Force Majeure In Times of COVID 19

Bhavuk Bansal

Author:

Index

Introduction

Force Majeure and Vis Major

Force Majeure clause in the Contract

Indian Jurisprudence on the concept of Force Majeure

Distinction Between Force Majeure And Doctrine of Frustration

EPIDEMIC/PANDEMIC is ACT OF GOD

Causation And Mitigation

Conclusion

Bibliography

INTRODUCTION

Currently, 210 countries around the world are experiencing the global crisis triggered by Covid19. The Covid19 pandemic in India was not only a humanitarian crisis, but also an unprecedented depression. Therefore, this epidemic has had various effects on the world of trade. In particular, the restrictions on the movement of people and goods that are not related to essential services. If they are not broadly classified as "essential services", have serious doubts about the parties' ability to perform contractual obligations. The uncertainty of contract performance forces the parties to imagine breaches of the contract and review their rights and remedies. The magnitude of uncertainty surrounding supply chains due to the COVID-19 has shifted the main target back on the historical expression referred to as force majeure. In order to save many of them from uncontrollable consequences, they must renegotiate the force majeure clause in the contract or, in this case, defend themselves through legal remedies.

The bottom line of business or trade growth is the contract between the two parties. Contract law stipulates the mutual obligations of both parties. According to Section 37 of the Indian Contract Act of 1872, the parties must fulfill their respective commitments or offer to fulfill these commitments, unless such performance is revoked or waived in accordance with the Act or any other regulations. This pandemic may lead to a situation where one party in the commercial contract cannot perform part of the contract without any fault on its part. With this in mind, it is important to capture and analyze the commercial impact of Covid19. If the current restrictions can be regarded as force majeure, closely analyze the concept of Force Majeure in the light of current jurisprudence and the distinction between force majeure and doctrine of frustration. If the current restrictions can be regarded as force majeure, then you should carefully study the concept of force majeure and the difference between force majeure and the doctrine of frustration in accordance with current jurisprudence.

FORCE MAJEURE AND VIS MAJOR

"Force majeure", a French term resembling "Vis majeure", in Latin, means "superior force" As per the Black's Law Dictionary, catastrophe is an occurrence or effect that may be neither anticipated nor controlled. The term includes both acts of nature (for instance, floods and hurricanes) and acts of individuals (for instance, riots, strikes, and wars).

In fact, ‘Vis Major’/ ‘Act of God’ actually forms a part of ‘Force Majeure’ as the former contemplates only natural unforeseen events whereas the latter encompasses both natural and artificial unforeseen events.

The Supreme Court has, in Dhanrajamal Gobindram v. Shamji Kalidas & Co.[1]recognised the difference between ‘Act of God’/‘Vis Major’ and ‘Force Majeure’.
Notwithstanding the differences, the effect of both the terms is to make a case for non-performance of a party and prevent a party from being answerable for a breach of contract whilst also saving the non-performing party from the results of something over which it has no control

FORCE MAJEURE CLAUSE IN CONTRACTS

A force majeure clause is inserted into a contract by the companies contract to prevent itself from liability that it cannot fulfill the terms of a contract (or if attempting to undertake to to so will end in loss or damage of goods) for reasons beyond its control. Contracts may specify the events that qualify as force majeure events like , acts of god, wars, terrorism, riots, epidemics, pandemics, plagues, quarantines, boycotts, , strikes, embargos and government action.
Force majeure aims at exempting a party from a contract to perform its part of contract which has become impossible, due to intervention of a superior force.
If the force majeure clause clearly mentions an event after the occurrence of the event suspected of affecting the performance of the contract, such as a pandemic, the party's performance can be excused. In the event of force majeure, even if the mentioned event does not explicitly mentioned, many force majeure clauses contain a catch-all phrase (such as “including, but not limited to” or “any cause/ event outside the reasonable control of the parties”) that's additionally to the specifically mentioned events Even otherwise, if ‘Vis Major’/ ‘Act of God’ has been specifically included as a force majeure event, it are often contended that an epidemic like Covid-19 is an ‘Act of God’.

Indian Jurisprudence on the concept of Force Majeure

The concept of force majeure has not been clearly specified or defined under the Indian statutes. However, Section 32 of the Indian Contract Act, 1872 dealing with contingent contracts makes clear to some extent the concept of the force majeure.

In case of force majeure, The force majeure clause allows one party to temporarily waive its contractual obligations. The basic elements of the force majeure clause are:

  1. The event occurred must be      unforeseen / unexpected

  2. The parties to the agreement      have supposed that such an event will not occur;

  3. Upon happening of this event it      has become impossible for the parties to perform their promises

  4. All necessary measures to      perform the obligations under the agreement or at least to mitigate the      damage have been taken by the parties; and

  5. In the event of force majeure, the parties that      require remedial measures shall bear the burden of proof that the force      majeure affects their performance of the contract.

Whether the outbreak of Covid-19 and also the ensuing lockdowns ordered by the Central and state government would be sufficient to invoke the force majeure clause within the contract would rely on the subsequent factors:
1. Establishing the causal connection between the force majeure event and hindrance to the performance of the contract;
2. Harmonious construction with all the provisions; and
3. Compliance with the condition precedents contained within the force majeure clause
Section 56 deals with two distinct levels-
1. It renders void all agreements to do impossible acts, and
2. It envisages those situations where an earlier was lawful but subsequently the act has become unlawful or impossible to perform.
Some of the essential elements of Section 56 of the Indian Contract Act, 1872 :
1. There must be a valid contract;
2. The performance of the contract is yet to be made or is ongoing; and
3. The aforesaid performance becomes impossible by way of facts or law.
It is impossible to compile an exhaustive list of situations in which the doctrine of frustration can be used to ensure excuse of performance. Some of the reasons for frustration are listed below:
1. Destruction of subject matter;
2. Death or incapacity for personal service;
3. Non- existence or non- occurrence of a specific state of things;
4. Intervention by legislative or executive authority;
5. Intervention of war; and
6. The circumstances of a particular fact change.
Having analysed the ingredients if Section 32 and Section 56 of the Indian Contract Act, 1872, it's pertinent to notice that where the contract itself, as a matter of construction, contains impliedly or expressly a term according to which it might stand discharged on the happening of certain circumstances, the question of dissolution of the contract in keeping with force majeure clause falls under Section 32 and not under Section 56 of the Indian Contract Act, 1872. Under the English law, these cases would be included in frustration, but under Indian law, these cases would be included in Section 32, which deals with Contingent Contracts.

Distinction between force majeure and doctrine of frustration

A force majeure clause may also encompass acts of state , war, acts of God or the alternative activities or situations as may also integrated by the parties in the contract before its execution. In case any party wants to avoid his performance under force majeure clause, it shall need to satisfy the situations laid out in force majeure clause. The agreement isn't always terminated however the overall performance of the agreement is suspended during the time the supervening event constituting force majeure exists. After this type of force majeure event ceases to exist, the party who has taken the gain of this force majeure has got to carry out its a part of the contract. In the case, the party who has been given to carry out its a part of the agreement post such force majeure event failed to perform its agreement, the alternative party shall have the right to terminate the contract. Force majeure is a contractual remedy and additionally the terms and conditions constituting force majeure clause are determined by the parties before the execution the contract.

Frustration of a contract is that the happening of an act (after the execution of contract) outside the agreement and such act makes the overall performance of agreement impossible. Frustration of agreement is a statutory remedy. Frustration of contract is enshrined under Section 56 of the Indian Contract Act. The bottomline to it is "impossibility". Section 56 needs to be interpreted in a practical form and not liberal sense. Contract would come below Section 56 even if there may be now no longer an absolute impossibility, however the agreement has essentially modified which the parties had now no longer pondered at the time of the agreement.

Whether the scenario of Covid-19 and additionally the subsequent lock downs might be blanketed below Section 32 or Section 56 of the Indian Contract Act, 1872 shall rely on the very fact whether or not the agreement incorporates the force majeure clause or not.

EPIDEMIC/PANDEMIC is ACT OF GOD

Although the Indian courts have not directly determined whether epidemics/pandemics like Covid19 are "force majeure", arguments on this matter  can derive support from the decision of the Supreme Court in the Divisional Controller, KSRTC v. Mahadava Shetty[2], which holds that the expression ‘Act of God’ refers to the action of natural forces without human intervention with the caveat that each unexpected natural event doesn't prevent the party from liability if there's a reasonable possibility of anticipating that happening.

In Lakeman v. Pollard[3], a labourer at a mill left his job early during a cholera epidemic because of concerns of contracting the disease and, therefore, did not complete his work contract. In an action by the mill owners seeking compensation for work done by the labourer, it had been argued that the work contract had been breached. The Supreme Court of Maine held that the cholera outbreak was an ‘Act of God’ and therefore the labourer was thus not in breach of his contract since duty to perform under the contract was discharged.

Similarly, in Coombs v. Nolan[4], the District Court for the Southern District of New York excused a delay within the discharge of cargo where the defendant couldn't obtain enough horses to unload a ship on time because of a then prevailing horse flu pandemic on the ground that the horse flu pandemic fell within the ambit of ‘Act of God’

In Sandry v. Brooklyn School District[5], the Supreme Court of North Dakota considered an appeal concerning claims by bus drivers for their wages/compensation under their transportation contracts during the period that the schools were shut due to the influenza outbreak. The Supreme Court of North Dakota discharged the school district from paying the bus drivers during the period that the schools were shut because of the influenza epidemic. it's pertinent to notice that the reasoning was supported the very fact that the contract had become impossible to perform due to the shut-down.

CAUSATION AND MITIGATION

Even if a pandemic like Covid19 is a force majeure clause, this alone does not exempt one of the parties from performing the contract. Force majeure should directly affect the non-performance. In the event of force majeure, the party ,who is interested in avoiding the contract under force majeure clause, is also obliged to mitigate and/or inspect alternative enforcement.
If the direct and direct cause is not the Covid19 pandemic itself, but the government's response to it, complex causal issues will also arise, such as prohibitions, curfews, or restrictions on the movement of people and goods. According to the language of the force majeure clause, such an official action can constitute an independent force majeure event and justify the excuse of performance of the contract.

Another situation where the Covid19 pandemic cannot affect contract performance is when employees of service organizations are forced to self-isolate at home. Depending on the type of service, it can be said that the delivery of the service will not be affected because employees can continue to work from home. Similarly, the economic recession caused by the Covid19 pandemic or interruptions caused by other general business conditions are unlikely to be sufficient to seek excuse from performance of the contract under force majeure conditions.

The language of the force majeure clause in the contract will also affect the directness of the causal relationship between the force majeure event and the non performance of the contract. A clause requiring a force majeure event to prevent a party from fulfilling its obligations is likely to be construed as requiring a more direct and causal relationship than one which merely requires the party to "hinder" or is "disabled" in fulfilling its obligations.

A force majeure clause may require both parties to make reasonable efforts to perform the contract by alternative ways. Even in the absence of an express provision, party must prove that although you have taken measures to mitigate the consequences of the force majeure, party have failed to fulfill your obligations.

CONCLUSION

While various contracting parties can try to waive contractual obligations in view of the Covid pandemic19, it is not a matter of course to invoke the clause on force majeure in the respective contract or section 56 of the Act. Whether Covid19 actually impaired the fulfillment of certain contractual obligations in individual cases depends largely on whether the party request to excuse performance of the contract. A good place to start when reviewing whether the Covid19 pandemic (and / or the action taken by the authorities in response) falls within the scope of the force majeure clause is; Issues such as causal link and the duty to mitigate should also be examined to assess the relative strengths and weaknesses of that party's position.

A deeper scrutiny of the approach adopted by Courts on the issue of force majeure shows that there are no straitjacket principles regarding the applicability of the concept of force majeure to excuse a party from the performance of contracts. It has to examine the matter on the basis of the facts of the respective case and grant the parties an appropriate relief. Therefore, the parties should avoid attempting to demonstrate frustration in a case where performance is otherwise possible. Further, what attains significance is that the proximity of the event with the non-performance which isn't attributable or foreseeable by the parties.

Bibliography

https://www.mondaq.com/india/litigation-contracts-and-force-majeure/930674/force-majeure-in-times-of-covid-19-challenges-and-the-road-ahead

https://corporate.cyrilamarchandblogs.com/2020/04/force-majeure-in-the-times-of-covid-19/

https://economictimes.indiatimes.com/small-biz/legal/force-majeure-how-successful-has-the-law-been-post-covid-in-india/articleshow/82227338.cms?from=mdr

https://www.clydeco.com/en/insights/2020/05/covid-19-india-a-curious-case-of-force-majeure

[1] AIR 1961 SC 1285

[2] 2003 7 SCC 197

[3] 43 Me 463 (1857)

[4] 6 F Cas. 468

[5] 182 NW 689

Bhavuk Bansal