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COMMERCIAL CONTRACTS AND THE ROLE OF THE FORCE MAJEURE CLAUSE DURING LOCKDOWN

The nationwide lockdown as a consequence of the COVID-19 crisis has gravely impacted both small and large businesses across the country. The spread of the novel coronavirus globally has impaired some of the world’s strongest economies. In this era of globalisation and unprecedented amounts of international trade, lockdowns in large parts of the world have left suppliers and contractors with no possible means of honouring their contractual obligations within time. In such a situation, more and more parties are trying to seek protection under the force majeure clause to obtain some temporary relief from performance. This article discusses some of the key aspects related to force majeure and the scope of its applicability to the current crisis.

1. What is force majeure? Force majeure literally means superior strength or an act of god. This doctrine is invoked in cases of unforeseeable circumstances which prevent a party to a contract from performing their contractual obligations

The Supreme Court of India has given a broad meaning to the term, holding that “...The expression "force majeure" is not a mere French version of the Latin expression "vis major". It is undoubtedly a term of wider import. Difficulties have arisen in the past as to what could legitimately be included in "force majeure". Judges have agreed that strikes, breakdown of machinery, which, though normally not included in "vis major" are included in "force majeure". An analysis of rulings on the subject shows that where reference is made to "force majeure", the intention is to save the performing party from the consequences of anything over which he has no control.” [See (1961) 3 SCR 1020: AIR 1961 SC 1285].

Further, the Ministry of Finance states that Force Majeure (FM) means extraordinary events or circumstance beyond human control such as an event described as an act of God (like a natural calamity) or events such as a war, strike, riots, crimes (but not including negligence or wrong-doing, predictable/seasonal rain and any other events specifically excluded in the clause). An FM clause in the contract frees both parties from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract. An FM clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the FM. The firm has to give notice of FM as soon as it occurs and it cannot be claimed ex-post facto [See Clause 9.7.7, Manual for Procurement of Goods 2017, issued by Dept. of Expenditure, Ministry of Finance, Govt. of India].

Thus, parties to the contract may have this clause as part of their contract agreement which lists unforeseeable circumstances beyond their control wherein non-performance or delayed performance by one or both parties may be excused to a limited extent should those circumstances arise.

2. Is the COVID-19 crisis and the consequent lockdown considered force majeure? Keeping in mind the meaning of force majeure, it does appear that the global pandemic COVID-19 contains the requisite elements to invoke this doctrine: it is an unforeseeable circumstance, beyond the control of parties involved, which is leading to parties being unable to perform their contractual obligations.

On February 19, 2020, the Finance Ministry clarified that disruption of supply chains due to the spread of the novel corona virus in various countries would be considered a case of natural calamity and covered under force majeure, and the doctrine may be invoked where appropriate following due procedures [See Office Memorandum No. F-18/4/2020-PPD, issued by Dept. of Expenditure, Ministry of Finance, Govt. of India].

As recently as on April 20, 2020, a single-judge bench of the Delhi High Court also opined that the countrywide lockdown, which came into place on March 24, 2020 was, prima facie in the nature of force majeure. Such a lockdown was unprecedented, and was incapable of having been predicted either by the respondent or by the petitioner, according to the Court. [See Order dt. 20.04.2020, O.M.P. (I) (COMM) & I.A. 3697/2020, Delhi HC].

The nationwide lockdown as a consequence of the COVID-19 crisis, therefore, is to be considered in the nature of force majeure, and appropriate reliefs will accordingly be available.

3. Who can benefit from the force majeure clause? Whether a party will be able to take advantage of the force majeure clause depends greatly on the particular terms of the contract in question. For instance, it appears that in a lot of contracts for supply of goods, the provision is one-sided and only the supplier can invoke the clause. The role of the buyer being limited to collection and payment, does not permit them to invoke the force majeure clause. This can be particularly difficult in times such as the present where income of procurers has been greatly severed due to the absence of sales.

In a recent order, the Bombay High Court also refused to grant benefit of force majeure to local importers of products from South Korea, observing that the remedy was only available to the Respondent foreign suppliers, and not the procurers [See Order dt. 08.04.2020, Commercial Arb. Pet. (L) No. 404-408/2020, Bombay HC].

Therefore, a particular party may only be entitled to seek relief under force majeure if their contract specifically provides that they are entitled to do so, and such relief will depend on the facts of each case.

4. Do parties with no force majeure clauses in their contracts have no form of relief? Not all contracts will have a specific force majeure clause within them. This does not mean that parties to those contracts have no legal recourse in these times. In cases of such a contract, parties may turn to the “doctrine of frustration” under the Indian Contract Act.

As per the doctrine, if 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, then that contract becomes void [See S. 56, Indian Contract Act 1872]. The spread of the novel corona virus and the consequent lockdown meet this definition as they create circumstances wherein the performance of certain contracts after they have already been formed has become impossible, and in some cases even unlawful, during the lockdown.

Thus, parties who do not have a force majeure clause within their contract may be able to seek relief under the doctrine of frustration if their circumstances meet the requirements laid down in Section 56.

 

By Shiv Mangal Sharma

Advocate Supreme Court