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COVID 19 – FORCE MAJEURE AND LEGAL IMPLICATIONS ON COMMERCIAL CONTRACTS

INTRODUCTION

‘Force Majeure’ is a French phrase which translates to ‘superior strength’. According to the Black’s Law Dictionary, Force Majeure is an event or effect that can be neither anticipated nor controlled.[1] Indian statutes do not specifically deal with force majeure, but the Indian Contract Act of 1872 implies that a contract can be discharged for unforeseen circumstances. It is closely related to the concept of the Act of God, any event beyond a reasonable man. This may include natural calamities such as hurricanes, tornadoes, floods, earthquakes and other perils. Section 32 and 56 of the Indian Contract Act permits the contracting parties to skip their part of obligations in case of impossibility of performance. Such impossibility should be a Force Majeure event. Section 32 says that the contracting can skip performance on the ground of impossibility, and the contract becomes void[2]. Section 56 mentions about ‘frustration’ of a contract which includes three situations:

  1. A contract to do an impossible act in itself is void.
  2. A promisor enters into a contract which later becomes impossible or, by some reason that they could not prevent, the contract becomes void.
  3. A contract is made between parties, and the promisor knows that the act is impossible to perform yet induces the other party to agree. Such a contract is voidable at the other party’s option and is liable to get compensation.[3]

In the case of Satyabrata Ghose v Mugneeram Bangurn & Co. & Anr[4], it was determined that frustration is not limited to physical impossibility. The court stated that the term ‘impossible’ used in Section 56[5] does not limit the scope of the section to physical impossibility or require the impossibility to be literal and that it should be treated as an impossibility of performance if an unprecedented event or change in circumstances completely defeats the purpose for which the contract was entered into or the primary goal for which the parties bargained to enter into the agreement. As a result, the contract must be viewed as frustrated if the object of the agreement is lost.

TREATING COVID-19 AS A FORCE MAJEURE EVENT

Covid-19 is a pandemic disease which caused several deaths across the world. Its impact was also seen in public health as well as businesses. The covid-19 pandemic created an emergency in the country. The government invoked the Disaster Management Act of 2005 to implement a lockdown. The word ‘disaster’ is used for natural calamities, which denotes that Covid-19 is a calamity. Thus, Covid-19 can be treated as a ‘force majeure’ event and contracting parties can be excused from their obligations on the ground of a global pandemic. Some conditions need to be considered to include Covid-19 as a force majeure event:

An Unexpected Event: The event is considered a ‘Force Majeure Event’ if it prevents the parties from performing their obligations in the contract because of physical impossibility or the primary objective of the contract fails. If the party successfully establishes that the Covid-19 pandemic prevented the performance by total restraint on the supply of the subject matter.[6]

Economic hardship alone cannot invoke force majeure defence: The economic downturn brought on by the COVID-19 pandemic may have ramifications for the contracting parties, including higher contract performance costs. However, a party must be allowed to perform a contract due to simple financial difficulties. The courts will not consider the Force Majeure claim if the party can perform the contract while incurring additional costs. Therefore, if the party chooses Covid-19 as a defence, he must demonstrate that the occurrence rendered the performance impossible and not just difficult from a financial standpoint.[7]

The Unforeseeable event must not be temporary: The nature of the event should be such that it cannot be anticipated by a reasonable man in the near future while entering into the contract. The defence of force majeure is not available for temporary events which may be foreseeable. A party who asserts that the government’s lockdown announcement and the pandemic prevented him from fulfilling his obligations under a contract need not be treated as having been frustrated by the court because the lockdown is only temporary. The contract can be fulfilled once lockdown orders have been lifted. However, before making a decision, courts must consider the circumstances and the nature of the contract. They cannot just assume that a contract has been broken. Because the Covid-19 pandemic crisis was unexpected and out of the parties’ control, the Force Majeure defence is available when time is of the essence of the contract and performance is rendered impossible.

Proximity: Any event which causes the impossibility of performance must not be self-induced. The test to determine whether the event is self-induced is a ‘causal test’. The court considers the proximity of the supervening event. Whether the event has an immediate impact on the performance of the contract must be considered. Similarly, the Court needs to assess whether the pandemic lockdown has an immediate effect on the performance of commercial contracts or not.

Prior notice to mitigate loss: The provision that a non-performing party must give prior warning to the other party to avoid the damage if he intends to benefit from the contract’s Force Majeure clause is typically stated in commercial contract deeds. These conditions must be met to invoke the Force Majeure clause, and failure may prevent the party from doing so.

IMPLICATIONS OF COVID-19 ON CONTRACTS

The Finance Ministry, in the year 2020, through an office memorandum, acknowledged the Covid-19 situation as a natural calamity, and force majeure may be invoked following the due procedure.  The inclusion of the Force Majeure clause will free the contracting parties from their respective obligations. However, their liabilities will not be excused entirely, and the suspension will last until the force majeure situation resolves. The Ministry, considering the lockdown that affected the transportation, manufacturing and distribution of goods and services, made sure that no sanction can be imposed for delay or failure in fulfilling obligations in commercial contracts.[8]

The contract’s provisions will determine whether a party can invoke force majeure to extend, suspend, or frustrate the performance of the contract.[9]

CONCLUSION

Covid-19 is one of the worst pandemics the 21st century has seen. It is treated like any other natural calamity which can potentially interrupt the performance of contracts and, thus, can be brought under the ambit of Force Majeure. This pandemic can be used as a defence to omit contractual obligations for the period. It largely depends upon the nature of the contract. A person can be freed from his liability entirely only when time is the essence of the contract. However, force majeure remains a defence for non-performance. We have seen in earlier epidemics how various governments across the country have excused contractual liabilities by invoking the force majeure clause. While drafting contracts, it is essential to note whether a force majeure clause has been included. It can save both the contracting parties from loss.

Author(s) Name: Srijani Mazumder (XIM University, Bhubaneshwar)

Reference(s):

[1] Poorvi Sanjanwala and Kashmira Bakliwal, ‘What is force majeure? The legal term everyone should know during Covid-19 crisis’ The Economic Times (October 20, 2020) <https://economictimes.indiatimes.com/small-biz/legal/what-is-force-majeure-the-legal-term-everyone-should-know-during-covid-19-crisis/articleshow/75152196.cms?from=mdr> accessed 26 June 2023

[2] Indian Contract Act 1872, s 32

[3] Indian Contract Act 1872, s 56

[4] Satyabrata Ghose v Mugneeram Bangur (1954) SC 44

[5] Indian Contract Act 1872, s 56

[6] Archana K, ‘Implications of Covid-19 Pandemic on Contractual Obligations in India’ (2021) 3(1) CMR University Journal for Contemporary Legal Affairs <https://www.cmr.edu.in/school-of-legal-studies/journal/wp-content/uploads/2022/02/10-Implications-of-Covid-19-Pandemic-on-the-Contractual-Obligations-in-India.pdf> accessed 19 June 2023

[7] Ibid

[8] Samiksha Gupta, ‘Covid 19- Force Majeure and Legal Implications on Commercial Contracts’ (Mondaq, 27 November 2021) <https://www.mondaq.com/india/litigation-contracts-and-force-majeure/1135322/covid-19–force-majeure-and-legal-implications-on-commercial-contracts> accessed 21 June 2023

[9] Ibid