By Shubham Shakti
Worldwide market has confronted serious repercussions during the COVID-19 pandemic. The whole world is in the grasp of COVID-19 which has been declared as a pandemic by the World Health Organization. Government, so as to cut down the hindering outcomes of the pandemic, has forced a few restrictions which further limits the parties from performing their contractual obligations. Nations around the globe have imposed travel restrictions, temporary lockdowns and extremely restricted human movement thereby bringing an unparalleled halt to domestic and international trade. This situation of impossibility faced by the businesses in performing their contractual obligations could neither be anticipated nor controlled by them. A party may invoke ‘force majeure’ clauses in their contracts against the other parties in case of non fulfillment of promises as per the contractual terms. Parties may refer to this pandemic as a ground for releasing their business. It is in this situation, that this study has been carried out to understand the concept of force-majeure as a contractual term and its application. Furthermore, the article seeks to deal with the execution of the doctrine in different nations. Moreover, the doctrine faces some implications that have been dealt in this article. The author also attempts to suggest why COVID-19 should be considered as a force majeure event.
Keywords: Doctrine of force majeure, doctrine of frustration, Contractual obligations, COVID-19 outbreak.
Force majeure is derived from the French phrase which means ‘superior power’. It is also defined as ‘an event or effect that cannot be reasonably anticipated or controlled’. COVID-19 being the worldwide hindrance has indicated an extraordinary slump to the worldwide market. Because of the lock down and activities by the legislature, numerous individuals can’t perform their legally binding commitments. Since it has become incomprehensible for certain parties to perform out their commitments, ‘force majeure’ has become imperative.
The reference to “power majeure” is intended to portray occasions past the sensible control of contracting parties and could incorporate wild occasions, (for example, war, work stoppages, or extraordinary climate) that are not the deficiency of any gathering and that make it troublesome or difficult to complete typical business.
A provision of power majeure in an agreement is proposed to release off the party or defer its commitments totally or suspend it briefly for reasons which can’t be interpreted to be a breach of contract by the defaulting party.
Force majeure is interpreted as “an event or effect that can be neither anticipated nor controlled.”It is an event or effect that cannot be reasonably anticipated or controlled. The Cambridge dictionary defines force majeure as “an unexpected event such as a war, crime, or an earthquake which prevents someone from doing something that is written in a legal agreement.”
In India, the entire jurisprudence relating to Force Majeure has been summed up by Justice RF Nariman of the Supreme Court in the case of Energy Watchdog vs. CERC (2017). While reiterating that doctrine of frustration cannot apply to the cases as the fundamental basis of the contract remains unaltered, the Court held that “an unexpected price rise will not absolve the generating companies from performing their part of the contract for the very good reason that when they submitted their bids, this was a risk they knowingly took. We are of the view that the mere fact that the bid may be non-escapable does not mean that the respondents are precluded from raising the plea of frustration, if otherwise it is available in law and can be pleaded by them….When a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application”.
- What is Force Majeure Clause?
In India, the law on force majeure is embodied under sections 32 and 56 of the Indian Contract Act, 1872 (“Contract Act”). Section 32 of the Contract Act provides that ‘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.’ Section 56 of the Contract Act enshrines the ‘doctrine of impossibility’, which provides that ‘a contract to do an act which, after the contract is made, becomes impossible or unlawful or, by reason of some event which the promisor could not prevent, becomes void when the act becomes impossible or unlawful.’
Also, under the aforesaid provisions, contracting parties can plead impossibility of performance and consequently frustration of a contract on account of a particular event, unforeseen previously and beyond the control of the parties.
A force majeure clause relieves one or both parties from liability to perform contract obligations when performance is prevented by an event or circumstance beyond the parties’ control. Typical force majeure events may include fire, flood, civil unrest, or terrorist attack. Force majeure is a term used to describe a “superior force” event. The purpose of a force majeure clause is two-fold: it allocates risk and puts the parties on notice of events that may suspend or excuse service.
Force majeure clause, in contract, is embedded deliberately to safeguard the promisor from its contractual obligations under specific conditions. The parties will be relieved if significantly the entire agreement gets inconceivable of execution or, at the end of the day, impracticable by some reason for which neither of the parties had been responsible.
The most generic clause under most force majeure clauses is the ‘Act of God’, and the Covid- 19 can be brought under the ambit of the same. But the effect of this clause can be mitigated through the ‘duty to mitigate’ and ‘exercise due diligence clause.’ The subjective standards on the case to case basis have to be applied in order to determine their effect on the overall contract. The ‘best endeavor’ clauses might also play a crucial role in order to define the ambit and implications of the force majeure clause, as the presence of the same might end up mitigating the effects of force majeure clauses.
The most conventional provision under force majeure clause is the Act of God’, and the Covid-19 can be brought under the ambit of the same`. Yet, the impact of this provision can be alleviated through the ‘duty to mitigate’ and ‘exercise due diligence clause.’ But this implication of COVID- 19 cannot be upheld for every contract, and the clause needs to be interpreted based on different circumstances.
- Implications in absence of ‘FORCE MAJEURE CLAUSE’?
Without force majeure clause under the provisos of the agreement, one can claim by bringing precept ‘doctrine of frustration’. To get benefited with the ‘doctrine of frustration’, one will above all else need to establish that the performance for the promisor has become impossible and such condition was not under the control of the promisor.
Such an issue was settled in a case where both the parties agreed to the terms of agreement with no force majeure proviso referenced under the agreement. Further, the performance got unlawful and impossible. It depended on conceding of declaration which the administration didn’t give delivering the agreement unlawful.
The court declared that the petitioner stands at a place to not to pay for any damage and for the forfeiture of the money received by the respondent. The contract was declared as frustrated.
It was stated that “it is clear from the facts of the case that the agreement entered into between the parties became impossible to perform as well as unlawful and, thus, amounted to of the same. 56 of the Contract Act, 1872, as quoted above, does not cover every case of which, neither of the parties is responsible. Giving regard to the nature and circumstances of the transaction and implied terms, no doubt is cast in the present case that the performance of the contract on the part of the petitioner became impossible and such impossibility can be brought within the fold of “force majeure”.”
- Force Majeure Clause and COVID-19
COVID-19 has been declared as a pandemic by WHOand it has created hurdles for the parties to fulfill or perform their contractual obligation.
Initially it was a matter of discussion and concern if force majeure clause can be invoked because of COVID-19.
The event or events of that can be covered under the force majeure clause must be expressly provided for under the contract, and the non-performance of the obligations under such contract will depend on the language of such clause or the definition of the event provided under the contract. It is noteworthy to mention here that in the event where a dispute arises with respect to the scope of such clause or event, the Courts are likely to apply the common principles of interpretation to such contracts.
Accordingly, unless an event clearly falls within the ambit and scope of a ‘force majeure’ clause, the Courts may not accept such event so as to trigger the consequences of the ‘force majeure’ clause.
The primary focus, while interpreting such clauses, ought to be on whether the clause encompasses the type of event a contractual party claims is causing its non-performance.
In view of the above, there are two possible instances, which may suggest that a force majeure clause covers a pandemic:
(i) If the definition of a force majeure event in the contract expressly includes a ‘pandemic’. In such an instance, the inclusion of ‘pandemic’ to the list of events of a ‘force majeure’ clause in the contract would make it clear that the outbreak of Covid-19 would trigger a force majeure clause; or
(ii) If the given force majeure clause encompasses the extraordinary events or circumstances beyond the reasonable control of the parties. In such an instance, such ‘force majeure’ clause may be invoked if it is determined that the factual circumstances caused by the pandemic i.e. Covid-19 are beyond reasonable control of the affected party.
Thus, whether a party can be released from its obligations under the contract on account of Covid-19 being declared a pandemic can be determined on the basis of the specific facts and circumstances i.e. depending upon the nature of the obligations of the said party and the specific terms and conditions of the contract. In case the force majeure event alters the very basis of the agreement, then the parties are under no obligation to perform the same.
For instance, if the agreement or performance thereof becomes unlawful by virtue of any government notification or a change in law, which arises after the execution of the agreement, then such agreements do not have to be performed. In such cases, if the agreement contains a force majeure or similar clause, Section 32 of the Indian Contract Act will be applicable.
- Recommendations and Conclusion:
It totally depends on the contracting parties, their terms of contract and merits of each case whether the defaulting party would avail ‘force majeure’ or ‘doctrine of frustration’. But there are certain things that should be considered by the defaulting party:
- The outcomes of initiating of the force majeure clause.
- If there are any terms and conditions that have to be fulfilled before invoking the force majeure clause or the doctrine of frustration.
- The burden of proof of establishing the force majeure or frustrating event is on the defaulting party.
- Whether provisions such as price adjustment, material adverse change etc. are incorporated in the contract and available, in addition to force majeure.
- Ensuring that all communications with the other party are recorded and made into writing so far possible
With the outbreak of COVID-19, the Government has been bound to take some strict actions to safeguard the nation. Subsequently all the trading activities had been shut then and somewhere now as well which left the contractual parties helpless and unable to perform their contractual duties. In this situation ‘force majeure’ plays a vital role for the defaulting party. Subsequently the author is of view that COVID-19 being a pandemic, should be considered force majeure events. Therefore the parties must be given the relief from their contractual obligations.
- Preetam D’Souza and Ranjit Mahishi,COVID 19: Impact of Force Majeure in Indian Commercial Contracts , available at https://www.worldservicesgroup.com/publications.asp?action=article&artid=15081
- Chandrasekhar Tampi and Ankur Khandelwal,Contracts and Force majeure during a pandemic: A view from India, available at https://www.mondaq.com/india/litigation-contracts-and-force-majeure/963934/contracts-and-force-majeure-during-a-pandemic-a-view-from-india
- Renjith Mathew, Force majeureunder contract law in the context of COVID-19 pandemic.
- Saurav,Force majeure: A shield to contractors amidhst the COVIS-19 outbreak?
 Merriam-webster Dictionary, available at:https://www.merriam-webster.com/dictionary/force%20majeure.
 Bryan A. garner, black’s law dictionary (10th ed. 2014).
 Cambridge dictionary, available at: https://dictionary.cambridge.org/dictionary/english/force-majeure.
 Industrial Finance Corpn. of India Ltd. v. Cannanore Spg. and Wvg. Mills Ltd., (2002) 5 SCC 54 at page 78
 Supra note 9.
 Syed Khurseed Ali Vs. Territory of Orissa and Anr 006(II)OLR557
 Supra note 17, para 12.
 World Health Organization, available at: https://www.who.int/dg/speeches/detail/who-director-general-s-opening-remarks-at-the-mediabriefing-on-covid-19