COVID19 - is it a Force Majeure

COVID19 - is it a Force Majeure

AN ARTICLE ON A FORCE MAJEURE: IS COVID-2019 A FORCE MAJEURE? IF YES, THEN WHAT ARE LEGAL & STATUTORY OBLIGATIONS UNDER INDIAN LAWS

The growing number of COVID19 cases across India day by day and as a part of the preventive procedure to curb the spread of the coronavirus, the Hon’ble Prime Minister of India, being Chairperson of National Disaster Management Authority, (NDMC) has announced completely lock-down for 21 days, effecting from 25th March’2020 which is forcing many public and private organizations to scale down/shut-down their establishments/companies as per guidelines of the Central Government / State Government. The Coronavirus crisis has given new relevance to the legal term “Force majeure (/ˌfɔːs maˈʒəː/)” and such FM clause can be found or cannot be found in many commercial contracts such as lease agreement, collaboration agreement, outsourcing agreement, building construction agreement, logistic agreement, shipment agreement, etc. Now the companies/establishment have started for invoking Force majeure  clause to take advantage of the “act of God” or “doctrine of frustration” as enumerated under Section 32 and 56 of the Indian Contract Act,1872. In fact, the word of ‘Force Majeure” (in short ‘FM’) has not been codified specifically in the Indian Contract Act, 1872 (in short ‘Act, 1872’) so there is need for judicial examination and interpretation thereof for invoking the FM clause in the present circumstances.

What is the meaning of the “Force Majeure”?

Force majeure has a long history since the Roman law, as part of the principle that possibility is the limit of all obligations ( ad impossibillia nemo tenetur), meaning that no one is expected to perform the impossible. A Force Majeure is a French word that means “a superior power”. A French pronunciation is “ Fohce Mejeuh” and an equivalent Latin word is ‘ Vis Major”. English common law applies force majeure principles to the commercial contract. In Indian language, it is called the “act of God”. But unfortunately, FM is not specifically codified in the Indian laws.

What is the meaning of the “Force Majeure Clauses” Under Indian Law?

The law on impossibility or doctrine of frustration under the Indian Contract Act, 1872 (“Contract Act, 1872”) can be best understood through a careful legal analysis of Sections 9, 32 and 56 of the Act, 1872. Therefore, for the sake of convenience, the relevant Section(s) are being reproduced as under:

Section 9 of the Indian Contract Act 1872: 

“Promises, express, and implied.—In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied. —In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied."

Section 32 in the Indian Contract Act, 1872: 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.

— 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 in The Indian Contract Act, 1872: Agreement to do impossible act.

—an agreement to do an act impossible in itself is void.

—an agreement to do an act impossible in itself is void." Contract to do act afterward 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.

1 —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.

2 "Compensation for loss through non-performance of an 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. 

—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."

Interpretation of Section 32 of the Act, 1872: 

If read alone which provides for the discharge of obligations due to the impossibility of an express contingency. In other words, if the contract/agreement expressly provides that performance is contingent on the occurrence of an event, the impossibility of that event shall lead to the contract becoming void. Express ‘force majeure’ clauses can be read as stipulating such financial contingencies. Therefore, I say that Section 9 of the Act,1872 permits the court has to consider implied terms in contracts which should be epitomized in commercial agreement categorically. Such financial implication may only derive from the intent of the parties, as indicated by the relationship of the parties and too, their prior dealings at the time of the commercial agreement. Accordingly, section 9 read with section 32 provides the basis for the discharge of obligations due to the impossibility of an implied contingency.

Interpretation of Section 56 of the Act, 1782: 

Provides, separately, that a contract to do an act becomes void when the act becomes impossible. 

Before digging into the interpretation of the aforesaid section along with section 32, it is necessary to draw a clear distinction between the purport of section 32 and that of section 56 of the Act, 1782. 

Under both sections 32 and 56, legal obligations under the commercial contract stand discharged due to an impossibility.

However, under section 32, the link between the impossibility and the discharge of obligations is to be found in express or implied contractual terms and conditions of the commercial agreement. In other words, section 32 accounts for the subjective intent of the parties to discharge obligations upon the occurrence of certain contingencies. 

On the other hand, section 56 is concerned with impossibilities which on an objective determination by the court go to the root of the contract which can be narrated in other words ‘Force Majeure’. 

The landmark decision interpreting section 56 of the Act, 1972 was pronounced in the matter of Satyabrata Ghose v. Mugneeram Bangur & Co. 1954 AIR 44=1954SCR310, the Supreme Court, in this case, acknowledged the aforementioned distinction between section 32 and section 56, stating: “Section 56 lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties.” 

The Court observed that section 56 allowed for the discharge of obligations on grounds of impossibility that 

'The doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of S. 56 of the Indian Contract Act.' 

The view that Section 56 applies only to cases of physical impossibility and that where this section is not applicable recourse can be had to the principles of English law on the subject of frustration is not correct. English cases can have only a persuasive value and are only helpful in showing how English courts decided cases under similar circumstances. Section 56 of the Indian Contract Act lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties. 

According to the Indian Contract Act. A promise may be express or implied. In cases, therefore, where the court gathers as a matter of construction that the contract itself contained impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of S. 56 altogether. Although in English law these cases are treated as cases of frustration, in India they would be dealt with under s. 32 of the Indian Contract Act which deals with contingent contracts or similar other provisions contained in the Act. 

In the large majority of cases however the doctrine of frustration is applied not on the ground that the parties themselves agreed to an implied term which operated to release them from the performance of the contract. The relief is given by the court on the ground of subsequent impossibility when it finds that the whole purpose or basis of a contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was beyond what was contemplated by the parties at the time when they entered into the agreement. 

Here there is no question of finding out an implied term agreed to by the parties embodying a provision for discharge, because the parties did not think about the matter at all nor could possibly have any intention regarding it. When' such an event or change of circumstance occurs which is so, fundamental as to be regarded by law as striking at the root of the contract as a whole, it is the court which can pronounce the contract to be frustrated and at an end. The court undoubtedly has to examine the contract and the circumstances under which it was made. The belief, knowledge and intention of the parties are evidence, but evidence only on which the court has to form its own conclusion whether the changed circumstances destroyed altogether the basis of the adventure and its underlying object. This may be called a rule of construction by English Judges but it is certainly not a principle of giving effect to the intention of the parties which underlies all rules of construction. This is really a rule of positive law and as such comes within the purview of s. 56 of the Indian Contract Act. The reason underlying the rule of English law that the doctrine of frustration does not apply to contracts for the sale of land. is that under the English law, is soon as the agreement to sell is complete the buyer becomes the owner of the land inequity? As a mere agreement to sell does not confer any rights of ownership on the buyer under the Indian law, the doctrine of frustration is as applicable in India to agreements for sale of land as in the case of other agreements. 

In 1940 as an integral part of a development scheme of an extensive area of land- started by the defendant company, it entered into a contract with the plaintiff's predecessor for the sale of a Plot of land to the latter accepting a small sum of money as earnest. It undertook to construct roads and drains and the conveyance was to be completed soon after the completion of tile roads on payment of the balance of the Price. As a considerable portion of the area comprised in the scheme was requisitioned by the Government for military Purposes in 1941, the company wrote to the defendant that the road construction could not be taken up for an indefinite period and required him to treat the agreement as cancelled and receive back his earnest: Held. that having regard to the nature and terms of the contracts the actual existence of war condition at the time when it was entered into the extent of the work involved in the scheme fixing no time limit in the agreement for the construction of the roads etc., and the fact that the order of requisition was in its very nature of a temporary character, the requisition did not affect the fundamental basis of the contract; nor did the performance of the contract become illegal by reason of the requisition, and the contract had not, therefore, become impossible within the meaning of s. 56 of the Indian Contract Act.

What does the Supreme Court say about the interpretation of the word ‘ Force Majeure’ under the civil laws or contract Act?

In the case of Energy Watchdog Vs. Central Electricity Regulatory Commission & Ors. (2017) 14 SCC , the Hon’ble Supreme Court of India, restated the law of force majeure and laid down the following guidelines to be mindful of while invoking a force majeure clause:

1. The very basis of such clauses is that the events are beyond the reasonable control of the parties and in such conditions parties cannot be held liable for non-performance of obligations under the contract. 

2. While analyzing the force majeure clause, it is also necessary to analyze if best endeavors have been taken to mitigate the force majeure events. 

3. For an event to qualify as a force majeure, it is necessary that the same is unforeseeable by the parties. 

4. The event has actually rendered the performance impossible or illegal.

The Hon’ble Supreme Court in the above matter has considered the law relating force majeure in detail and has held though paragraph 34 that "Force majeure" is governed by the Contract Act, 1872. 

Insofar as it is relatable to an express or implied clause in a contract, such as the PPAs before us, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. 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.

" Section 56. Agreement to do impossible act - An agreement to do an act impossible in itself is void. Contract to do act afterward becoming impossible or unlawful. A contract to do an act which, after the contract 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 an 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.”

What are the types of the “Force Majeure Event”?

The Force Majeure Events can be classified into three categories :

(i) Natural Force Majeure Event: Act of God, including, but not limited to lightning, drought, fire, and explosion (to the extent originating from a source external to the Site), earthquake, volcanic eruption, landslide, flood, cyclone, typhoon, tornado, or exceptionally adverse weather conditions which are in excess of the statistical measures for the last hundred (100) years.

(ii) Direct Non-Natural Force Majeure Event: Direct Non-Natural Force Majeure Events Nationalization or compulsory acquisition by any Indian Government Instrumentality or any material assets or rights of the Seller or the Seller’s contractors; or the unlawful, unreasonable or discriminatory revocation of, or refusal to renew, any Consent required by the Seller or any of the Seller’s contractors to perform their obligations under the Project Documents or any unlawful, unreasonable or discriminatory refusal to grant any other consent required for the development/ operation of the Project, provided that an appropriate court of law declares the revocation or refusal to be unlawful, unreasonable and discriminatory and strikes the same down; 

or Any other unlawful, unreasonable or discriminatory action on the part of an Indian Government Instrumentality which is directed against the Project, provided that an appropriate court of law declares the revocation or refusal to be unlawful, unreasonable and discriminatory and strikes the same down.

(iii) Indirect Non – Natural Force Majeure Event: Any act of war (whether declared or undeclared), invasion, armed conflict or act of foreign enemy, blockade, embargo, revolution, riot, insurrection, terrorist or military action; 

or Radioactive contamination or ionizing radiation originating from a source in India or resulting from another Indirect Non-Natural Force Majeure Event excluding circumstances where the source or cause of contamination or radiation is brought or has been brought into or near the site by the affected party or those employed or engaged by the affected party; or Industry-wide strikes and labour disturbances having a nationwide impact in India.

Conclusion

Keeping in view of the above discussions, the COVID-2019 pandemic and lock down imposed by the Central Government thereof is coming under the category of “Natural Force Majeure” because it’s an event that occurred outside the control of the parties.

Action Plan For an Aggrieved Party For Invocation ‘Force Majeure Event Clause 

What are the main conditions for the invocation of the commercial contract?

The sine qua non for invocation of Section 32 or Section 56 of the Act,1872 are as below:

1. an existence of a legally valid commercial contract between the parties; 

2. the commercial contract is yet to be performed; and 

3. the commercial contract after it is entered into becomes impossible to perform the said contract due to beyond the control of party or regulatory order of the government or by operation of law.

What should be done by the aggrieved party?

(i) Affected party has right to get relief by making a notification or communicating to the other party in writing through supporting evidence. It may be through email or through speed post. 

(ii) Seek a reasonable /amicably solution to minimize the counter’s party loss due to a natural force majeure event.

(iii) By mutual understanding for changing /modifying the terms and conditions of the commercial agreement or transaction document to continue during force majeure event and thereafter for the subsequent remaining period of the commercial agreement. 

(iv) Termination of commercial contract or transaction document as per the terms and conditions of the commercial agreement.

Note: The above are only legal views of our legal firm which may differ from other Learned Advocates. However, their legal views with supporting the Supreme Court’s judgment are welcome for legal discussions.

Author

Adv. Sudhir Kumar Gupta

Supreme Court, Delhi,

www.makeinindialawfirm.com

Author Detail

Sudhir Kumar Gupta - Advocate, who initially started his practice in Revenue Courts, Labour Courts, and Consumer Courts. After a brief stint at lower courts, Mr. Gupta moved his focus and starting practicing at various National Tribunals at Delhi, Delhi High Court, and Supreme Court of India.