-Devam Shah, SVKM’s Pravin Gandhi College of Law, Mumbai University.

With whole world succumbing to recession during this devastating pandemic, almost every sector bleeding, commercial disputes are bound to arise. The outbreak of coronavirus has triggered unprecedented global crisis with a series of events that will hinder or prevent performance of several contracts in the upcoming months. Government lockdowns has led to uncertainty in demand, disruption in supply chain across the world, cash flow problems, employment issues, creating a domino effect, which begets the companies to unable to fulfil their contractual obligation and potentially may engage in dispute with their counterparties. In the wake of Covid 19, several elements of contracts have gained significant importance which were not even given a second glance. Clauses such as Force Majeure Clause, the Termination Clause, the Suspension of Obligations Clause, the Notice Period Clause, etc have been brought to light.

Force Majeure has been one of the most talked clauses in COVID-19 times.In Black Law Dictionary, it has been defined as “an event or effect that can be neither anticipated or controlled. It is a contractual provision allocating the risk of loss if performance becomes impossible or impractical especially as a result of an event that the parties could not have anticipated or controlled.’’[1]Leading Indian firms- from up market high street retailers in shopping malls to movie exhibitions and from companies in broad swathes of the industry from cement, power, energy, logistics, ports, automobiles and tyres  have or are planning to invoke this magic clause. This is to protect themselves from any default on contractual obligations.

There are several sectors which are facing a problem of restriction in movement, stoppage of production, increase in costs due to scarcity of raw materials, labour shortages, shortage of funds, disruption in supply chain etc.Many firms in the cement sector are planning to invoke this clause, firms import raw materials across the globe and may not be able to fulfil the contract with suppliers due to supply problems and lack of demand in home turf. A cement firm executive said, “In the near term, gypsum and clinker imports from West Asia, China, Thailand may stabilise and our suppliers might ask us to honour the purchase contract. One may not have an alternative other than invoking force majeure,”.[2]

The automobile sector in India has been forced to stop key manufacturing activity due to disturbance in supply chain and sharp drop in sales.Companies are not able to import vital automotive parts, notably China accounts for 27 percent of India’s automotive part imports and major global auto part makers such as Robert Bosch GmbH, Valeo AS and ZF Friedrichshafen AG have their factories located in the Hubei province. Owing to the closure of the factories of these companies, there has been a delay in the production and delivery of components.[3]In this sector, Hero MotoCorp and Eicher Motors have already invoked force majeure clause.

Some of other well known names which have already declared or likely to declare a force majeure include PVR, INOX, Gateway Terminals India Private Limited, Adani Ports in Gujarat, Indian Oil and Mangalore Refineries.private highway developers such as Ashoka Buildcon and IRB Infrastructure.

Corporates are relying on a government notification in February that says firms can invoke the clause as coronavirus can be consideredas a major “natural calamity.”On 19-2-2020, the Ministry of Finance, Government of India issued a notification clarifying that the disruption of supply chains due to the spread of coronavirus should be considered as a case of natural calamity and force majeure clause may be invoked, wherever considered appropriate, following due procedures.[4] The aforementioned notification further specifies that “coronavirus should be considered as a case of natural calamity and force majeure may be invoked, wherever considered appropriate, following the due procedure…a force majeure clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the force majeure. The firm has to give notice of force majeure as soon as it occurs and it cannot be claimed ex-post facto…If the performance in whole or in part or any obligation under the contract is prevented or delayed by any reason of force majeure for a period exceeding ninety days, either party may at its option terminate the contract without any financial repercussion on either side”. However, the aforesaid Office Memorandum may not necessarily or implicitly serve as binding document for the contracting parties, being more in the form of an advisory or recommendation.

Though in Indian Contract Act, this clause hasn’t been dealt specifically. Section 32 and Section 56of the Indian Contract Act 1872 can be seen as a ray of hope. Section 32 of the Contract Act provides that ‘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.’ Section 56 of the Contract Act enshrines the ‘doctrine of impossibility’, which provides that ‘a contract to do an act which, after the contract is made, becomes impossible or unlawful or, by reason of some event which the promisor could not prevent, becomes void when the act becomes impossible or unlawful.’[5]

There is a narrow difference between the two sections, in Section 32 of the Indian contract Act, if the designated event on which the contract is contingent, becomes impossible, such contracts will become void. Whereas, under section 56, the parties have not, while entering the contract considered any such event due to which contract may become void.

As such, for a force majeure clause to become applicable, the occurrence of such events should be beyond control of the parties and the parties will be required to prove that they have made attempts to mitigate the impact of such force majeure event, merely difficult or uneconomical performance is not sufficient. The burden to prove is on the shoulders of party claiming force majeure. 

If an event or circumstance comes within the scope of a force majeure event and fulfils the conditions for applicability of the clause then the consequence would be that parties would be relieved from performing their respective obligations to be undertaken by them under the contract during the period that such force majeure events continue.

Further consequential liabilities, depending on the language of the clause, the parties may be required to issue a notice formally intimating the other party of the occurrence of such event and invocation of the force majeure clause. Some contracts may also contain a provision that if such force majeure event continues for a prolonged time period, the parties may be permitted to terminate the contract.

Force majeure clauses are not unknown to the Indian Courts, courts have on multiple occasions, clarified and explained the principles to be kept in mind with respect to such interpretation as well as applicability of the statutory provisions.

In Satyabrata Ghosh v. MugneeramBangur& Amp; Co. the Supreme Court has held that the word “impossible” has not been used with respect to physical or literal impossibility. Where an unexpected occurrence or change in circumstances decimates the very objective of the contract the same may be considered as “impossibility” to do as agreed.[6]

In DhanrajamalGobindram v. Shamji Kalidas And Co the Supreme Court held that –

“17. …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”, and even if this be the meaning, it is obvious that the condition about “force majeure” in the agreement was not vague. The use of the word “usual” makes all the difference, and the meaning of the condition may be made certain by evidence about a force majeure clause, which was in contemplation of parties.”[7]

The Supreme Court in Energy Watchdog v. Central Electricity Regulatory Commission clearly laid down that only those events which are explicitly included in the contract, can excuse a party from performance. Meaning, that a force majeure clause, at all times will be strictly interpreted.[8]

The parties claiming force majeure should be very careful about the evidence of such impossibility, what steps they are taking to prevent such impossibility and magnitude of that event, since parties making the claims are always at a risk of making a wrongful claim. It is definite that courts and arbitrators will have to evaluate and decide each dispute on an individual merit, which would be based on the terms of the contract, the intent of the parties and steps taken to mitigate it. [9]

It will be quite interesting to watch out how courts interpret COVID 19 in force majeure provisions, it will be interesting to see the stand which the insurance companies take vis-à-vis insurance policies taken by businesses arising due to unforeseen circumstances and whether Covid 19 will be covered under these policies.

In the meantime, business will have to learn from this crisis and be henceforth very meticulous in framing and approaching force majeure and other similar concepts in their contracts, we hope that these clauses will no longer be considered entirely boiler plate as it may have in previous cases. Likewise, organisations and businesses may renegotiate existing contracts that do not contain suitable force majeure type wordings. The parties should be diligent while filing notice of force majeure, they should not just document the fact that force majeure has occurred but also the specific effects of the same on the contractual obligation which the party seeks to be excused from performing.[10]

In the light of current times, parties should even consider to abandon a civil action and proceed with arbitration or mediation or any other alternative dispute resolution which can prove as a more expeditious and effective way to settle their disputes, also saving them from incurring further costs and disruption from continuing litigation. These options prove to be the best choice available given the backlog of cases which courts will face when they reopen. In the current environment, firms need to adapt to the new normal as quick as possible, take the right decisions in every aspect of business and enter into agreements that are tailored to the needs and the circumstances and settle their disputes efficiently.

END NOTES:

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[1]Black’s Law Dictionary, 11th Edition, at page 788

[2]Surajeet Das Gupta, Sudipto Dey, and AvisekRakshit, “Companies invoke force majeure for relief.” pressreader, 2^nd April 2020. Available at :<https://www.pressreader.com/india/business-standard/20200402/281552292963987>Last Accessed on 28 July 2020.

[3]Bloomberg News, “Virus endangers parts supply for already embattled car industry.” Bloomberg Quint, 5 Febuary 2020. Available at:<https://www.bloombergquint.com/onweb/virus-endangers-parts-supply-for-already-embattled-car-industry> Last Accessed on 28 July 2020.

[4]Office Memorandum No.F. 18/4/2020-PPD titled ‘Force Majeure Clause’, issued by Department of    Expenditure, Procurement Policy Division, Ministry of Finance, Government of India

[5] Indian Contract Act, 1872

[6]Satyabhrata Ghose v. MugneeramBangur, 1954 SCR 310

[7]DhanrajamalGobindram vs Shamji Kalidas And co, 1961 3 SCR 1029

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

[9]Tushar Behl, “How Bombay High Court is changing Force majeure amid Covid19.” Jurist, May 14 2020. Available at :<https://www.jurist.org/commentary/2020/05/tushar-behl-force-majeure-india-covid19/>Last Accessed on 28 July 2020.

[10]PoorviSanjanwala and KashmiraBakliwal, “What is force majeure the legal term everyone should know during covid 19 crisis.” TheEconomic Times, 21 May 2020. Available at: <https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis/articleshow/75152196.cms?from=mdr>Last Accessed on 27 July 2020.