Force Majeure – An Important Tool in times of COVID-19
The pandemic caused by COVID 19 has spread throughout the globe. It has not only caused major health crisis but has also severely affected the economy of the world. The whole world is facing losses in various forms; even many companies are marching towards bankruptcy. Soon after the World Health Organisation announced COVID 19 as a global pandemic on 11 March 2020[i], the world started to experience unprecedented lockdowns and curfews. India being one of the country has not only faced the effects of pandemic but also the repercussions of the lockdown.
Where there is a business, there is a contract. The countrywide lockdown has very badly affected the business’ as in such situations, the restriction on the movement of goods and persons made it very difficult for parties to perform their contracts, leading to breach of contracts. Amidst which parties are now resorting to the principle of force majeure for their rescue.
FORCE MAJEURE AND INDIAN CONTRACT ACT
The concept of force majeure has its roots in the section 32 of the Indian Contract Act. Although the Indian legislation has nowhere explicitly mentioned about force majeure but the judicial precedents and the its definition show the relevance with section 32 of Indian Contract Act. Black’s Law Dictionary defines force majeure as, “an event or effect that can be neither be anticipated nor controlled”[ii].
Force Majeure is an exception to pacta sunt servanda, which means it is a defence for non-performance of a contract. This concept of force majeure comes into play only when there is a force majeure clause in the contract. A force majeure clause basically contains various events or circumstances which would amount to “force majeure events”, upon happening of which the parties could claim the defence. Upon occurrence of a force majeure event, the force majeure clause provides temporary relief to a party from performing its obligations under a contract. The performance of obligations under contract are suspended till the time the force majeure event exists. Contract is dissolved under its own force under section 32, meaning if the contract itself impliedly or expressly states that, the obligations of contract would stand discharged on happening of certain events, then the dissolution of contract would take place under the terms of contract itself.[iii]
FORCE MAJEURE AND DOCTRINE OF FRUSTRATION
Often there is a confusion between force majeure and doctrine of frustration and both are used interchangeably, but there is difference between both of them. Generally, most of the contracts contain the force majeure clause to save the parties from uncertainties. But, the parties to the contracts which does not contain this clause are not necessarily bound to perform the contract on an impossibility to do so. Here is when the section 56 of Indian Contract Act come into play. It embodies the doctrine of frustration, according to which if performance of the contract becomes impossible or unlawful due to certain events which are beyond the control of the parties then the contract becomes void. When an event of change of circumstances occurs, which is so fundamental as to be regarded by law as striking at the root of the contract, it is the court which can pronounce the contract to be frustrated and at an end.
If there is no force majeure clause in the contract, the doctrine of frustration can be made applicable in today’s COVID 19 scenario also. The lockdown caused due to COVID 19 can be considered as an event which is beyond the control of parties to a certain contract, hence leading to impossibility to perform the contract. But it is not as easy as it seems to claim impossibility to do an act. If the terms of contract explicitly mentions that the contract would stand valid despite any intervening circumstances, like a global pandemic, then the parties would not have any defence to claim “impossibility to do the act” and would have to perform the contract anyhow and failing to do so would attract the consequences of breach of contract.
COVID 19 PANDEMIC AS FORCE MAJEURE EVENT
Force majeure events are generally events which are out of the control of human beings or which cannot be anticipated, such as acts of god, war, natural calamities, terrorism, acts of government, fires, etc. additionally, it can also contain other events narrated by the parties, only condition being that those events should be out of the control of parties. COVID 19 pandemic, if interpreted by referring to the Courts in USA[iv], can be considered as an Act of god and hence a force majeure event. Also, the Hon’ble High Court of Delhi in the case of M/s Halliburton Offshore Services Inc. v. Vedanta Limited [v] had stated the lockdown imposed by the government due to COVID 19 pandemic can be seen as force majeure. But this does not mean that there is a blanket protection for every contract in the view of lockdown. For the force majeure claim to succeed the party invoking the clause need to show that there is a direct connection between the force majeure event and non-performance of the contract. And also, the decision of court whether to allow the claim of force majeure would depend on intention of language of the contract.
IMPORTANCE OF FORCE MAJEURE
By analysing the section 32 and section 56 of the Indian Contract Act, the conclusion can be drawn that the force majeure clause is an important element in the contract. Typically, where a force majeure event is not specifically covered under a contract, frustration of a contract may be claimed by the affected party. But this cannot be true for every situation. Therefore the importance of force majeure clause needs to be highlighted.
Only relying on the relief under section 56 of Indian Contract Act for non-performance of contract due to impossibility may not always be helpful because if the parties while forming the contract itself contemplate the intervening circumstances and explicitly mentions that the contract would stand despite such circumstance, then the party would remain with not defence. Also, due to lockdown many parties have faced losses, which is one of the reason for non- performance of the contract, but the doctrine of frustration does not provide any protection to such parties. As according to the Supreme Court in the case of Naihati Jute Mills Ltd v. Hyaliram Jagannath[vi], the commercial hardships cannot lead to frustration of contracts. These are not the only barriers to claim doctrine of frustration, but the court’s interpretation is also the key factor. As it is not possible to lay down an exhaustive list of situations in which the doctrine of frustration is to be applied to excuse performance, it depends upon the court’s interpretation. Court’s decision may vary from case to case, keeping in mind the circumstances of each case. So, here when the force majeure clause helps out the parties.
Especially, now in these unexpected times, where the COVID 19 cases are nowhere seen to decrease and the government could further take any step to prevent the spread of this virus, which may even include a lockdown, force majeure clause have become essential in a contract. In order for a party to have the benefit of force majeure, it shall have to fulfil the conditions specified in force majeure clause. So, it is necessary that the formation of contract should be such that it includes the force majeure clause. Already people have faced many losses till now, and explicitly adding the force majeure clause and stating the consequences of COVID 19 as force majeure events could be very helpful for the parties. Also, consequences of force majeure events should be covered while drafting the force majeure clause. As stated by the Supreme Court in Energy Watchdog v. Central Electricity Regulatory Commission[vii], that the force majeure clause should be strictly interpreted, hence a party can be excused from performance of the contract only when those events are explicitly included in the terms of the force majeure clause.
As the world is becoming progressive, the chances of unprecedented events happening are increasing. As every coin has two sides, similarly, the new technologies and inventions not only benefit the human race but sometimes also pose situations of difficulty. Same has happened to the world right now, and might also happen in future. The commercial relations of the humans have become part and parcel of their lives and cannot be ignored at as such times. In order to protect these relations, force majeure is one of the important tools. Although right now there are no explicit provisions for force majeure but as the situations are changing, the legislature should come up with some comprehensive force majeure provisions.
[ii] Black's Law Dictionary Eighth Edition, First South Asian Edition 2015.
[iii] Energy Watchdog v. Central Electricity Regulatory Commission, (2017) 14 SCC 80.
[iv] Lakeman v. Pollard, 43 Me 463 (1857).
[v] O.M.P. (I) (COMM)& I.A. 3697/2020.
[vii] (2017) 14 SCC 80.
ABOUT THE AUTHOR
This blog has been authored by Sanskruti Sable who is a 2nd Year B.A., LL.B. (Hons.) student at Maharashtra National Law University, Nagpur.
[PUBLICATION NO. TLG_BLOG_20_2104]