Lucknow, UP, India, 226028

CAN ENTITIES HIDE BEHIND THE WALL OF FORCE MAJEURE?

afng

CAN ENTITIES HIDE BEHIND THE WALL OF FORCE MAJEURE?

The world has faced many disasters like tsunami, earthquakes, and many other pandemics like Malaria, Tuberculosis, Leprosy, Cholera but the recent Pandemic COVID-19 has become the reason that has ruined not only lives but also businesses, private and public sectors. On 11th March 2020, The World Health Organisation had declared Covid-19 as a pandemic [1]. Due to which lockdown was imposed in most of the cities resulting in loss to society at large, it not only ruined the social life of individuals in many countries but also the economy of the country at large. On 22nd March 2020 [2], the Government declared a complete lockdown, resulting in the shutting down of all the businesses, government departments, private sectors, factories except for essential commodities. This leads to huge economic loss to the country. On one hand, the economy was falling, while on the other hand people were using this lockdown to escape the duty from their civil contracts. Here comes the concept of Force Majeure.

DEFINITION OF FORCE MAJEURE

According to Merriam Webster,

  • A superior or irresistible force
  • An event or effect that cannot be reasonably anticipated or controlled.

FORCE MAJEURE CLAUSE IN A CONTRACT

Any party shall not be held liable for delay in performing or failure in performing the fundamental or any certain part of any contract for the period of such delay or failure is-

  1. Beyond the reasonable control of the party
  2. Could not reasonably have been  foreseen, but

Parties will not be excused for failure or delay resulting from only general economic conditions or other general market effects.[3]

The Force Majeure clause has its origin in French. This clause is a prevention clause that helps the party to escape from their liability and contractual obligations in cases where nothing can be done to perform the contract. The defaulting party has been given protection under this clause. Section 56 of the Indian Contract Act deals with a similar scenario i.e. Impossible Contract. That explains about a contract, to do any act which afterward gets impossible to do, due to the reason for becoming impossible is considered as Void, here in this serious situation of Covid-19 this clause has been invoked. Pameshwari Das Mehra v.Ram Chand Om Prakash [4] explained the principle as,

“It is clear that if there is an entirely unanticipated change of circumstances the question will have to be considered whether this change of circumstances has affected the performance of the contract to such an extent as to make it virtually impossible or even extremely difficult or hazardous. If that be the case, the change of circumstances not having been brought about by the fault of either party, the courts will not enforce the contract.”

But the question that arises here is whether the global pandemic Covid-19 had invoked the Force Majeure clause in India? Whether this situation is considered as an impossible situation, where people can avoid their contractual obligation?

Before invoking the Force Majeure clause, three points must be considered 1) whether the situation or clauses are in that manner which proves that the contract is impossible to perform. 2) Temporary Test: temporary test must be considered as to see the situation is temporary in nature or not. 3) the most important point that requires a huge focus is that a lot of people will like to invoke the Force Majeure clause on the price aspect, that the price is feasible for that business or not. Here the above-mentioned two points the strong point to be taken under consideration but the point is the weakest of all. Considering it as the want of the public on a large scale.

In India, there is no written rule for Force Majeure situation, but there are certain judgments where this clause has been invoked. Moreover, in the recent notification No. F. 18/4/2020-PPDin the Official Gazette, the government had notified that:

“A doubt has arisen if the disruption of supply chains due to the spread of the coronavirus in China or any other country will be covered in the Force Majeure Clause (FMC). In this regard, it is clarified that it should be considered as a case of natural calamity and FMC may be invoked, wherever considered appropriate, following the due procedure as above.” [5]

The significant point to be noted is that this memo has given access and rise to invoke Force Majeure Clause in the contracts depending upon the supply chain. But the judiciary will not give easily rise to this clause, the major points that have been put in the observations will be

1) whether the force majeure clause applies to the particular contract or not? and

2) whether this global pandemic had affected the basis of the particular contract? This memo clearly states a very limited region will be covered under Force Majeure. It is entirely dependent on the Indian Judiciary to decide whether the contract falls under this or not.

CASE STUDIES

M/S Haliburton Offshore Services Inc. Vs Vedanta Limited & Anr.[6]

 A bench headed by J. C. Hari Shankar implemented a restrain on Vedanta from invoking guarantees of Haliburton on eight banks till 11th may. He said;

“…The injunction presently being granted, it is reiterated, is pure as interim in nature, and is being granted only in view of the completely unpredictable nature of the lockdown, and its sudden imposition on 22nd march, 2020, of which the petitioner could not legitimately be treated as having been aware in advance.”

In-Office Memorandum bearing no. 283/18/2020-GRID SOLAR, dated: March 20, 2020

3.b “The Renewable Energy implementing agencies may grant a suitable extension of time for projects, on account of coronavirus, based on evidence/ documents produced by developers….”

It has termed the occurrence of Covid-19 as a Force Majeure.

Rural FairPrice Wholesale Ltd. & Anr v. IDBI Trusteeship Services Ltd. & Ors. [7]

Hon’ble High Court of the Bombay while understanding the situation of Covid-19 and recognizing the market situation that how Share Market had been collapsed, issued an Interim Order restraining the bank from acting upon the sales notices. Also, the Bombay High Court directed to withdraw any pending sale order for pledged shares until a new order has been passed.

Indirajth Power Private Ltd vs Union of India & Ors. [8]

Delhi High Court in this case observed that there is no need to grant an injunction to the petitioner. Despite the extension provided to the petitioner of 12 months, could not fulfill its obligation. The court refused to grant relief, observing that the terms of the contract were not affected by the lockdown.

CONCLUSION

Application of the rule of Force Majeure in this crucial point of time of Pandemic is required for the Justice in the society. Yes, the greed of human beings and profit-making motives will try to find the loophole in their contract and try to escape their liabilities and obligations. The court must analyze each case profoundly. In deeper scrutiny, it is found that there are no specific principles concerning the applicability of Force Majeure. There are few things to check in a contract before applying force majeure:

  • Whether there is a clause of force majeure or not? If yes, then section 32 of the Indian Contract Act will be attracted.
  • If not, then section 56 of the Indian Contract Act will be attracted and in this case, few points should be taken into consideration, which are
  • Whether the contract allocates the risk of any particularly occurred event?
  • Whether a fundamental change in the contractual obligation has arisen?
  • Whether this fundamental change is due to the fault of any party to the contract or not. If yes, then Force majeure will not be attracted.
  • Mere difficulty in fulfilling the obligation of the party will not be the factor for the imposition of Force Majeure.

The Covid-19 lockdown has shaken the fundamental clauses of any civil contract, imposing Force Majeure will definitely bring some justice.

Author(s) name: Ritika Saxena (Ramswaroop Memorial University, Lucknow)

References:

Image

[1] https://www.pharmaceutical-technology.com/news/who-declares-covid-19-pandemic/

[2] https://economictimes.indiatimes.com/news/politics-and-nation/india-will-be-under-complete-lockdown-starting-midnight-narendra-modi/articleshow/74796908.cms?from=mdr

[3] https://www.contractstandards.com/public/clauses/force-majeure

[4] Pameshwari Das Mehra v. Ram Chand Om Prakash, AIR 1952, Punj 34,38.

[5] https://www.doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf

[6] 29th May. 2020, O.M.P (I) (COMM.) No. 88/2020 & I. As. 3696-3697/2020

[7] Interim Application No. 1 of 2020 in Commercial Suit (L) 307 of 2020

[8] W.P.(C) 2957/2020 & Cm Nos. 10268-70/2020 (URGENT)