A lot of information is available on the internet today, regarding applicability of 'force majeure' clauses to the disruptions caused in business activities due to the prevailing COVID-19 crisis. In the wake of this pandemic, while it is important to understand the general legal position in this regard, it is equally important to follow and understand how courts are actually handling cases where the 'force majeure' exemption is being raised. The High Court of Bombay (Court) recently dismissed a plea invoking the 'force majeure' exemption, in a contract involving steel importers.1

BRIEF FACTS

The petitioners were importers of steel who had caused letters of credit to be issued by Wells Fargo Bank to their Korea-based suppliers. It is pertinent to note that the petitioners' contracts with these suppliers were on a cost and freight (C&F) basis. Due to the operational shutdown following the preventive and protective measures adopted by the Government to combat the COVID-19 pandemic, the contract between the petitioners and their suppliers had allegedly been frustrated in terms of Section 56 of the Indian Contract Act, 1872. Consequently, some goods which were shipped by the suppliers from South Korea did not reach the petitioners in India. The petitioners therefore refused to make payments to their suppliers, and filed an application before the High Court of Bombay under Section 9 of the Arbitration and Conciliation Act, 1996 in an attempt to restrain Wells Fargo Bank from negotiating or encashing the letters of credit.

'FORCE MAJEURE' CLAUSE

"Article 11. Force Majeure In the event of an Act of God (including but not limited to floods, earthquake, typhoons, epidemics and other natural calamities), war or armed conflict or serious threat of the same, government order or regulation, labor dispute or any other similar cause beyond the control of "Seller" or any of its suppliers or sub-contractors which seriously affects the ability of "Seller" or any of its suppliers or sub-contractors to manufacture and deliver the "Goods", "Seller" may, at its sole discretion and upon written notice to "Buyer" either terminate the Contract or any portion affected thereof by such event(s), or delay performance of the Contract, in whole or in part, for a reasonable period of time. Any such delay of performance by "Seller" shall not preclude "Seller's" later right to terminate the Contract or any portion affected thereof by such event(s). In no event shall "Seller" be liable to "Buyer" or to any third party for any costs or damages arising indirectly or consequentially from such non-fulfillment of or delay in the performance of all or part of the Contract."

FINDINGS OF THE COURT

The Court found no merit in the contentions of the petitioners, and did not deem any ad-interim relief to be necessary under these circumstances. Firstly, it clarified that letters of credit are independent transactions with the bank, and their encashment is not concerned with any underlying disputes between the parties to the contract under which such letters of credit have been issued.

Secondly, it opined that the wording of the 'force majeure' clause in the contract between the parties is such that it aids only the supplier/seller of steel, in a 'force majeure' event. There is no indication whatsoever that the petitioners, who are the buyers, may also derive some benefit of relaxation on account of a 'force majeure' event. The Court held that a clause worded as such cannot possibly be relied upon to allow non-payment for goods that have already been dispatched by the supplier.
In any case, the contracts were on C&F basis, which means that risk in relation to the goods transfers from suppliers/sellers to petitioners/buyers, once the goods have been loaded on board the carrier.

The Court held that since it is not disputed here that the goods in question have indeed been shipped by the suppliers/sellers, the risk in relation to the goods has already transferred to the petitioners and they may not justify withholding payment for the same at this stage.

The Court further observed that distribution of steel has been declared as an essential service, and there have been no significant restrictions on movement of vehicles and manpower in the context of the steel industry, or operations of container freight stations and warehouses for steel. It was further noted that the lockdown is meant to last only for a limited duration and therefore, it cannot serve as an excuse for the petitioners to escape their payment obligations towards suppliers.

COMMENTS

Although reliance was sought to be placed by the petitioners on judicial precedents in this regard,2 the Court found such precedents to be easily distinguishable on a factual basis. While there are several judicial precedents that indicate that the nationwide shutdown due to COVID-19 could qualify as a 'force majeure' event, and there are government notifications that could support this argument3, it must be borne in mind that applicability of 'force majeure' is still examined on a case to case basis. The threshold for each individual industry is set by the guidelines and directions applicable to that particular industry under the present circumstances. The wording of 'force majeure' clauses contained in contracts will also dictate whether a contracting party may lean on the 'force majeure' exemption to secure some respite in these times. A one-sided 'force majeure' clause which protects the interests of only one of the contracting parties, such as the one seen in this case, may prove to be particularly problematic. The outcome of each dispute involving invocation of a 'force majeure' clause must therefore be gauged on its own facts and merits.

Footnotes

1 Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp & Ors., Commercial Arbitration Petition (L) No. 404 of 2020.

2 Energy Watchdog v. CERC, (2017) 14 SCC 80; and Satyabrata Ghosh v. Mugneeram Bangure & Co., (1954) SCR 310.

3 For more information, please see "India: COVID-19 and Force Majeure", authored by Shweta Vashist & Reshma Ravipati, available at https://www.mondaq.com/india/litigation-contracts-and-force-majeure/913932/covid-19-and-force-majeure.

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