Force Majeure, et al –Is it a Cogent Line of
Defence?
Broadly, the doctrine of ‘force majeure’ is applied to a situation where it becomes impossible for a party to
undertake its promises or contractual obligations in the wake of prohibitive circumstances. The COVID-19
pandemic has triggered many discussions in the context of Force Majeure. The provisions pertaining to
frustration of contract are contained in sections 32 and 56 of the Indian Contract Act, 1872, albeit with distinct
perspectives, which has evolved over a period of time in the context of the doctrine of force majeure. Courts in
India have applied a very high standard in relation to frustration of contract on account of occurrence of a force
majeure event. This article discusses the doctrine of force majeure in light of judicial pronouncements, where
the doctrine has been tested and applied to determine whether there are valid grounds to declare frustration
of a contract, and thus, void, on account of ‘Force Majeure’
BACKGROUND
Colloquially, we have come across the phrase ‘force majeure’
or ‘act of god’, most times interchangeably, and more so,
after release of the Hindi motion picture Oh My Go
Due to the rapid spread of the novel coronavirus disease
(COVID-19), India was forced to go into a nationwide
lockdown on March 25, 2020 resulting in suspension of most
of its economic activities. This situation which was indeed
unforeseen has considerably impacted the economy.
Whilst, it appears that the economy and commerce would
bear the impact of COVID-19 crisis for a significant period,
the community at large is faced with myriad of questions
and thoughts in their minds in relation to their contractual
obligations - whether such obligations are enforceable against
the so called ‘promisor’, whether I am entitled to a relaxation in
performance of my obligation to pay under a contract, whether
rent for the period of the lockdown payable, etc., on account of
‘force majeure’, etc.
The concept of ‘force majeure’ is an import of the French civil
law system, which means ‘superior force’ in English. In common
parlance, it denotes an event or effect that can neither be
reasonably anticipated nor controlled, or an unexpected event
that prevents someone from doing or completing something
that he or she had agreed or planned to do. Even though ‘force
majeure’ is, generally, understood to encompass both natural
and human-initiated events, very often a distinction has been
drawn between ‘force majeure’ and ‘act of God’. The latter
phrase can roughly be understood to be a subset of the former.
As per Black’s Law Dictionary, ‘act of god’ would include an
overwhelming, unpreventable event caused exclusively by
forces of nature, and exclude an event where human agency,
by act or negligence, had a part to play.
FORCE MAJEURE IN INDIA
Broadly, the doctrine of ‘force majeure’ is applied to a situation
where it becomes impossible for a party to undertake its legal
obligation in the wake of unavoidable circumstances. The
application of the doctrine of force majeure would normally
entail frustration of contract, leading to the contract being
declared as void.
The doctrine of frustration is an aspect of the law of discharge
of contract by reason of supervening impossibility or illegality
of the act agreed to be done. The English law on the doctrine
of frustration contemplates interruption of such a character and
duration that it vitally and fundamentally changes the conditions
for performance of the contract, and could not possibly have
been in the contemplation of the parties to the contract when
it was made. In terms of the judicial precedents in India,
over a period of time, the doctrine of force majeure must be
applied only in such situations where the force majeure event
is of such a prohibitive gravity as to prevent the promisor from
performance of its obligations under the contract.
The test, therefore, is not just the occurrence of a force majeure
event but also whether such force majeure event leads to a
prohibition on performance of the contract.
Broadly speaking, in this context, there are two kinds of
contracts which may be required to be construed, interpreted
or adjudicated in the context of frustration of contract due
to a ‘force majeure’ event. One, a contract which sets out a clause dealing with force majeure events and consequences
on occurrence thereof, and the other, which does not set
out any provision in relation to a force majeure event and
consequences on occurrence thereof.
Whilst, the doctrine of force majeure does not specifically
find mention in the Indian statute, the concept of frustration
of contract, under common law, has been encapsulated in
Sections 32 and 56 of the Indian Contract Act, 1872 (“Contract
Act”).
The judicial pronouncements in India, and the bare Sections 32
and 56 of the Contract Act, create a distinction in applicability
of the two provisions, in as much as, Section 32 would apply
in relation to a contract which contains provisions pertaining
to occurrence of force majeure events, and Section 56 would
apply to contracts which do not contain provisions pertaining
to force majeure events.
Where the contract itself either implicitly or expressly contains a
term, according to which performance would stand discharged
in certain circumstances, the dissolution of the contract
would take place under the terms of the contract itself, and
such cases are required to be dealt with under Section 32 of
the Contract Act. However, if the frustration is to take place
dehors the contract, it would be governed by Section 56 of
the Contract Act. In case of the former, courts would be limited
to only interpreting the provisions of the contract, rather than
going beyond the provisions of the contract and rewriting the
contract.
Courts in India have applied a very high standard in relation
to frustration of contract. In cases where an untoward event or
change of circumstance totally upsets the very foundation upon
which the parties entered into an agreement, it has been held
that the promisor finds it impossible to do the act which he had
promised to do. Further, merely because the circumstances in
which a contract was made have altered the contract would
not be considered to have frustrated the contract. The courts
would, generally, not absolve a party from the performance of a
contract merely because its performance has become onerous
on account of unforeseen turn of events.
Natural calamity, directly or substantially affecting the
performance of obligations, and judicial order preventing a
party from performing its obligations under a contract, are
certain basic illustrations, where courts have applied the
doctrine of force majeure to declare that the contract stands
frustrated.
The courts would, therefore, be required to infer from the
nature of the contract and the surrounding circumstances that
a condition which is not expressed in the contract was the
foundation upon which the parties contracted. The doctrine of
frustration would require a multi - factorial approach. Among
the factors, ones which ought to be considered are:
- the terms of the contract itself, its matrix or context;
- the parties’ knowledge, expectations, assumptions and
contemplations, in particular as to risk, as at the time of
the contract, at any rate so far as these can be ascribed to
mutually and objectively;
- the nature of the supervening event; and
-
the parties’ reasonable and objectively ascertainable
calculations as to the possibilities of the future performance
in the circumstance.
"Courts in India have applied a very high
standard in relation to frustration of
contract. In cases where an untoward event
or change of circumstance totally upsets
the very foundation upon which the parties
entered into an agreement, it has been held
that the promisor finds it impossible to
do the act which he had promised to do.
Further, merely because the circumstances
in which a contract was made have altered
the contract would not be considered to
have frustrated the contract"
THE PANDEMIC
With the substantial restriction on commercial activities to
varying extent during different phases of the lockdown, it is
inevitable that performance of contractual obligations (including
payments of rent) would have been hampered. Various
circulars issued by the departments within the Government
have indicated that disruption in the supply chains caused by
the spread of coronavirus disease in China and elsewhere
should be considered as a natural calamity and the doctrine of
force majeure should be invoked, wherever appropriate.
The executive orders would, perhaps, be subjected to judicial
review before the constitutional courts of India. However,
keeping in view the peculiar circumstances and public health
and safety, normally, the courts are unlikely to interfere with
them.
It would be imperative for the courts to peruse the contract
as a whole, in order to determine if the obligations under
the contract, required to be performed, were of such nature
as are prohibited in terms of the various executive orders /
circulars. In case the same were permitted, the restrictions or
lockdown due to coronavirus disease are unlikely to weigh in
positively with the courts. However, if the activities at the core
of a commercial contract were prohibited, the doctrine of force
majeure would be required have to be applied.
The Hon’ble High Court of Delhi, on April 20, 2020, in Halliburton
Offshore Services Inc. v. Vedanta Ltd. and another passed an
order imposing ad interim temporary injunction against Vedanta
Limited from invoking bank guarantees issued in its favour by
M/s Halliburton Offshore Services Incorporation. Due to the
unprecedented order of nationwide lockdown, the Petitioner
could not complete its work by March 31, 2020 as the work of
drilling three oilfields of the Respondent required mobilization
of labour and other personnel, within and outside India. The
Respondent opposed the grant of the temporary injunction that
invocation of bank guarantee could be stayed only on ground
of egregious fraud. It was also the case of the Respondent that
petroleum being an essential commodity the production thereof
was exempted from the rigors of lockdown. The Bench arrived
at the conclusion that besides egregious fraud, invocation of bank guarantee could also be stayed under special equities or
special circumstances and the petitioner being involved only
in drilling of the wells and not in direct production of petroleum
was subjected to the restrictions of the lockdown. The Bench
also, prima facie, viewed the nationwide lockdown as a force
majeure event. Accordingly, an ad interim injunction restraining
or encashment of the bank guarantees was passed.
However, in the final judgment of the case, dated May 29,
2020, the Hon’ble Court arrived at the conclusion that the
Petitioner had breached the existing agreement between
the Petitioner and the Respondent in September, 2019 itself,
well before the COVID-19 pandemic and the lockdown set in
afterwards. Hence, the Petitioner could not take recourse of a
force majeure event, and accordingly, the ad-interim injunction
passed on April 20, 2020 (as modified on April 24, 2020) stood
vacated.
On the other side of the spectrum, the case of Standard Retail
Pvt. Ltd. v. M/s G.S. Global Corp & others stands out. This
case was decided by the Hon’ble High Court of Bombay on
April 8, 2020. The Petitioner in this case submitted that in
view of the lockdown, the contract between the Petitioner and
the Respondent for supply of steel by the latter to the former
from Korea, stood frustrated under Section 56 of the Indian
Contract Act, 1872. However, the ad-interim prayers of the
Petitioner stood rejected because the Respondent had already
dispatched the steel to India from south Korea and distribution
of steel had been declared an essential service and there was
no restriction on movement thereof to India and within the
territory as well.
Further, in cases dealing with contractual relationship between
a tenant and a landlord, the Hon’ble High Court of Delhi on
May 21, 2020, in Ramanand & Others v. Dr. Girish Soni &
another, while analysing Sections 32 and 56 of the Contract
Act and Section 108 (B) of the Transfer of Property Act, 1882
held that a relationship between such parties can be governed
either by contract or by law. The manner in which the rights
and obligations of the parties amidst pandemics, such as
COVID-19 can play out in the realm of contracts, would be
determined by the terms and conditions of the contract itself.
Therefore, where no written agreement exists between a
landlord or tenant, it would be required to be established that
the lockdown was a force majeure event of such permanent and
prohibitive nature, bearing in mind various factors which have
been highlighted here, which prevented the tenant to perform
his end of the obligation i.e. to make payment to the landlord.
Additionally, it would be worthwhile to consider that the banks
were functioning even during the lockdown, therefore, allowing
making of payment through banking channels
Whilst, the law of the doctrine of force majeure, in the context
of frustration of contract, in relation to the executive orders
issued by the Government to control the spread of COVID – 19
pandemic, is yet to evolve, the courts and the arbitral tribunals
would be required to decide each case in light of the peculiar
circumstances and facts.
Setting the tone, the Hon’ble High Court of Delhi had the
opportunity to consider the nature of the advisories issued by
the Ministry of Shipping regarding charging of ground rent,
detention charges etc. It has been observed and clarified by the
Hon’ble Court that such advisories are by no extent directory
or mandatory in nature. They have been issued only to advise
the port authorities to adopt a sympathetic and humanitarian
approach.
Relying on few of the above-mentioned cases, a Single Judge
Bench of the Hon’ble Delhi High Court, in the matter of Rashmi
Cement Ltd. vs. World Metals and Alloys (FZC) & Anr. refused
to grant an interlocutory relief to the Petitioner in a petition
under Section 9 of the Arbitration and Conciliation Act, 1996.
Whilst, the Petitioner in the given case sought to rely upon a
contractual force majeure clause to recuse from its liability to
pay demurrage, the Ld. Single Judge held that whether the
force majeure clause could be invoked, and consequently,
whether demurrage was required to be paid or not is required
to be decided in the arbitration proceeding, the same could not
be decided by the Court under the scope of examination of
Section 9. It was also observed, that a force majeure clause
could not be invoked merely upon request of one of the parties
to a contract and the same ought to be decided in light of the
facts and circumstances of each case.
" Whilst, the law of the doctrine of force
majeure, in the context of frustration of
contract, in relation to the executive orders
issued by the Government to control the
spread of COVID – 19 pandemic, is yet to
evolve, the courts and the arbitral tribunals
would be required to decide each case in
light of the peculiar circumstances and
facts."
In a similar context, a co-ordinate bench of the same court has
held that a force majeure clause comes into effect when it has
been acknowledged by the other contracting party. In such a
case, the need to explicitly invoke the force majeure clause
does not arise.
As the consequence of application of the doctrine of force
majeure, i.e. frustration of contract, is draconian, keeping in
mind the peculiar facts and circumstances of each case, the
Court would be, inter alia, required to examine, whether:
- the terms of the contract itself, its matrix or context;
- the contract itself contains provisions pertaining to
consequences, upon occurrence of a force majeure event;
- the parties’ knowledge, expectations, assumptions and
contemplations, in particular as to risk, as at the time of
the contract, at any rate so far as these can be ascribed to
mutually and objectively;
- the executive orders issued by the Government, imposing
the lockdown, were of such prohibitive nature, so as to
prevent the promisor from performing its obligations under
the contract, or making them impossible to perform;
- the period for performance of the contract, and whether,
the contract was to be performed and determined during
the time when such restrictions were in place or whether
such restrictions came to be in force, for a certain
intervening period, during the course of the performance
of the contract;
- the impact is such, so as to permanently or for a
significant period of time, prevent the promisor to perform
its obligations under the contact; and
- the parties’ reasonable and objectively ascertainable
calculations as to the possibilities of the future performance
in the circumstances.
Potentially, it is possible, in multiple cases, for the contract to
not attract the doctrine of force majeure, as the court may find,
subject, obviously, to the peculiar facts and circumstances of
each case, that the COVID – 19 pandemic did not have an
impact of such nature so as to permanently or for a significant
period of time prevent the performance of the contract.
In examining whether the COVID – 19 pandemic has had such
an impact, so as to permanently or for a significant period of
time, prevent the promisor to perform its obligations under the
contact, perhaps, consider the global economic impact, and
the resultant payment capacity of a promisor. This would be relevant especially in case of contracts involving a promise to
pay, such as finance / loan agreements and rent agreements.
In a case where the court takes a view that performance of
a particular contract, in light of the facts and circumstances
surrounding, is not hit by the doctrine of force majeure on
account of the COVID – 19 pandemic, and consequently, the
contract is not frustrated, it is possible for the court to hold
that the executive orders imposing nationwide lockdown have
caused a material adverse effect on the performance of the
contract by the promisor, and invoke certain special equities
and not hold the contract as void on account of frustration.
Whilst, the concept of material adverse effect is not ripe in
the legal regime in India, the judicial fora in India may take
references from the observations and interpretations of courts
at United States of America (where the law of material adverse
effect has evolved considerably), for their persuasive value.
Accordingly, albeit, it is possible to argue the doctrines
pertaining to force majeure, frustration of contract or material
adverse effect as a defence in relation to performance of
contract which has been hindered on account of the instant
pandemic, much will depend on the peculiar facts and
circumstances of each case. However, it is desirable that the
parties explore equitable and commercially viable options for
enforcing contracts, performance of which have been impacted
owing to the COVID – 19 nationwide lockdown.
REFERENCES:
1. Black’s Law Dictionary 983 (10th ed. 2009)
2. Satyabrata Ghose v. Mugneeram Bangur and Co. and
Ors., AIR 1954 SC 44.
3. Metropolitan Water Board v. Dick Kerr and Co. Ltd., 1918
AC 119.
4. Lanco Hills Technology Park Pvt. Ltd. v. Manisha
Balkrishna Kulkarni and Anr., 2019 SCC OnLine SC 1649.
5. M/s Halliburton Offshore Services Inc. v. Vedanta Ltd. and
Anr., O.M.P. (I) (Comm.) & I.A. 3697 of 2020.
6. Boothalinga Agencies v. V.T.C. Poriaswami Nadar, AIR
1969 SC 110.
7. The Naihati Jute Mills Ltd. v. Khyaliram Jagannath, AIR
1968 SC 522.
8. Energy Watchdog v. CERC & Ors., (2017) 14 SCC 80
9. Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp and
Ors., Commercial Arbitration Petition (L) No. 404 of 2020
10. Ramanand & Ors. v. Dr. Girish Soni & Anr., RC. REV.
447/2017
11. Rashmi Cement Ltd. vs. World Metals and Alloys (FZC)
& Anr., O.M.P. (I) (Comm.) 117/2020 and O.M.P. (I)
(Comm.) 118/2020.
12. M/S Polytech Trade Foundation vs. Union of India and
Ors., W.P. (C ) 3092 of 2020, order dated May 22, 2020.
13. MEP Infrastructure Developers Ltd. vs. SDMC, W.P. (C)
2241 of 2020, order dated June 12, 2020
This article was published in ICSI Chartered Secretary August 2020 Issue
(https://www.icsi.edu/media/webmodules/linksofweeks/ICSI-August_2020.pdf).
