COVID- 19 COMES UNDER THE CLAUSE OF FORCE MAJURE

 COVID- 19 COMES UNDER THE CLAUSE OF FORCE MAJURE

Currently, 210 countries around the world are passing through the global crisis on account of Covid-19. It has been officially declared as a pandemic by World Health Organisation on March 11, 2020. 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. Soon thereafter, many states in India declared a ‘lockdown’, an emergency measure [under the Epidemic Diseases Act, 1897 and the Disaster Management Act, 2005 (“Disaster Management Act”)] to prevent and contain the spread of SARS-CoV-2, and also issued prohibitory order(s) under Section 144 of the Code of Criminal Procedure, 1973. A stricter lockdown was then imposed by the Central Government. During the lockdown, many businesses temporarily shut for the time being, and consequently, it became difficult, and in some cases impossible, for them to fulfil their contractual obligations.

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 and Section 56 of the Act dealing with frustration of a contract. 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." 

Section 56 of the Indian Contract Act, 1872 reads as follows:

56. Agreement to do impossible act.—An agreement to do an act impossible in itself is void. —An agreement to do an act impossible in itself is void." Contract to do 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.

The essential ingredients of force majeure clauses are as follows:

1. An unexpected/unforeseen intervening event occurred;

2. The parties to the agreement assumed that such an event will not occur;

3. Such an event has made the performance of the obligations under the contract impossible or impracticable;

4. The parties have taken all such measures to perform the obligations under the agreement or at least to mitigate the damage; and

5. 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.

It is pertinent to note that in India, the one of the earliest instances of COVID-19 getting recognised in the realm of contractual law was by the Government of India, Ministry of Finance, and through the Govt. of India vide its Memo No. F. 18/4/2020 PPD dated 19-02-2020 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.

Further, The Ministry of New & Renewable Energy vide Office Memorandum bearing no. 283/18/2020-GRID SOLAR dated March 20, 2020 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, 2020 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.  

Various courts in India have also recognised COVID-19 as force majeure. The celebrated judgment of M/s Halliburton Offshore Services Inc vs Vedanta Limited O.M.P.(I)(COMM.) No. 88/2020 was one of the earliest judgments wherein the High Court of Delhi specifically held COVID-19 to be a force majeure event. The judgment also holds that a force majeure clause has to be interpreted narrowly and if there is a breach from before the COVID-19 period, then the party will not be entitled to take the benefit of the Force Majeure clause. 

Although Indian Courts have not directly ruled on whether an epidemic/ pandemic like Covid-19 is an ‘Act of God’, an argument to that effect can derive support from the decision of the Supreme Court in The Divisional Controller, KSRTC v. Mahadava Shetty, which holds that the expression ‘Act of God’ signifies the operation of natural forces free from human intervention with the caveat that every unexpected natural event does not operate as an excuse from liability if there is a reasonable possibility of anticipating their happening. Similar judgments have also been passed by the Madras High Court and the Kerala High Court.

The party claiming force majeure must establish that it used reasonable efforts to mitigate the effects of the excluded event. The burden is cast on the party seeking to be relieved to establish that the excluded event actually and fully prevented it from performing its obligations under the contract. 

Under many force majeure clauses, the party invoking force majeure must provide notice to its counter party, including (under some contracts) a commitment to identify in the notice the expected duration and effects of the force majeure event excusing performance. In the context of the COVID-19 pandemic, as with some other severe force majeure events, a party may not be able to determine with any degree of certainty the duration of nonperformance or its ultimate effects. As a result, a party that has the notification obligation should consider qualifying the clause in future contracts to make explicit that only good faith estimates need to be provided, and that the estimates have no binding contractual effect and are provided for informational purposes only.

The judgment of the Orissa High Court in Sri Ananda Chandra Behera v. Chairman, Orissa State Electricity Board provides some guidance on the causal link between the force majeure event and the resulting situation by citing, with approval, the decision of the House of Lords in Greenock Corporation v. Caledonian Railway Co., where it was held that:

“…An accident may be an act of God if it has resulted directly from natural causes without human intervention. It is true that in most cases human and natural agency co-operate to produce the result, but the immediate and direct cause is alone to be looked at in determining whether the act is that of God or man. When a ship is cast away in a tempest, this would not have happened but for the act of the owner in sending her to sea but the loss is the act of God for all that.”

A contract had to be performed, notwithstanding the fact that it had become impossible of performance, owing to some unforeseen event, after it was made, which was not the fault of either of the parties to the contract. This rigidity in which the absolute sanctity of contract was upheld was loosened somewhat by the decision in Taylor vs. Caldwell which held that if some unforeseen event occurs during the performance of a contract which makes it impossible of performance, in the sense that the fundamental basis of the contract goes, it need not be further performed, as insisting upon such performance would be unjust.