Articles

Force Majeure – Silver Lining amidst COVID-19-
By Deepankur Sondhi (Managing Partner)

This article tends to focus on the current situation of Covid -19 pandemic which has brought the world to a standstill and the legal remedy available to fight with this virus in cases where the performance of an agreement, contract or understanding is affected because of this pandemic is the doctrine of force majeure and frustration of contract.

Force majeure is a French phrase that means a superior force or unforeseeable circumstance that prevents someone from fulfilling a contract. The law related to force majeure is laid down under various sections of The Indian Contract Act, 1872. It is important here to mention that Force Majeure includes events such as Act of God or natural disasters, war, labour unrest and strikes, epidemics etc. Any event which is beyond the control of a party and forces a party not to perform their contractual obligation can be termed as Force Majeure. In such conditions where force majeure comes into play no party can be held liable for non performance of the contract. It is also reasonable to mention here that the Covid -19 pandemic is also beyond the control of humans and is an Act of God.

Force Majeure is an exception to Breach of Contract. In India the Litigation for Breach of Contract would definitely go up once this pandemic gets over and lockdown restrictions are removed. The silver lining in this Covid-19 is the doctrine of Force Majeure. The Indian courts in such circumstances would examine that whether in the present case the parties were not able to abide by the contract and perform their contractual obligations due to the impact of Covid- 19.

In Energy Watchdog vs CERC (2017) 14 SCC 80. The bench comprising of Justice PC Ghosh and R F Nariman laid down some principles related to the doctrine of frustration. Following principles were laid down in this landmark judgment delivered by Justice PC Ghosh and R F Nariman:-

If a contract has an expressed or implied force majeure clause, it will apply over the principles under Section 56 of the Indian Contract Act.

1. Application of the doctrine of frustration may always be within narrow limits.
2. A rise in cost or expense will not frustrate the contract.
3. Doctrine of frustration will not apply so long as the fundamental basis of the contract remains the same.
4.Force majeure will not apply if alternative modes of performance are available.

For the reference of the reader Section 32 and 56 of the Indian Contract Act, 1872 are reproduced below.

Sec 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. 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.

Sec 56. Agreement to do impossible act— An agreement to do an act impossible in itself is void. 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 is 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.1 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, becomes void when the act becomes impossible or unlawful.2" Compensation for loss through non-performance of act known to be impossible or unlawful. Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise. Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the non-performance of the promise." Illustrations.

(a) A contracts to take in cargo for B at a foreign port. A’s Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared. (d) A contracts to take in cargo for B at a foreign port. A’s Government afterwards declares war against the country in which the port is situated. The contract becomes void when war is declared."

What happens in the case of a Contract where there is no clause related to Force Majeure?

This is the most important question which comes to everyone’s mind that what happens if my contract is not well drafted and lacks the force majeure clause. If the contract does not have a clause related to Force Majeure then in that case the parties can resort to and look up to the Doctrine of Frustration under Sec 56 of the Indian Contract Act, 1872. For any party to claim that the contract has been frustrated, it must be shown that the performance of the contract is entirely impossible and that it has become fundamentally different from the arrangement arrived upon at the time of executing the contract.

Problems which can possibly arise due to the current situation of Covid-19. As we all are aware about the current Pandemic i.e. Covid- 19 has shook the roots of big economies and businesses and is creating a global state of medical emergency, causing too much problems. Now here I will focus on the problems which can arise due to Covid-19. Following problems are possibly the most sensitive of all.

a.Mergers and Acquisitions
b.Issues between Landlord and tenants
c.Insolvency of companies
d.Disputes between Employees and Employer
e.Disputes between customers and Insurance Companies
f.Delayed Litigations
g.Delayed Payments

Conclusion

The pandemic has resulted into loss of lives, livelihood and caused economic hurdles to many. The coronavirus pandemic presents unprecedented challenges and is sure to disrupt contractual relationships. In such a time, the Doctrine of Frustration and Force Majeure is a silver lining for many. Parties should be ready to invoke Force Majeure clauses and related doctrines that may operate to excuse performance.

Sondhi & Partners- Advocates and Solicitors has a team of experienced lawyers practising in the area of Contracts across industries domestically and internationally, and are ready and available to provide further information and discuss particular circumstances. So join hands with Sondhi & Partners and Know How to Win...