India: Force Majeure Clause In Case Of Commodities Dispute

Introduction

In a recent decision handed down on 8 April 2020 in Standard Retail Private Ltd v Gs Global Corporation¹, the Bombay High Court refused to stay the encashment of Irrevocable Letters of Credit ("LCs") sought by an Indian Importer, Standard Retail Private Ltd ("Buyer") who had terminated its contracts, with a South Korean Commodity Trader, GS Global Corporation ("Seller"), and revoked the acceptance of the LCs opened under these contracts, on grounds of Force Majeure, as well as frustration, impracticability and impossibility of performance owing to the COVID-19 Pandemic.

Background Facts

The Buyer is an Indian entity involved in importing steel products. The Buyer had entered into a number of contracts with the Seller to import these steel products. The terms of payment provided were by way of certain confirmed and Irrevocable LCs, which were payable at sight.

The goods were duly shipped by the Seller in furtherance of its contractual obligations. While such goods were still in transit, the Buyer sought to terminate the contract and revoke its acceptance of the said LCs by invoking the Force Majeure Clause in the contracts and citing frustration, impracticability and impossibility in performance of the contracts owing to the COVID-19 Pandemic. The Seller did not accept this revocation and asked the Buyer to comply with its contractual obligations.

The Buyer, however, filed a Petition under §9 of the Arbitration and Conciliation Act 1996 ('the Arbitration Act'), before the Bombay High Court seeking an injunction against negotiating/enchasing the Irrevocable LCs.

Issues Arising & Contentions Raised

The primary issues which arose for consideration before the Bombay High Court were:

(i) Whether the sales contracts between the Buyer and Seller could be declared as unenforceable, void or voidable solely on the grounds of frustration, impracticality or impossibility, as claimed; and

(ii) Whether the dispute under the underlying sales contracts would entitle the Buyer to an injunction against the encashment/invocation of Irrevocable LCs.

The contentions that were raised by both parties in this matter are primarily as under:

Buyer's Contentions:

(i) The sales contracts are unenforceable/ void/voidable as the 'Force Majeure' clause in them exempts only the Seller from performing its contractual obligations, thus contravening the rule of mutuality of the obligation.

(ii) The Buyer's contractual duty to make payments to the Seller, stands discharged due to impossibility since the onward selling of the steel products was not categorized as an 'essential service'.

(iii) The Buyer's contractual duty stands discharged as their performance has become impractical and consequently frustrated as they cannot be expected to perform the contracts by assuming the risk of occurrence of such an unforeseen event.

Seller's Contentions:

(i) The LCs were independent contracts which were unaffected by any dispute between the Buyer and Seller in the underlying contract. Only in cases of egregious or established fraud or irretrievable injury can a LC be injuncted.

(ii) On a factual basis, the Buyer's contention on frustration/impossibility/impracticality of the sales contracts due to the prevailing COVID-19 situation was erroneous as there a number of government circulars/notifications, which demonstrate that distribution of steel had been declared as an "essential service".

(iii) The contention of the COVID-19 pandemic being a force majeure event or leading to frustration of the contract was baseless. The Buyer had to demonstrate that the terms of the contract and its very foundation had been fundamentally altered.

Summary of the Decision

The Bombay High Court dismissed the injunction for interim relief and re-affirmed the settled principle that LCs are independent transactions with a Bank, and that the Bank is not concerned with an underlying dispute between the Buyer and Seller.

The Court held that various notifications/circulars cited by the Seller clearly demonstrate that steel is an "essential service" and, therefore, the situation arising from the pandemic cannot assist the Buyer. The Seller had already shipped the goods and fulfilled its obligation. The fact that the Buyer would not be able to perform its obligations in so far as its own customers were concerned or it would suffer damages was not a factor which could be held against the Seller.

The Court also discussed principles of §56 of the Indian Contract Act 1872 and certain leading Indian authorities on Force Majeure and frustration of contract such as Energy Watchdog v CERC² and Satyabrata Ghose v Mugneeram Bangur and Company and Ors³, and held that the same would not come to the aid of the Buyer, as these judgments were distinguishable on facts.

Concluding Remarks

With the on-going situation in relation to the COVID-19 pandemic, this is most certainly the tip of the iceberg in terms of the disputes in relation to Force Majeure clauses that are likely to be seen in India in the short course. It, however, remains to be seen what stance the various courts across the country will take in similar disputes which are bound to flow from the terms of the contract and the underlying facts⁴.

Footnotes