Currently, 210 countries1 around the world are passing through the global crisis on account of Covid-19. Covid-19/corona virus has been officially declared as a pandemic by World Health Organization on March 11, 20202. This pandemic has not just resulted in loss of lives but has had an adverse impact on business, commerce and the global economies on account of lockdowns and restricted movement. This pandemic therefore has its varied implications on the commercial world. There have been certain disruptions to the economy in the past as well comprising of, but not limited to Gujarat earthquake in 2001 and the Indian Ocean Tsunami in 2004. The outbreak of Covid-19 however has brought the economies around the world to a halt.
The bottom line for any business or commerce to grow is the contracts entered into between the parties. The law of contracts lays down the reciprocal obligations of the parties. As per Section 37 of the Indian Contract Act, 1872, the parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. On account of this pandemic, the situations may arise in a catena of commercial contracts wherein a party, without any fault on its part, is not able to perform its part of the contract.
In the light of the foregoing, it is important to access and analyze the commercial ramifications of Covid-19, whether the current situation of lock downs can be considered 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 of contract.
Brief Description of the Concept of Force Majeure
"Force majeure", a French term equivalent to "Vis majeure", in Latin, means "superior force". The term "force majeure" has been defined in Black's Law Dictionary3 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). 4
Black's Law Dictionary5 defines force-majeure clause as 'A contractual provision allocating the risk if performance becomes impossible or impracticable, esp. as a result of an event or effect that the parties could not have anticipated or controlled.'
A company may insert a force majeure clause into a contract to absolve itself from liability in the event it cannot fulfill the terms of a contract (or if attempting to do so will result in loss or damage of goods) for reasons beyond its control.
Force majeure aims at exempting a party from a contract which has become impossible for performance, due to intervention of a superior force. The concept of force majeure has gained significance in the present situation. By and large, the judicial response to the doctrine of force majeure has been rigid.
Indian Jurisprudence on the concept of Force Majeure
Force majeure is often mixed up with the doctrine of frustration of contract. But these are completely different concepts.
The concept of force majeure has neither been defined or specifically dealt with under the Indian statutes. However, the legislators have to some extent dealt with this concept as is clear from Section 32 of the Indian Contract Act, 1872 dealing with contingent contracts. Section 32 of the Indian Contract Act, 1872 reads as follows:
"32. 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. If the event becomes impossible, such contracts become void."
From contractual perspective, a force majeure clause provides temporary reprieve to a party from performing its obligations under a contract upon occurrence of a force majeure event.
The essential ingredients of force majeure clauses are as follows:
- An unexpected/unforeseen intervening event occurred;
- The parties to the agreement assumed that such an event will not occur;
- Such an event has made the performance of the obligations under the contract impossible or impracticable;
- The parties have taken all such measures to perform the obligations under the agreement or at least to mitigate the damage; and
- The affected party claiming relief under force majeure, will have the burden of proof to show that the force majeure event has affected such party's performance of the contract.
Whether the outbreak of Covid-19 and the ensuing lockdowns ordered by the Central and State Government would be sufficient to invoke the force majeure clause in the contract would depend on the following factors:
- Establishing the causal connection between the force majeure event and hindrance to the performance of the contract;
- Harmonious construction with all the provisions; and
- Compliance with the condition precedents contained in the force majeure clause.
Section 56 of the Indian Contract Act, 1872 reads as follows:
56. Agreement to do impossible act. 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.
Section 56 deals with two distinct levels-
- It renders void all agreements to do impossible acts, and
- It envisages a situation wherein a lawful act has subsequently become impossible or unlawful to perform.
Cardinal ingredients of Section 56 of the Indian Contract Act, 1872 :
- There must be a valid contract;
- The performance of the contract is yet to be made or is ongoing; and
- The aforesaid performance becomes impossible by way of facts or law.
It is not possible to lay down an exhaustive list of situations in which the doctrine of frustration is to be applied to excuse performance. Yet certain grounds of frustration which are well established are as follows:
- Destruction of subject matter6;
- Death or incapacity for personal service7;
- Non- existence or non- occurrence of a particular state of things8;
- Intervention by legislative or executive authority9;
- Intervention of war10; and
- Change of circumstances of particular state of things.
Having analysed the ingredients if Section 32 and Section 56 of the Indian Contract Act, 1872, it is pertinent to note that where the contract itself, as a matter of construction, contains impliedly or expressly a term according to which it would stand discharged on the happening of certain circumstances, the question of dissolution of the contract according to its term falls to be determined under Section 32 and not under Section 56 of the Indian Contract Act, 1872. Under the English law, they are all treated as cases of frustration, but under the Indian law such cases would fall under Section 32, which deals with contingent contracts.
Distinction between force majeure and doctrine of frustration
A force majeure clause may include acts of Government, war, acts of God or any other events or circumstances as may incorporated by the parties in the contract prior to its execution. In order for a party to have the benefit of force majeure, it shall have to fulfill the conditions specified in force majeure clause. The contract is not terminated but the performance of the contract is suspended during the time the supervening event constituting force majeure exists. After such a force majeure event ceases to exist, the party who has taken the benefit of this force majeure has to perform its part of the contract. In the event of failure of the party who has to perform its part of the contract post such force majeure event, the other party shall have the right to terminate the contract. Force majeure is a contractual remedy and the terms and conditions constituting force majeure clause are decided by the parties prior to the execution the contract.
Frustration of a contract is the happening of an act (after the execution of contract) outside the contract and such act makes the performance of contract impossible. Frustration of contract is a statutory remedy. Section 56 of the Indian Contract Act enshrines the doctrine of frustration of contract. The bottomline to it is "impossibility". Section 56 has to be interpreted in a practical form and not liberal sense. Contract would come under Section 56 even if there is not an absolute impossibility, but the contract has fundamentally changed which the parties had not contemplated at the time of the agreement.
Whether the situation of Covid-19 and the subsequent lock downs would be covered under Section 32 or Section 56 of the Indian Contract Act, 1872 shall depend on the fact whether the contract contains the force majeure clause or not.
Analysis of some Govt. Notifications in view of Covid-19
- It is to be noted that the Govt. of India vide its Memo No. F. 18/4/2020 PPD dated 19-02-202011 issued by the Deputy Secretary of Govt. of India, Ministry of Finance states as follows:
"A doubt has arisen if the disruption of the supply chains due to spread of corona virus in China or any other country will be covered in force majeure clause. In this regard it is clarified that it should be considered as a case of natural calamity and force majeure clause may be invoked whenever considered appropriate, following due procedure."
The pertinent point is that this memo gives rise to force majeure in respect of contracts dependent on supply chains, however the courts may not apply the same principles in all commercial contracts. Therefore, the questions which shall be considered by judiciary:
- Whether there lies a force majeure clause in the contract in question or not; and
- Whether this pandemic has affected the fundamental basis of the contract.
The analysis of the aforesaid memo shows that a very limited purview has been covered by this Memo. It does provide a blanket protection to all commercial contracts. If the answer to point 1 above is in affirmative, force majeure clause may be invoked. If the answer to Point 1 above is in negative, it will amount to frustration of contract under Section 56 of the Indian Contract Act, 1872.
- The Ministry of New & Renewable Energy vide Office Memorandum bearing no. 283/18/2020-GRID SOLAR dated March 20, 202012 has again termed the occurrence of Covid-19 as a Force Majeure Event. Vide the said notification, the Ministry of New & Renewable Energy has decided to grant time extension in Scheduled Commissioning Date of RE Projects considering disruption of the supply chains due to spread of coronavirus in China or any other country as a Force Majeure event.
- The Ministry of New & Renewable Energy vide Office Memorandum bearing no. F. No. 283/18/2020-GRID SOLAR dated April 17, 202013 has reiterated the occurrence of Covid-19 as a Force Majeure Event. It is pertinent to note that it has been provided to treat the delay on account of disruption of the supply chains due to spread of corona virus in China or in any other country, as Force Majeure and has directed for the grant of suitable extension of time for RE projects on account of coronavirus. However, such extension shall be based on the evidence produced by the developers in support of their respective claims of such disruption of the supply chains due to spread of corona virus in China or in any other country. It has further been provided that all the Renewable Energy implementing agencies of the Ministry of New and Renewable Energy (MNRE) will treat lockdown due to Covid-19 as Force Majeure. It has been directed that all the Renewable Energy implementing agencies may grant extension of time for the aforesaid projects on account of lock down due to Covid-19, equivalent to the period of lock down and additional 30 days for normalisation after end of such lock down.
However, such government notifications are only restrictive in nature. The bottom line as to whether a party can have the benefit of force majeure or not shall depend on the contractual provisions. The events constituting force majeure event stipulated in the contract shall be considered to determine whether the performance of the contract may be suspended or will stand frustrated.
- Satyabrata Ghose v. Mugneeram Bangur & Co.14
The relevant portion of this judgement reads as follows:
"16.....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."
"23.....But when there is no time limit whatsoever in the contract, nor even an understanding between the parties on that point and when during the war the parties could naturally anticipate restrictions of various kinds which would make the carrying on of these operations more tardy and difficult than in times of peace, we do not think that the order of requisition affected the fundamental basis upon which the agreement rested or struck at the roots of the adventure."
"24......In our opinion, having regard to the nature and terms of the contract, the actual existence of war conditions at the time when it was entered into, the extent of the work involved in the development scheme and last though not the least the total absence of any definite period of time agreed to by the parties within which the work was to be completed, it cannot be said that the requisition order vitally affected the contract or made its performance impossible."
"25......In our opinion, the events which have happened here cannot be said to have made the performance of the contract impossible and the contract has not been frustrated at all........"
The dispute between the parties in this matter revolves around a short point as to whether a contract for sale of land to which the litigation relates, was discharged and came to an end by reason of certain supervening circumstances which affected the performance of a material part of it. Judiciary examined the nature and terms of the contract and the circumstances under which it was entered into to determine whether or not the supervening circumstance, which is alleged to have happened here, has substantially prevented the performance of the contract as a whole. The contract involved in the present case is an ordinary contract of sale and purchase of a piece of land and is one of the many contracts entered into by the defendant company with many persons. The most material point which was considered by the Hon'ble Court in the present case was that there was absolutely no time limit within which roads and drains were to be made and there was no understanding between the parties with respect to the same either. Hon'ble Court in the light of the provisions of the contract considered the question finally whether the passing of the requisition orders affected the performance of the contract? Hon'ble Court observed that the existence of war conditions has made the performance of the contract more tardy and difficult than in times of peace but the order of requisition has not affected the fundamental basis of the contract. Therefore, it was observed that the performance of the contract in question is not impossible, so the contract is not frustrated at all.
Justice Mukherjea in this illuminating judgement laid down the following points of Indian law:
- The Indian Law of frustration which term is interchangeable with supervening impossibility is embodied in Section 56 of Indian Contract Act, 1872 as a positive rule of law which does not leave the matter to the intention of the parties and casts the duty on the court to decide whether the contract is ended by frustration;
- To the extent the Indian Contract Act deals with a particular matter, it is exhaustive and it is not permissible to import English principles de hors the provisions in the Act. The English decisions have a persuasive value but the several theories of frustration of English law do not bind us;
- When the whole purpose or basis of contract is frustrated by the intrusion or occurrence of an unexpected or change of circumstances beyond the contemplation of the parties, it is the duty of the court to give relief and hold the contract frustrated and ended as it is really a rule of positive law under Section 56 of the Indian Contract Act, 1872;
- Section 56 of the Indian Contract Act, 1872 lays down rule of positive law, not dependent on the intention of the parties but only evidence, and the court has to form its own conclusion by examining the contract and the circumstances; and
- When there is frustration, the contract is dissolved automatically and does not depend on rescission or repudiation or breach or choice or election of either party, and the court has to decide expost facto.
- Alopi Parshad & Sons Ltd. v. Union of India15
The relevant portion of this judgement reads as follows:
"21. Performance of the contract had not become impossible or unlawful; the contract was in fact performed by the Agents, and they have received remuneration expressly stipulated to be paid therein. The Indian Contract Act does not enable a party to a contract to ignore the express covenants thereof, and to claim payment of consideration for performance of the contract at rates different from the stipulated rates, on some vague plea of equity."
"22. There is no general liberty reserved to the courts to absolve a party from liability to perform his part of the contract, merely because on account of an uncontemplated turn of events, the performance of the contract has become onerous..................................................."
"22......no matter that a contract is framed in words which taken literally or absolutely, cover what has happened, nevertheless, if the ensuing turn of events was so completely outside the contemplation of the parties that the court is satisfied that the parties, as reasonable people, cannot have intended that the contract should apply to the new situation, then the court will read the words of the contract in a qualified sense; it will restrict them to the circumstances contemplated by the parties; it will not apply them to the uncontemplated turn of events, but will do therein what is just and reasonable."
"23. We, are therefore, unable to agree............... that the arbitrators were justified in ignoring the express terms of the contract prescribing remuneration payable to the Agents, and in proceeding upon the basis of quantum meruit."
In this matter, M/s Alopi Parshad and Sons Ltd. were acting as agents to the Government of India. These agents purchased ghee for the army. The agents mentioned hereinabove were to be paid on cost basis for the work. The work was in progress. Second World War intervened. On June 20, 1942, the original agreement was, by mutual consent, revised. The rates fixed in peace time were totally altered by the war time conditions. The agents demanded revision of rates. They received no reply. The Government terminated the contract in 1945. The agents claimed payment at enhanced rates. They did not succeed.
The pertinent point is that the agents continued the supplies without insisting upon any modification of the agreement dated June 20, 1942. The original agreement dated May 3, 1937 was modified by the supplementary agreement dated June 20, 1942 and the modified agreement was binding upon the agents. The modification was made nearly three years after the commencement of hostilities. The agents were fully aware of the altered circumstances at the date when the modified schedule for payment of overhead charges, contingencies and buying remuneration, was agreed upon. The Hon'ble Court observed that the contract is not frustrated merely because the circumstances, in which the contract was made, are altered. The performance of the contract had not become impossible or unlawful. The contract was in fact performed by the agents and they received remuneration expressly stipulated to be paid.
Therefore, the courts have no general power to absolve a party from the performance of his part of the contract merely because its performance has becomes onerous on account of an unforeseen turn of events. Commercial hardship will not by itself support frustration and excuse performance.
- Dhanrajamal Gobindram v. Shamji Kalidas & Co. 16
The relevant portion of this judgement reads as follows:
"2. ..............We confirm having sold to you African raw cotton on the following terms and conditions subject to the usual Force Majeure Clause......."
"17. McCardie J. in Lebeaupin v. Crispin ( 2 K.B. 714), has given an account of what is meant by "force majeure" with reference to its history. 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. This is the widest meaning that can be given to "force majeure", and even if this be the meaning, it is obvious that the condition about "force majeure" in the agreement was not vague. The use of the word "usual" makes all the difference, and the meaning of the condition may be made certain by evidence about a force majeure clause, which was in contemplation of parties."
"19. ....The addition of the word "usual" refers to something which is invariably to be found in contracts of a particular type. Commercial documents are sometimes expressed in language, which does not, on its face, bear a clear meaning. The efforts of Courts is to give a meaning, if possible. "
"20. Applying these tests to the present case and in the light of the provisions of
s. 29 of the Indian Contract Act, it is clear that the clause impugned is capable of being made certain and definite by proof that between the parties or in the trade or in dealings with parties in British East Africa, there was invariably included a force majeure clause of a particular kind.
In our opinion, the contract was not void for vagueness or uncertainty by reason of the reference in the terms stated, to the force majeure clause."
In the present case, Messrs Dhanrajamal Gobindram (buyer) entered into an agreement with Messrs Shamji Kalidas & Co. (seller) for the purchase of 500 bales of African raw cotton. The contract was in the form of a letter written by the sellers and confirmed by the buyers. The contract was not performed. The seller wrote 5 letters to the buyer between March 1, 1958 and May 26, 1958 but received a reply only on June 3, 1958. The seller had by that time exercised its right of resale after giving notice and claimed Rs. 34,103.15 np. for which a debit note had been issued. The note was returned by the buyer with a letter dated June 3, 1958 stating that the contract was void and illegal and they were not obliged to perform it. The contract in this case used the words "usual force majeure clause". There is no clear force majeure clause in the contract or no contractual provision stipulating as to what events shall constitute force majeure.
The Hon'ble Court observed "usual" refers to something which is invariably to be found in contracts of a particular type. Commercial documents are sometimes expressed in language which does not, on its face, bear a clear meaning. The effort of the court is to give it a meaning, if possible. The Hon'ble Court dismissed the present appeal made. The contention advanced that the contract is vague on account of the vagueness and uncertainity in the aforesaid terminology in contract "usual force majeure clause", was rejected.
Therefore, the principle underlying the aforesaid judgement is where in a contract, the reference is made to force majeure, the intention of the parties is to save the performing party from the consequences of anything over which it has no control. If this is the underlying meaning that comes out from the specified contractual provision, that condition about force majeure cannot be considered vague. Even if there lies some vagueness in such a clause, it is capable of being made certain and definite based on the dealings of the parties in the ordinary course of business and other related proofs.
- Naihati Jute Mills Ltd. v. Hyaliram Jaganath 17
The relevant portion of this judgement reads as follows:
"9.....It is therefore manifest that their application was refused because of a personal disqualification and not be reason of any force majeure. Since this was the position there is no question of the performance becoming impossible by reason of any change in the Government's policy which could not be foreseen by the parties. No question also would arise of importing an implied term into the contract."
"12. In the view that we take that the said contract cannot be said to be or to have been void and that in any event the stipulation as to obtaining the import licence was absolute, the question that the arbitration clause perished along with the contract and consequently the arbitrators had no jurisdiction cannot arise. But assuming that the appellants had established frustration even then it would not be as if the contract was ab initio void and therefore not in existence. In cases of frustration it is the performance of the contract which comes to an end but the contract would still be in existence for purposes such as the resolution of disputes arising under or in connection with it. The question as to whether the contract became impossible of performance and was discharged under the doctrine of frustration would still have to be decided under the arbitration clause which operates in respect of such purposes."
In this matter, there was an ordinary contract of sale and purchase wherein Naihati Jute Mills (buyer) agreed to purchase and Hyaliram Jaganath (seller) agreed to sell 2000 bales of Sadipur N.C. Cuttings. The contract was in standard form prescribed by India Jute Mills Association. One of the printed terms provided –"Buyers shall not however be held responsible for delay in delivering letters of authority or opening letters of credit where such delay is directly or indirectly caused by god or due to act of God, war, mobilization, demobilization, breaking off trade relations between Governments, requisition by or inference from Government or force majeure...." The contract could not be performed by the buyer on account of the change of the policy of the government imposing total prohibition of import of Pakistan jute. They could not provide the import license to the seller. The contention advanced on behalf of the buyer that the performance of the contract in question has become impossible, it therefore stands frustrated in the light of Section 56 of the Indian Contract Act, 1872 and is void, was rejected by the Hon'ble Court.
The Court observed that it is clear from the circulars produced that as early as March 1958 the Government of India had issued warnings that import of Pakistan jute would be permitted to the absolute minimum and the jute mills should satisfy their needs by purchasing Indian jute. The buyer was very much aware that the licenses are not freely issued. The application of import license by the buyer was refused on account of personal disqualification and not by reason of any force majeure. Therefore, it was held by the Hon'ble Supreme Court that there therefore, lies no question of the performance of the contract becoming impossible by reason of the change of policy of the Government. No question would arise of importing an implied term into the contract.
Therefore, a contract is not frustrated merely because the circumstances in which it was made are altered. The performance cannot be discharged merely it has become onerous for one of the parties to perform.
- Energy Watchdog v. CERC18
The relevant portion of this judgement reads as follows:
"34. Force majeure is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied clause in a contract... it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract Act......"
"36........It was further held that where the Court finds that the contract itself either impliedly or expressly contains a term, according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Act. If however, frustration is to take place de hors the contract, it will be governed by Section 56..."
"45.......the force majeure clause does not exhaust the possibility of unforeseen events occurring outside natural and/or non – natural events. But the thrust of their argument was really that so long as their performance is hindered by an unforeseen event, the clause applies."
"46. As a matter of fact, clause 12.4 of the PPA, which deals with force majeure exclusions, reads as follows :
"12.4 Force Majeure Exclusions
Force Majeure shall not include
- any event or circumstance which is within the reasonable control of the parties and
- the following conditions, except to the extent that they are consequences of an event of Force Majeure:
- Unavailability, late delivery, or changes in cost of the plant, machinery, equipment, materials, spare parts, fuel or consumables for the Project;
- Delay in the performance of any contractor, sub-contractors or their agents excluding the conditions as mentioned in Article 12.2;
- Non-performance resulting from normal wear and tear typically experienced in power generation materials and equipment;
- Strikes or labour disturbance at the facilities of the Affected Party;
- Insufficiency of finances or funds or the agreement becoming onerous to perform; and
- Non-performance caused by, or connected with, the Affected Party's:
- Negligent or intentional acts, errors or omissions;
- Failure to comply with an Indian Law; or
- Breach of, or default under this Agreement or any Project Documents."
This clause makes it clear that changes in the cost of fuel, or the agreement becoming onerous to perform, are not treated as force majeure events under the PPA itself."
"47. We are, therefore, of the view that neither was the fundamental basis of the contract dislodged nor was any frustrating event, except for rise in the price of coal, excluded by Clause 12.4, pointed out."
In this case, the generating company had voluntarily quoted energy charges as non- escalable, however, a change in law in Indonesia aligned the export price of coal from Indonesia to international market and on account of this rise in price, it sought discharge from performance of Power Purchase Agreement and sought restoration to the same economic condition as existing prior to change in law. The contract entered into between the parties contained a Force Majeure Clause. Clause 12.4 of the PPA entered into between the parties contained the Force Majeure exclusions. The question before the Hon'ble Supreme Court was that whether the rise in prices of coal imported from Indonesia would be covered under this Clause 12.4.
In the said case, the Apex Court did not accept the argument that rise of prices of coal imported from Indonesia would attract force majeure in respect of this PPA.
The following principles are deduced from this judgement:
- When the contract contains an express or implied term according to which the performance of the contract would stand discharged in certain circumstances (force majeure clause), the dissolution of the contract would take place under the terms of the contract itself and it shall be covered under Section 32 of the Indian Contract Act, 1872.
- When the contract does not contain a clause as referred to in point i) above, frustration of the contract shall take place de hors the contract and shall be governed by Section 56 of the Indian Contract Act, 1872.
- The word "impossible" has not been used in Section 56 in the sense of physical or literal impossibility. The performance of act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties.
- Coastal Andhra Power Limited v. Andhra Pradesh Central Power Distribution Co. Ltd.19
The relevant portion of this judgement reads as follows:
"29. In light of the above discussion we find:
- that the appellant has failed to make-out a prima facie case in its favour for grant of any interim relief in relation to the bank guarantees, since change in Indonesian law and consequential increase in price of coal in Indonesia does not prima facie amount to force majeure under the Agreement....."
Coastal Andhra Power Limited (appellant) entered into a Power Purchase Agreement with Andhra Pradesh Central Power Distribution Co. for setting up and operating an Ultra Mega Power Project at Krishnapatnam. Under the terms of the Agreement, the fuel to be used for generating electricity was imported coal and the appellant had to arrange for import of coal from Indonesia. The appellant failed to perform its part of the contract. The contention advanced was that such failure to perform has been on account of escalation in the price of coal, which resulted in amendments in Indonesian law and that such price increase amounted to force majeure under the Agreement. This argument was rejected by the Hon'ble High Court of Delhi.
The Hon'ble High Court of Delhi in this matter applied the principles laid down in Energy Watchdog v. CERC (supra) and held that the change in Indonesian law and consequential increase in price of coal in Indonesia does not prima facie amount to force majeure under the Agreement.
- Recently, the Hon'ble High Court of Delhi in M/s Halliburton Offshore Services Inc. v. Vedanta Limited 20vide its interim Order dated April 20, 2020 (Order reserved on April 15, 2020) observed that the lock down done by the Government in view of the outbreak of corona virus was prima facie in the nature of a force majeure. In this case, the contract entered into between the parties contained the force majeure clause which was allegedly invoked by the petitioner. The Hon'ble Court therefore stayed the invocation of bank guarantees by Vedanta Ltd.
The relevant portions of this interim order reads as follows:
"20. The country wide lockdown, which came into place on 24th March 2020, was, in my opinion, prima facie in the nature of force majeure. Such a lockdown is unprecedented, and was incapable of having been predicted, either by the respondent or the petitioner.
....... Prima facie, in my view, special equities do exist, as would justify grant of the prayer, of the petitioner, to injunct the respondent from invoking the bank guarantees of the petitioner, forming subject matter of these proceedings, till the expiry of a period of one week from 3rd May 2020, till which date the lockdown has been imposed."
"29. There shall be an ad interim stay on invocation and encashment of the eight bank guarantees......"
Based on the analysis of the aforesaid judicial precedents, it is clear that the judicial response to the doctrine of force majeure has been rigid. The courts have not allowed economic inability, inconvenience, difficulty in performance, onerousness etc. as grounds of force majeure for a party to terminate or get exemption from a contract.
The following are the pertinent points which need to be taken into consideration in order to access and analyze whether force majeure clause is attracted or not:
- Whether a contract contains force majeure clause or not?
- If the contract contains Force Majeure clause, Section 32 of the Indian Contract Act, 1872 is attracted.
A party which successfully establishes the force majeure clause is relieved of its obligations to perform its obligations under the contract during the time the supervening force majeure event subsists, the performance of the obligations under the contract are suspended and is relieved of its liability to pay damages for breach of contract.
Invoking a force majeure clause could result in the right to the other party to terminate a contract if the force majeure event lasts longer than a particular period as stipulated in the contract.
- If the contract does not contain Force Majeure clause, Section 56 of the Indian Contract Act, 1872 is attracted.
The three important parameters which help in determining whether there is frustration of contract or not are:
- Has the contract allocated the risk of the particular event occurring?
- Has there been a radical change in obligations?
- Was the radical change due to the fault of one party?
- Mere difficulty or inconvenience of a party is not force majeure.
The situation on account of the outbreak of corona virus, the subsequent lock downs and restriction on movement as declared by the Government and a halt to the economic activities is something which no reasonable and average contracting party could have foreseen. Based on the current jurisprudence as it stands, the aforesaid exceptional circumstances may only result in litigation in a catena of commercial contracts. It is then a matter of interpretation by the courts whether a contract containing force majeure clause would cover such restrictions in movement and lock downs imposed by the Government. The recent interim Order of the Hon'ble High Court of Delhi in M/s Halliburton Offshore Services Inc. v. Vedanta Limited (supra) is certainly a step in evolving the jurisprudence in this direction. However, the need of the hour is that instead of having piece meal notifications, we need to have a codified law which exempts an affected party from performing its obligations under the contract during the period of such lock downs and such lock downs have to be considered as force majeure. The time has come that we should have law related to force majeure rather than only drawing light from Section 32 of the Indian Contract Act or the contractual provisions.
3 Black's Law Dictionary Eighth Edition, First South Asian Edition 2015
4 Black's Law Dictionary Eighth Edition, First South Asian Edition 2015
5 Black's Law Dictionary Eighth Edition, First South Asian Edition 2015
6 Taylor v. Caldwell (1863) 3 B & S 826
7 Stubbs v. Holywel Railway Co. (L.R. 2 Exch 311)
8 Krell v. Henry (1903) 2 KB 740
9 Metropolitan Water Board v. Dick Kerr & Co. Ltd. (1918) AC 119
10 Basanti Bastralaya v. River Steam India Navigation AIR 1987 Cal. 271
14 AIR 1954 SC 44
15 AIR 1960 SC 588
16 AIR 1961 SC 1285
17 AIR 1968 SC 522
18 (2017)14 SCC 80
20 O.M.P. (I) (COMM)& I.A. 3697/2020
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