FORCE MAJEURE AND THE COVID-19 PANDEMIC: INDIAN AND INTERNATIONAL PERSPECTIVE
This article has been authored by Devarsh Shah, a current third year student at Gujarat National Law University.
Meaning and Introduction
Black’s Law Dictionary defines Force Majeure (Vis Major) as an overpowering force and an unavoidable event which affect the profits of the firm. It can be applied either by a contractual agreement or by a statutory provision. Force Majeure events usually include an act of god, natural disasters, epidemics, pandemics, war or similar situations etc. The doctrine of Force Majeure saves the performing party from the consequences of something over which the said party had no control. In other words, force majeure is an exception to what would have otherwise amounted to a breach of contract. Further, there is no objective rule to determine whether the contractual performance is affected due to a Force Majeure event. There is no strait-jacket rule and the decision has to be based on the relevant facts and circumstances of each matter.
COVID-19 & Force Majeure – An Indian Perspective
"Force majeure" is governed by the Indian Contract Act, 1872 (“the Act"). The settled position of law, as affirmed by the Supreme Court of India in Energy Watchdog v. Consumer Education and Research Centre, states that where there is an express or implied clause in a contract stipulating 'Force Majeure' events, it is governed by Chapter III of the Act dealing with contingent contracts, and more particularly, Section 32 of the Act. However, if a Force Majeure event occurs outside the contract, the same is dealt with by the rule of positive law (often regarded as Doctrine of Frustration) provided under Section 56 of the Act. Section 56 of the Act stipulates that a contract which, after entering, becomes impossible or unlawful to perform due to an intervening event, becomes void in law.
It is important to note that statutory protection under Section 56 of the Act is accorded only to those contracts where the performance becomes impossible. Section 56 of the Act does not apply where the performance becomes onerous. Supreme Court in Alopi Parshad & Sons Ltd. v. Union of India 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 his part of the contract merely because its performance has become onerous on account of an unforeseen turn of events”. Section 56 of the Act only apply when the performance of the contract becomes impossible.
The scope of the Force Majeure clause in Indian law has been well summarised by the Supreme Court in Energy Watchdog v. Consumer Education and Research Centre which lays down the following:
1) The doctrine of frustration must be applied within narrow limits
2) A mere rise in cost or expense of performance will not frustrate the contract under Section 56 of the Act
3) The frustration of contract is not effected unless the root of the contract changes.
4) Force majeure clause in the agreement does not apply if alternate modes of performance are available.
5) Most importantly, it was stated that any term in the contract pertaining to force majeure (whether direct or implied) shall override Section 56 of the Act. In simple words, when a clause is present in the agreement then the dissolution of the contract would take place under the terms of the contract and not under Section 56 of the Act.
For better understanding, certain additional points also need to be considered. Firstly, the party which claims force majeure is usually cast with a duty to show that it took all reasonable steps to mitigate the event and its effects. Secondly, the burden of proof to prove a force majeure event is upon the party who asserts the defence of force majeure. Lastly, the force majeure clause must also cover a pandemic or have a residuary clause that shall cover all extraordinary events which are beyond the control of the parties failing which COVID-19 cannot be considered as vis major.
Various high courts have already dealt with application of Force Majeure in times of COVID-19. Bombay High Court in Standard Retail Pvt. Ltd. v. M/s G S Global Corp & Ors. denied the relief of Force Majeure to the petitioners on the grounds that the subject matter of the contract (steel industry) was not affected by the pandemic since it was classified as an essential service by the Central Government. The Delhi High Court in an order in M/s Haliburton Offshore Services v. Vedanta Limited and Anr granted an ad interim relief to the petitioner. The petitioner’s argument that delay in completion of the project was caused due to Central Government’s imposition of lockdown was prima facie accepted by the Court and the respondent was restrained from invoking the petitioners guarantees. However, the final judgment dated 29th May, 2020 altered the same, on the ground that major delay in completion was caused due to petitioner’s own fault. Accordingly, the stay on the respondent for invocation of petitioner’s guarantees was vacated.
On a concluding note, it is clarified that whether a party can be excused from the performance of the contract on account of COVID-19 (which has been declared as a pandemic now) depends upon the specific terms of the force majeure clause as mentioned in the contract.. But if the contract is silent, then Section 56 of the Act may apply if the performance has become impossible (and not just onerous).
COVID-19 & Force Majeure – An International Perspective
Supreme Court of the People’s Republic of China ordered during the 2002-2003 SARS epidemic that defaults in relation to epidemic or default due to government’s countermeasures would be considered as ‘Force Majeure’ within Chinese Civil Law. Another relief provided under Chinese Civil law is Force Majeure Certificates which serve as a valid proof in the court proceedings. On February 17, 2020, the China Council for the Promotion of International Trade, revealed that it had issued over 1,600 ‘Force Majeure certificates’ to firms in more than 30 sectors, which covers contracts worth over $15 billion. Besides, there are efforts being undertaken in China to cover the consequences of the current crisis by way of special regulation. Thus, Chinese law is accommodative and provides adequate relief to counter the losses/hardships faced by a party due to the pandemic.
Italy does not have any general statutory provisions related to Force Majeure. However, the parties are given a free hand to regulate force majeure events in their contracts. It will then depend upon the language of the agreement. Article 1218 of Civil Code of Italy stipulates that a debtor is not liable for compensation if he could not perform his/her obligation due to a supervening impossibility. ‘Supervening Impossibility’ is not defined and its interpretation depends upon the facts of each case. Similar to India, a party can take a defence of hardship in performance of a contractual obligation under Italian Civil law. An effective remedy of termination of contract can be availed if the performance has become onerous due to change in circumstances.
French law recognises Material Adverse Event clause (MAC) in addition to statutory recognition provided to force majeure and hardship. As far as MAC is concerned, parties may freely determine the circumstances which shall be considered a material adverse event in a particular situation. If the aforesaid provision is unclear, then French Courts are empowered to interpret the terms of the contract.
Article 1218 of the French Civil Code prescribes that a vis major event justifies suspension or even termination of a contract, even if the contract does not contain any provision in that respect. However, 3 conditions must be met for an event to qualify as a vis major event.
1. The event must have been beyond the control of the debtor
2. The event in question was not foreseeable to the parties at the time of the conclusion of the contract.
3. The event must be irresistible.
If the impossibility to perform the contract is temporary in nature then only the performance of the obligation shall be suspended for some time. But if it is permanent, the contract itself is terminated by operation of the law and parties are discharged from their respective obligations. The COVID-19 pandemic may constitute a permanent Force Majeure event for those contracts wherein time is of the essence as per French Law.
Under Article 1195 of the French Civil Code (provision of hardship), a party to the contract which was entered on or after October 1, 2016, may ask the other party to renegotiate the contract if there is a change in the circumstances, which were unforeseeable at the time when the contract was concluded, rendering its performance excessively onerous. If the other party refuses or if the negotiation fails, then the parties may either terminate the contract at a date and under conditions that they agree on, or they can agree to request a judge to adapt the contract to the new circumstances. If the parties fail to reach to an agreement within a reasonable time, then either of the parties may request the judge to revise the contract or terminate it, at a date and under conditions to be determined by the judge himself. In cases where the COVID-19 pandemic and subsequent measures do not meet the conditions to qualify as force majeure events, but these events make it more onerous for a party to perform its obligations under a contract, the party may, therefore, be able to claim the benefit of the statutory hardship provision.
COVID-19 has severely affected trade all over the world. In the prevailing situation, it is obvious that Force Majeure clause will be repeatedly invoked for avoiding performances under contract. Making a distinction between the genuine claims and claims intended for illegitimate personal gains is the most important task which the judiciary needs to undertake at this juncture. Further, having a strict application of the hardship rule where invocation of Force Majeure is denied merely because performance has become onerous and not impossible (in cases where contract does not contain a Force Majeure clause) may be detrimental to public policy. The French Law provides an effective solution. It meets the practical needs of the prevailing situation. Recognition of hardship as a ground for renegotiation or termination of contract accords protection to both the parties. In any case, it is indisputable that a liberal application of Force Majeure doctrine is most suitable and desirable in light of the prevailing economic situation.