duration of the force majeure. The firm has to give notice of force majeure as soon as it occurs and it cannot be claimed ex-post facto…If the performance in whole or in part or any obligation under the contract is prevented or delayed by any reason of force majeure for a period exceeding ninety days, either party may at its option terminate the contract without any financial repercussion on either side”. However, the aforesaid Office Memorandum may not necessarily or implicitly serve as binding document for the contracting parties, being more in the form of an advisory or recommendation.
In addition to the above, the question as to whether COVID-19 outbreak along with its consequential restrictions including the quarantines, travel restrictions or other related limitations on normal business imposed by government would qualify as force majeure, would depend on the language of the clause and the rules of legal interpretation of force majeure clauses[13]. Hence, the wordings used in different clauses of the contract assume salience in order to find out as to whether or not parties to the contracts/agreements can plead for being excused from performing their part of the contract citing force majeure given the situation posed by the COVID-19 pandemic. For the aforesaid purpose, further discussion in this article is broadly categorised into two headings — (i) Firstly, cases where force majeure clause is enshrined in the contract itself, and (ii) Secondly, cases where force majeure clause is not enshrined in the contract.
1. If Force Majeure Clause is enshrined in the Contract
Pertinently, if the force majeure clause in the contract refers to a pandemic or an epidemic, the same may be pleaded and urged by contracting parties where performance of the contract entered between them has become practically and commercially impracticable on account of COVID-19 outbreak. Where a contracting party seeks to claim relief under the force majeure clause, the occurrence of one of the events set out in the force majeure clause is needed to be proved and the burden of proof lies on the party which invokes the force majeure clause.
Now, in contracts where the force majeure clause explicitly covers pandemics and epidemics or situations arisen by responses to the pandemic or epidemic, the discharge of the aforementioned burden remains fairly uncomplicated. However, complications arise in a scenario where a force majeure clause simply uses the phrase ‘event beyond the reasonable control of parties’. Here, to facilitate swift and favourable discernment of disputes, it becomes vitally important for the party invoking the force majeure clause to maintain any and all documents related to the event in question which may prove to be consequential in the ascertaining process. In regard to this discussion, the said documents may include (i) any notification and/or guideline issued by the national and/or state governments imposing restrictions on trade, (ii) definite forms of information from reliable media sources related to COVID-19 outbreak, restrictions on public movement and/or mandatory shutdown of modes of travel (iii) documents revealing any cancellations disrupting travel itinerary, such as cancelled/rejected visa et al.
2. If Force Majeure Clause is not enshrined in the Contract
As has been discussed earlier, when an event which is not mentioned in the contract takes place which frustrates the very purpose thereof, the provision contained in Section 56 of the Contract Act, 1872 shall come into play. The Supreme Court of India, while explaining the concept of frustration in contract law in Satyabrata Ghosh v. Mugneeram Bangur & Amp; Co.[14] has held that the word “impossible” has not been used with respect to physical or literal impossibility. Where an unexpected occurrence or change in circumstances decimates the very objective of the contract the same may be considered as “impossibility” to do as agreed.
A study of the landmark judgments rendered by the Supreme Court of India over the course of time showcases a very high threshold to apply the concept of force majeure which requires the entire foundation of the contract to be shown to be obliterated. An existing contract shall cease to bind the contracting parties only when consideration of the terms of the contract, in light of the circumstances existing when it was entered into, shows that there was no agreement to be bound in a fundamentally different and unexpected situation. The performance of a contract is never discharged merely on the ground that the same may become onerous to one of the parties[15]. In order elucidate and highlight the threshold defined by the Indian courts for citing force majeure by contracting parties, certain celebrated judgments rendered by the Supreme Court are discussed below:
In Satyabhrata Ghose case (supra), it was held by the Supreme Court of India that the contract of sale for a chunk of land was not frustrated and performance thereunder could not be said to be rendered impossible under Section 56 of the Contract Act, 1872 merely because the said land had been requisitioned by the Government for military purposes during the Second World War. The Supreme Court even went ahead to observe that during the war, the parties could naturally anticipate restrictions of various kinds which would make performance under contracts more difficult than in times of peace and therefore, the requisitioning of the land which formed the subject matter of the contract of sale could not be said to affect the fundamental basis upon which the agreement rested or strike at the roots of the adventure.
Likewise, in Alopi Parshad & Sons Ltd. v. Union of India[16], the claim of the appellant for enhanced prices for supply of ghee for Army personnel during the second world war was rejected by the Supreme Court despite enormous scarcity and enhanced procurement expenses owing to conditions of war and it was categorically held by the court that the parties to an executory contract are often faced with a turn of events which they did not at all anticipate, such as, an abnormal rise or fall in prices, a sudden depreciation of currency etc. However, the same does not per se affect the bargain they have made.
In Naihati Jute Mills Ltd v. Hyaliram Jagannath[17] while observing that it is not hardship or inconvenience or material loss which brings about the principle of frustration into play, the Supreme Court held that rejection of an import licence to a jute supplier sourcing Pakistani jute could not be said to have rendered performance under the contract entered into between the parties as impossible.
More recently, in Energy Watchdog v. Central Electricity Regulatory Commission[18] the rise in price of coal consequent to change in Indonesian Law, which though admittedly rendered the contract commercially impossible, was not treated as a force majeure event by the Supreme Court as neither was the fundamental basis of the contract, which in this case was to generate and supply energy from coal, was shown to be dislodged nor was any frustrating event, except for a rise in the price of coal, pointed out. On the contrary, the Court observed that where alternative modes of performance of obligations under the contract were available, albeit at a higher price, the same could not be treated to have been frustrated.
Conclusion
There is no gainsaying that the behemoth of COVID-19 has inter alia virtually brought economic activity to a halt and has disturbed the chain of production, supply and distribution. However, it would be extremely difficult, if not impossible; to prove beyond reasonable doubt that disruptions qua unprecedented outbreak of COVID-19 pandemic have radically and irreversibly dislodged the very bargain contemplated in a contract, particularly in view of the temporariness of such disruptions or for that matter the full probability of resumption of the “pre-Corona” times. Mere inconveniences, difficulty, pause or delay in performance of obligations under a contract owing to COVID-19 pandemic and its consequential restrictions would not hold ground to treat the same as a force majeure event given the little judicial importance offered by the courts of law to such parameters while defining the high benchmark for force majeure to apply. However, given that the Courts would assess the application of concept of force majeure in light of the facts and circumstances of each case presented before them, by either resorting to principle of equity or by adopting a more technical approach, it would be imperative for the contracting parties be thorough with the terms and clauses incorporated in the contract as well as their contractual rights and obligations thereunder.
*Author is a graduate of University of Cambridge (United Kingdom) with a specialisation in Commercial Laws. Currently practicing law before the Lucknow Bench of Allahabad High Court.
**Co-Author is a gold medallist in law from Unity Post Graduate and Law College Lucknow (affiliated to Lucknow University, Lucknow). Currently practicing law before the Lucknow Bench of Allahabad High Court.
The authors deeply acknowledge the guidance of Mr. Gaurav Mehrotra, Advocate
[1] See World Health Organisation Virtual Press Conference on Covid-19, 11th March 2020 available at https://www.who.int/docs/default-source/coronaviruse/transcripts/who-audio-emergencies-coronavirus-press-conference-full-and-final-11mar2020.pdf?sfvrsn=cb432bb3_2
[2] The term force majeure has been borrowed from French, the literal translation whereof is “superior force” in English.
[3] Black’s Law Dictionary, 11th Edition, at page 788.
[4] Dhanrajamal Gobindram v. Shamji Kalidas & Co., (1961) 3 SCR 1020
[5] Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310
[6] Lebeeaupin v. Crispin, (1920) 2 K.B. 714
[7] Taylor v. Caldwell , (1863) 3 B & S 826
[8] Naihati Jute Mills Ltd. v. Khyaliram, (1968) 1 SCR 821
[9] Satyabhrata Ghose v. Mugneeram Bangur, 1954 SCR 310
[10] Raja Dhruv Dev Chand v. Harmohinder Singh, (1968) 3 SCR 339
[12] Office Memorandum No.F. 18/4/2020-PPD titled ‘Force Majeure Clause’, issued by Department of Expenditure, Procurement Policy Division, Ministry of Finance, Government of India
[13] Mulla & Pollock on Indian Contract Act, 1872 & Specific Relief Act, 1967, page 1181.
[14] 1954 SCR 310 (12)
[15] Alopi Parshad & Sons Ltd. v. Union of India, 1960 (2) SCR 793
[16] 1960 (2) SCR 793
[17] (1968) 1 SCR 821
[18] (2017) 14 SCC 80
Incredible.
Thank you.