[Anirudh Agrawal and Rishabh Sharma are 4th year BA.LL.B. (Hons.) students at NALSAR University of Law, Hyderabad]
Since the widespread reporting of cases of the coronavirus, Covid-19, around the world, several countries have imposed travel bans, citizens have been quarantined and the infected persons have been isolated, all with a view to stop the proliferation of the virus. Amidst such an outbreak, the commercial sector has been impacted to a significant extent. With emergency measures being put into place by numerous countries including India, which is amidst a 21-day lockdown to contain the deadly virus, many suppliers are not able to fulfill their contractual obligations within the agreed time limit. They have either delayed the supply of goods or have sought to terminate their contract. They are favoring termination of contract majorly because Covid-19 has justifiably prevented them from performing their obligation according to the contract or to save themselves from unfavorable deals owing to the fact that Covid-19 has materially changed the circumstances. In light of such a critical situation, several companies have either sought to terminate the contract or use the epidemic as the basis for renegotiating the terms of the contract. Consequently, the pertinent question which arises is: can Covid-19 be considered as a force majeure event?
What is Force Majeure?
Generally, a force majeure event is defined as any circumstance which is beyond a party’s control. In India, the law on force majeure is embodied under sections 32 and 56 of the Indian Contract Act, 1872. The occurrence of any force majeure event excuses a party from performance of its part of the contract. The intention behind inserting such a clause is to condone parties from liability under a contract that has been rendered impossible to perform due to materially changed circumstances owing to reasons over which both the parties had absolutely no control. It can also be said that such an event is an exception to a breach of contract. In most contracts, unless otherwise stated, the force majeure clause does not absolve a party from performance of the contract completely and requires it to perform that part of the contract which is not affected by the force majeure event.
Language of the Force Majeure Clause in the Contract
A force majeure clause often includes list of events, the occurrence of which may excuse a party from performing it. Under Indian law as the Supreme Court has enunciated, a force majeure clause must be strictly construed, i.e., only those events that are explicitly mentioned in the contract can excuse a party from performance. If “pandemics” have been specifically included in the force majeure clause of a contract, then it goes without saying that a party can invoke the same to excuse performance due to Covid-19, given that its outbreak has been declared to be a pandemic by the World Health Organisation (WHO) in March. However, a problem arises when parties have not explicitly mentioned such a term. If parties use catch-all phrases like the “clause will cover all other events which are beyond the control of the parties” or “any other similar event”, then the scope for invoking the force majeure clause will depend upon its wording and the specific events mentioned it. In such cases, the common law jurisprudence says that doctrine of ejusdem generis shall be applicable, i.e., only such events which are mentioned in the provision must be used. For example, if the clause uses the words “acts of God, boycotts, strikes, riots or any other similar event”, then in such cases an event beyond the scope of the aforementioned events, such as a third party suddenly rescheduling delivery, cannot be used as a ground to invoke the force majeure clause despite the event being outside the control of both the parties since, from the wording, it cannot be contemplated that the parties intended to cover even such an event.
In Seadrill Ghana Offshore v Tullow, the England and Wales High Court had said that for a party to rely upon a force majeure event, such event must be the sole operative reason because of which the party is unable to perform the contract. This means that if a party is affected by Covid-19, but is also affected by some other reason which is hindering performance of the contract, then the party cannot rely upon force majeure clause. The Court also said that the parties must make reasonable efforts to overcome such force majeure events and, while making the endeavors, must weigh their own business interest with that of the other parties. In Classic Maritime Inc v Limbungan Makmur, an English court said that if performance of the contract is possible in any alternative way, then party must seek to perform the contract in that manner before invoking the force majeure clause.
What if the Force Majeure Clause is absent in a Contract?
The very purpose of inserting the force majeure clause in a contract is to provide relief to parties in terms of adaptation or termination of a contract on occurrence of a supervening event. If, for some reason, the parties have failed to include the force majeure clause, then the affected party can seek relief under section 56 of the Contract Act which deals with the doctrine of frustration; however, this is very a limited defence to non-performance. To claim relief under this section, the parties must prove the absolute impossibility of contractual performance, and not merely any loss or financial difficulty in its execution.
To determine whether the consequences of Covid-19 will qualify as impossibility or whether it will be merely treated as hardship, one needs to consider the threshold of impossibility as set by judiciary. The House of Lords in Tsakiroglou & Co. Ltd. v Noblee Thorl had said that merely because performance of an obligation has become too cumbersome on account of the occurrence of an unforeseen circumstance, it cannot be a ground to frustrate the contract if there is an alternative manner through which the contract can be performed, although in a manner more onerous than as against originally intended. In the landmark case of Satyabrata v Mugneeram, the Supreme Court of India had said that section 56 of the Contract Act derogates from the central idea of a contract, which is performance of the contract according to the intention of the parties. Section 56 allows discharge of obligation only when the performance of the contract has become impossible owing to “change of circumstances that have totally shaken the very foundation upon which the parties have entered into the agreement.” However, in the recent past, the Court seems to have blurred the understanding of frustration. In the recent case of Energy Watchdog v Central Electricity Regulatory Commission, the Supreme Court noted that under the doctrine of frustration, the performance of contract may not be impossible, but if the parties are able to demonstrate that “performance of it will be impracticable and useless from the view of the original intention and object of the parties to the contract”, then in such cases parties can validly invoke doctrine of frustration and seek exemption from performance of the contract.
Office Memorandum Issued by the Government of India on Force Majeure Clause
Recently, with respect to the force majeure clause of the Manual for Procurement of Goods, 2017, the Government of India has issued an office memorandum, wherein it has been stated that the Covid-19 outbreak should be considered as a natural calamity and that “force majeure clause may be invoked wherever considered appropriate”. Even the China Council for Promotion of International Trade (CCPIT), a quasi-governmental trade body of China, has issued more than 1600 force majeure certificates over the past month. Even though the guidance in the office memorandum is merely recommendatory in nature and not universally applicable, it will have persuasive value while interpreting any contract entered into with the Government of India which is similarly worded.
Conclusion
For a party to claim immunity from contractual performance under section 32 or 56 of the Contract Act, it will have to show that Covid-19 has shaken the very foundation upon which the party originally entered into the contract, which may prove to be a challenging task. This is because the courts will be inclined to interpret the outbreak as a mere “hardship”, i.e., an event responsible for creating circumstances which make the performance of the contract onerous and, therefore, pronounce failure of the parties to satisfy the threshold attached to a force majeure event. Also, from a positivist point of view, it would be very difficult for a party to qualify Covid-19 as a valid force majeure event unless they have expressly covered “pandemics” within the scope of the force majeure clause of the contract. A party seeking to claim benefits of such a clause has the onerous requirement to prove that the epidemic is the sole reason behind non-performance, and that it would have performed its part of the contract as originally intended but for the occurrence of the epidemic. Moreover, the party will need to show that there was no alternative means by which the contract could have been performed, and that all reasonable endeavors had been made to mitigate the consequences of such a circumstance, proof of which will be a very painstaking task for the party concerned.
– Anirudh Agrawal & Rishabh Sharma