Shelter Under ‘Force Majeure’ Clause in COVID-19 Times

Due to the continues lockdown by the Central Government to contain the spread of Novel Coronavirus (COVID-19) pandemic, there is a major blow to the all industries in India and the World over. Not only are MSME’s facing the brunt of present situation but even large corporates are facing difficulties in performing its day to day businesses will be left with no other alternative but to take shelter under the force majeure clause.

As per Black's Law Dictionary the meaning of the word "Force Majeure" is - An event or effect that can be neither anticipated nor controlled. In literal sense the “Force Majeure” translates from French as a “superior force.” Force Majeure event can be described as an act of god, natural calamity, war, strike, riots, crimes, etc.

A Force Majeure clause in the contract exempts both parties from their contractual liability or obligation when prevented by such an unforeseeable event from fulfilling their obligations. A Force Majeure clause does not always except a party from non-performance, but only suspends it for the duration of the Force Majeure event. However, the same has to be communicated by the party and cannot be claimed ex-post facto.

The Hon’ble Supreme Court of India in Energy Watchdog and Ors. v/s Central Electricity Regulatory Commission and Ors.observed that "Force majeure" is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied clause in a contract, it is governed by Chapter III of the act dealing with contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs de hors the contract, it is dealt with by a Rule of positive law under section 56 of the Act. Sections 32 and 56 are set out herein:

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.

56.  Agreement to do impossible act - 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 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.”

Under common law, the agreement to do an impossible act is known as “Doctrine of Frustration”. In Satyabrata Ghose v/s Mugneeram Bangur & Co. and Anr.it was observed by the Hon’ble bench:

"........ the doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of section 56 of the Indian Contract Act”.

In Tandrin Aviation Holding Ltd. v/s Aero Troy Store LLC. And Ors.it was observed by England and Wales High Court that “the extent that there may be some overlap between the operation of force majeure clauses and the doctrine of frustration, Lord Simon made clear in National Carriers Ltd. v. Panalpina (Northern) Ltd that an increase in the mere expense or onerousness of the contract cannot constitute frustration:

"Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance."

The Hon’ble Supreme Court of India in various judgments has dealt with different events in the contracts

which had a Force Majeure Clause:

1)      In relation to performance contracts -

Energy Watchdog and Ors. v/s Central Electricity Regulatory Commission and Ors.it was observed that neither was the fundamental basis of the contract dislodged nor was any frustrating event, except for a rise in the price of coal. Alternative modes of performance were available, albeit at a higher price. This does not lead to the contract, as a whole, being frustrated. Where the fundamental basis of the  contract  remains  unaltered,  an  unexpected  rise in  the  price  will  not  absolve  the  party  from performing its part of the contract as when they enter into a contract, they take such risk knowingly. Force Majeure clauses are to be narrowly construed and a mere rise in price rendering the contract more expensive to perform will not constitute Force Majeure.

In Treitel on Frustration and Force Majeure, 3rd edition, the learned author has opined, that the cases provide many illustrations of the principle that a force majeure clause will not normally be construed to apply where the contract provides for an alternative mode of performance. It is clear that a more onerous method of performance by itself would not amount to a frustrating event. The same learned author also states that a mere rise in price rendering the contract more expensive to perform does not constitute frustration.”

However, in Hindustan Steel Works Construction Ltd. vs Tarapore & Co. and Ors., the Hon’ble Supreme Court of India referred to a foreign case of “Itek Corporation. v. The First National Bank of Boston 566 Fed Supp 1210. In that case the underlying contract had become impossible of performance, because of \'force majeure\'. It was an event subsequent to the execution of the contract. Yet injunction was granted by the Hon’ble Court on the ground that the plaintiff had no adequate remedy  at  law  and  the  allegations  of  irreparable  harm  were  not  speculative  but  genuine  and immediate and the plaintiff would have suffered irreparable harm if the request for relief was not granted.”

2)      In relation to price escalation and costs –

In Parsa Kente Collieries Limited vs Rajasthan Rajya Vidyut Utpadan Nigam Limited, as per the agreement there was a specific clause regarding the price escalation every year as per the formulae mentioned in the agreement, commencing from the date of commencement. However, the date of commencement was extended due to Force Majeure as there was a delay of 21 months in obtaining the forest clearance and environmental clearance. The arbitrator passed an award stating that though the

date  of  commencement  of  supply was  extended,  there  was  no  corresponding amendment  in  the relevant clauses of the agreement with respect to price escalation. There was no specific agreement wherein the supplier would supply the coal at the same price, without any price escalation in scenario where date of commencement was extended due to Force Majeure. The Hon’ble Supreme Court of India upheld the contention of the arbitrator.

3)      In relation to extension of bank guarantee -

In Mahatma Gandhi Sahakra Sakkare Karkhane vs National Heavy Engg. Coop. Ltd. and Ors.it was observed that “if the period of agreement is extended due to Force Majeure or sellers not fulfilling their obligations under the agreement or for any other reasons whatsoever, sellers shall have such guarantees extended upto the corresponding extended period and failure of the sellers to do so will amount to a breach of the contract and in no case the extension of the period of the contract shall be construed as waiver of the right of the purchasers to enforce the guarantee.”

During the present period of lockdown, the Bombay High Court and Delhi High Court respectively have passed following judgments in relation to invocation of Force Majeure clause –

1) Standard Retail Pvt. Ltd. vs. M/s. G.S. Global Corp & Ors. [LSI-257-HC-2020(BOM)] tagged along with other Commercial Arbitration Petitions –

The Petitioner approached the Bombay High Court with the view that due to COVID-19 and lockdown declared by Central/State Government, wherein, its contract with the seller who shipped the supply of steel from South Korea should be considered as terminated as unenforceable on account of frustration, impossibility and impracticality. The Petitioner sought ad-interim reliefs to restrain the supplier from encashing the Letters of Credit. Upon interpreting the Force Majeure clause in the present case the High Court held that the clause was only applicable to the seller and the same cannot come to aid of the Petitioner. The High Court further held that distribution of steel was declared as an essential service and there were no restrictions on movement of vehicles and manpower on all ports. The fact that Petitioners would not be able to perform its obligations so far as its own purchasers are concerned and/or it would suffer damages, is not a factor which can be considered and held against the seller. In light of the above, the ad-interim relief was rejected.