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COVID-19 Crisis: Force Majeure And Impact On Contracts From An Indian Law Perspective

RAMIT MEHTA
2 April 2020 12:03 PM GMT
COVID-19 Crisis: Force Majeure And Impact On Contracts From An Indian Law Perspective

“Whether Covid-19 will be considered as a ‘force majeure’ event?”

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Human civilization has its history of evaluation and development footprints on the sands of time and in the progression of growth of human civilization, pandemics, right from Circa in 3000BC to Zika virus in year 2015, have been witnessed by this intellectual breed called Humans. In this line novel, Corona Virus COVID-19 has been discovered in the year 2019 which has widespread throughout the world and covered almost every country which has put the billboard on Earth as "CLOSED".

At this juncture, it is important to understand that what is a pandemic? In simple words, it can be said that a pandemic is an epidemic that spreads beyond a country's border. While outbreaks are almost constant even in this modern period, not every outbreak reaches the pandemic stage as the Novel coronavirus (COVID-19) has.

ORIGIN OF NOVEL CORONA VIRUS COVID-19

According to the World Health Organization (WHO), COVID-19 is an infectious disease caused by the most recently discovered coronavirus. This new virus and disease were unknown before the outbreak began in Wuhan, China, in December 2019. Many health experts believe and claim that the new strain of coronavirus likely originated in bats or pangolins. The first transmission to humans was in Wuhan, China. Since then, the virus has mostly spread through person-to-person contact.

The Coronavirus, COVID-19, which originated in Wuhan, China, is widespread around the world with such speed that the World Health Organization (WHO) has declared the outbreak a pandemic.

SOCIAL IMPACT OF COVID-19: A BRIEF

Being Coronavirus declared to be pandemic, in its wake, several countries including India have called out for a complete lockdown by virtue of which travel restrictions have been imposed. Infact, the mobilization of the private vehicle has been regulated by restraining the movement of the privately owned vehicles other than emergency works and purposes which are duly to be explained to the Police authorities as and when required.

In this pursuance flights, hotel bookings, conferences, sports events and much more have been cancelled and our country, India has been put under Janta Curfew on 22nd March 2020 which was further followed by 21 days lockdown w.e.f 24th March 2020 till 14th April 2020 while imposing Section 144 CrPC so as to promote social distancing and break the chain of the coronavirus spread.

During this course schools, colleges, offices, business houses have been shut and only necessary services and goods are in circulation. As a result, National and Global stock markets have crashed while adversely impacting the businesses and economic lines of the Nation and across the world. Moresoever, the banks are lowering interest rates and taking measures reminiscent of the 2008 financial crisis whilst focusing on the social distancing and form a combat strategy against the invisible enemy which has impacted millions of lives and caused thousands of deaths globally.

The COVID-19 coronavirus poses severe challenges to the global economic and commercial market. In addition to the humanitarian impacts of this global crisis, quarantine, travel bans, denial of access and other restrictive measures have severely affected global supply chains and contracting parties' ability to comply with contractual obligations. Some have had direct commercial impacts on specific sectors, with interruptions to supply chains, challenges in meeting contractual obligations and implications under funding arrangements etc.

COVID-19 AND FORCE MAJEURE

Force majeure translates literally from French as superior force. It's a common clause in legal contracts that allows either party to limit their liability in the face of some unforeseeable, extraordinary event. In English, the term is often used in line with its literal French meaning, but it has other uses as well, including one that has roots in a principle of French law.

In business circles, "force majeure" describes those uncontrollable events or circumstances beyond human control such as an event described as an act of God (like natural calamity, war, strike, riots, etc) that are not the fault of any party and that make it difficult or impossible to carry out normal business and perform the contractual liability despite of readiness and willingness. Generally, on the activation of the Force Majeure clause in the contract, it absolves both parties from contractual liability or obligation under the contract. The relevant provisions are embodied under Sections 32 and 56 of the Indian Contract Act, 1872

In the present scenario and circumstances where the world is at standstill axis due to pandemic coronavirus, it is likely that performances under many contracts will be delayed, interrupted, or even cancelled. There would be chances that the suppliers in contracts may seek to delay and/or avoid performance (or non-performance liability) of their contractual obligations and/or terminate contracts, either because Covid-19 has legitimately prevented them from performing their contractual obligations, or because they are seeking to use it as an excuse to extricate themselves from an unfavorable deal. Also, parties may also cite Covid-19 as a basis for renegotiation of price or other key contractual provisions (e.g volume of materials exported from or imported into affected areas due to shifts in supply and demand).

Thus, in this set of facts and circumstances, it becomes important to ascertain the answer to the question that whether Covid-19 will be considered as a 'force majeure' event? Generally "Force Majeure" clause is that any event or circumstance or combination of events and circumstances including those stated below that wholly or partly prevents or unavoidably delays an Affected Party in the performance of its obligations under this Agreement, but only if and to the extent that such events or circumstances are not within the reasonable control, directly or indirectly, of the Affected Party and could not have been avoided if the Affected Party had taken reasonable care or complied with Prudent Utility Practices.

Moresoever, Force Majeure can be classified to be Natural Force Majeure Events and Non Natural Force Majeure Events. The present widespread of coronavirus which has caused to lockdown the entire nation falls within the ambit of Non Natural Force Majeure Events and the COVID-19 could make performance of the contractual obligations to be more difficult.

In the persisting circumstances, the consideration of the COVID-19 pandemic to be Force Majeure depends on the fact that the clause of Force Majeure is incorporated in the Contract to be considered. A force majeure clause cannot be implied under Indian law. It must be expressly provided for under the contract and protection afforded will depend on the language of the clause. In the event of a dispute as to the scope of the clause, the courts are likely to apply the usual principles of contractual interpretation. In case, if the a force majeure event clause expressly includes a pandemic events then Covid-19 outbreak would activate a force majeure clause in the contract. Although, whether a party can be excused from a contract on account of Covid-19 being declared a pandemic is a fact-specific determination that will depend on the nature of the party's obligations and the specific terms of the contract.
As a matter of fact, the Ministry of Finance, Govt of India has already issued an office memorandum dated 19th February, 2020 inviting attention to para 9.7.7 of the "Manual for procurement of Goods, 2017" issued by Department of Expenditure, stating that disruption of the supply chains due to spread of coronavirus will be covered in the Force Majeure clause (FMC) and should be considered as a case of natural calamity and FMC may be invoked, wherever considered appropriate, following the due procedure. The supply can be ranging from articles, material, commodities, livestock, medicines, furniture, fixtures, raw material, consumables, spare parts, instruments, machinery, equipment, industrial plants, vehicles, aircrafts, ships, railway rolling stock, assemblies, sub assemblies, accessories, or such other goods etc.

This requirement of causation is likely to be the key battleground in COVID-19 force majeure cases in the months and years to come, and the focus in any eventual litigation or arbitration will certainly be on whether any travel restrictions, quarantines imposed, lack of available employees or similar specifically impacted the project or party at issue in the period of time surrounding the notice of force majeure.

Some force majeure clauses will expressly state that the party seeking to rely on it was "prevented" from performing due to the force majeure event. If the clause is drafted in this way, the party typically must show that performance of its obligations would have been possible "but for" the COVID-19 outbreak (or the governmental measures taken in response) and that there is no alternative way in which the obligation can be mitigated or discharged. A key issue likely to arise in this context is the nature of governmental measures taken, and whether such measures are mandatory or advisory in nature, together with whether any governmental measure (e.g. the shutdown of a specific plant) was in fact requested by or instigated by the party then claiming force majeure. A party relying on a force majeure clause must also show that there are no reasonable steps that it could have taken to mitigate or avoid the effects of the force majeure event.

All hope is however, not lost for the party if the contract does not contain force majeure provisions as the party may nevertheless be able to rely on the common law doctrine of frustration of contract. The doctrine will apply where an unforeseen event either renders a contract impossible to perform or makes the outcome of the performance radically different from what was envisaged by the parties at the time the contract was formed.

Also, it is important to draw attention to Doctrine of Frustration. The said doctrine has its root of the English law which express this doctrine that acts as a device to set aside contracts where an unforeseen event either renders contractual obligations impossible, or radically changes the party's principal purpose for entering into the contract. The said Doctrine of frustration has been enshrined in Section 56 of the Indian contract act 1872 which deals with those cases where the performance of contract has been frustrated and the performance of it has become impossible to perform due to any unavoidable reason or condition. Although the frustration principle is subject to a very high threshold, it is possible to envisage a range of factual circumstances in which COVID-19 and the ensuing governmental response measures could be construed as a frustrating event.

If the force majeure clause refers to pandemics and/or epidemics, then it will almost certainly be applicable given that the World Health Organization on 11th March 2020 declared COVID-19 a pandemic. However, the position becomes more uncertain where the clause may, for example, refer to an "act of God" without further definition. If the outbreak does fall within the scope of the clause, it must then be determined to what extent the contractual obligations are affected. It is possible for example that some obligations within the contract are not impeded by the outbreak and some obligations may simply be postponed. Therefore, both parties will need to closely scrutinize the relevant evidence, including the timing of the alleged performance difficulties as compared to the spread of COVID-19 and corresponding government measures are taken in the particular place of operation at a given time.

For the above reasons, it can clearly be stated that there is also a risk involved on the party who intends to invoke the force majeure clause in the contract. If a party declares force majeure but is not contractually entitled to do so, it may expose itself to a claim for repudiatory breach of contract and the other party may be entitled to claim damages as a consequence.

It is important to note that doctrine of frustration, though similar in effect to the doctrine of force majeure, is more restrictive. Courts will generally not allow a party to use the doctrine of frustration as a tool to escape a bad bargain. The doctrine of frustration will also not relieve a party from performing a contractual obligation simply because the event complained of has made the performance more difficult or expensive. Economic hardship is not a ground for invoking the doctrine of frustration.

CONCLUSION

Since, it depends on what has been stated and incorporated in the clause of force majeure in the contract; it becomes utmost necessary at this point of time of pandemic situation to analyze the key contracts and the clauses inculcated therein. Further, it would be best suitable to invoke clauses like that of escalation, price adjustment, liquidated damages and such so as to avoid the suffocation of the amount involved in commercial contracts and get the amount in circulation. It is crucial that businesses and consumers are aware of their rights under the contracts they have entered into, under the common law and under statute so that they are prepared when confronted with an inability to perform their contractual obligations as a result of COVID-19. Of course, it is always advisable to seek the advice of a lawyer in such circumstances.

The author is an advocate at  Rajasthan High Court, Jodhpur and Managing Partner, Mehta Chambers, Law offices. www.mehtachambers.in

[The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of LiveLaw and LiveLaw does not assume any responsibility or liability for the same]

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