The outbreak of COVID-19 has caused havoc across the world. Apart from its impact on the health and well-being of over half a million people in the world, COVID-19, a declared pandemic has caused significant disruption in the day-to-day functioning of businesses. To curb the spread of COVID-19, governments around the world have imposed nation-wide lockdowns, which have effectively halted the supply chain and distribution of businesses. The predominant sectors that have been affected by this chain of events are the manufacturers and suppliers of electronic companies, pharmaceutical, and energy equipment companies owing to their substantial dependence on China for raw materials and manufacturing. Additionally, even the aviation, tourism, shipping, transport, commercial vehicles, and real estate sectors are severely impacted by the halt in production and the nation-wide lockdown in India.
To cater to unforeseen situations like this, a Force Majeure clause is often incorporated in commercial contracts. A Force Majeure clause essentially states that on the occurrence of a specified unlikely event that is outside the control of the parties and renders the execution of the contract significantly or wholly, impossible or unreasonable, the party will not be held liable for non-performance.
Force majeure encompasses any event or condition, not existing as of the date of signing the contract that is not reasonably foreseeable as of such date and is not reasonably within the control of either party. Such an event or condition prevents in whole or in significant part, the performance by one of the parties of their contractual obligations, or renders the performance of such obligations so difficult or costly as to make such performance commercially unreasonable. Such unforeseeable circumstances include but are not limited to Acts of God such as floods, earthquakes, and other natural calamities; civil wars, epidemics, state of emergency, riots, and strikes. These provisions usually operate to suspend an obligation under an agreement and to eliminate the right of a party to bring action against another for failure to perform any obligation, where an unanticipated external event affects the performance of the contract.
To enforce a Force Majeure clause, the party who has suffered from the Force Majeure event has to notify the other parties within the period stipulated in the clause. Moreover, the party enforcing the clause is to show efforts made to mitigate the adverse effects of the pandemic and its aftermath such as the government imposed lockdown. The party must show that the performance of its contractual obligations has been prevented by the event. In the case of Energy Watchdog v. Central Electricity Regulatory Commission and Anr., the Supreme Court held that the ambit of Force Majeure cannot be stretched to a probable difficulty or loss caused to the entity obligated to perform the contract. Not every difficulty faced can be inferred as a reason for Frustration of contract and therefore, the contract can be frustrated only in circumstances that make the execution of obligations impossible. Thus, if the performance of contractual obligation can be fulfilled through alternative means then the Force Majeure clause cannot be invoked. Evidence must be produced to prove that the pandemic was the cause for the inability to perform contractual obligations.
The pandemic of COVID-19 can be considered to be covered in a Force Majeure clause. The Ministry of Finance and the Ministry of New and Renewable Energy in a memorandum dated 19 February 2020 and 20 March 2020 respectively, clarified that disruption of supply chain due to COVID-19 in China or any other country would be covered in the Force Majeure clause as COVID-19 is to be considered as a case of natural calamity.
Similarly, the Ministry of Corporate Affairs ('MCA') in a circular dated 23 March 2020 noted that the government of India treating COVID-19 as a notified disaster made spending of CSR funds for COVID-19 an eligible activity as it could be considered as disaster management and promotion of health care. Thus, if the Force Majeure of the contract clause specifies natural calamity or natural disaster or something similar, then the Force Majeure clause can be invoked.
However, even in the absence of a Force Majeure clause in the contract, relief through the doctrine of Frustration under Section 56 of the Indian Contract Act, 1872 can still be claimed. Section 56 provides that a contract becomes void when its performance becomes impossible or unlawful which could not be prevented by the promisor after the contract is made. Thus, the contract is brought to an end once made impossible to perform owing to an unpreventable event. Here, it must be proved that the performance of the contract that while possible when signed, was subsequently made impossible and such impossibility was due to an unpreventable event with no fault of the claimant.
To this effect, the Ministry of New and Renewable Energy in a memorandum dated 20 March 2020 stated that project developers claiming disruption in business and seeking time extensions for completion of projects due to COVID-19 are to make a formal application to the implementing agency along with supporting documentary evidence. Once the claim is examined by the implementing agency, an appropriate extension of time is granted if the implementing agency is satisfied that the claimants were affected due to the disruption of supply chain due to spread of COVID-19/coronavirus in China or any other country in the period for which extension of time has been claimed. The implementing agency is also to ensure that no double relief is granted due to overlapping periods of extension granted for reasons eligible for such relief.
To accommodate disruptions in businesses caused by the pandemic, several statutory bodies such as SEBI, Ministry of Corporate Affairs have granted relaxations for specified compliance stipulations. MCA took cognizance of the gravity of the outbreak of COVID-19 and relaxed the rules concerning meetings of the board, dispensed with the necessity of holding physical meetings on matters relating to approval of financial statements, board reports, restructuring, etc.
Further, to minimize the spread of the disease, courts and tribunals across the country have suspended functioning and have resorted to conducting urgent matters through video conference whereas ongoing non-urgent matters have been adjourned en-bloc. The Supreme Court in an order dated 23 March 2020 extended the period of limitation for proceedings in courts/tribunals across the country till further orders.
Similarly, the Union Finance Minister, Smt. Nirmala Sitharaman announced several relief measures undertaken by the government given the pandemic and the consequent national lockdown. Such measures for statutory and regulatory compliance matters were related to various sectors such as income tax, GST/indirect tax, customs, financial services, Ministry of Corporate Affairs, Department of Fisheries and Department of Commerce.
More importantly, the qualifying threshold for initiation of the insolvency resolution process under the Insolvency and Bankruptcy Code ('the Code') for default of Rs. 1 lakh has been increased to Rs. 1 crore to avoid large scale insolvencies, particularly those of small scale industries and MSMEs that have faced undue financial stress due to the pandemic. The government is also considering the suspension of Sections 7, 9 and 10 of the Code for six months, if the current situation continues beyond April 30, 2020.
Given the dire circumstances accommodating the national lockdown owed to the rapid spread of COVID-19, the Ministry of Labour and Employment in an order dated 20 March 2020 advised employers of private and public establishments to not terminate or reduce wages of the employees in this crisis. In this regard, the Insurance Regulatory and Development Authority of India also provided an extended grace period for payment of insurance premiums and stated that insurance claims related to COVID-19 were to be settled expeditiously.
Accordingly, in an attempt to mitigate the impact of COVID-19 on the economy, the Reserve Bank of India Governor announced that all commercial banks and non-banking financial companies are permitted to allow a 3-month moratorium on the payment of instalments of term loans outstanding as on 1 March 2020. Further, a 3-month deferment on payment of interest on working capital facilities for such facilities outstanding as on 1 March 2020 was granted with the assurance that such measures would not harm the credit history of the beneficiaries. Additional measures to increase cash flow and inject liquidity to the system such as reduction of RBI repo rate, reduction of Cash Reserve Ratio (CRR) of all banks, auction of targeted long term repo operation and increased accommodation of Marginal Standing Facility.
Despite several measures undertaken by the government to ease the burden of businesses in the aftermath of the pandemic, there exists the danger of parties taking undue advantage of the situation to escape fulfilling their obligation and making payments. One can reasonably expect numerous contractual obligations to be delayed or abandoned in addition to an influx of litigation. Thus, reasonable assessments should be made before suspending contracts and statutory requirements. Notably, parties who entered contracts with a reasonable knowledge of the virus's potential consequences, such as contract entered into in January or February 2020 when the virus began to gain attention in China and few other countries may have difficulty in proving that the pandemic was an unforeseeable event. Factors that will be considered when assessing the applicability of the Force Majeure clause or doctrine of Frustration are the nature of the industry, impact on the parties, the disruption caused, and whether the Force Majeure clause in the contract specifically accommodates natural calamities, epidemics, pandemics or any other qualifying category for COVID-19.
Considering all the essentials of Force Majeure and the doctrine of Frustration, it is also to be kept in mind the practicality of business and corporate houses to bounce back post lockdown period. These pressing times will demonstrate the mettle of the businesses to survive such a pandemic and their ability to generate profits soon thereafter.
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