What is known to exist but is not visible is surrounded by mystery. It excites the imagination and people spin yarns about it. Though that is not true when it comes to novel coronavirus ("COVID-19"), the outbreak of which has been globally reported. COVID-19 has caused worldwide unprecedented disruptions to business operations; and the commercial turmoil continues. The pandemic has impacted the ability of companies around the globe to maintain steady operations and perform their respective contractual obligations.
Perhaps the companies in order to mitigate the impact related to delayed operation and non-performance of the contracts inter alia will take recourse to force majeure clause contained in their contracts. An extraordinary event or circumstance beyond human control such as event described as an act of God (like natural calamity), government restrictions or other extraordinary circumstances which prevent fulfilment of a contractual obligations would qualify as a force majeure event. This article, from the perspective of Indian Law, discusses the extent of immunity offered by a force majeure clause and whether the said immunity can still be claimed when there is no force majeure clause in the contact.
If Force Majeure clause is enshrined in the contract - A classic force majeure clause would require that the disruption of performance be beyond the invoking party's reasonable control and that the event was not reasonably foreseeable. Whether the COVID-19 would qualify a force majeure event will depend on each particular contract i.e. the way force majeure clause has been worded in the contract or what all contingencies have been captured (explicitly or impliedly) in force majeure clause occurrence of which would qualify as a force majeure event. The burden of proof rests on the party invoking the force majeure clause. The said burden can be effortlessly discharged where force majeure clause in the contract explicitly provides for events like epidemics, pandemics or government restriction. However, the situation may become convoluted where a force majeure clause is not explicitly worded and simply uses the term "act of God" or "event beyond the reasonable control of parties". Apart from this, a party's entitlement to the benefit of force majeure clause would depend on the following factors:
- Majority of contracts would require the party invoking a force majeure clause to adequately apprise the counterparty, within a stipulated time, regarding the event which prompted invocation of force majeure clause. Further, the invoking party would be expected to outline an estimation of the impact and duration of effects resulting from the said event.
- There is a possibility that parties have an obligation to mitigate damages. In that case, what deserves consideration is whether there are other means through which a party can perform the contract or whether the party not affected by the force majeure event is obligated to mitigate the damages in some way. Depending upon the terms of a contract, the parties are expected to take reasonable steps.
- Varied consequences of force majeure event should also be considered. For instance, performance of the contract may be suspended during the operation of force majeure event and performance may be suitably extended, the parties may have option of renegotiating and modifying the contract's terms or termination of contract would happen if the force majeure event continues for specific period of time.
- Nature of evidence on which the claim of force majeure would be based is of utmost importance. It is vital that the party invoking the force majeure clause must keep all documents related to the force majeure event, which might be required in case a dispute arises in future. In the present scenario, the said documents may include (i) national and state government notice and guideline imposing restriction of trade, (ii) news articles related to COVID-19 outbreak, quarantines, restricted travel and mandatory shutdown of airports, trains stations and seaports, (iii) cargo booking and freight agency agreement, (iv) cancelled flight or train ticket or anything other documents relating to travel itinerary, and (iv) cancelled visa or rejected visa application.
If contract does not have a Force Majeure clause – This situation may appear daunting, but the same has been well guarded by doctrine of frustration prescribed under Section 56 of the Indian Contract Act, 1872 ("Act") and views adopted by the Hon'ble Supreme Court of India since 1954. In a landmark judgement titled Energy watchdog Vs. Central Electricity Regulatory Commission reported at 2017 (4) SCALE 580, Justice R.F. Nariman of the Supreme Court opined that the event leading to frustration which is relatable to an express or implied clause in a contract, is governed by Section 32 of the Act and if it occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Act. Under the prevailing circumstances, reliance on Section 54 of the Act depends upon the following conditions:
- a valid and subsisting contract between the parties;
- there must be some part of the contract yet to be performed; and
- the contract after it is entered into becomes impossible of performance i.e. subsequent impossibility.
It is imperative to mention that the Indian Courts are according relief on account of subsequent impossibility when it is found that the whole purpose or the basis of the contract has been frustrated by the intrusion or occurrence of an unexpected event or change in circumstances, which was not contemplated by the parties during execution of the contract1 or the performance of the contract becomes impracticable or useless having regard to the object and purpose the parties had in view2.
Apart from the above, the initiatives taken by the Government of India deserve a special mention. Government of India is taking necessary measures in order to prevent further disruption in international trade and commerce by declaring outbreak of COVID-19 as a force majeure event. For instance, Ministry of Finance issued an office memorandum dated February 19, 2020 ("Memorandum") which states that Force Majeure clause can be invoked in Government contracts if there is a "disruption in supply chain due to spread of corona virus in China or any other country". The Memorandum further states that COVID-19 should be considered as a case of "natural calamity". Further gaining strength from the Memorandum, the Ministry of New & Renewable Energy has issued an Office Memorandum dated March 20, 2020 which directs all Renewable Energy implementing agencies of the Ministry of New & Renewable Energy (MNRE) to treat delay on account of disruption of the supply chains due to spread of COVID-19 in China or any other country, as Force Majeure event.
Are we prepared for potential dispute? – Although currently it would be impossible e to ascertain the quantum and extent of damage caused due to the outbreak of COVID-19, it would be prudent for any commercial organization to be adequately prepared to protect their respective businesses from the prospective disputes. Broadly, the following steps are excepted from a cautious business house:
- Promptly notify the counterparty regarding the occurrence of a force majeure event, in the manner provided under the contract.
- Collate all documents related to the force majeure event, as the same would serve as a vital evidence at the time of dispute resolution.
- Ensure a detailed evaluation of the contract and other related aspects by a legal expert.
At Kochhar & Co. we have promptly and effectively transitioned our worldwide teams to working remotely. We are aware of the challenges our clients face as the businesses are being impacted due to COVID-19 and are here to support the necessary support during these unprecedented times. Please feel free to reach us for any questions or concerns you may have.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.