COVID-19 was categorized as a pandemic by the World Health Organization (“WHO”) on March 11, 2020. There is a significant impact on the business sector around the globe. In this era of open borders and extra-territorial business activity, this pandemic can lead to an enormous slowdown of the global economy. One of the apprehensions caused by the consequences of COVID-19 is the difficulty faced by a business or corporate sector to fulfil their obligations under a contractual relationship with another entity. In such circumstances, most business entities try to invoke the force majeure (“FM”) clause to avoid their liability. However, a mere qualification of COVID-19 as an event of FM does not provide any relief to the business entities. In this article, the authors try to venture into this question of force majeure and its application amid COVID-19 in a contractual relationship.
Laws Applicable to Existing Agreements Amid COVID-19.
With the COVID-19 outbreak around the globe, the performance of most of the existing agreements between business sectors is at stake and this raises serious legal concerns. The fate of such existing agreements could be decided by the force majeure clauses in a contract. Force majeure has been defined by Black’s Law Dictionary as an event or effect that can be neither anticipated nor be controlled and is usually governed by Section 32 of the Indian Contract Act, 1872. Most of the companies have an FM clause which contains a list of events which may prevent, delay or render the performance of the obligations impossible. Some of these events can be categorized as acts of God including fire, drought, volcano, epidemic, earthquake etc. However, in the case of Energy Watchdog v. CERC, it was clearly held that the FM clause has to be strictly interpreted hence the provision would not be attracted unless the event falls clearly within the events provided in the clause.
The sine qua non to invoke Section 32 is to determine whether COVID-19 qualifies as an FM event. This can be determined only by looking into the FM clauses in the contract. The situation can give rise to three possible scenarios. First, there is a contract which has clearly listed epidemic or pandemic in the FM clause. In such a case, the affected party can easily invoke Section 32 since Covid-19 has been declared as a pandemic by the WHO and the Indian Government via an office memorandum. Second, there is a clause which has explicitly excluded pandemic as an FM event in the clause. In such situations, the parties cannot claim Covid-19 as an FM event. The law has been settled by Satyabrata Ghose v. MugneeramBangur&Co case, which states that when the parties themselves contemplate the continuation of the performance of contract despite any event of FM nature, the obligations continue even when the event happens. Third, in case of any ambiguities, when pandemic has neither been listed explicitly but words like “any other force majeure events” has been used, Courts have followed a strict rule of interpretation and no claim can be made in such a case.
What happens in an absence of a FM clause?
In case of the absence of an FM clause, the affected party can seek relief under Section 56 for discharging the contract by invoking the doctrine of frustration. However, for invoking Section 56, the parties have to show that due to COVID-19, the performance of the contract has become impossible or the performance would be impracticable or useless for the object and purpose of the contract. It places a higher burden on the parties and proving a mere economic difficulty or loss in business would not lead to the invocation of this doctrine.
Does COVID-19 qualify as an FM Event with respect to all contracts?
Although Covid-19 has been declared as a pandemic, it does not mean that COVID-19 would qualify as an FM event with respect to all contracts. Mere qualification as an FM event would not discharge all the contracts. The application would rather depend on the nature, terms, facts and circumstances of each case.
For instance, a contract to supply a car on 1stApril, 2020 would not attract the FM clause, even if a pandemic was included in the FM clause. This is because there is merely a delay in the performance and no impossibility of performance of the contract. With every FM clause, there is a different level of impact on the performance for the FM clause to trigger. Such impacts could be in the form of prevention, hindrance or delay in the performance of the contract and all of which require a varying degree of onus probandi. For instance, the onus required to prove a delay in the performance of the act shall be less than to prove that the performance has become impossible. Thus, there cannot be a straitjacket formula for the invocation of Section 32 to discharge the contract rather it largely depends on the nature and terms of each contract.
What is the difficulty in the application of such Laws?
Although both Section 56 and 32 relates to discharging of contract due to some unforeseeable circumstances, it becomes very difficult to determine whether a contract falls within Section 32 or 56. Although the Supreme Court has awarded a strict interpretation to FM clause, the difficulty would arise due to the use of words like “all other events which are beyond human control”. This opens the scope of liberal and wide interpretation and can often cause confusion with respect to the applicable laws in such a scenario. Moreover, similar confusion can be caused in case of the implied condition, where the non-performance of such a condition can attract either Section 32 or 56. Thus, it is very important to have clear and precise conditions listed in the FM clause.
After the end of this pandemic, it is very likely that the companies would be hit by a slew of litigation for the non-performance of their contractual obligations. Therefore, to avoid a catch situation and the surrounding ambiguity in the laws applicable during such crucial times, the following suggestions should be adopted.
- Every company or business firm should have a precise wording of the FM clause and shall expressly cover events like epidemics, pandemics, and any other likely events which would qualify as force majeure within their FM clause.
- Use of vague phrases like “any other force majeure events”, “any events beyond human control” should be minimized or avoided as it creates ambiguity and makes the application of the FM doctrine optional. This could have a detrimental effect on the parties.
- Before invoking the doctrine of frustration under Section 56, it is suggested that the parties exhaust all possible alternatives to fulfil the contract. Even at the instance of a loss incurred by the firm, they should explore the performance of the contract because they cannot be excused due to commercial hardship.
- Compliance with all the procedural requirements of notice and consultation etc. is suggested, thereby leaving no scope for dismissing the pleading on grounds of the doctrine of unclean hands.
The abovementioned measures would be helpful to remove uncertainties with respect to contracts during COVID-19. This would reduce the litigations in future and infuse certainty and transparency in business transactions.
ABOUT THE AUTHORS
Harsha is a third-year student at National National University, Jodhpur. She has keen interest in taxation law and corporate law.
Suvam Kumar is a fourth-year BA LLB student from National Law University, Jodhpur. He has a keen interest in Commercial Law.
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