FORCE MAJEURE: COVID-19 AND ITS IMPACT ON COMMERCIAL CONTRACTS AND CONTRACTUAL OBLIGATIONS

The Authors of this blog are Manpreet Singh & Gunjanpreet Kaur, students, School of Law, CHRIST Deemed to be University, Bengaluru

 

COVID- 19 Outbreak: Societal Impact

COVID-19 is a disease which is rampant globally and yet its provenance remains cryptic. It has been categorized as a pandemic and is striking communities to the core. The COVID-19 outbreak affects all segments of the population and is particularly detrimental to members of those social groups in the most vulnerable situations, continues to affect populations, including people living in poverty situations, older persons, persons with disabilities, youth, and indigenous people.[1] It has a far-reaching impact on humans as they have been trembled by the economic and social crises which is therefore beyond repair. This outbreak has brought almost all economies to an unparalleled grinding stop. To curb the situation, several countries have brought down complete lockdown which means that no movement in the country is allowed leading to all kind of restrictions excluding emergency needs and conditions from the same.

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.[2]The social impact of this pandemic is immense which is spreading human suffering and would ultimately lead to other major issues like exclusion and global unemployment and loss of livelihood if not timely addressed.

The commercial agreements that have been entered into between the parties at all levels seems to be a far-fetched and an impracticable reality as the parties to the contract cannot perform their underlying obligations thereby leading to frustration of contract. The situation will therefore provoke the parties to invoke the ‘Force Majeure’ clause to escape from their liability of fulfilling the contract.

COVID-19 And Force Majeure

The outbreak of Covid-19 has led to a global crisis leading to a halt in every economic operation. Such halt has resulted into non-fulfilment of contractual obligations which was otherwise stipulated in the contract. In such a scenario, it becomes a matter of concern to determine whether the outbreak of Covid-19 can be viewed as a force majeure event and if yes, then what is the degree of protection offered by such a clause.

As per the Manual for Procurement of Goods 2017, a Force Majeure means extraordinary events or circumstances beyond human control such as an event described as an act of God (like a natural calamity) or events such as a war, strikes, riots, crimes (but not including negligence or wrong-doing, predictable/seasonal rain and any other events specifically excluded in the clause).[3] Where "force majeure" is mentioned, the intention is to save the performing party from the repercussions of anything over which it has no control.[4] On occurrence of such event, the force majeure clause in a contract exempts the performing party or parties from their contractual obligations. These contingencies on the happening of which the performance of the contract shall stand discharged and is governed by the provisions of Section 32 of Indian Contract Act 1872.[5]

In order to invoke the force majeure clause, the following two conditions must be contemplated by the parties to a contract.

Firstly, the affected party needs to prove that such force majeure event was not reasonably foreseeable which prohibited them from performing their contractual obligations. Secondly, the interpretation of force majeure clause will generally rely on the principles of contractual interpretation which might lead to different interpretation for different contract. i.e., it will depend upon the language used while drafting the force majeure clause. Some contracts expressly include or exclude certain force majeure events that will either be applicable or exempted in case such event occurs. Therefore, in a case where a force majeure clause expressly provides for the inclusion of endemics and pandemics, then the affected party will be protected and discharged from its obligation. However, the problem arises when a force majeure clause in a contract contain ambiguous and unclear terms leading to different interpretations. In such a case, the principle to be kept in mind while interpreting a force majeure clause is that it must be narrowly construed.[6]

COVID-19 And Doctrine Of Frustration

The aforementioned section of the article discusses about a scenario where a contract has an expressed force majeure clause. However, it might happen that a particular contract does not have such a clause. The main question then arises whether there is any legal recourse available to the affected party.

The safeguard available in such a situation is doctrine of frustration which is incorporated under section 56 of the Indian Contracts Act, 1872. In a recent landmark judgement titled Energy watchdog Vs. Central Electricity Regulatory Commission[7]Justice R.F. Nariman of the Supreme Court opined that the event leading to frustration which is relatable to an express or implied clause in a contract, is governed by Section 32 of the Act and if it occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Act.

However, practically it is not an easy task to establish frustration and it often leads to many complications. In particular, it cannot be used (a) where the parties have contractually agreed the consequences of the supervening event, (b) an alternative method of performance is possible, (c) because performance has become more expensive or (d) because a party has been let down by one of its suppliers.[8]

For the above reasons, it can be clearly stated that the protection given to the affected party to a contract, under the Indian law regime, can be classified into two groups. The first group consists of those who explicitly or impliedly incorporated the force majeure clause into the contract and the second group consists of those who does not have an expressed or implied force majeure clause in the contract but are still protected under section 56 of the Indian Contracts Act, 1872 in case an event of frustration occurs. However, at the same time it is to be strongly emphasised that the doctrine cannot be lightly invoked which means that its ambit cannot be stretched to a probable difficulty or loss caused to the entity obligated to perform the contract.[9]

Legal Implications And Suggestive Measures

The ramifications of COVID-19 have brought all businesses around the world to a complete standstill thus making it difficult to fulfil the due obligations and performance of the contract. Counterparties (especially suppliers) to contracts may seek to delay or avoid performance 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 unfavourable deal.[10]

For the above reasons, it can be clearly stated that you have to strictly go by what exactly has been defined in a particular contract to be a force majeure ribbon. The parties concerned will have to see as to how the present situation can be covered under force majeure event as defined in the respective contracts.

Furthermore, parties must be aware and take care about how they have provided in their contracts as an event should be dealt with. In most of the contracts, there is a provision that once a force majeure event happens, then one of the parties puts the other party to the notice defining that such event has occurred and during this period the respective obligations of the party remain suspended.

The parties need to look at their respective contracts and read them strictly so as to find out whether this event is covered as per their contract. In a case where a contract is silent, the courts are of the view that a mere commercial difficulty per se is not an impossibility.

In today’s scenario, though we can see some difficulty as a reason but in all the situation it may not be impossible for the party to act. In several cases, it may only be a commercial hardship. So once a party is satisfied that they are not able to act then they must again put the other party to notice taking resort to section 56 of the Indian Contracts Act, 1872. However, the scope of this section is very restrictive and the courts will generally not allow a party to use the doctrine of frustration as a tool to escape a bad bargain.[11]

Therefore, it can clearly be stated that in these times the parties must revisit their commercial contracts to understand and evaluate what their position at this point may be as per their respective contracts.

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[1] Everyone Included: Social Impact of COVID-19, available at:https://www.un.org/development/desa/dspd/everyone-included-covid-19.html (Visited on April21, 2020).

[2] COVID-19 Crisis: Force Majeure And Impact On Contracts From An Indian Law Perspective,available at: https://www.livelaw.in/law-firms/articles/covid-19-crisis-force-majeure-and-impact-on-contracts-from-an-indian-law-perspective-154698 (Last Modified April 2, 2020).

[3]COVID-19: The Force Majeure clause and its impact on contracts, available at:https://www.investindia.gov.in/team-india-blogs/covid-19-force-majeure-clause-and-its-impact-contracts (Last Modified April 14, 2020).

[4]Applicability Of Force Majeure And Doctrine of Frustration During COVID-19: An Interpretation,available at:https://www.livelaw.in/law-firms/articles/applicability-of-force-majeure-and-doctrine-of-frustration-during-covid-19-an-interpretation-155326(Last Modified April 16, 2020).

[5] Indian Contracts Act, 1872(Act 9 of 1872), s. 32.

[6]Energy Watchdog and Ors. v. Central Electricity Regulatory Commission and Ors.(2017) 14 SCC 80.

[7]ibid.

[8]Coronavirus outbreak: The legal implications, available at:https://www.nortonrosefulbright.com/en/knowledge/publications/29747bbb/coronavirus-outbreak-the-legal-implications(Last Modified February, 2020).

[9] Energy Watchdog (n 6).

[10] Coronavirus: Key Legal Issues For India Inc. With Covid-19, available at:https://www.bloombergquint.com/opinion/coronavirus-key-legal-issues-for-india-inc-with-covid-19(Last Modified March 14, 2020).

[11]Id at 2.