By Divyansh Ganjoo and Kartikey Gaur, Law Student, USLLS, GGSIPU
The unprecedented impact of Covid-19 has the whole global market economy in shambles. Even in India its tremors can be felt, affecting not just local businesses but big multinationals and manufacturing enterprises with production centers on halt and recession right around the corner. Not forgetting the possibility of job cuts hitting the working class and the plight of people working in the informal sector who are basically sustaining themselves without any fixed source of income at the mercy of their employers. Now that India GDP Q1 Data is out and it shows that India’s economic growth sliped 23.9% in Q1 of 2020-21
But one important facet to the whole situation would be how the commercial contracts would be impacted during these trying times, especially after the enactment of nation-wide lockdown on 24th March, 2020 by the Prime Minister of our Nation.
Force Majeure clause in Standard Contractual Agreements
In “Black Law’s Dictionary”[i] Force Majeure has been defined as a superior or irresistible force; such clause is common in construction contracts to protect the parties in the event that a part of the contract cannot be performed due to causes which are outside the control of the parties and could not be avoided by exercise of due care.[ii] It can also be translated as “irresistible compulsion or coercion[iii].” Despite the term descending from the Code of Napoleon and being applied for the first time in the Civil Code of France, it found its application in English and American laws, and sooner or later in laws across the globe.
In Indian statutes while force majeure has neither been defined nor specifically dealt with, some reference can be found in Section 32 of the Indian Contract Act, 1872. It envisages that if a contract is contingent on the happening or not happening of an event, then the contract becomes void if that event becomes impossible to perform, and in Section 56 of the said act. It propounds on the voidability of an agreement based on its impossibility. Force Majeure elucidates such events which might render agreements impossible. The occurrence of such events should be beyond control of the parties and the parties will be required to demonstrate that they have made attempts to mitigate the impact of such force majeure events.
Objective of the Force Majeure Clause
From a contractual perspective, a force majeure clause provides temporary reprieve to a party from performing its obligations under a contract upon occurrence of a force majeure event. An analysis of rulings on the subject concludes that where reference has been made to “force majeure”. The intention is to save the performing party from the consequences of anything over which he has no control. Widest meaning has been attributed to the force majeure clause in this aspect but that doesn’t necessarily mean the conditions stipulated in the clause however vague shall reprieve the party from contractual obligations. Also, such an excuse for non performance, once granted by the court, is only temporary in nature till the time the “force majeure” event subsides.
Substance of the Clause
A typical force majeure clause enumerates circumstances which would qualify as force majeure events. Such circumstances and events would serve as a qualifying factor for invocation of such a clause. These may include events such as war, terrorism, earthquakes, hurricanes, acts of government, plagues or epidemics and may also include unforeseen man-made circumstances such as change of government policy that adversely affects the performance of contracts. Where no relevant event is specifically mentioned, it is a question of interpretation of the clause whether the parties intended such an event to be covered. This involves considering whether the list of events included was intended to be exhaustive or non-exhaustive. Unless specific words are used to suggest that a list is non-exhaustive, it can be difficult to argue that parties who set out a list of specific events but did not include a particular event, such as an epidemic, nonetheless intended that event to be covered.
Doctrine of Frustration
‘Frustration’ means when the contract is rendered impossible of its performance by the external causes which are beyond the contemplation of the parties concerned. It includes both – (1) Impossibility of the performance of the contractual obligation and (2) Impossibility of the fulfillment of the ulterior purpose for which the contract was entered into. In other words, ‘Frustration’ occurs, when the performance of a contract becomes Impossible i.e. the purpose which the parties had in mind is frustrated. If the performance becomes impossible because of a supervening or unexpected and unforeseen event, then the promisor is excused from the performance. This doctrine has been codified in Indian law under Section 56 of Indian Contract Act, 1872. It is understood by the plain reading of the section that it talks about impossibility or illegality on the performance of the act, and such illegality or impossibility should not have been contemplated by the parties at the time they entered into the contract. The Indian judiciary in the case of Satyabrata Ghose vs. Mugneeram Bangur& Co &Anr[iv] stated that the word “impossibility” used in the section 56 of Indian Contract Act, 1872 should be taken in practical sense not literal sense. Therefore a contract would come under the preview of Section 56 even if there’s a practical change in the circumstances, not necessarily an absolute impossibility.
Justice Blackburn in case of Taylor v Caldwell has said that- “The principle seems to us to be that in contracts in which the performance depends on the continued existence of a given person or a thing, a condition is implied that the impossibility of performance arising from the perishing of the person on the thing excuses the performance.” The doctrine of frustration is relevant when it is alleged that a change of circumstances after the formation of the contract has rendered it physically or commercially impossible to fulfill the contract or, has transformed the required performance into a radically different obligation from that undertaken in the contract. The doctrine is not concerned with initial impossibility which may render a contract void ab initio, as where a party to a contract undertakes to perform an act which, at the time when the contract is made, is physically an impossible act according to the existing scientific knowledge and achievement.
Difference between Force Majeure clause and Doctrine of Frustration
The force majeure clause is a creature of contract, while the doctrine of frustration is a common law principle. Hence force majeure clause is a civil law concept that has no settled meaning in the common law. It must be expressly referred to and defined in a contract. It has been held in the case of Satyabrata Ghose v. Mugneeram Bangur& Co.[v] that when a contract contains a force majeure clause which on construction by the court is held attracted to the facts of the case, Section 56 of the Contract Act can have no application. Therefore, doctrine of frustration only comes into the play when a specific contract does not stipulate a force majeure clause.
The Supreme Court in its latest judgment in Energy Watchdog vs. Central Electricity Regulatory Commission and Others laid down the guidelines with respect to applicability of sections 32 and 56 of Contract Act to a contract. It was stated – “in so far as it is relatable to an express or implied clause in a contract, it is governed by Chapter III dealing with contingent contracts and more particularly, Section 32 thereof. In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract Act.”
Relevance during Covid- 19
Covid-19 has affected cross-border trade, real estate market, specifically the developers, the home-buyers and the commercial lease arrangements, EPC (engineering, procurement & construction), joint-venture agreements as well as M&A deals in India. Due to restriction in movement, stoppage of production, increase in costs due to scarcity of raw materials components, labor shortages, shortage of funds, and disruption in supply chains; it has also impacted the party’s ability to meet their contractual obligations
With widespread disruption in business, manufacturing and transport, due to COVID-19 the stage seems set for India to see a flood of ‘force majeure’ invocations. It is expected that over a period of time more and more Indian companies may invoke ‘force majeure’ clauses in their contracts resulting perhaps in a spew of litigations should parties not come to a workable understanding. Of course, in such events, the courts and arbitrators will have to evaluate and decide each dispute on individual merits, which would be based on the terms of the contract, the intent of the parties, steps taken to mitigate. In situations where force majeure clause is absent from the contract, lawyers might take the shield of Section 56, doctrine of frustration. It is upto the courts to decide whether such an event i.e. COVID- 19 renders the very contract impossible to perform or not.
The Ministry of Finance has by way of an office memorandum (O.M. No. 18/4/2020-PPD) issued on February 20, 2020 clarified that the disruption of the supply chains due to spread of corona virus in China or any other country should be considered as a case of natural calamity and “force majeure clause” may be invoked, wherever considered appropriate, following the due procedure. However, such clarification has been provided only with respect to the disruption of the supply chains and as indicated invocation of force majeure provisions in light of COVID-19 will have to be assessed on a case-to-case basis depending on the terms of the contract entered into between the parties.
The most generic clause under most force majeure clauses is the ‘Act of God’, and the Covid- 19 can be brought under the ambit of the same. But the effect of this clause can be mitigated through the ‘duty to mitigate’ and ‘exercise due diligence clause.’ In order to seek reliance on a force majeure clause, a party will be required to demonstrate that the event of force majeure was beyond control of the party, that it has taken all reasonable steps.
On March 11, 2020, COVID-19 was declared a pandemic. These doctrines fall within the ambit of “contractual excuses.” So, force majeure and the doctrine of frustration play very crucial roles in non-fulfillment of performance of contracts. Lastly, the maxim “les non cogit ad impossibilia” becomes pertinent under the given situation. It means “a man cannot be compelled by law to do what he cannot possibly perform.”
[i] Black’s Law Dictionary Eighth Edition, First South Asian Edition 2015
[ii] West Encyclopedia of American Law, edition 2, 2008.
[iii] Oxford Law Dictionary, page 207.
[iv] Satyabrata Ghose vs. Mugneeram Bangur& Co &Anr AIR (1956) SC 44