COVID19- National wide - Lockdown Force Majeure : An Analysis
In light of the COVID 19 situation in India, a lockdown is being enforced by Central and State Governments in most parts of the country and states with a clampdown : on movement of people, transport vehicles both locally and across states, directing closure of educational institutions, commercial establishments, non-essential businesses, industrial and manufacturing units among others with a view to curb and control the spread of the Corona Virus. The overall effect of the lockdown has given rise to situations where businesses, companies and commercial establishments are suddenly experiencing slowdown, standstill or their operations coming to a grinding halt. Several businesses, companies and commercial establishments have stalled their operations and are unable to receive their invoices, receivables, make sales, continue their business operations. Consequently the there are no cash inflows to honour their commercial and legal obligations to make payments for rents, pay salaries, pay for essentials like electricity, water, pay taxes, pay EMIs and in some situations the small and marginal businesses are unable to even pay for transport and other bare essentials also.
This news proposes to enlighten our readers on the issue of invoking the force majeure clause or the Doctrine of Frustration under The Indian Contracts Act, 1872.
1. Force majeure in French language means Greater Force. Force majeure means and includes extraordinary events or circumstances beyond human control such as an event described as an Act of God (like a natural calamity) or events such as war, strike, riots, crime. The occurrence of a force majeure event should be beyond the control of the parties and impact the ability of the parties to perform their contractual obligations. The events should be such that the parties cannot rectify or are not in a position to perform even though they intend to perform for reasons beyond their control. Force Majeure situations arise as a result of God or third or unknown party’s action. Such an event, may suspend the operation of the contract for the duration of the occurrence of the change in circumstance or event, or render the entire contract frustrated. The intention of a force majeure clause is to save the performing party from consequences of something over which it has no control. Force majeure clause is important and should be appropriately drafted and incorporated to enable parties to suspend the performance of their obligations and to protect in adverse situations or business conditions.
2. The law relating to force majeure can be found under sections 32 and 56 of The Indian Contract Act, 1872 (“Act”). As per section 56 of the Act:
…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…
In this clause, the word ‘impossible’ has not been used 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. This was stated by the Supreme Court in the case of Energy Watchdog v. CERC and Ors. (Civil Appeal Nos.5399-5400 of 2016). It must be proved that the ‘untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement’.
3. It is to be noted that the Courts have over time, read into section 56, the Doctrine of Frustration (“Doctrine”) as well. Section 56 of The Indian Contract Act, 1872 is based on the Latin maxim “les non cogit ad impossibilia” which means that law will not compel a man to do what he cannot possibly perform. This Doctrine is useful where the parties have not specifically included a force majeure clause in the contract. However, in order to invoke this Doctrine, it must be established that the performance of the contract obligation has become impossible by reason of some event which the claiming party could not prevent, that the impossibility is not self-induced and that it not due to his negligence.
In the case of Satyabrta v. Mugneeram Bangur and Co. and Anr. (1954 AIR 44) the Supreme Court stated that:
The relief is given by the court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement. Here there is no question of finding out an implied term agreed to by the parties embodying a provision for discharge, because the parties did not think about the matter at all nor could possibly have any intention regarding it.
4. However, in the case of Mary v. State of Kerala and Ors. [MANU/SC/1087/2013], the Supreme Court stated that in the case of existence of a statutory contract, in which party takes absolute responsibility, the party cannot escape liability whatever may be the reason. The parties would also be prevented from taking shelter under section 56 if the consequences of non-performance of contract are provided in the statutory contract itself.
5. We need to look into the Doctrine only if the force majeure clause is not included within the contract.
6. Looking into the current circumstances, we need to see if COVID-19 can come within the ambit of force majeure.
7. It should be noted that there is no precedence of Indian cases that define whether viruses come within the ambit of force majeure. However, on February 19, 2020, the Department of Expenditure, Procurement Policy Division, Ministry of Finance issued an Office Memorandum, in relation to the Government’s ‘Manual for Procurement of Goods, 2017’ (“Manual”) has stated that COVID-19 outbreak could be covered by a force majeure clause. As per para 2 of the clause:
A doubt has arisen if the disruption of the supply chains due to the spread of corona virus in China or any other country will be covered in the Force Majeure Clause (FMC). In this regard, it is clarified that it should be considered as a case of natural calamity and FMC may be invoked, wherever considered appropriate, following the due process as above.
8. However, this interpretation is specific to the Manual alone. While this can be used as an argument to support the inclusion of COVID-19 within the ambit of force majeure, it cannot be used as a defence for every kind of contract in every circumstance, as different contracts and governing laws stipulate different requirements for different situations.
9. From the previous judgements of the Court, it can be reasonably opined that:
(i) If the contract specifically excludes force majeure, then the parties cannot take shelter under the concept of force majeure.
(ii) If the contract has a force majeure clause, the Court would look into the wording of the clause. If a force majeure clause explicitly uses terms such as “disease” “epidemic” “pandemic,” “quarantine,” “act of government” or “state of emergency,” parties may, depending on the circumstances, be able to assert force majeure as a defence to non-performance or anticipatory breach in the case of the COVID-19 pandemic.
a. If these terms are not used, the Court would accordingly interpret the clause used in the contract and determine whether a pandemic would come within its ambit.
b. Further, if the clause specifically excludes “pandemic”, “epidemic” etc., then the parties would have no defence.
If the contract does not have a force majeure clause, then the parties may invoke the Doctrine.
10. However, before invoking force majeure, the party claiming protection under force majeure usually has a duty to show that it has taken all reasonable endeavours to avoid or mitigate the event and its effects. This is a subjective standard. The court will interpret this on a case-to-case basis.
In light of the above discussion, the situation arising out of the COVID-19 situation may qualify for invoking the force majeure clause or the Doctrine of Frustration depending on the facts of the case.
(The above article is intended for circulation for general knowledge purposes and does not constitute nor is it intended to be legal advice to anyone. Parties should seek specific legal advice keeping in view the agreement, contract or specific factual circumstances.)