While the world is grappling with the outbreak of the novel coronavirus (Covid-19), the lockdowns and restrictions that have been imposed to contain this pandemic, have brought businesses to a grinding halt. In such unprecedented times, when the wheels of global and regional supply chains are clogged, it becomes imperative to have a relook at all existing contractual arrangements, so that bullets of breaches and damages may be dodged in time.
Commercial contracts often contain a provision which excuses performance by affected parties upon the occurrence of 'force majeure'1, more popularly known as an 'Act of God'. In the absence of such a provision, impossibility and illegality in the performance of the contract would be governed by the doctrine of frustration enshrined in Section 56 of the Indian Contract Act, 1872 ("Act").2 A plea of force majeure or frustration of contract, if upheld, exempts a person from performance of its obligations under the contract, without being held liable for a breach thereof. This defence is of a paramount importance, since present day contracts are complex creatures, covering a number of deterrents to ensure performance, such as guarantees, deposits and liquidated damages.
The purpose of this paper is to discuss, in the context of the Covid-19 outbreak, the enforceability of force majeure clauses in commercial contracts and the boundaries of the doctrine of frustration under the Act.
A Provision for Force Majeure
Covid-19 as a Force Majeure Event
While the term 'force majeure' has not been defined under the Act, the Supreme Court of India has provided the following succinct definition of force majeure in the case of Dhanrajamal Gobindram v. Shamji Kalidas and Co.3, approving the view taken by Mr. Justice McCardie in Lebeaupin v. Crispin4:
"The expression "force majeure" is not a mere French version of the Latin expression "vis major". It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in "force majeure". Judges have agreed that strikes, breakdown of machinery, which, though normally not included in "vis major" are included in "force majeure". An analysis of rulings on the subject into which it is not necessary in this case to go, shows that 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." (emphasis supplied)
In commercial contracts, a force majeure clause, may not only provide for the manner in which the parties intend to deal with the occurrence of an event of force majeure, but may also provide for a list of events which would constitute 'force majeure' within the meaning of the said contract. Some contracts may contain a broad laundry list of force majeure events that capture, in addition to Acts of God, all circumstances beyond the control of the parties such as acts of terrorism, war, labour disputes, strikes, unavailability of material, political events, etc., while some others may contain an equally long list of exclusions to force majeure.
It may be pertinent to note that traditionally Indian Courts have provided a narrow interpretation of force majeure provisions in contracts5, presumably on the basis that the same reflect the commercial understanding between the parties. Hence, in the present context, if a contract specifically includes pandemics, outbreak of diseases, natural calamities, or governmental actions (in view of the lockdown and other restrictions imposed), then subject to the wording of the contract, the Covid-19 outbreak may squarely fall within the meaning of force majeure. However, in the absence of inclusion of such particular events, reliance may have to be placed on the residual words of the provision, if any, such as 'other events beyond the reasonable control of the parties'. With respect to the scope of such generic language in a force majeure clause, the Orissa High Court in Md. Serajuddin v. State of Orissa6, has held that:
"Therefore the words "any other happening" must be given Ejusdem generis construction so as to engulf within its fold only such happenings and eventualities which are of the nature and type illustrated above in the same clause with close attention to the nature and terms of the lease, and would not reasonably be within the power and control of the lessee." (emphasis supplied)
The long standing rule of ejusdem generis, is that where a general term follows a specific one, the general term is required to be construed to encompass only events which are similar in nature to the events enumerated by the specific words.7 Hence, whether the Covid-19 outbreak falls within the ambit of a force majeure provision, will have to be analysed on a case to case basis.
Invoking Force Majeure
Assuming that the Covid-19 outbreak can be a triggering event for force majeure under a contract, the next step would be to invoke such a provision. Enforcement of force majeure provisions has been explained by the Supreme Court in Satyabrata Ghose v. Mugneeram Bangur and Company and Ors.8, as follows:
"According to the Indian Contract Act, a promise may be express or implied (vide Section 9.). 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 Section 56 altogether. Although in English law these cases are treated as cases of frustration in India they would be dealt with under, Section 32 of the Indian Contract Act which deals with contingent contracts or similar other provisions contained in the Act." (emphasis supplied)
It was further held:
"It must be pointed out here that if the parties do contemplate the possibility of an intervening circumstance which might affect the performance of the contract, but expressly stipulate that the contract would stand despite such circumstance, there can be no case of frustration because the basis of the contract being to demand performance despite the happening of a particular event, it cannot disappear when that event happens."
Accordingly, upon invocation of the force majeure clause, the parties are bound to act in the manner stipulated in the contract, including ensuring compliance with any notice or mitigation requirements that may be contained therein. Further, the parties would continue to be governed by the suspension/ termination provisions and reliefs provided in the contract itself. For instance, if in the contract, the parties had agreed to an alternate mode of performance in a force majeure condition, then the parties would continue to be liable to perform in such alternate mode during the period of force majeure.9
When it comes to interpretation of force majeure provisions, a 'one size fit all' approach has not been taken by the Courts in India, as each case has been examined in light of the language of the relevant contractual provisions applicable thereto. Therefore, questions as to whether an event constituted force majeure, or if an event was beyond the control of the parties, or did an event prevent or hinder performance, etc., have been ascertained by the Indian Courts on a case to case basis.10
1 'Force Majeure' can be defined as an event or effect that can be neither anticipated nor controlled. The term includes both, acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes and wars) – Black's Law Dictionary, 11th Edition; Page 788.
2 Section 56 of the Indian Contract Act, 1872: An agreement to do an act impossible in itself is void. Contract to do an act afterwards 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. Compensation for loss through non-performance of 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. (emphasis supplied)
3 AIR 1961 SC 1285.
4 (1920) 2 KB 714.
5 Energy Watchdog and Ors. v. Central Electricity Regulatory Commission & Ors. [(2017) 14 SCC 80].
6 AIR 1969 Ori 152. Also see TGV Projects & Investments Pvt. Ltd. v. National Highways Authority of India [2019 (173) DRJ 717], and Simplex Concrete Piles (India) Ltd. v. Union of India [(2010) ILR 2 Delhi 699].
7 U.P. State Electricity Board & Ors. v. Hari Shanker Jain & Ors. [1978 SCC (4) 16] and Interore Fertichem Resources Sa v. MMTC of India Limited [2007 (4) ARBLR 242 Delhi].
8 AIR 1954 SC 44.
9 Bharat Heavy Electricals Limited v. G+H Schallschutz GMBH, decided on July 9, 2018 by the High Court of Delhi.
10 Energy Watchdog and Ors. v. Central Electricity Regulatory Commission & Ors. [(2017) 14 SCC 80], TGV Projects & Investments Pvt. Ltd. v. National Highways Authority of India [2019 (173) DRJ 717], Gimpex Limited v. Indian Barytes and Chemicals Limited & Ors. [1996 (4) ALT 423], MMTC of India Ltd. v. Interore Fertichem Resources Sa [AIR 2012 Delhi 123], and Oil & Natural Gas Commission Ltd. v. Dilip Construction [AIR 2000 Cal 140].a
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