The article is written by Naman Jain pursuing BBA-LLB from Bennett University, Greater Noida. This article endeavours to demystify the key concepts of force majeure and the repercussions of Covid-19 on contractual obligations. This article insights into the legal permissibility of this clause in the current scenario and highlights the elements to be considered before the invocation or while defending a force majeure claim.
“LAW AND ORDER ARE THE MEDICINE OF THE BODY POLITIC AND WHEN THE BODY POLITIC GETS SICK, MEDICINE MUST BE ADMINISTERED”
~ DR. B.R. AMBEDKAR
The continuous spread of COVID-19 has forced the country into a conspicuous uncertainty. Global disruptions are evident in the business and commercial sector. A significant population of the world has been put under lockdown. Due to this, operations carried by various businesses have been hindered and fulfilment of contractual obligations has been greatly impacted. The disruptions in the supply chain will lead to delay, interruption, or even cancellation of many contracts. As businesses are making plans to address this international emergency, this article provides guidance to inform strategic decision making in accordance with the contractual relationships. To escape from the contractual penalties arising due to missing project deadlines, non-payment, etc as a result of the pandemic, parties to contracts are bringing word like “Force Majeure” in use.
WHAT IS ‘FORCE MAJEURE’ ?
The French phrase means a “superior force”, is a law U/S 32 and 56 of Indian Contract Act, 1872. Black Law Dictionary defines it as “In the law of insurance, superior or irresistible force. Such clause is common in construction contracts to protect the parties in the event that a part of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by the exercise of due care”. It is a provision that protects a party in contractual agreement from liability for its failure to function the contractual obligations. It is an expressed provision in contract law which describes an extraordinary event involving circumstances beyond human control as an act of god or a superior force. Further, this clause frees both the parties from a contractual liability when some specified or uncertain events beyond human control obstruct the carrying of obligations under the contract.
As mentioned in the clause, this exhaustive list contains events like wars, riots, fire, flood natural calamities, lockouts, famines, and govt. action affecting any party to function or perform the pre-decided obligations under the contract cause its frustration or impossibility. The clause provides relaxations to perform the contractual obligations, but it does not entirely excuse a party from a contract. Moreover, it suspends the contract for the duration of that superior force. However, if this superior force continues to dominate for more than a specified period, the clause gives the power to both the parties to terminate the contract without any financial effects on either party.
Force Majeure principle is ruled by chapter 3 of the Indian Contract Act dealing with the contingent Contract. S. 32 of the act defines this Supreme power whereas S.56 is a rule of positive law which mentions about frustration. ‘Impossible’ or ‘Frustration’ is only confined to something which is beyond the control of both the parties and not to the literal impossibility to perform i.e. strikes or commercial hardships as held in the case of Satyabrata Ghose V. Mugneeram Bangur.
The Supreme Court in the case of Naihati Jute Mills Ltd. v. Hyaliram Jagannath held that “A contract is not frustrated merely because the circumstances in which it was made are altered. The Courts have no general power to absolve a party from the performance of its part of the contract merely because its performance has become onerous on account of an unforeseen turn of events.” The capacity to invoke the clause depends on the nature of the contract as well as the wordings of the contract. Therefore, with respect to the pandemic situations, implications of the above provisions would be dealt by the adjudicatory bodies on case to case basis.
FORCE MAJEURE AND COVID-19
The Ministry of Finance has clarified the doubt stating that disruption in supply and production chains due to the spread of coronavirus has to be considered as a case of natural calamity and Force Majeure clause may be invoked wherever appropriate according to the circumstance and nature of the contract. Many of the contracts are such in India that do not says explicitly to invoke the benefits of Force Majeure clause. Whether a contract on the account of Covid-19 has the capability to invoke the benefits of this clause is a fact-specific determination that totally depends on the nature of the obligations involved and the specific terms of the contracts. If in case the contract formed by the party does not involve ingredients of Force Majeure, then the party can claim under the “Doctrine of Frustration” U/s 56 of the Indian Contract Act, 1872. This doctrine makes the party excusable if the whole contract becomes impossible to perform. ‘Frustration’ and ‘impossible’ are often used interchangeably.
Force Majeure is an element of a contract being strict in nature while the doctrine of frustration is a common law concept.
In the light of the current situation, the lockdown has been imposed in India restricting the performance of some contracts. As the lockdown is imposed by the Govt. and is construed as an order of the Govt. Therefore, the party having the obligations to perform can issue a notice saying that such an event has occurred i.e. lockdown which is beyond its control and therefore, the provisions of Majeure clause can be triggered giving relaxation to the party by suspending the party till the supreme force i.e. lockdown gets over.
Further, the contracts made before lockdown between 2 parties involving advance payment and non-performed obligations which is impossible to execute at this time of lockdown in the purview of S. 56 of Indian Contract Act become void and the party who had paid advanced can claim for a refund as the one who received the payment in advance is bound to pay back the amount.
KEY ASPECTS WHILE INVOKING/DEFENDING FORCE MAJEURE
- Keeping a track of the events that would be in accordance with the ingredients of the clause based on the contractual understanding of the parties and the nature of the contract. The list of the above events can be exhaustive or non-exhaustive in nature.
- Actions that have to be taken to invoke the Force Majeure clause should be informed prior, with an issuance of notice to the opposite party.
- Repercussions of the Force Majeure events, mitigation strategies, relaxations to be provided in performance and issues dealing with suspension or delay of standard quality performance should be analysed thoroughly.
- Mindfulness of businesses in knowing that economic hardships i.e. higher cost of performing the obligations under a contract will not be a strong ground to assert Force Majeure clause or Frustration principle as a defence.
In the English case of Tsakiroglou & Co. Ltd. v. Noble Thorl GmbH, the facts comprise of a ship that needs to perform sale of coconuts by transporting it from one place to another. The contract was made but later at execution, it was found that the canal to be used on the customary route was closed. Despite knowing the fact, it was held that the above contract of sale of coconut cannot be considered impossible to perform and hence there was a way for the ship to travel from another passage being 3 times longer than the usual one. Economic hardship that was faced by the ship hence, failed to become a ground for frustration to contract. Therefore, the party failed to get the defence under this principle. The above view of the law was also stated in ‘Chitty on Contracts’, 31st edition. Further, the view of not to trigger Force Majeure clause unless an alternative way is available was evident in ‘Treitel on Frustration and Force Majeure’.
Moreover, legal advisors should be contacted by the parties to have a clear view of the sector they are involved in and the specific events and provisions being invoked to avoid any ambiguity later. Some cases where negligence or malfeasance of a party is seen, those are intended to get the benefit of the above clause. Understanding of the loopholes in law enforcing Force Majeure provisions with the guidance of legal practitioners would help in serving the justice better minimising the misuse of such benefit providing provisions of the law.
OTHER FACTORS AFFECTING FORCE MAJEURE CLAUSE
It would be important to note that the burden to proof of special circumstances, the events under the list of Force Majeure or Frustration principle and the mitigation assurance to be provided is on the party asserting Force Majeure defence. The liability is on the asserting party to prove the existence of Force Majeure conditions. Such clauses are construed strictly by Courts. Force Majeure clause is expressly provided and not implied under the Indian Law. Expressly means that courts will apply usual principles of contractual interpretation as per the scope of the clause to make decisions regarding the protection to be provided to the parties of the contract.
Parties can also attempt to invoke other contractual clauses. For instance, Material adverse Change (MAC) clause, price adjustment clauses, limitation and exclusion clauses to limit or minimise the burden of non-performance. Moreover, the companies can also consider the ramification of non-performance clauses to clarify the liquidity of damages and the amount of compensation for non-performance of contract which is pre-determined and agreed between the parties before making a contract.
Remedies to the clause depends on the nature of contracts. For instance, some contracts may provide immediate cancellation, or some may put the contract on hold. Some may give leniency in time or in standard quality of performance. In the verdict of Alopi Parshad & Sons Ltd. v. Union of India, it was ruled out that the Indian Contract act does not enable a party to a contract to disregard their expressed statements made earlier and to claim compensation for the non-performance of a contractual obligation which was made at rates different from stipulated rates, on an indeterminate plea of equity. Irrespective of any sudden price hikes or market inflation or deflation, the party to a contract does not itself get rid of the bargain they have made and is liable to perform the obligation until proven in the Court that the above performance is ‘impossible’ or ‘impracticable’.
MITIGATING THE CURRENT CIRCUMSTANCES
With COVID-19 effects all over the globe, Life Insurance companies also have the right to invoke Force Majeure clause and escape the liability of paying the claims to the clients.
Insurance companies being private or public, have stated that they will not invoke this clause in cases of COVID-19 related death claims and will process them as fast as possible. This step was taken to assure the premium payers, that the Life Insurance industry is taking every possible measure to mitigate the disruptions and the suffering being caused, due to the lockdown. Further, the company will be providing the clients with maximum digital support to honour COVID-19 death claims in accordance with the “social distancing” rules. A grace period of 30 days is bring provided by the company to pay their premiums. Relaxations in settlements of policy is being given due care and attention to keep the policyholders at ease. All the other special charges are exempted except the fund management charge. Options like partial withdrawal and switching of accounts will be restricted during the settlement period. Other insurance companies will be providing maximum support to cover the loss arising due to special unsure circumstances in the various businesses. Policyholders are falling largely on ‘Force Majeure’ and ‘Act of God clause’.
AROUND THE WORLD
COVID-19 virus arising from the Virus ology labs of China has already made the country to work on the problems arising due to non-performance of Contracts. China Council for The Promotion of International Trade (CCPIT) has already provided thousands of Force Majeure certificates to businesses, relaxing the difficulties in performing the specified obligations of their respective contracts. It is right to conclude that the invocation of the Force Majeure clause has been successful in China. If the clause is a failure to some of the businesses, then those companies can go for the provisions governing non-performance of contract due to impossibility or impracticability also known as ‘Frustration’ to contract as mentioned in the Uniform Commercial Code (UCC) of China.
In India, Department of Expenditure, Procurement Policy Division, Ministry of Finance discharged an Office Memorandum on February 19, 2020, with regard to the Government’s ‘Manual for Procurement of Goods, 2017, which sets out the direction for procurement by the government. Further, it states that COVID-19 could be brought under Force Majeure clause based on ‘Natural calamity’ providing that ‘due procedure’ has to be followed.
COVID-19 is having an unforeseeable impact on businesses and the companies. It has restricted the parties to perform their contractual obligations, leading to a decline in the economy. As discussed in detail, Force Majeure is an express provision and invoking it for the purpose of invocation or as a defence, depends on the nature of a contract, impossibility to perform, alternativity to perform and various other circumstances that are different in different cases and would be assessed by the Courts on a case by case basis. Contracting parties must go through the language of the contract so formed by them and the various provisions regarding them. This would help in determining the plausibility of their success. Presently, massive challenges are being faced by the society. The hope for everyone is that the wrecks of COVID-19 will go by swiftly.