Impact Of COVID-19 On Business Transactions Following Lockdown - Litigation, Contracts and Force Majeure

The present FAQs cover the following:

Force Majeure
Performance of Contracts
Law of Limitation
Impact on Cheque Bounce Cases
Impact on Insolvency and Bankruptcy Code and proceedings

A. Force-Majeure

1. What is the meaning of the term "force majeure"?

The impossibility of performing contractual obligations is directly related to the happening of such events or circumstances;
The circumstances were not within the reasonable control, direct or indirect, of the parties and;
The party/parties had taken all reasonable care and/or prudent steps to ensure the performance of contractual obligations, and still failed to do so.

Force Majeure in general parlance means any event or circumstance (or combination thereof) that wholly or partly prevents or causes unavoidable delay in the performance of contractual obligations or makes the performance of the obligations unlawful.

To claim an event of force majeure, the following ingredients must be established:

2. Whether the outbreak of COVID-19 can be considered as a "force majeure" event?

To determine whether a party may claim that the spread of COVID-19 amounts to an event of "force majeure", the following vital aspects are to be looked upon:

Whether the contract has a "force majeure" clause or not?
Whether the "force majeure" clause includes events like an epidemic/pandemic/virus outbreak, in expressive terms?
Whether the performance of the contractual obligations has become impossible directly due to the outbreak of COVID-19?
Whether the parties took all the reasonable and prudent steps to ensure the performance of the contractual obligations, despite the occurrence of the force majeure event?

If the answer to the all the four questions is "yes", in that case we are of the view that outbreak of COVID-19 can be considered as a force majeure event subject to terms and circumstances of the contract.

In the event the contract does not contain a "force majeure clause" or does not define the pandemic/lockdown to be an event of "force majeure", then the contract will be governed by the provisions of Indian Contract Act, 1872, as well as the terms of the contract and intent of the parties.

3. Whether the lockdown announced by the Government can be considered as a "force majeure" event?

The government had issued strict directions imposing country-wide lockdown, restricting the movement across state-borders and closing down various factories and businesses. As a result, any activities involving manufacturing, supply, delivery, traveling, construction, etc. (expect for essential services) have been exempted from the lockdown, all others are deemed to be unlawful and therefore any delay/default in performing the contractual obligations during the period of the lockdown may be considered as a "force majeure" event.

4. Can a force majeure clause be implied under a contract?

A force majeure clause cannot be implied under a contract. In the event the contract does not either provide for a force majeure event or does not expressly provide for "pandemic" to be a force majeure event, in that case the party may seek refuge under Section 56 of Indian Contract Act to prove that the performance of the contract has become impossible/unlawful.

Succinctly, if epidemic/pandemic is defined as an event of force majeure in the contract, the parties can take refuge under the force majeure clause. Otherwise, the parties will have to satisfy the conditions of Section 56 of Indian Contract Act to establish that it was impossible/unlawful for the parties to perform their contractual obligations.

5. Upon whom does the burden of proof lie to establish a force majeure event?

The burden of proof lies upon the party asserting the force majeure event as a defence for non-performance of its contractual obligations.

6. What is the effect on the contractual obligations of the parties who enter into a contract during the outbreak of COVID-19 while being fully aware of the situation?

If the parties enter into a contract knowing fully well that due to the spread of COVID-19 the States are in a temporary lockdown, then in the event any of the parties commits default in performing their contractual obligation, it cannot claim refuge under force majeure as the parties were aware of the risks which was foreseeable at the time when they entered into the contract.

7. What is the legal consequence of non-performance of contractual obligations that have become impossible to perform due to government guidelines/restrictions issued to curtail the spread of COVID-19?

In case the contractual obligations become impossible to perform due to the restrictions imposed by the government, its legal consequence is that the non-performance will be considered as an event of force majeure unless the contractual obligations are relating to "Essential services".

However, it is important to note that such a claim may be sustainable only during the time period for which the relevant guidelines are in effect and not before or after that.

8. Whether the obligation to make payments under the contract can be delayed or withheld due to the lockdown?

No. The obligation to make payments under the contract cannot be delayed/withheld due to the lockdown. It has to be kept in mind that the banking system is effectively functional. Considering the same, the party defaulting in making timely payment can be held liable for interest on delayed payments and other consequences.

9. Whether a force majeure event is time specific or parties can take refuge for the entire period the pandemic continues despite lifting of lockdown by the Government?

The parties to a contract cannot take refuge of a force majeure event to justify non-performance of the contractual obligations merely on account of the outbreak and continuation of COVID-19 even after the lockdown period is over. In order to take refuge, it is strictly to be proved by the defaulting party that:

The time period within which the obligation was to be discharged was physically impossible/unlawful due to the outbreak of COVID-19; and
It was not merely onerous/expensive/inconvenient/burdensome but specifically impossible and/or unlawful to perform; and
The defaulting party took all the reasonable steps to discharge the contractual obligation during the specific time period despite that it was still prevented from discharging the contractual obligation, wholly or partly.

10. What are the consequences of a force majeure event?

Depending upon the terms of the contract, triggering of the force majeure clause may result in immediate termination of the contract. However, the parties may mutually decide that an additional time period may be provided for performing the contractual obligation; or may decide to put the contract on hold till the event is over or resolved; or such other stipulation as the contract may provide for.

11. In the event the parties are facing practical difficulties in performing their contractual obligations due to the lockdown, what steps need to be taken by the parties to mitigate the losses?

The most important step to be taken is to immediately issue a notice to other party to the contract specifically setting out:

The nature of the unforeseeable events which have made it impossible for the affected party to perform its contractual obligations;
Estimated time period till when the affected party will not be able to perform its contractual obligations;
Inform the other party of all the steps taken by the affected party to perform its obligations.

12. Company A is receiving letters from parties invoking force majeure or communicating the intention to invoke it. How should company A deal with such letters. Whether such letters need to be replied?

In the event Company A receives letters/notice from the affected party invoking force majeure, Company A should respond to such letters appropriately after considering the terms of the contract and assessing the legal implications whether or not there is such a situation leading to force majeure condition or not.

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The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.