COVID-19 has been declared as a "pandemic" by the World Health Organisation on 11 March 2020. Given the supply chain disruption caused by the pandemic, it is likely that several contractual obligations are impeded by this pandemic. The COVID-19 pandemic has led to a scenario where the performance of contracts has either become extremely difficult, or contracts have been rendered completely incapable of being performed. It is therefore imperative to analyze whether COVID-19 will qualify as a force majeure event.

Force majeure translates literally from French as superior force. Force majeure is a contractual provision that is usually agreed upon by parties to a contract. Force majeure means extraordinary events or circumstances beyond the control of parties to a contract and typically includes events described as act of god or natural disasters, war or war-like situations, labour unrest or strikes, epidemics or pandemics. The intention of a force majeure clause is to save the performing party from consequences of something over which it has no control. Force majeure is therefore an exception to what would ordinarily otherwise amount to a breach of contract.

The law pertaining to force majeure in India is governed by the Indian Contact Act, 1872 (Contract Act). In so far as it relates to an express or an implied clause in the contract, it will be governed by Section 32 of the Contract Act. However, where a force majeure event occurs dehors a contract, it is dealt with by Section 56 of the Contract Act. Over the years, we have observed a general tendency amongst Indian courts to adopt narrow interpretations, when it comes to force majeure clauses in contracts.

The law in India has been laid down in the decision of Satyabrata Ghose vs Mugneeram Bangur & Co.1 . In this case, the Supreme Court of India (Supreme Court) held that the word "impossible" has not been used in Section 56 in the sense of physical or literal impossibility. The performance of an act may not be literally impossible, but it may be impractical and useless from the point of view of the object and purpose of the contractual arrangement between the parties. If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do. It was further held that where the court finds that the contract itself either impliedly or expressly contains a term, according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Contract Act. If, however, frustration is to take place dehors the contract, it will be governed by Section 56 of the Contract Act.

In Alopi Parshad & Sons. Ltd. vs Union of India2 , the Supreme Court held that the Contract Act does not enable a party to a contract to ignore the express covenants thereto, and to claim payment of consideration for performance of the contract at rates different from the stipulated rates, on a vague plea of equity. Parties to an executable contract are often faced, in the course of carrying it out, with a turn of events which they did not at all anticipate; for instance, a wholly abnormal rise or fall in prices which is an unexpected obstacle to execution. This does not in itself get rid of the bargain they have made. It is only when a consideration of the terms of the contract, in light of the circumstances existing when it was made, showed that they never agreed to be bound in a fundamentally different situation which had unexpectedly emerged, that the contract ceases to bind. It was further held that the performance of a contract is never discharged merely because it may become onerous to one of the parties.

Similarly, in Naihati Jute Mills Pvt. Ltd. vs. Khyaliram Jagannath3 , the Supreme Court held that a contract is not frustrated merely because the circumstances in which it was made were altered. It was further held that 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. Contracting parties are expected to bear on their own, any such risk of unforeseen circumstances which may impart an onerous tone to discharge of their obligations under a contract.

In the recent decision titled as Energy Watchdog vs CERC4 , the Supreme Court held that force majeure clauses are to be narrowly construed. The court opined that in the force majeure clause contained in the contract in question, "hindrance" could mean an event wholly or partly preventing performance. However, a mere increase in prices would not amount to a hindrance. It was held that since the force majeure specifically excluded rise in fuel cost from force majeure, the fundamental basis of the contract was never dislodged. In view of the fact that alternative modes of performance were available even though the same were at a higher price, a force majeure situation did not arise. The Court further held that since there was a specific clause addressing force majeure in the contract in question, Section 56 of the Contract Act would not have any application.

In light of COVID-19, the China Council for the Promotion of International Trade on 17 February 2020, issued over 1,600 'Force Majeure certificates' to firms in 30 sectors, covering contracts worth over USD 15 billion .

In India, the Department of Expenditure (Procurement Policy Division) of the Ministry of Finance, issued an office memorandum dated 19 February 2020 in relation to the 'Manual for Procurement of Goods, 20175,6 . The said office memorandum, which serves as a guideline for procurement by the Government, effectively states that the COVID-19 outbreak could be covered under a force majeure clause on the basis that it is a 'natural calamity'. However, it has been clarified that that 'due procedure' should be followed by any Government department seeking to invoke it.

A similar interpretation has been adopted by the Ministry of New and Renewable Energy (MNRE) in the office memorandum dated 20 March 2020, in relation to the scheduled commissioning of renewable energy projects. The office memorandum effectively directs all implementing agencies of the MNRE as well as the State Renewable Energy Departments to treat delay in commissioning the projects on account of disruption of supply chains due to spread of COVID-19 in China or any other country, as force majeure.

While this interpretation by the Government may not be binding on all contracts, it may still have persuasive strength in interpreting contracts with the Government of India.

Whether force majeure can be invoked by a party will depend mainly on the nature and the general terms of the contract, the events that precede or follow it and the facts of the case. The following aspects are relevant while considering the implications of COVID-19 on contractual obligations: -

  1. Whether or not the contract contemplates the occurrence of an event that renders the performance of the contract impossible or illegal? If the contract does not provide for such a clause, the remedy may lie in Section 56 of the Contract Act. However, Section 56 would not be applicable where parties specifically agree upon a recourse to be adopted by them in such a scenario. To the extent that the parties have already contemplated and agreed upon the consequences of an event that render the performance of a contract impossible, the same would be binding on them.
  2. The terms of most force majeure clauses vary widely. Therefore, whether or not a pandemic such as a COVID-19 and the subsequent shutdowns can be used to trigger the force majeure clause in a contract will depend upon the language of the clause.
  3. The burden of proof for establishing force majeure conditions is usually upon the party invoking the force majeure clause in a contract.
  4. Contracts may cast a duty to mitigate the effect of non-performance upon a party. A party may also be required to show proof of such mitigation measures undertaken by it. Mitigation is a subjective standard and will have to be interpreted on the individual facts surrounding each contract.
  5. The terms of a contract may require a formal notification by the party proposing to excuse itself from non-performance of the contract. A party may also be required to fulfil these formal requirements within a particular period of time.

Keeping in mind the fact that the aforesaid aspects are necessarily fact-specific and will vary from contract to contract, it will be necessary to understand the terms of each contract as well as the commercial and transactional operations of the concerned company in order to determine whether COVID-19 will qualify as a force majeure event.

1 Satyabrata Ghose vs Mugneeram Bangur & Co., AIR 1954 SC 44.

2 Alopi Parshad & Sons. Ltd. vs Union of India, AIR 1960 SC 588 (India).

3 Naihati Jute Mills Pvt. Ltd. vs. Khyaliram Jagannath, AIR 1968 SC 522 (India).

4 Energy Watchdog vs CERC, (2017) 14 SCC 80 (India).

5Dalila Ouerghi, China issues record number of force majeure certs to coronavirus-hit businesses, FASTMARKETS MB (March 02, 2020, 3:48 PM), https://www.metalbulletin.com/Article/3921083/China-issues-record-number-of-force-majeure-certs-to-coronavirus-hit-businesses.html.

6 OFFICE MEMORANDUM issued by GOVERNMENT OF INDIA, MINISTRY OF FINANCE dated February 19, 2020, https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf.

7 OFFICE MEMORANDUM issued by GOVERNMENT OF INDIA, MINISTRY OF NEW & RENEWABLE ENERGY (MNRE) dated March 03, 2020, https://mnre.gov.in/img/documents/uploads/file_f-1584701308078.pdf.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.