Author : Carol James, Student at The Tamilnadu Dr. Ambedkar Law University (SOEL)
Co-Author : Venkatesh Kkr, Student at The Tamilnadu Dr. Ambedkar Law University (SOEL)
COVID -19 has been reported as widespread across the globe. The virus has caused disastrous consequences such as impermanent lockdown, travel bans etc. On gthe contrary, this has also led to a downfall in the economic activities. The WHO has officially declared COVID -19 as a global pandemic. Domestic and international trade has come to an unprecedented halt. There has been devastating impact on the supply and commercial contracts. The basic concern of any commercial activity is the contract entered by the parties. The law of contracts sets out the reciprocal obligations of the parties. By virtue of this pandemic, there can be circumstances emerging where a party is unable to perform his obligations. The authors of the research paper have analyzed the possible commercial consequences of Covid-19 and whether the current circumstance of lock down can be considered an event of force majeure. Further, the author has also provided a close analysis on the notion of Force Majeure in the light of current law and the distinction of force majeure and doctrine of frustration of contract.
(Keywords : Covid-19, Indian Contract Act, Force Majeure, Bussiness, World Health Organisation)
In these unprecedented times, where the world is grappling with the catastrophic COVID-19 pandemic, businesses across the globe are witnessing their worst losses which include even bankruptcies. The scale of uncertainty surrounding supply chains owing to the COVID-19 has shifted the focus back on the historical expression known as force majeure. The Black’s Law Dictionary, has defined the term force majeure as an event or effect that can be neither anticipated nor controlled. Therefore, the authors have provided a detailed analysis on the concept of force majeure, the inclusion and exclusion of the clause in a contract. The authors have also elaborated with judicial decisions on whether the outbreak of COVID-19 and its consequences amount to a situation of force majeure or a mere impossibility of performance.
MEANING OF FORCE MAJEURE:
The notion of force majeure owes its source to Roman Law which recognized the principle of “clausula rebus sic stantibus”. It refers to an event or impact which will be neither foreseen nor controlled by the contracting parties and could incorporate uncontrollable events (such as war, labour stoppages, or extreme weather) that are not the flaw of any party and which make it difficult or impossible to convey normal business. The main purpose of the term is to protect all contracting parties from legal liability of nonperformance during events which are beyond his reasonable control.
FORCE MAJEURE & INDIAN CONTRACTUAL JURISPRUDENCE:
The word force majeure is borne out from the “Code Napoleon”. The term is not explicitly mentioned under Indian law , the origin of its doctrine can be traced in the provisions of the Indian Contract Act, 1872 (‘Act’). In case of a clause which is expressed or implied in the contract it is regulated by Section 32 under Chapter III of the act. An event of force majeure that occurs post execution of contract is covered under Section 56. Invoking the clause of force majeure doesn’t mean that the contract is terminated completely. It is only a temporary suspension of nonperformance. The party seeking protection under the clause is obligated to prove that it has taken all sufficient measures to avoid the impacts. If there is any delay in the time of force majeure the parties can resort to terminate the contract.
- Iƒ Force Majeure Clause is enshrined in the Contract
Any party claiming an event to be a force majeure the burden to prove lies on the party invoking the clause. If parties are including an epidemic or pandemic in the force majeure clause it is upon the parties to legitimately argue that material impossibilities have occurred as an impact of the widespread Corona virus.
If the contract explicitly includes pandemic or epidemic as a force majeure, the burden to prove the same is comparatively easier. The complexities arise when the contract merely mentions the phrase ‘event beyond the reasonable control of parties. Therefore, in order to ensure quick and favorable adjudication of dispute, it is necessary that the parties invoking the force majeure clause maintain all documents corroborating the event such as government orders imposing lockdown, reliable media evidences of limiting movement of people etc.
2. Iƒ Force Majeure Clause is not enshrined in the Contract
In the earlier mentioned points, the authors have emphasized that any occasion that is not mentioned in the contract results in frustration Section 56 of the act would be applicable. After researching several judgements, the authors have mentioned certain renowned decisions of the Supreme Court of India elucidate and highlight the threshold of the force majeure clause in the Contract Act. Therefore, the authors have cited the cases below:
Satyabrata Ghosh v. Mugneeram Bangur & Amp; Co,the Supreme Court had opined that there was no impossibility of performance under Section 56 of the Contract Act, 1872 on a contract of sale for a chunk of land merely because that particular land was claimed by the Government for military purposes during the Second World War. The Supreme Court also stated that the performance of contracts becomes very much difficult in the cases of war and therefore, the requisitioning of the land which was actually the subject matter of the contract of sale could not be said to affect the fundamental basis upon which the agreement was concluded.
Alopi Parshad & Sons Ltd. v. Union oƒ India , The appellants had raised an allegation in order to enhance the prices while supplying ghee for the Army personnel during the Second World War. The Supreme Court by denying this plea had held that even though there was enormous scarcity, the parties to an executor contract are usually faced with a sudden shift of events which was not foreseen by them, in the form of an abnormal rise or fall in prices, a sudden depreciation of currency etc. However, the same does not per se affect the bargain that they have made.
Naihati Jute Mills Ltd v. Hyaliram Jagannath , the Supreme Court has categorically provided that mere denial of an import license to a jute supplier extracting Pakistani Juice could not be said to have rendered performance of the contract entered into between the parties as impossible and thereby it further observed that it is not hardship or inconvenience or material loss which brings about the principle of frustration into application.
Energy Watchdog v. Central Electricity Regulatory Commission The court while ascertaining the frustrating event in the increase in price of coal subsequent to a change in Indonesian Law, classified it not as a force majeure event despite the fact that a resultant or a subsequent change had made the contract as commercially impossible. This was not considered to be a force majeure event since it did not lie as a fundamental ingredient of the contract and accordingly when the alternate manner of discharge of obligations were available under the contract concluded by the parties, the Court observed that there was no frustrating event per se in this regard.
DISTINCTION BETWEEN FORCE MAJEUREAND DOCTRINE OF FRUSTRATION:
Force majeure is frequently mixed up with the doctrine of frustration of contract. However, these are totally diverse concepts.
- A ƒorce majeure clause includes several acts of Government, war, natural calamity etc. In order to invoke the benefit of the provision it is mandatory that the parties comply with the essential conditions of the force majeure clause. When an event of force majeure exists the contract is not terminated as such but it only suspended for a temporary period. After the event comes to an end, the party that has obtained the benefit of the provision is under an obligation to fulfill the contract. Any nonperformance of obligation will provide the opposite party the privilege to end the agreement. The essential conditions of force majeure are irresistible force, beyond the control of parties, making it materially impossible to perform obligation.
- Frustration : Section 56 of the Indian Contract Act, defines the term frustration of a contract it is the occurrence of an event post execution of contract and such event amounts to impossibility of performance of contract. The essential conditions of frustration which are well established are as follows:
- Destroying the material
- Incapability to perform personal service;
- Non- existence of specific state of things ; Interference by governmental authority ;
- Intervention of war\
COVID-19 A FORCE MAJEURE ?
The situation that has occurred as a result of the Corona virus outbreak, such as imposition of lockdown, limiting the movement of people and a halt in the economic progress are events which are cannot be foreseen by the contracting parties. The scope of the term force majeure must be analyzed in light of the meaning and laws relating to event’s which are beyond the foreseeability and control of the parties. It is important regardless of whether the agreement includes epidemic and pandemic in the force majeure clause the parties invoking the same should prove it.
The Government of India has also taken few measures to protect commercial contracts. The latest declarations by the Ministry of Finance, Government of India on 19.02.2020 and the Ministry of New & Renewable Energy on 20.03.2020 to consider COVID 19 as a event of force majeure. These initiatives provide a huge relief in these crisis times. However, it is necessary to preserve all evidences that support the event of force majeure in order to get speedy favorable decisions for the claimant.
COVID-19 THROUGH THE JUDICIAL LENS
As mentioned earlier, the spread of the COVID-19 pandemic and lockdowns forced by many countries have made execution of contracts challenging and/or impossible. India was under a total lockdown since 25th March 2020. All business activities saving a couple of business services were suspended. Resultantly, Indian courts have started witnessing the attack of contractual disputes inter-alia revolving around the doctrine of frustration. The underlying approach of the Indian Courts has shifted from case to case as can be seen from the ongoing orders of the Bombay High Court and the Delhi High Court.
To check whether the extent of the on-going pandemic will qualify as impossibility, it is fundamental to determine the threshold set by the Apex Court in this regard. In the landmark case of :
Rural Fairprice Wholesale Ltd. & Anr. vs IDBI Trusteeship Services Ltd. & Ors. on 3 April 2020 
In this case the Bombay High Court had stated that pursuant to the COVID-19 outbreak the market situation had collapsed and it was necessary to prevent the banks from taking action on sale notices and pending sale orders for the pledged share.
Standard Retail Pvt. Ltd vs Gs Global Corp And Ors on 8 April, 2020 
In this case the court had a complete shift from its previous decision, the court rejected the claim of granting interim measure for the appellant on the ground that the commodity in question is an essential item and that the lockdown was imposed only for a limited period.
SOLUTIONS TO PROTECT COMMERCIAL CONTRACTS:
Considering the present scenario of global pandemic, the authors have provided certain solutions to protect the contracts of commercial nature. They are:-
oTo evaluate the agreement comprising the force majeure clause and scrutinize the possible factors to exclude performance.
oTo ensure that the notification procedure as mentioned in the contractual guidelines comply strictly with the conventional ‘notice’ regulations.
oTo evaluate jointly with the parties the impact of pandemic on the performance of contract.
oTo collect evidences that corroborate the nonperformance of contract in a circumstance of force majeure, in the current scenario, the outbreak of COVID-19.
oTo prioritize reviewing of financial and insurance agreements
o Maintain a proper record of several notifications and orders by governmental bodies. The same can be produced as an evidence during the litigation stage.
The authors concludes the paper on the note that, one needs to bear in mind, that establishing an event as a force majeure’ in an Indian Court of Law would not be simple, since the court would only interpret the Corona Virus outbreak as a tender difficulty and at times pandemics or epidemics are not explicitly mentioned in the clause as an event of force majeure. Therefore, it is advisable for the parties to resort to the following measures such as,
Preserve corroborative evidence, i.e. the supportive documents regarding the impossibility of performance, postponement of service of notification. Notices must be served promptly indicating the impossibility of performance or that a circumstance of force majeure exists. It is also essential for the parties to identify the source of non-execution.
Lastly, above all the most significant point is that the parties need to analyze if post execution of contract the occasions related to COVID-19 resulted in adverse effect. This could be a legitimate line of contention though this would rely on the language used in the particular case.
Indian Contract Act, 1872
- INDIAN JUDGEMENTS
- Dhanrajamal Gobindram v. Shamji Kalidas & Co.
- Satyabrata Ghosh v. Mugneeram Bangur & Amp; Co
- Alopi Parshad & Sons Ltd. v. Union of India
- Naihati Jute Mills Ltd v. Hyaliram Jagannath
- Energy Watchdog v. Central Electricity Regulatory Commission
- Taylor v. Caldwell
- Stubbs v. Holywel Railway Co
- Krell v. Henry
Black’s Law Dictionary Eighth Edition, First South Asian Edition 2015
 The term force majeure has been borrowed from French; the literal translation whereof is “superior force” in
 Black’s Law Dictionary Eighth Edition, First South Asian Edition 2015
 Black’s Law Dictionary, 11th Edition, at page 788.
 Dhanrajamal Gobindram v. Shamji Kalidas & Co., (1961) 3 SCR 1020
 http://legiteye.com/contractual-obligations-and-covid-19-force-majeure-and-frustration-by-utkarsha-nikam/ (last viewed on July 27th, 2020)
 AIR 1954 SC 44
 Alopi Parshad & Sons Ltd. v. Union of India, AIR 1960 SC 588
 1968 AIR 522, 1968 SCR (1) 821
 Energy watchdog vs CERC (2017) 14 SCC 80
 Taylor v. Caldwell (1863) 3 B & S 826
 Stubbs v. Holywel Railway Co. (L.R. 2 Exch 311)
 Krell v. Henry (1903) 2 KB 740
 Metropolitan Water Board v. Dick Kerr & Co. Ltd. (1918) AC 119
 Basanti Bastralaya v. River Steam India Navigation AIR 1987 Cal. 271
 (L( 307 of 2020, decided on 30-03-2020
 (2020) 14 SCC 80