FORCE MAJEURE: Q&A Concerning Force Majeure In View Of COVID 19 Pandemic - Litigation, Contracts and Force Majeure

What is the meaning of Force Majeure?

"Force majeure", a French term equivalent to "Vis majeure", in Latin, means "superior force". A Force majeure clause is defined under the Black's Law Dictionary as 'A contractual provision allocating the risk if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled.'

It is noteworthy that the expression "force majeure" is a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in "force majeure". Judges have agreed that strikes, breakdown of machinery, which, though normally not included in "vis major" are included in "force majeure". An analysis of rulings on the subject shows that where reference is made to "force majeure", the intention is to save the performing party from the consequences of anything over which he has no control. This is the widest meaning that can be given to "force majeure" - Dhanrajamal Gobindram v. Shamji Kalidas & Co., AIR 1961 SC 1285, 1291.

It is not uncommon for the parties to incorporate a force majeure clause in contracts where the parties to the contract would not be held liable for any delay or failure in performance if such delay or failure is beyond their reasonable control and may include but not limited to act of God, government action, fire, war, pandemic, epidemic, natural disaster, act of terrorism or any such major upheaval.

How is force majeure dealt with under the Indian Law?

In India, "Force majeure" is governed under the Indian Contract Act, 1872. Insofar as it is relatable to an express or implied clause in a contract, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. Section 32 reads as under:

"32. Enforcement of contracts contingent on an event happening. —Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened.

If the event becomes impossible, such contracts become void."

Insofar as a force majeure event occurs dehors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract Act. Sections 56 read as under:

"56. Agreement to do impossible act.— An agreement to do an act impossible in itself is void.

Contract to do act afterwards becoming impossible or unlawful.—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.

Compensation for loss through non-performance of act known to be impossible or unlawful.— Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise."

[Energy Watchdog v. CERC, (2017) 14 SCC 80)]

How is Section 56 of the Indian Contract Act interpreted?

The doctrine of frustration is covered under Section 56 of the Indian Contract Act. The doctrine of frustration must always be within narrow limits. The Apex Court has succinctly explained Section 56 of the Indian Contract Act in Satyabrata Ghose v. Mugneeram Bangur & Co., 1954 SCR 310, as under:

The first paragraph of the Section lays down the law in the same way as in England. It speaks of something which is impossible inherently or by its very nature, and no one can obviously be directed to perform such an act.

The second paragraph enunciates the law relating to discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. The wording of this paragraph is quite general. This much is clear that the word "impossible" has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose which the parties had in view; and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promissor finds it impossible to do the act which he promised to do.

Whether COVID -19 can be construed to be a force majeure event?

Recently, the High Court of Delhi in M/s Halliburton Offshore Services Inc. v, Vedanta Limited & Anr., O.M.P (I) (COMM.) No. 88/2020 & I.As. 3696-3697/2020 inter alia observed that there is no doubt that COVID-19 is a Force Majeure event. But the question as to whether COVID-19 would justify non-performance or breach of a contract has to be examined on the facts and circumstances of each case. Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. The Court would have to assess the conduct of the parties prior to the outbreak, the deadlines that were imposed in the contract, the steps that were to be taken, the various compliances that were required to be made and only then assess as to whether, genuinely, a party was prevented or is able to justify its nonperformance due to the epidemic/pandemic.

Whether rise or fall in prices would come within the purview of "Force majeure"?

In Alopi Parshad & Sons Ltd. v. Union of India, AIR 1960 SC 588, the Supreme Court, after setting out Section 56 of the Contract Act, held that the Act does not enable a party to a contract to ignore the express covenants thereof 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 example, 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 the 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.

Whether performance can be discharged where the contract becomes onerous to one of the parties?

It has been held in Alopi Parshad & Sons Ltd. v. Union of India, AIR 1960 SC 588 that the performance of a contract is never discharged merely because it may become onerous to one of the parties.

In Naihati Jute Mills Ltd. v. Khyaliram Jagannath (1968) 1 SCR 821, it has been held by the Supreme Court that the 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.

In Chitty on Contracts, 31st Edn. in Para 14-151, it is stated that a rise in cost or expense has been stated not to frustrate a contract. Similarly, in Treitel on Frustration and Force Majeure, 3rd Edn., it has been opined at Para 12-034, that the cases provide many illustrations of the principle that a force majeure clause will not normally be construed to apply where the contract provides for an alternative mode of performance. It is clear that a more onerous method of performance by itself would not amount to a frustrating event. Treitel also states that a mere rise in price rendering the contract more expensive to perform does not constitute frustration. (See Para 15-158.)

Whether the invocation of the Bank Guarantees is liable to be injuncted on the ground of occurrence of COVID-19?

In M/s Halliburton Offshore Services Inc. v, Vedanta Limited & Anr., O.M.P (I) (COMM.) No. 88/2020 & I.As. 3696-3697/2020, the question before the High Court of Delhi was whether the invocation of the Bank Guarantees is liable to be injuncted on the ground of occurrence of a force majeure event i.e., COVID-19, if the breach occurred prior to the said outbreak? In the aforesaid case, the grounds taken to invoke the Force Majeure clause were that due to outbreak of COVID-19, experts from France who may be required cannot travel to India. Since the Force Majeure clause in the contract covers epidemics and pandemics, the Contractor claimed that its non-performance is justified and the invocation of Bank Guarantees is liable to be stayed. The High Court of Delhi observed that the question as to whether COVID-19 would justify non-performance or breach of a contract has to be examined on the facts and circumstances of each case. Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. The Court would have to assess the conduct of the parties prior to the outbreak, the deadlines that were imposed in the contract, the steps that were to be taken, the various compliances that were required to be made and only then assess as to whether, genuinely, a party was prevented or is able to justify its nonperformance due to the epidemic/pandemic. The Court observed that it is the settled position in law that a Force Majeure clause is to be interpreted narrowly and not broadly. Parties ought to be compelled to adhere to contractual terms and conditions and excusing non-performance would be only in exceptional situations. The Court placed reliance on the decision of the Supreme Court in Energy Watchdog v. CERC, (2017) 14 SCC 80) and observed that it is not in the domain of Courts to absolve parties from performing their part of the contract. It is also not the duty of Courts to provide a shelter for justifying non-performance. There has to be a 'real reason' and a 'real justification' which the Court would consider in order to invoke a Force Majeure clause. In view of the above, the Court held that the past non-performance of the Contractor cannot be condoned due to the COVID-19 lockdown in March 2020 in India. With regard to the facts of the case, it was observed that the Contractor was in breach since September 2019 and opportunities were given to the Contractor to cure the same repeatedly. Despite the same, the Contractor could not complete the Project. As such the outbreak of a pandemic cannot be used as an excuse for nonperformance of a contract for which the deadlines were much before the outbreak itself.

Whether issuance of tender ought to be postponed on account of COVID-19?

In PKSS Infrastructure Private Ltd. v. South Delhi Municipal Corporation and Ors., W.P. (C) 2995/2020 (Delhi), a writ petition was filed under Article 226 of the Constitution of India in relation to the notice inviting tender dated 6th April, 2020 issued by South Delhi Municipal Corporation [SDMC], whereby the SDMC invited technical and financial bids from Interested Developers/ Toll Plaza Operators to collect Toll Tax from specified commercial vehicles, upgrade/modify, operate and maintain 124 Toll Plazas/Posts/Barriers locations bordering Delhi. The Petitioner sought for urgent orders in the nature of issuance of a writ to the Respondents for postponing the tender to a later date after the expiry of the prevalent lockdown ordered by the Government of India, in order to enable the Petitioner to participate in the same.

It was inter alia held that the situation existing in the country on account of the pandemic is no doubt unfortunate and the general public is indeed facing adverse circumstances, however, it does not necessarily mean that in every situation where a party would approach the Court and cite COVID-19 and the lockdown ordered by the government as a ground to explain its inability or failure to fulfil its obligation, the Courts ought to interfere. With regard to the case in question, it was noted that it is imperative that the tender process has to be completed with urgency as the term of the existing contractor had already come to an end on account of the action of termination by the Respondents. As such the Petition was dismissed.

Whether the parties can be restrained from encashing the Letters of Credit due to the COVID-19 pandemic? Further, what would be the effect on contractual obligations of the parties where the distribution of a particular material is declared an essential service by the Government?

In Standard Retail Pvt. Ltd v. GS Global Corp and Ors., 2020 SCC OnLine Bom 704, the Petitioner filed a petition under Section 9 of the Arbitration and Conciliation Act seeking directions restraining the Respondent-Bank from negotiating/ encashing the Letters of Credit. It was the case of the Petitioners that in view of the COVID-19 pandemic and the lockdown declared by the Central/State Government, its contracts with Respondent No. 1 were terminated as unenforceable on account of frustration, impossibility and impracticability. The Petitioners relied upon Section 56 of the Indian Contract Act, 1972. Under the said Contracts, the Respondent No. 1 which has its head office at South Korea was to supply certain steel products, the shipments of which were to be dispatched from South Korea, to the Petitioners at Mumbai. The High Court of Bombay inter alia held that the Letters of Credit are an independent transaction with the Bank and the Bank is not concerned with underlying disputes between the Petitioners who are buyers and the Respondent No. 1 who is the seller. Further, that the Force Majeure clause in the present contracts is applicable only to the Respondent No. 1 and cannot come to the aid of the Petitioners.

With regard to the contract between the Petitioner and the Respondent No.1, it was observed that the contract terms are on Cost and Freight basis (CFR) and the Respondent No. 1 has complied with its obligations and performed its part of the contracts and the goods have been already shipped from South Korea. The fact that the Petitioners would not be able to perform its obligations so far as its own purchasers are concerned and/or it would suffer damages, is not a factor which can be considered and held against the Respondent No. 1. It was further observed that the distribution of steel has been declared as an essential service and there are no restrictions on its movement and all ports and port related activities including the movement of vehicles and manpower, operations of Container Freight Station and warehouses and offices of Custom Houses Agents have also been declared as essential services. Also, as per the Notification of the Director General of Shipping, Mumbai, there would be no container detention charges on import and export shipments during the lockdown period. Notwithstanding the above, it was held that the lockdown would be for a limited period and the lockdown cannot come to the rescue of the Petitioners so as to resile from its contractual obligations with the Respondent No. 1 of making payments.

Whether a tenant can seek suspension of rent on account of COVID -19?

The High Court of Delhi, in Ramanand & ors. v. Dr. Girish Soni & anr. [CM Appl. 10847/2020 in RC. REV. 447/2017], dealt with various issues relating to suspension of payment of rent by tenants owing to the COVID-19 lockdown crisis and the legal questions surrounding the same. In the aforesaid case, following the outbreak of COVID-19, an application for suspension of rent was moved, during the lockdown period. The stand of the tenants was that due to the lockdown, there had been complete disruption of all business activities, including the business of the tenants. It was accordingly pleaded that the circumstances are force majeure and beyond the control of the tenants. It was thus claimed that the tenants are entitled to waiver of the monthly payment directed vide order dated 25th September, 2017, or at least some partial relief in terms of suspension, postponement or part-payment of the said amount.

The High Court inter alia held:

The relationship between a Landlord and Tenant, a Lessor and Lessee and a Licensor and Licensee can be in multifarious forms. These relations are primarily governed either by contracts or by law. In the realm of contracts, the respective rights and obligations of the parties would be determined by the terms and conditions of the contract itself.

The question of waiver, suspension or any remission in the rental payments would operate differently for each category of agreements. Where there is a contract, whether there is a force majeure clause or any other condition that could permit waiver or suspension of the agreed monthly payment, would be governed by the contractual terms. If, however, there is no contract at all or if there is no specific force majeure clause, then the issues would have to be determined on the basis of the applicable law.

In circumstances such as the outbreak of a pandemic, like COVID-19 outbreak, the grounds on which the tenants/lessees or other similarly situated parties could seek waiver or non-payment of the monthly amounts, under contracts which have a force majeure clause would be governed by Section 32 of the Indian Contract Act, 1872. The said clause could be differently worded in different contracts, as there is no standard draft, application or interpretation. The fundamental principle would be that if the contract contains a clause providing for some sort of waiver or suspension of rent, only then the tenant could claim the same. The force majeure clause in the contract could also be a contingency under Section 32 which may allow the tenant to claim that the contract has become void and surrender the premises. However, if the tenant wishes to retain the premises and there is no clause giving any respite to the tenant, the rent or the monthly charges would be payable.

In the absence of a contract or a contractual term which is a force majeure clause or a remission clause, the tenant may attempt to invoke the Doctrine of Frustration of Contract or `impossibility of performance', encapsulated under Section 56 of the Indian Contract Act. There are various conditions that have to be fulfilled to satisfy the conditions of `impossibility' under Section 56. However, in the context of a tenant's obligations, the High Court referred to the decision of the Supreme Court in the Raja Dhruv Dev Chand v. Raja Harmohinder Singh & Anr., AIR 1968 SC 1024 where the tenant who had agricultural lands in Punjab which he could not utilise due to the 1947 Partition, sought refund of the rent paid by him for the said land for Kharif season 1947 and Rabi season 1948. The Supreme Court, after considering the law on `impossibility of performance' from various jurisdictions, held that in the Indian context Section 56 "lays down a positive rule relating to frustration of contracts and the Courts cannot travel outside the terms of that section". The Court held that Section 56 does not apply to lease agreements and there is a clear distinction between a completed conveyance and an executory contract, and events which discharge a contract do not invalidate a concluded transfer. By its express terms Section 56 of the Contract Act does not apply to cases in which there is a completed transfer.

A covenant under a lease to do an act which after the contract is made becomes impossible or by reason of some event which the promisor could not prevent unlawful, becomes void when the act becomes impossible or unlawful. But on that account the transfer of property resulting from the lease granted by the lessor to the lessee is not declared void.

Section 56 of the Indian Contract Act would not apply to a lease agreement and other similarly situated contracts which are `executed contracts' and not `executory contracts'.

The doctrine of force majeure is recognised in Section 108(B)(e) of the TPA. The provision itself would apply only in the absence of a contractual stipulation. Further, on the occurrence of any of the situations contemplated under clause (e), which would render the property `substantially and permanently unfit' to be used for the purpose for which it was leased, at the option of the lessee, the lease would be void. In Raja Dhruv (supra) the Supreme Court, while interpreting as to what constitutes `substantially and permanently unfit' held that temporary non-use by the tenant due to any factors would not entitle the tenant to invoke this section.

With regard to the facts of the case, it was held that in the absence of a contract or a contractual stipulation, as in the present case, the tenant may generally seek suspension of rent by invoking the equitable jurisdiction of the Court due to temporary non-use of the premises. The question as to whether the suspension of rent ought to be granted or not would depend upon the facts and circumstances of each case, including the nature of the property, financial and social status of the parties, amount of rent, other factors, any other contractual conditions, and protection under any executive order(s) etc.

With regard to the case in hand, the tenants' application for suspension of rent was rejected inasmuch as while invoking the doctrine of suspension of rent on the basis of a force majeure event, it was clear that the tenants did not intend to surrender the tenanted premises. However, while holding that suspension of rent is not permissible in these facts, the Court held that some postponement or relaxation in the schedule of payment can be granted owing to the lockdown.

Whether COVID -19 can be construed to be a force majeure event under Construction Contracts?

The Ministry of Road Transport and Highways (MoRTH) vide its Notification dated 18th May, 2020 inter alia classified COVID -19 pandemic as a force majeure event. The High Court of Delhi in MEP Infrastructure Developers Ltd. v. South Delhi Municipal Corporation and Ors., [W.P. (C) No. 2241/2020 elucidated the effect of the notification as under:

"27(i) The respondent Corporation itself referred to Circular dated 19.02.2020 issued by the Ministry of Road Transport Highways (MORTH) which notified that the COVID-19 pandemic was a force majeure occurrence. In effect, the force majeure clause under the agreement immediately becomes applicable and the notice for the same would not be necessary. That being the position, a strict timeline under the agreement would be put in abeyance as the ground realities had substantially altered and performance of the contract would not be feasible till restoration of the pre-force majeure conditions."

Whether a prior notice is required under the construction contracts to invoke the force majeure clause?

In most of the construction contracts, there is generally a requirement for issuance of a prior notice for invoking the force majeure clause. The High Court of Delhi in MEP Infrastructure Developers Ltd. v. South Delhi Municipal Corporation and Ors., [W.P. (C) No. 2241/2020] inter alia dispensed with the aforesaid requirement of prior notice and observed that there was no requirement for a distinct and separate notice postulating the occurrence of the force majeure event.

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.

India: FORCE MAJEURE: Q&A Concerning Force Majeure In View Of COVID 19 Pandemic