Force Majeure Clause and Contractual Obligations during COVID-19: Cases from India

GLA University - B.Com | LLB | B.A.
GLA University | B.Com | LLB | B.A.

While the usage of the force majeure clause and its doctrine is relatively narrow, it became almost overused during the Covid-19 pandemic and several lockdowns in states and the country which followed. Among many other things that the Covid-19 pandemic hit, it also disrupted the economy and the fulfilment of contracts and contractual obligations. Namit Vora explains the meaning of force majeure and doctrine of frustration and explains how its use panned out in India.

the force majeure clause

By Namit Vora, a first-year BLS LLB student from Government Law College. 

Introduction

The COVID-19 pandemic and subsequent lockdowns brought the world to a halt: the same affected businesses and contractual obligations for longer than expected.

In light of aberrations to contractual obligations, the article discusses the application of the force majeure clause during the Covid-19 pandemic.

The piece will first understand the meaning of the force majeure clause and the doctrine of frustration. Then, through various Indian government notifications and judgments, it will see whether the Covid-19 pandemic is now considered a force majeure event.

The Force majeure Clause

The term ‘force majeure’ originates from the French language and means ‘greater force’. The Force majeure clause is invoked when it becomes impossible to fulfil contractual obligations due to a particular event. These can temporarily erase the liability of nonperformance of the contract from both parties, especially when time is of the essence.

Force majeure clauses can be invoked only when the event seems to be unforeseeable and unavoidable. Furthermore, such events shouldn’t be caused or controlled by either of the parties or their actions.

It should render the contract impracticable or illegal.[1] Such clauses can be applied only in extreme cases, unlike minor inconveniences and market conditions. The burden of proof for showing that a force majeure event has affected the performance of a contract lies on the party claiming relief.

PIMR Indore Admission

Although the term ‘force majeure’ is not explicitly mentioned in the Indian Contract Act (1872) (hereinafter referred to as the ‘Act’), it comes under the ambit of Section 32 as the Supreme Court stated in Energy Watchdog v. Central Electricity Regulatory Commission.[2]

Section 32 deals with contingent contracts. It states that if an uncertain future event happens, rendering an arrangement unworkable, the contract may be considered void.[3]

This clause mainly includes an ‘Act of God‘ but is not limited to it and may include man-made conditions. A few events that can trigger the force majeure clause are earthquakes, floods, tsunami, wars, riots or epidemics.

To understand the assertion mentioned above, consider the following illustration.

‘A’ and ‘B’ enter into a contract on January 1, 2020. According to this contract, A is liable to provide B with 100 whiskey bottles by April 14. Both the parties agree to the terms and conditions and also add a force majeure clause.

And let’s assume that on March 3, 2020, the government declares that the manufacturing, sale and consumption of alcohol are illegal. In such a case, the contract signed by A and B becomes unlawful. Providing alcohol to B would thus result in a breach of law. Hence, the force majeure clause comes into play.

As A cannot fulfil his contractual obligations and the nonperformance is due to their actions, A can take shelter under the force majeure clause. Thus, they cannot be held liable for not executing their part of the contract.

Let us take an alternative situation where alcohol is still legal, but the raw materials used to manufacture whiskey witness a price hike. The price hike could reduce A’s profits. But now, if they wish to shelter under the force majeure clause, the same won’t be possible.

Doctrine of Frustration

 There may be instances where the contract does not contain a force majeure clause, but the events are such that performing the contract becomes impossible. In such cases, one resorts to the doctrine of frustration which renders the contract void.

England first introduced this doctrine in Taylor v. Caldwell.[4] It resembles a lot to a force majeure clause.

In India, the doctrine of frustration must be understood within the scope of Article 56 of the Act as stated by the Supreme Court in Satyabrata Ghose v. Mugneeram Bangur.[5]

Section 56 of the Act deals with agreements that eventually become unlawful or impossible to carry out due to a particular event. For a contract to exist, the event must be unforeseeable and not in the parties’ control.

If the contract is rendered impossible after such an event, then the doctrine of frustration comes into play.[6] Suppose a party knowingly or capable of knowing by decent examination and inspection proposes a contract that would be impossible or unlawful. And the other party is not aware of this. In that case, the promisor can be held liable to compensate for the promise.

However, the word ‘impossible’ used in Section 56 does not mandate the execution of the contracts to be impossible. Instead, it means that it can be futile in terms of the goal that the parties had in mind.

If any unfavourable occurrence destabilizes the very basis upon which the parties built their bargain, then the contract can be said to be impossible. The terms’ frustration’ and ‘impossibility’ are capable of being used in an exchangeable fashion.[7]

For example, in Energy Watchdog v Central Electricity Regulatory Commission, the court referred to England’s Sea Angel case (2013) and reiterated its contemporary approach to ‘frustration’. Citing the Sea Angel case, the court read:

“Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.”[8]

However, if the event was predictable, it will be considered a breach of contract.

To understand the court’s assertion better, consider the following illustration.

A and B enter into a contract in the absence of a Force majeure clause. A agrees to supply 10 tonnes of steel to B, who resides a few states apart. The agreement is enforced on July 15, 2020, and has a two-month deadline. In the first week of September, the nation suffers multiple terrorist attacks, resulting in the declaration of a National Emergency. The government orders to shut down travel and trade among states for three weeks.

In such a situation, A is not in a position to fulfil his contractual obligations. Thus, even in the absence of a force majeure clause, the contract will remain frustrated under Section 56 exempting A.

Pandemic under Act of God

The Indian law and judiciary do not explicitly say if a pandemic is considered an Act of God. Hence, the inclusion of a pandemic under an Act of God is questionable. However, in the Divisional Controller case, the Supreme Court stated:[9]

“Act of God is an unanticipated natural event, and it is free from human mediation. Predictable events cannot be considered an Act of God, and a person not fulfilling the conditions of the contract in such a case will breach the contract. A pandemic also occurs along the same lines. No one can predict nor control a pandemic.”

Some Government Notifications During Covid

On February 19, 2020, the government released the official notification regarding Force majeure for the first time, keeping with the COVID-19 situation.

The Deputy Secretary of the Government of India and the Ministry of Finance released the same. The notification explicitly added COVID-19 as a force majeure event in para 9.7.7 of the Manual of Procurement of Goods, 2017.

It stated that all construction/work contracts, goods and services contracts and PPP contracts with government agencies to be completed on or after February 20, 2020, can invoke the force majeure clause. And they will get an extension of three to six months at no extra cost or penalty.[10]

Later, on March 20, 2020, the Ministry of New and Renewable Energy also released a notice stating that all renewable energy agencies and the Ministry of New and Renewable Energy were obliged to treat COVID-19 as force majeure. Thus, directing the agencies to entertain delays because of the disruption in the supply chain due to coronavirus. However, it also emphasized that agencies deploying renewable energy would grant extensions based on the evidence provided by the contractors in support of their respective claims.[11]

The Ministry of Road Transport and Highways released a notice on May 18, 2020, declaring COVID-19 a force majeure event and granted various relief measures.[12] The Ministry released another circular on June 3, 2020, giving more reliefs and extensions and reiterating COVID-19 was a force majeure event.[13]

Indian Courts on the Force Majeure Clause During COVID

The courts have been slanted to authorize the particular advantages accessible under the different government notifications or the legally binding agreements. Especially since there is no penetration of the contract by the contractor and the oppressed party has indeed conjured the force majeure clause.

Standard Retail Pvt Ltd v. G.S. Global Corp & Ors was one of the first cases requesting relief under Section 56 of the Act during the lockdown because of COVID-19.

In this case, the petitioner, Standard Retail Pvt Ltd, argued that the contracts stood terminated on account of frustration, impossibility and impracticability.

The respondent, G.S. Global Corp, had its office located in South Korea and was supposed to supply steel products to the petitioner. However, the Bombay High Court held that no relief could be granted to the petitioner as steel distribution was declared an essential service also because there were no restrictions on its movement.[14]

In M/s Halliburton Offshore Services Inc v. Vedanta Ltd & Anr, the petitioner Halliburton was obliged under a contract to develop three blocks in Rajasthan for Vedanta Ltd. Due to the lockdown, Halliburton was not in a position to complete the work in the given time frame. Thus, the company decided to invoke the force majeure clause, but Vedanta Ltd objected to this. As a result, Vedanta threatened to terminate the contract, forcing Halliburton Offshore Services Inc to move to the Delhi High Court.

The Delhi High Court tended towards granting an ad-interim injunction to the invocation of bank guarantees given by Halliburton to Vedanta. The court held that the lockdown caused due to COVID-19 was prima facie a force majeure event.[15]

In Indrajit Power Pvt Ltd v. Union of India & Ors, the petitioner Indrajit Power Pvt Ltd moved to the Delhi High Court to stop the Central Government and Ministry of Coal from appropriating their bank guarantees.

In this case, due to non-payment of money, Indrajit Power Pvt Ltd had failed to fulfil its contractual obligations. However, owing to Covid, the Central Government had already granted them an extension of twelve months before deciding to appropriate the bank guarantees. Therefore, the Delhi High Court dismissed the petition and stated that even after the government granted them an extension of twelve months, they defaulted on the payment. However, it’s important to note that the court didn’t consider financial distress reason enough to stay the decision of the Central Government.[16]

In South Delhi Municipal Corporation v. MEP Infrastructure Developers Ltd., the Delhi High Court cited the Ministry of Road Transport and Highways (MoRTH) circular of May 18, 2020.

The contractor, in this case, had to fulfil the payments to the employer for the toll collected.

The judgement granted relief to the respondent South Delhi Municipal Corporation by invoking the force majeure clause. Further, the court extended the relief until 90 per cent of the traffic was restored like the pre-lockdown traffic.[17]

These judgements show that the courts’ response in invoking the force majeure clause has been rigid. The courts haven’t considered ‘inconvenience’ reason enough to invoke the force majeure clause. However, in some instances where the due date for completing the agreement clashes with the timeline of lockdown, courts have invoked the force majeure clause.

Thus, one can say that the court judgements and the government notifications have been consistent with each other. Additionally, there hasn’t been much difference in how the judiciary has interpreted the force majeure clause in the pre-pandemic and post-pandemic judgements.

However, the inclusion of COVID-19 as a force majeure event does widen the scope of this term and its usage. For example, suppose a party can demonstrate how it could not hold up its side of the bargain due to reasons outside its control, and the occurrences were unforeseeable. In that case, the court could grant interim relief.

Since uncertainty still prevails regarding the third wave of the Covid pandemic, parties should consider tweaking their force majeure clauses to include COVID-19 as a force majeure event.

Revising and upgrading the contracts can reduce the chances of confusion regarding the performance of agreements. Along with this, parties should also contemplate how such incidences can affect their contracts to mitigate further issues.

Who knows, numerous parties could include ‘pandemic’ as a force majeure event under the agreements permanently.

COVID-19 has proved to be a challenge for everyone. In these unprecedented times, it is necessary to prevent the spread of the disease, even if that includes imposing a lockdown. However, amidst these debilitating times, government notifications and several judgments have provided some clarity and relief.

It is essential to reiterate that the courts have considered individual cases when invoking the force majeure clause vis-à-vis the pandemic. Thus, there are no pre-defined rules that apply to all force majeure cases despite Covid.

Endnotes

[1] Energy Watchdog v Central Electricity Regulatory Commission, (2017) 14 SCC 80.

[2] Id.

[3] Indian Contract Act § 32 (1872).

[4] Taylor v. Caldwell, (1863) 27 JP 710.

[5] Satyabrata Ghose v. Mugneeram Bangur, (1954) SCR 310.

[6] Indian Contract Act § 56 (1872).

[7] Satyabrata Ghose v. Mugneeram Bangur, (1954) SCR 310.

[8] Energy Watchdog v Central Electricity Regulatory Commission, (2017) 14 SCC 80.

[9] The Divisional Controller, KSRTC v. Mahadeva Shetty, (2003) SCC 197.

[10] Ministry of Finance, No. F. 18/4/2020-PPD (Issued on Feb. 19, 2020).

[11] Ministry of New & Renewable Energy, No. 283/18/2020 (Issued on March 20, 2020).

[12] Ministry of Road Transport & Highways, No. COVID-19/Roadmap/JS(H)/2020 (Issued on May 18, 2020).

[13] Ministry of Road Transport & Highways, No. COVID-19/Roadmap/JS(H)/2020 (Issued on June 3, 2020).

[14] Standard Retail Pvt. Ltd. v. G.S. Global Corp., (2020) SCC OnLine Bom 704.

[15] Halliburton Offshore Services Inc. v. Vedanta, (2020) SCC OnLine Del 542.

[16]  Indrajit Power Pvt Ltd v. Union of India., W.P.(C) 2957/2020 & CM Nos. 10268-70/2020.

[17] South Delhi Municipal Corporation v. MEP Infrastructure Developers Ltd. LPA 165/2020.

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