With the sudden and grave advent of COVID-19 in India, 'Force Majeure' clauses have come into life after years of languishing in the boilerplate clauses of commercial contracts. Due to the outbreak of COVID-19 pandemic and the lockdown measures announced by the Government, businesses across the length and breadth of the country (and the world at large) have come to a standstill. The impact of COVID-19 extends to travel bans, hotel closures, closure of offices, factories, public transportation, airlines and trains. The impact of COVID-19 is not just limited to human lives but also to operation of businesses eventually affecting a broad swathe of economy. Due to the fact that the lockdown measures have forced many businesses to temporarily shut for the time being, it has become difficult, and in some cases impossible, for them to fulfil their contractual obligations. Accordingly, many businesses are staring at potential contractual defaults which may result in significant monetary liability on them, resulting in such business now exploring the possibility of invocation of the concept of 'Force Majeure' under various contractual scenarios.

Meaning of Force Majeure

Force Majeure is a French word that literally means 'superior force'. Force Majeure has been referred to mean an 'event or effect that can be neither anticipated nor controlled'. In 'Dhanrajamal Gobindram vs Shamji Kalidas & Co.' (AIR 1961 SC 1285), the Supreme Court of India while referring to an English case 'Lebeaupin v Crispin' stated that Force Majeure clause's intention is to 'save the performing party from the consequences of anything over which he has no control'.

The Indian Contract Act, 1872, does not define 'Force Majeure'. The Indian Contract Act, 1872, also does not provide for any temporary suspension of performance obligations under a contract. The concept of Force Majeure in India has actually evolved through jurisprudence over a period of time, such that it has now become a recognized concept under Indian contract law.

Relationship between Causation and Effect

The first and foremost step before evaluating the remedy is to assess the impact of COVID-19 on the business and performance of contractual obligations. It is pertinent to first understand the relationship between 'cause' and 'effect' before looking to invoke the contractual remedy of Force Majeure.

Basis this analysis of impact, a party should determine whether COVID-19 and consequent lockdown has resulted in or will result in partial failure of performance/ temporary suspension of performance; or the contract has become impossible to perform. The remedies available to a party will depend upon the outcome of this determination.

In the event, the outcome is partial failure or temporary suspension, the remedies will have to be identified in the language of the contract. In case the contract has become impossible to perform, then recourse under the Indian Contract Act, 1872 could be sought.

Force Majeure – Contractual and Legal Remedies

For a party to be able to seek temporary suspension of its contractual performance by invoking 'Force Majeure':

  1. the 'Force Majeure' clause/ events should be explicitly set out in the agreement;
  2. it has to rely on the wordings in the contract with regards to the definition and scope of 'Force Majeure' event in the contract. In case such 'Force Majeure' clause is of a wide/ inclusive nature (i e covering terms such as natural calamity, natural disaster, pandemic, epidemic), then it will be easier to invoke Force Majeure due to the outbreak of COVID-19 and the lockdown measures implemented by Government and seek temporary suspension of contractual obligations. In case such 'Force Majeure' clause is narrowly worded/ worded in an exclusive manner, it may be difficult to invoke it to seek temporary suspension of contractual obligations due to COVID-19. The Supreme Court in Energy Watchdog v CERC (2017 14 SCC 80) has stated that 'Force Majeure' clauses are to be narrowly construed and while construing Force Majeure clauses, the contract must be read as a whole;
  3. ascertain the kinds of contractual performance that are capable of being suspended under the contract. Depending on the precise wording of the 'Force Majeure' provision, it is for the affected party to demonstrate that an event of 'Force Majeure' (and not some other factor) delayed performance of the contract or caused the failure in performance of the contract notwithstanding the commercially reasonable efforts of the affected party to overcome or mitigate the effect of the event of 'Force Majeure'; and
  4. adhere to the requirements of notification of 'Force Majeure' event under the contract. Typically, most of the contracts require a party to notify the occurrence of a 'Force Majeure' event, within a stipulated time period, for seeking suspension of its contractual obligations.

While invoking a contractual 'Force Majeure', some of the things to be borne in mind are: (i) the onus lies on the party who wants to invoke the 'Force Majeure' clause to establish an existence of such events, circumstances or conditions which result in 'Force Majeure'; (ii) before triggering 'Force Majeure', one must enquire whether there is any alternative way to perform or has a best endeavour been made to mitigate a 'Force Majeure' event before invoking it; and (iii) it has to be kept in mind that the time period of subsistence of 'Force Majeure' event is crucial to determine the extent to which the contractual obligations can be suspended.

If a contract does not contain 'Force Majeure' provisions, then a party could look to avail the legal recourses available under the Indian Contract Act, 1872:

  1. Section 32: This section deals with the concept of contingent events (which could include explicitly identified 'Force Majeure' events) within the realm of enforcement of contracts that are dependent on happening/ non happening of certain contingencies. In other words, if the contract contains terms that specify discharge of parties' obligations under the contract upon occurrence/ non-occurrence of a specified (Force Majeure) event, such cases would fall within the purview of Section 32. A typical example of a Section 32 provision in a contract are the material adverse change (MAC)/ material adverse effect (MAE) clauses which are generally used in M&A agreements, allowing an acquirer to walk away from the deal prior to its closure, upon happening of certain events which result in a MAC/ MAE on the business, condition (financial or otherwise), operations, performance, properties or prospects of the target entity. In order for a party to seek the benefit of a MAC/ MAE provision in relation to performance of its obligations under a contract, an express MAC/ MAE provision is required to be included in the contract and a notification of the occurrence of MAC/ MAE event, within a stipulated time period, will be required to be given in order for a party to seek termination of its contractual obligations.
  2. Section 56: This section delves into the concept of impossibility of performance of contract or frustration of contract, which results in a contract becoming void. While Section 56 envisages impossibility of performance leading to avoidance of the contract, it does not statutorily encapsulate the concept of unforeseen contingencies which result in temporary suspension of performance and resumption of the contract. Unlike a 'Force Majeure' clause where the non-performing party needs to elect or choose to invoke the clause, either by means of a notice or otherwise, frustration of contract under Section 56 operates automatically from the date of the impossibility and puts the contract to an end. Frustration of performance has to be determined only when the unforeseen event is so fundamental that it strikes at the root of the contract and far beyond what was contemplated by the parties when they entered into the contract. It renders further performance impossible, illegal or make it radically different from that contemplated by the parties at the time of signing the contract. Each case has to be determined based on the specific facts, however, the fact that an event makes performance more expensive or more difficult will not be treated as having frustrated the very purpose or object of the contract.

In Conclusion - things to note while invoking Force Majeure pursuant to COVID-19

The Indian Government has also jumped in the 'Force Majeure' clause bandwagon. The Ministry of Finance, Ministry of New & Renewable Energy and other arms of the Government of India have declared 'COVID-19' as a 'natural calamity' within the definition of 'Force Majeure' under the relevant contracts covered under such Ministries/ Government arms. While these clarifications/ notifications are of interpretative assistance, these cannot be held to be binding while interpreting commercial contracts that are outside the scope of such Ministries/ Government arms. The Delhi High Court, in a recent judgment (Halliburton Offshore Services Inc. v Vedanta Ltd. & Anr. (Order in O.M.P (I) (COMM.) No. 88/2020 & I.As. 3696-3697/2020 dated May 29, 2020)) has stated the even though COVID-19 is a 'Force Majeure' event, whether such 'Force Majeure' event is behind the contractual non-performance requires to be determined. The Court held that the 'question as to whether COVID-19 would justify non-performance or breach of a contract has to be examined on the facts and circumstances of each case. Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. The Court would have to assess the conduct of the parties prior to the outbreak, the deadlines that were imposed in the contract, the steps that were to be taken, the various compliances that were required to be made and only then assess as to whether, genuinely, a party was prevented or is able to justify its non-performance due to the epidemic/pandemic.... There has to be a 'real reason' and a 'real justification' which the Court would consider in order to invoke a Force Majeure clause.'

Accordingly, to conclude, a party looking to invoke a Force Majeure must note the following while invoking the Force Majeure provisions in commercial contracts pursuant to COVID-19.

  1. Express Contractual Provisions: An express Force Majeure provision is required in the contract for a party to invoke it.
  2. Rules of Interpretation: Force Majeure clauses are to be narrowly construed and while construing 'Force Majeure' clauses, the contract must be read as a whole. This has been held in various judicial pronouncements, including that of the Supreme Court of India.
  3. Causation: Another key consideration is 'causation'. Depending on the precise wording of the 'Force Majeure' provision in the contract, it is for the affected party to demonstrate that an event of 'Force Majeure' (and not some other factor) delayed performance of the contract or caused the failure in performance of the contract.
  4. Burden of Proof: The onus lies on the party who wants to invoke the 'Force Majeure' clause to establish an existence of such events, circumstances or conditions which result in delayed performance or failure to perform. Once it is established, the burden of proof stands discharged for the stipulated or specified period of 'Force Majeure'.
  5. Duty to Mitigate: Before triggering 'Force Majeure', one must enquire whether there is any alternative way to perform or a best endeavour must be made to mitigate a 'Force Majeure' event before invoking it.
  6. Notification of Occurrence of Force Majeure event: Typically, most of the contracts require a party to notify the occurrence of 'Force Majeure' event, within a stipulated time period, for seeking suspension of its contractual obligations.
  7. Time Period of subsistence of Force Majeure: It has to be kept in mind that the time period of subsistence of 'Force Majeure' event is crucial to determine the extent to which the contractual obligations can be suspended.
  8. In cases of payment related obligations, whether 'suspension' means 'non-payment' or 'deferment' of payment. In contracts where payments have to be made on pre-defined frequency in lieu of receipt of services (for examples, leases, service contracts, maintenance contracts), 'Force Majeure' clauses should be carefully reviewed to determine whether the temporary suspension can be claimed under the contract for 'non-payment of contractual charges' or 'deferment of contractual charges'. Contracts that contain a formula for determining service charges/ lease rents or that depend on minimum guaranteed charges and net sales figures should be reviewed carefully.

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